Wells Fargo profit beats Wall Street estimates

updated 2:50 p.m. ET July 22, 2009

CHARLOTTE, N.C. - Wells Fargo & Co. joined other big banks in announcing a big second-quarter profit and tempering the news by reporting it is still contending with losses from failed loans.

The bank also followed its rivals Wednesday in forecasting loan losses would continue in the coming quarters as more consumers are unemployed and can't make their payments. The company said some of its second-quarter loan losses came from the continuing cleanup of the loan portfolio acquired along with struggling Wachovia Corp. in December.

Wells Fargo said its earnings after payment of preferred dividends came to $2.58 billion, or 57 cents per share, up from $1.75 billion, or 53 cents per share, a year earlier.

The earnings surpassed the 34 cents per share forecast of analysts surveyed by Thomson Reuters. Wells Fargo's revenue of $22.5 billion also beat their forecast.

Wells Fargo's shares fell 68 cents, or 2.7 percent, to $24.67 in afternoon trading. On Wednesday, increasing worries about the health of banks sent the stocks of many financial companies sliding.

"I think Wells Fargo remains fairly strong, but are still struggling some from their mortgage loans, and that's something we all need to expect," said Nancy Atkinson, senior analyst at Boston-based research firm Aite Group. "As consumers continue to lose jobs and be concerned about their ability to make their mortgage payments, there are going to be problems for a while."

Wells Fargo said its results also reflected a $700 million credit-reserve build, a $565 million charge to bolster a federal deposit insurance fund, and merger-related and restructuring expenses of $244 million.

Like Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc., Wells Fargo added more money to its reserves to cover failed loans. Wells Fargo said it recorded a $5.1 billion provision for loan losses during the second quarter.

All four banks reported billion-dollar profits that masked the fact that the banking industry is still deeply troubled because of loan losses that are expected to continue.

The amount of loans that Wells Fargo wrote off as unpaid during the second quarter totaled $4.39 billion, or 2.11 percent of average loans, up from $3.26 billion, or 1.54 percent, in the first quarter. Nonperforming assets, or loans past due, totaled $18.34 billion up from $12.61 billion in the previous quarter.

"Credit losses rose in the second quarter, as expected, due to the weak economy and higher unemployment in the quarter," said Chief Credit Officer Mike Loughlin in a statement. He added that the San Francisco-based bank expects credit losses and nonperforming assets to increase.

Even so, "we are beginning to see some stabilization in early stage delinquency in the unsecured consumer loan portfolios," Loughlin said, mirroring signs at other banks that have seen similar trends from customers who are between one and three months behind on payments.

Credit card charge-offs, or balances determined to be uncollectible, rose $82 million to $664 million in the quarter, as customers who are already at last three months past due continue to miss payments because of rising unemployment and bankruptcies, Loughlin added.

Loughlin reported that Wells Fargo took significant writedowns in the Wachovia portfolio, and was exiting riskier mortgage businesses including Wachovia's Pick-A-Pay loans. Those loans, in which borrowers got low introductory rates and were allowed to defer some interest payments until later years, were a big contributing factor to Wachovia's near-collapse.

The Wachovia deal was one of a series of bank takeovers announced last fall during the height of the credit crisis.

Wells Fargo said it had strong profit from its mortgage-banking business. During the most recent quarter, Wells Fargo originated $129 billion of mortgages — the second highest level since 2003.

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