The Wachovia effect continues to have a mostly positive influence on Wells Fargo & Co. despite lingering worries about Wachovia's loan portfolio.
Yesterday, Wells Fargo reported record profit of more than $3.2 billion in the third quarter -- nearly double the net income from the third quarter of 2008.
Some analysts have said that Wells Fargo should be posting record profits, given that it bought a larger bank at a bargain price last year and gained $812 billion in total assets.
Taking out a $598 million preferred-dividend payment to the U.S. Treasury, Wells Fargo had net income of $2.64 billion. Diluted earnings based on that net income were 56 cents a share.
The average earnings forecast by analysts surveyed by Zacks Investment Research was 35 cents.
John Stumpf, Wells Fargo's president and chief executive, said that the merger continues to exceed the bank's expectations.
"Merger costs have been significantly less than originally expected," Stumpf said. The bank expects to spend $5.5 billion on merger costs rather than its previous estimate of $7.9 billion.
"We are achieving greater proportion of the labor-cost savings through attrition rather than severance, and because the cost of disposing and/or subleasing owned office space has turned out to be lower than assumed," the bank said.
Despite the news of good earnings, Wells Fargo's share price fell 5 percent, or $1.56, to close at $28.90.
Investors appeared to be concerned more about the recession's impact on Wells Fargo's commercial and individual customers than its overall performance.
Wells Fargo reported that its loan-loss provision rose to $6.1 billion from $2.5 billion a year ago.
Net charge-offs were $5.5 billion, rising nearly 150 percent in the past year. It had nearly $1.11 billion in charge-offs on Wachovia consumer loans, compared with $2.48 billion from Wells Fargo's original portfolio. Nonperforming assets were at $23.5 billion, up almost fourfold from 2008.
"While the level of nonperforming assets and losses is expected to remain elevated for a period of time, we currently expect total credit losses to peak in 2010," said Howard Atkins, Wells Fargo's chief financial officer. Arnold Danielson, the chairman of Danielson Associates of Bethesda, Md., considered Wells Fargo's performance as "most encouraging, particularly as it is more of a traditional bank than the other three big banks" -- Bank of America Corp. JP Morgan Chase & Co. and Citigroup Inc.
"Thus, it is more of an indication of where real banking stands going forward, which is good news for the bigger banks but also smaller banks," Danielson said.
Matt O'Connor, an analyst with Deutsche Bank, said that Wells Fargo benefited from "robust mortgage" business -- up nearly fourfold compared with a year ago to $3.1 billion
"As expected, the rate of increases in nonperformers and charge-offs remains high vs. most banks, and is being driven/distorted by the legacy Wachovia book," O'Connor said. "Meaningful declines in losses may not occur until 2011."
However, one analyst believes that Wells Fargo is being too optimistic on its loan-loss reserves, contending that it should be raised to 5 percent of the total loan portfolio.
"Commercial real-estate losses will eat up most earnings unless they try to defer losses by merely extending underwater loans, which most banks are doing," said Joseph Gordon of Gordon Asset Management LLC, an investment-advisory company in Durham.
"Wells will earn their way out of this Wachovia commercial real-estate and Golden West mess. One-time gains won't bail them out of the fourth quarter."
rcraver@wsjournal.com
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