Wells Posts 12% Earnings Jump
Wells Fargo & Co. reported 12% higher second-quarter earnings Tuesday despite a drop in mortgage revenue, saying its results were helped by strong business and consumer lending, rising deposits and investment gains.
The San Francisco company, the largest bank based in California, earned $1.91 billion, or $1.12 a share, up from $1.71 billion, or $1, in the year-earlier period. Total revenue rose 6% to $7.87 billion, even though revenue at Wells Fargo Home Mortgage fell 42% to $774 million.
Chief Financial Officer Howard Atkins said the mortgage business remained healthy despite the drop in revenue, which was caused by a technical adjustment: As falling long-term rates fueled another surge in refinancings, Wells recorded a $304-million decrease in the value of its loan-servicing operations.
But Atkins said lower rates had increased the number of home loans in the pipeline at Wells, boding well for third-quarter mortgage earnings.
Although Wells fell a penny shy of analysts’ consensus earnings estimate of $1.13 a share for the quarter, its stock was little changed Tuesday, off 16 cents to $61.83.
Analyst Joe Morford at RBC Capital Markets in San Francisco said it was impressive for Wells to approach analysts’ average profit estimate after taking the mortgage-servicing charge, which cut earnings by 12 cents a share. “They’re quite strong across the board,” he said.
Wall Street also may have been soothed by an increase in Wells’ net interest margin, the difference between what a bank pays to borrow money and what it earns on its loans and investments.
Reflecting an unusual decline in long-term interest rates this year even as the Federal Reserve pushed short-term rates higher, shrinking net interest margins resulted in disappointing earnings Monday at Citigroup Inc. and Bank of America Corp., the nation’s two largest banks.
Two of Wells’ regional-bank rivals, U.S. Bancorp of Minneapolis and Wachovia Corp. of Charlotte, N.C., also saw their net interest margins decline in the second quarter, the companies said in earnings reports issued Tuesday.
By contrast, Wells, the fifth-largest U.S. bank, increased its net interest margin to a robust 4.89% in the quarter from 4.83% a year earlier. The bank said its recent sale of $35 billion in lower-yielding adjustable-rate loans was one reason for the increase.
Analysts said increased small-business lending also played a role, along with growth in home and auto loans at Wells Fargo Financial, a sub-prime lender to borrowers with credit blemishes. Small-business loans, a Wells specialty, and sub-prime loans typically carry higher interest rates.
Net interest income at Wells was $4.54 billion, up 7% from a year earlier. Non-interest income, such as from service charges, rose 4% to $3.33 billion.
Atkins said the U.S. economy was in “reasonably good shape,” but added that a 13% rise in lending to medium and large businesses in the second quarter was more a reflection of a growing customer base than an increase in use of existing credit lines.
Wells said its total assets averaged $435 billion in the quarter, up 6% from a year earlier.
Elsewhere in California, Newport Beach-based Downey Financial Corp. said its profit more than doubled in the second quarter, rising from $27.8 million, or 99 cents a share, to $64.1 million, or $2.29. Sales of loans and mortgage-backed securities were strong, and income from both lending and fees improved, the parent of Downey Savings said. Downey shares rose $1.48 to $79.17.
Pacific Capital Bancorp shares, by contrast, plunged $4.04 to $33.96 -- a 10.6% decline -- after the Santa Barbara bank holding company warned that second-quarter profit would be 29 cents to 31 cents a share instead of the 39 cents analysts had expected. Pacific Capital said it was having unexpected trouble collecting on its specialty of tax refund anticipation loans -- high-interest, short-term borrowings that critics contend can victimize the working poor.
