Though its purchase of the ailing Wachovia Corp. led to its first quarterly loss in eight years, Wells Fargo & Co. on Wednesday continued to sell the benefits of the acquisition while refusing to predict how much more pain it might produce.
Howard Atkins, Wells Fargo's chief financial officer, said the company has no plans to seek more money from the Treasury Department's Troubled Asset Relief Program, in stark contrast to Bank of America Corp., which this month returned to the government for more funds to help it complete its deal for Merrill Lynch & Co. Inc.
Wells also set itself apart by maintaining its dividend at 34 cents a share as many of its peers slash their payouts.
"Things can always change but right now our capital is strong. We've de-risked the balance sheet," Mr. Atkins said in an interview. "We are growing the company so I think it's not that hard a statement to make" that Wells won't need more government funding.
Wells' shares soared nearly 31% Wednesday, though analysts differed on why. Some cited its ability to show that it has made significant inroads in reducing the risk inherited with the Wachovia deal while others said it benefited from a broad rally in bank stocks tied to reports that the Obama administration is nearing a plan to buy bad assets and put them in a so-called bad bank.
(The KBW Bank Index closed up 14.4%. Other big banks, such as Citigroup Inc. and Bank of America, also posted gains.)
Jason Goldberg of Barclays Capital said Wells' stock price benefited from other news in its earnings release. "People were nervous about asset-quality trends at Wells Fargo in addition to how Wachovia would fit into the balance sheet. At the end of the day Wells Fargo's credit quality deteriorated, but it's manageable. And at the same time it took actions to de-risk part of the Wachovia balance sheet."
Arthur Hogan, chief market analyst at Jefferies & Co., said the surge in Wells stock price shows that people view Wells favorably compared to some of its competitors. Wells "has definitely become the best-looking horse in the glue factory, if you will."
The rising stock price aside, Wells' results weren't pretty. Wells reported a loss of $2.55 billion loss, or 79 cents a share, taking billions of dollars in hits tied to Wachovia.
For the year-earlier Wells reported earnings of $1.36 billion, or 41 cents a share. Analysts had forecast a 2008 fourth-quarter profit of 33 cents a share, according to Thomson Reuters. Wachovia, which Wells Fargo bought on Dec. 31, lost $11.2 billion in the quarter.
Wells took a laundry list of charges and losses tied to Wachovia, including a $37.2 billion credit writedown tied to Wachovia's portfolio of $93.9 billion in high-risk loans, a $1.2 billion net chargeoff on Wachovia's legacy pick-a-pay portfolio, $4.2 billion to build credit reserves, along with billions of dollars in other losses and charges. However, Wells said Wachovia has reduced period-end loans, securities, trading assets, and loans held for sale reduced by $115.2 billion, or 17%, since June 30, 2008.
Wells, meanwhile, spent $5.6 billion to boost reserves for its own loan portfolio and cited continued deterioration in home loans, credit cards and auto, as well as some souring of commercial and commercial real estate loans.
Despite Wachovia's sizable losses, Wells Fargo chief executive John Stumpf said during a prerecorded conference call: "I feel better about this deal now than when it was first announced. This merger is coming together better than we ever could have expected."
Mr. Atkins said during the same call that Wachovia's deposits had risen 10% since deal was announced in October. He cited gains in consumer, commercial, cash management and wealth management divisions. Mr. Atkins said in the interview that Wachovia customers who left it during its final days as a stand-alone institution have returned since the deal was announced, because "they assumed they were now going to be depositors in a company that has the highest credit rating of any bank in the U.S." Pressed on where those Wachovia deposits went, Mr. Atkins said: "They went to either local banks or other large banks in the area and came back in."
Including Wachovia's deposits, Wells Fargo reported core deposits of $745.4 billion at Dec. 31. On the call Mr. Atkins said that gave his company 11.2% of the nation's deposits, second only to Bank of America. Though the Federal Reserve Board bars any one bank from controlling more than 10% of the nation's deposits, Mr. Atkins said his company has already divested what it had to divest to comply with Fed rules. "The sky's the limit in terms of how much market share we can take in the country after the acquisition is already done."
Barclays' Mr. Goldberg said Wells "benefited from a flight to quality, as well as a business model that is focused on selling incremental products to its existing [customer] base." Wells' loans grew 11%, to $864.8 billion, from a year earlier. Mr. Atkins said declining mortgage rates resulted in a surge in applications, $116 billion for the quarter, up 40% from the third quarter. While 68% of applications during the quarter were for refis, almost $40 billion in new mortgage applications for purchased homes were taken in the quarter. "Their forward-looking mortgage indicators, pipeline, and applications were off the charts," Mr. Goldberg said.