Wells Fargo & Co. did not escape the housing market's ills in the second quarter, but most other things seemed to click for the San Francisco company, which said its perception among customers as a safe haven lifted deposits and fee income.
As a result, its profit dropped but still easily topped analysts' expectations. In addition, it took the step of unveiling a dividend increase of roughly 10% — a show of confidence that, coupled with the earnings, sent Wells' shares surging 33% Wednesday. The gains pushed the company into third place in the U.S. banking sector by market capitalization and sparked a broad financial stock rally the likes of which has rarely been seen. (See story on page 16.)
California's slumping housing market and other credit issues did apply pressure. The $609 billion-asset Wells said its second-quarter net income fell 23% from a year earlier, to $1.75 billion, or 53 cents a share, topping the average forecast of analysts polled by Thomson Reuters by 3 cents.
Higher fees helped Wells report a 16% jump in revenue, to $11.5 billion.
"The numbers speak for themselves," Howard A. Atkins, Wells' chief financial officer, said in an interview Wednesday. "The franchise is growing, even though credit losses have been going up."
Wells, which has struggled with rising defaults in its home equity portfolio, quadrupled its provision for credit losses from a year earlier, to $3 billion, and its net chargeoffs more than doubled, to $1.5 billion. Nonperforming assets nearly doubled, to $5.2 billion.
Noninterest income rose 10%, to $5.2 billion, as a result of big jumps in insurance and mortgage banking fees. Its capital ratios and net interest margin improved during the quarter, and overall loans and deposits rose.
In an interview Wednesday, Nancy A. Bush, the president of NAB Research LLC, called Wells' results "pretty remarkable," as well as "a testament to the fact that there will be banks that come through all of this in OK shape — not without damage, but OK."
Nevertheless, Mr. Atkins said that a cloud of uncertainty hangs over the banking sector, and that Wells, even though it is holding up relatively well, is not immune. "Credit losses may well keep going up before they peak, and we don't know when that will be."
Wells built up its credit reserves by $1.5 billion during the quarter and said about half of it would cover expected home equity losses.
"If housing prices continue to decline, losses will continue to go up" in the home equity portfolio, Mr. Atkins said. "It remains the portfolio with the greatest deterioration." It is not Wells' only weakness. The "soft" consumer market, as he put it, is struggling to pay off credit cards, and more small-business owners, hurting from a sour economy, are falling behind on loan payments.
Commercial and commercial real estate chargeoffs increased 28%, to $342 million, including $30 million of chargeoffs on loans originated through the small-business lending group and $18 million of losses on credit cards — something Mr. Atkins attributed to "higher bankruptcy rates" and "continuing economic pressure on consumers."
But he was not in a mood to dwell on the downside Wednesday. He said that raising the dividend was a show of strength, and that Wells would weather the credit crisis without serious harm and is poised for steady growth.
Insurance fees increased 27% from a year earlier, to $550 million, because of a string of small acquisitions over the past year. Most recently, in May the company entered the insurance premium finance business by purchasing Flatiron Credit Co. in Denver. Wells, the nation's largest private agriculture banker, also credited strong demand for crop insurance. Its U.S. real estate originations fell 36% — Wells cited tighter standards — but mortgage banking fees soared 74%, to $1.2 billion, reflecting a 7% increase in its servicing business, strong demand for refinancing of home loans, and customers' desire to work with a company they view as guarded against the threats of an economic downturn, Mr. Atkins said.
The gain also reflected wider margins, lower writedowns of repurchased mortgages, and the increased value of commercial mortgages held for sale, he said.
Mortgage escrow deposits fell 3% from a year earlier but rose 11% from the previous quarter, to $22.7 billion.
Wells "continues to show that its management knows how to navigate through otherwise perilous waters and avoid the fate of many beleaguered banks," Walter O'Haire, a senior analyst at Marsh & McLennan Cos.' Celent LLC in San Francisco, said in an e-mail Wednesday.
Average core deposits rose 6% from a year earlier, to $318 billion. Wells said that growth is linked to customers' perception of the company as a safe haven. Average loans grew 18%, to $391.5 billion. Despite some trouble spots, Mr. Atkins said average consumer loans rose 13%, to more than $220 billion, and commercial loans rose 27%, to nearly $170 billion, as a result of strong demand from the export, energy, and agriculture sectors. Net interest income rose 21%, to $1.1 billion.
The net interest margin rose 3 basis points from a year earlier and 23 basis points from the previous quarter, to 4.92%. Mr. Atkins credited a lower federal funds rate and a "disciplined" approach to keeping the deposit rates it pays customers steady. Its Tier 1 capital ratio rose 32 basis points from a quarter earlier, to 8.24%.
"We are open for business and getting lots of it," John G. Stumpf, Wells' chief executive officer, said in its earnings report.
