Wells Fargo Beats Estimates, Despite Soaring Losses on Junior Liens

Wells Fargo & Co. (WFC) saw its first quarter profit fall less than analysts had expected, it said on Wednesday morning, with the bank earning $2.0 billion, or $.60/share, compared to earnings of $2.24 billion one year ago. Bloomberg reported that analysts had pegged the bank’s earnings at 57 cents per share ahead of the report. The earnings come despite deteriorating asset quality, thanks to the ongoing residential mortgage mess: net charge-offs as a percentage of average total loans in the first quarter reached 1.60 percent, up from 1.28 percent one quarter earlier, while non-performing loans reached 0.84 percent of all loans, an increase of 20 percent within just one quarter. Nonetheless, the company’s results certainly didn’t seem fazed by any of it. “Despite a weakening economy, the continued downturn in housing and expected higher charge-offs, this was a remarkably strong quarter of growth for our company – very impressive growth in loans at wider spreads, a 9 percent increase in core deposits, double-digit revenue growth once again exceeding expense growth, and increases in both our capital and liquidity levels,” said president and CEO John Stumpf. Junior lien losses soar Home equity loans at Wells Fargo have been recently targeted by analysts, who have said the bank’s exposure in this area could become its Achilles heel. Not surprisingly, more than half of the bank’s increase in credit losses from one quarter earlier were due to residential junior liens — net charge-offs reached $438 million in Q1, versus $277 million at the end of last year. First liens also proved problematic, although on a lesser scale in absolute dollar terms. Charge-offs on residential 1-4 first mortgages more than doubled within one quarter, reaching $75 million in Q1 compared to $34 million just one quarter earlier. While the losses here are smaller in relative terms, the significant jump within one quarter should provide some pause if the economy continues to sputter, as most economists now expect. Looking at non-performing assets, the bank reported that residential mortgages contributed $542 million of the company’s $1.6 billion worth of loans 90 days or more past due and still accruing by the end of the first quarter (this total doesn’t include GSE guaranteed loans, for obvious reasons). That’s an increase of 11.2 percent in NPAs within one quarter; residential mortgage NPAs are up 143 percent versus year-ago levels. Disclosure: The author held no positions in WFC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.