Wells Fargo In-Line, but Profit Drops

Updated from 9:05 a.m. EST

Wells Fargo(WFC Quote) shares were on the rise, despite posting a 38% drop in fourth-quarter profit due to the deepening slump in the mortgage market.

In the final three months of 2007, the bank, the nation's second biggest mortgage lender after Countrywide Financial(CFC Quote), reported profit dropped 38% to $1.36 billion, or 41 cents a share, compared to $2.18 billion, or 64 cents a share, in the year-ago period.

Wells Fargo met analysts' profit expectations of 41 cents a share on roughly $10 billion of revenue. Shares recently were up 66 cents, or 2.5% to $27.15.

The fourth-quarter results included a previously announced charge to set aside extra money to protect against loan losses in home equity loans -- the company's riskiest loan base. Wells Fargo announced in November that it would take a $1.4 billion provision, amounting to 27 cents a share, for current and future losses in approximately $12 billion worth of home equity loans, which were placed in a separate portfolio.

The loans were either purchased or originated through indirect channels, such as wholesale mortgage lending platforms and the correspondent channel, Wells said. The bank still has approximately $73 billion of home equity loans, most of which were originated through its retail franchise.

Like several other banks, Wells Fargo also took a $203 million pretax charge, or 4 cents a share, for a settlement between American Express(AXP Quote) against Visa and a host of member banks for allegedly conspiring to keep American Express out of the bank-issued credit card business.

"While we're not immune to the unexpectedly sharp and rapid downturn in housing, and our earnings were reduced in the fourth quarter by the $1.4 billion credit reserve build, primarily for home equity losses, we largely avoided the problems and costly asset writedowns many large financial institutions incurred," said CFO Howard Atkins.

"With our strong capital position, the challenges facing the industry and the significant upward repricing of asset spreads, we are finding significantly more opportunities now for acquisitions, portfolio purchases, and attractive loan and asset purchases than we have seen in the past five years," Atkins added.

Still, President and CEO John Stumpf said that he expects the environment to remain challenging in 2008, "particularly in the consumer sector."

Wells Fargo set aside a total of $2.6 billion in the quarter for loan losses, which included net charge-offs of $1.2 billion and the previously announced $1.4 billion provision.

Total nonperforming assets were $3.87 billion, an increase of 60% from the year-ago quarter, which included $2.68 billion of nonperforming loans, but also $535 million of Government National Mortgage Association repurchases and $649 million of foreclosed real estate and repossessed vehicles.

The majority of the increase was due to national rise in foreclosure rates and the company's decision to hold onto more foreclosed properties than it has historically, the bank said.

To date, the financial services industry has taken more than $100 billion in credit reserves builds and asset writedowns, according to Wells Fargo.

On Wednesday, JPMorgan Chase(JPM Quote) said it took $1.3 billion in writedowns from mortgage-related investments, which caused the New York-based bank to miss analysts' estimates by 6 cents a share. The nation's third-largest bank behind Citi and Bank of America(BAC Quote), JPMorgan saw profits fall by 34% from a year ago to $2.97 billion.

But both JPMorgan and Wells Fargo have remained relatively resilient, as many other financial services companies reel from multi-billion writedowns on mortgage-backed securities and collateralized debt obligations, or CDOs, as well as higher credit costs that are eating at their capital levels.

The persistent problems of the credit crunch and mortgage industry decline forced Countrywide to agree to sell itself to BofA for $4 billion last week. It also forced financial titan Citigroup(C Quote), which on Tuesday reported a fourth-quarter net loss of nearly $10 billion due to $18.1 billion in writedowns, to slash its dividend and seek additional capital in order to steady its business.