Skip to main content

Updates with mention of Bove downgrade, closing share price




) --

Wells Fargo

(BAC) - Get Free Report

offered a rebuke to skeptics by posting a third straight quarter of record earnings on Wednesday, and predicted that next year will see the end of ongoing economic stress.

But while the San Francisco-based bank maintained its track record of forecast-beating results, and reassured investors about their

capital and credit concerns

, the company avoided making any statements about paying back bailout funds -- something it may not be able to do any time soon.

And the stock sold off sharply late in the session after Rochedale Securities analyst Dick Bove lowered his rating on the shares to sell from neutral and took issue with the quality of the company's earnings. The stock closed down 5.1% at $28.90, just above its session-low of $28.84.

Before the opening bell, Wells Fargo posted a profit available to common shareholders of $2.7 billion, or 56 cents per share, up 61% from the year-ago period. The company touted a bigger headline profit of $3.2 billion, which likely excludes preferred-stock dividends paid to the government for a $25 billion bailout investment.

Analysts had expected Wells Fargo to post a 37-cent per share profit, on average, according to Thomson Reuters.

Wells Fargo CFO Howard Atkins called the bank a "revenue machine," as results were driven by strong growth across several key divisions. Asset management, consumer and small lending, retirement services and wealth management all gained ground, while the mortgage business remained strong. Deposits were up 11%, net interest margins grew by 6 basis points and the firm extended $169 billion in new loans last quarter.

The company also predicted a peak of credit losses in the early part of 2010 -- more bearish than

Bank of America's

(BAC) - Get Free Report

forecast last week of the peak having come last quarter, but still a positive sign for the economy. Although Wells' net charge offs climbed to $5.1 billion and nonperforming loans rose to 2.93% of Wells' loan book last quarter, up from $4.4 billion and 2.23% the previous period, the pace of growth has moderated throughout the year.

"We are seeing signs of stability in our credit portfolio and, based on our current economic outlook, we expect credit losses to peak in 2010 with consumer losses potentially peaking in first half of the year and gradually declining as the year progresses," Atkins said in a prepared statement.

Wells Fargo management appears to be

more attuned to investors' concerns about credit costs and capital

. Atkins went on to note that Wells Fargo has "substantially less exposure" to credit cards, a particular area of concern for other large banks. Atkins said that where Wells Fargo does have "large exposure," in commercial and commercial real estate, management is "comfortable" with how the company's legacy loans were underwritten and are performing, and with how Wachovia's toxic assets were written down when the acquisition closed last year.

"We are on track - if not ahead - in terms of reducing Wachovia's credit risk," Atkins assured investors, adding that the worst acquired assets from Wachovia's "Pick-A-Pay" portfolio will likely lose less money than initially expected.

The firm also lifted Tier 1 ratios across the board, raising fresh capital through core earnings, as management has repeatedly promised Wells would do. It built reserves for near-term loan losses by $1 billion, to $24.5 billion. The reserve build was higher than last quarter, when Wells Fargo was criticized for under-reserving with a $700 million addition.

Nonetheless, its Tier 1 levels remain below those of competitors - including banks that have repaid bailout funds, like

JPMorgan Chase

(JPM) - Get Free Report


Goldman Sachs

(GS) - Get Free Report

, to those that haven't, like BofA and


(C) - Get Free Report

-- indicating that Wells Fargo may not pay back its $25 billion from the Troubled Asset Relief Program quickly.

The bank's ratio of Tier 1 common equity to risk-weighted assets was 5.2% at Sept. 30, up from 4.5% at the end of the second quarter. However,

the average bank that was strong enough to repay TARP

had a ratio of 8.43%, while the weaker firms had a ratio of 5.2%, according to the

Federal Reserve's

analysis of year-end data used for stress tests last spring.

Atkins didn't provide any additional information on when the bank may begin to repay TARP -- something management surely would have been asked about on a conference call. The closest the bank came to addressing TARP was its statement that it had overshot the Fed's stress test capital mandate by $6.3 billion, or 35%, over the past six months.

But Chairman and CEO John Stumpf -- who recently took over the reins completely from longtime leader

Richard Kovacevich

-- indicated a change in management's tight-lipped stance: For the first time ever, Wells Fargo will hold a live conference call for the fourth quarter, as well as an investor day next year.

"Wells Fargo has always been committed to providing clear, complete, and transparent communication about the Company's results to all of its stakeholders," Stumpf said in a prepared statement.

-- Written by Lauren Tara LaCapra in New York