Oct. 17: Housing hits Wells Fargo

Wells Fargo & Co. and U.S. Bancorp reported third-quarter earnings Tuesday that suggested bad mortgages were not a plague on both their houses. Just one.

While U.S. Bancorp results were unbowed, if not unscathed, by the troubles in the home-loan market, Wells Fargo reported the slowest profit growth in more than six years at a time of sinking home prices and rising strains on mortgage holders.

U.S. Bancorp met consensus forecasts for earnings. Wells Fargo fell short.

At first glance, overall financial results for July, August and September made the results of Minneapolis-based U.S. Bancorp seem like the laggard. Its earnings per share came to 67 cents, a gain of only 1.5 percent from a year earlier.

Meanwhile, San Francisco-based Wells Fargo, second-largest bank in Minnesota, reported a 6 percent gain in earnings per share, or 68 cents in the third quarter, compared with 64 cents in the same period of 2006.

But looking deeper, details of Wells Fargo's financials had bank analysts -- who had been expecting 70 cents per share -- more concerned than did the fine print of the U.S. Bancorp third-quarter statement. Wells Fargo shares fell 3.9 percent, or $1.46, to $34.55 in Tuesday's trading; U.S. Bank shares slipped 0.5 percent, or 16 cents, to $32.35.

"There were no real surprises with U.S. Bancorp's results, which is quite commendable given the challenges we've seen in the industry," said Tom Kersting, banking analyst at Edward Jones & Co., a St. Louis-based brokerage firm. The U.S. Bancorp results were relatively free of loan write-downs and credit losses, he said.

Others drew the same conclusion.

"We had no complaint with U.S. Bancorp's earnings," said Gary Townsend, bank analyst at FBR Capital Markets, based in Arlington, Va.

U.S. Bancorp's results set it apart from many other big banks, Keith Horowitz, bank analyst at Citicorp, wrote in a report to investors.

"Overall, we would say the quarter was in line [with expectations], but relative to other banks in the third quarter we expect this [U.S. Bancorp's results] to be one of the better quarters," he said.

U.S. Bancorp gave some of the credit for its results to where it does much of its business (a Midwestern region relatively free of the extreme drops in housing prices seen on the East and West coasts) and to careful lending practices in its home markets.

"Probably it's a little of both," U.S. Bancorp vice chairman and chief financial officer Andrew Cecere said in an interview.

"Our earnings this quarter, I think, demonstrate we've been quite prudent from a credit-quality standpoint, from a risk-management standpoint," Cecere said. "That has served us well because these are quite turbulent times in banking."

Wells Fargo is another story in the eyes of banking industry watchers.

"Credit quality did deteriorate more than people expected," Kersting said.

Total nonperforming assets were $3.18 billion as of Sept. 30, up from $2.72 billion at the end of the second quarter and $2.1 billion at the end of the third quarter, 2006, Wells Fargo reported.

A challenging quarter

Net credit losses at Wells Fargo in the third quarter were $892 million -- or about 1 percent of average loans on an annualized basis -- up from $720 million in the second quarter and $663 million in the third quarter of 2006.

"Given the severe disruption [in] the credit markets, it was a challenging quarter, to be sure," John Stumpf, Wells Fargo chief executive, said in a prepared statement.

But, he added: "Despite that, we had strong growth in revenue and earnings per share, as our team members remained focused on our time-tested, diversified business model."

Some banking analysts were willing to give Wells Fargo credit, predicting it will thrive -- in the long run.

"We still would say Wells will emerge as a principal beneficiary of all the shakeout in the mortgage space," Townsend said, noting that some lenders are exiting the home loan business in the face of financial distress.

But Wells Fargo's long-term prospects may be different from its financial situation in the months ahead. "At the same time, they're not immune," Townsend said.

Wells Fargo is the nation's second-largest mortgage lender, behind deeply troubled Countrywide Financial Corp., which said last month it would slash its workforce by 12,000 jobs or nearly 20 percent. Countrywide, which will release earnings next week, is expected to report a loss of about $1 per share, according to Bloomberg News.

Mike Meyers • 612-673-1746

Mike Meyers • meyers@startribune.com