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Banks Cope With Loan Losses

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By MICHAEL LIEDTKE, The Associated Press

Published: October 17, 2007

SAN FRANCISCO - Wells Fargo & Co.'s profit grew at its slowest pace in more than six years during the third quarter, dragged down by deteriorating home loans likely to cause more trouble in the months ahead.

The story was similar at U.S. Bancorp, whose earnings slipped by 2 percent amid a traumatic housing downturn that's threatening to yank the economy into a recession.

Wells Fargo, the fifth-largest U.S. bank, said Tuesday that it overcame the rocky market conditions to produce a profit of $2.28 billion, or 68 cents a share, during the three months that ended in September. That was a 4 percent increase from net income of $2.19 billion, or 64 cents a share, a year ago.

It's the first time that Wells Fargo's quarterly profit has risen by less than 5 percent since the San Francisco-based bank suffered an $87 million loss in spring 2001 after it absorbed more than $1 billion in charges to account for the financial fallout from the dot-com bust.

The results fell below the average earnings estimate of 70 cents a share among analysts polled by Thomson Financial.

'Bruised,' Not Broken

Wells Fargo's revenue during the period improved 10 percent to $9.85 billion, but that figure also lagged the average analyst estimate of $10.03 billion.

'They came out of the quarter bruised, but by no means broken,' RBC Capital Markets analyst Joe Morford said.

In an expression of investors' concern, Wells Fargo shares shed $1.40 to close at $34.55 on Tuesday.

U.S. Bancorp's third-quarter earnings fell $1.18 billion, or 67 cents a share, from $1.2 billion, or 66 cents a share, at the same time last year. The performance was a penny above the average analyst estimate, according to Thomson Financial.
Wells Fargo appears to be weathering the storm so far because it focuses more on basic consumer and business lending while limiting its exposure to the more exotic mortgage and hedging instruments haunting Citigroup and other large U.S. banks.

The third quarter did raise some red flags, though.

Like many other lenders, Wells Fargo is being hurt by a combination of crumbling home values and overextended borrowers who can't afford to make their monthly mortgage payments as once-low adjustable interest rates reset to higher levels.

'The housing sector is weak and we are not immune to that,' said Howard Atkins, Wells Fargo's chief financial officer.

The turmoil prompted Wells Fargo to mark down the value of its mortgages by $490 million during the quarter.

U.S. Bancorp is sharing in the pain. The Minneapolis-based bank said its provision for bad loans soared 50 percent to $199 million, largely because of difficulties in the home-building and mortgage industries.

Wells Fargo's most nettlesome problems involve loans made to borrowers who turned their homes into personal piggy banks as property values steadily rose through much of the United States from 2000 to 2005.

The bank recognized $153 million in losses on home equity loans in the third quarter, up by more than fivefold from $27 million in losses at the same time last year. Wells Fargo warned that its losses on home equity loans are likely to climb higher in the current quarter and remain at 'elevated levels' next year.

Losses On Late Loans

Atkins said the bank is having the toughest time collecting from homeowners in parts of the Midwest and California's Central Valley, where many borrowers now owe more money than their properties are worth.
Wells Fargo ended September with about $83 billion in home equity loans on its books. The bank held another $67 billion in so-called first mortgages - typically the loans used to buy the property. Well Fargo's losses on first mortgages totaled just $16 million in the third quarter.

The bank's overall loan losses in the quarter totaled $892 million, a 46 percent increase from $613 million at the same time last year. The losses represent about 1 percent of Wells Fargo's total loan portfolio, up from 0.86 percent a year ago.

In a telling indication of mounting stress facing borrowers, Wells Fargo said payments on $1.26 billion in loans were at least 90 days late. That was up by 16 percent, or $177 million, from the end of June.

U.S. Bancorp said its troubled loans have climbed 13 percent to $641 million since June 30.

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