Wells Fargo & Co. reported a record quarterly profit on Wednesday tied to strong mortgage banking results and the purchase of Wachovia Corp., but a 45 percent surge in nonperforming assets from the first quarter dampened results.
Wells Fargo shares fell 5.9 percent to $23.98 in premarket trading.
Nonperforming assets, where borrowers are not making payments, soared to $18.34 billion from $12.61 billion in the first quarter, including a 69 percent increase from commercial and commercial real estate loans.
Net charge-offs rose 35 percent from the first quarter to $4.39 billion. The bank added just $700 million to credit reserves, giving it $23.5 billion.
"The results I think are going to be disappointing," said Paul Miller, an analyst at FBR Capital Markets. "They continue to underprovision relative to their charge-offs."
Many analysts have expressed worry that San Francisco-based Wells Fargo will need to raise more capital to cover losses from real estate loans, including the option adjustable-rate mortgages it inherited when it bought Wachovia.
Chief Credit Officer Mike Loughlin said the bank expects credit losses and nonperforming assets to increase despite "some moderation" in the rate of growth in some consumer portfolios.
Second-quarter net income applicable to common shareholders increased 47 percent to $2.58 billion, or 57 cents per share, from $1.75 billion, or 53 cents, a year earlier.
Before payment of dividends, earnings rose 81 percent to $31.7 billion, the bank said. Revenue nearly doubled to $22.51 billion, with 39 percent of the total coming from Wachovia.
Regulators have not permitted Wells Fargo to repay its federal bailout money, though the bank said it has built a $13.7 billion capital buffer required under a federal "stress test" of its ability to weather a deep recession.
The bank said its loss reserves should cover 12 months of consumer loan losses and 24 months of commercial and commercial real estate loan losses. Wells Fargo took a $37.2 billion writedown on riskier Wachovia loans when it bought that bank.
Quarterly results reflected per-share charges of 8 cents tied to helping replenish a federal deposit insurance fund, and 3 cents tied to merger and restructuring costs.
Wells Fargo made $129 billion of home loans in the quarter, up 28 percent from the first quarter, and got $194 billion of home loan applications in the quarter. It ended June with $90 billion of mortgages yet to be closed.
The bank’s largest shareholder is Warren Buffett’s Berkshire Hathaway Inc.
Through Tuesday, the bank’s shares had fallen 14 percent this year, compared with a 19 percent drop in the KBW Bank Index.
