It's indisputable that with earnings of more than $3.3 billion, Wells Fargo & Co. enjoyed "the best quarter in our company's history," as its chief executive John Stumpf proclaimed at the open of its earnings call.
But a near-record of mortgage refinancings and expense control were essential to grinding that profit out as loan demand sputtered again.
Executives insisted Wednesday that Wells can keep increasing profits without a broad economic recovery. Others weren't so sure.
"Wells always says that," said Paul Miller, managing director of FBR Capital Markets. He praised the company's results and solid credit quality but said sustaining growth without economic improvements will be tough. "Wells is a good company, but it's also a very, very confident company."
On Wednesday, Wells' management sought to make the case that a continuation of the positive trends of the third quarter, coupled with incremental gains in basic banking and cross-selling at legacy Wells and its former Wachovia operations, could maintain the company's momentum even as lucrative ways to deploy capital remain scarce.
"Every time our financial advisory system cross-sell a mortgage, that's an ROA enhancer. Every time we bring in new checking accounts in New Jersey or California, that's an ROA enhancer," said Howard Atkins, Wells' chief financial officer, in an interview after the call. "I'd say very little of that is the result of what happens in the economy."
Wells reported there were some credit improvements in the quarter. Mortgage originations rose 25%, to $101 billion, and the mortgage unit's earnings more than doubled from the previous quarter, to $2 billion. Given another $101 billion of applications in the company's pipeline, origination profits may grow further next quarter.
"Rates are so far below where most homeowners have their mortgage that the potential for everybody in the country to refinance their mortgage is huge," Atkins said.
Aside from the strength in its mortgage division, a significant portion of Wells' results came down to avoiding some of the large, non-credit-related costs bedeviling its competitors.
In discussions with analysts, Stumpf and Atkins repeatedly argued that sound underwriting and servicing practices would keep the bank's exposure on repurchase requests relatively modest — and its foreclosure documentation troubles nearly nonexistent.
Early in the call, Stumpf distanced Wells' mortgage documentation processes from "business practices within our industry" that have raised concern. While other companies may have regularly fallen short of appropriate record keeping, any flaws Wells' paperwork suffers would be isolated and correctable, he said.
Wells has been "doing the hard work early and building processes that adhere to our standards as a company."
Likewise, Wells so far appears to be faring better than some of its peers in facing mortgage repurchase requests from government-sponsored housing finance entities and private investors. Wells' servicing portfolio has an 8.5% average delinquency and foreclosure rate, 3% below the industry average, meaning that fewer loans will be contested.
Overall, Wells' repurchase requests outstanding dropped from $4.3 billion to $3.8 billion between the second and third quarter. The company's average loss on such claims is 18.5%, Atkins said.
Expense reductions outside of repurchase requests also played a significant role. Wells' total noninterest expenses dropped 15% quarter over quarter, in part because of second-quarter costs from shuttering its stand-alone subprime lending unit and lower provisions for litigation. Atkins predicted that merger costs — $476 million for the quarter — would "trail off" within a few quarters, and noted that the $750 million quarterly cost of handling distressed loans would eventually shrink.
"Where we've had any expense growth has been entirely in sales-related activities," he said, citing the more than 1,200 employees the bank recently hired to accommodate the increased sales staff in converted Wachovia branches.