Wells Fargo & Co.'s ( 33.48 -0.10 -0.30%) first quarter 2010 operating earnings per share was 50 cents, topping the Zacks Consensus Estimate of 42 cents. Net income applicable to common stock came in at $2.55 billion or 45 cents per share compared to $3.05 billion or 56 cents in the prior-year quarter. This included after-tax integration expenses of $247 million or 5 cents per share.
During the quarter, Wells Fargo earned $21.4 billion (up 2% year-over-year) of combined revenue, driven primarily by 20% growth in trust and investment fees, 7% growth in insurance fees and 14% growth in processing and other fees. While total mortgage banking remained flat, results for mortgage hedging reduced drastically.
Net interest income for the quarter came in at $11.1 billion, down from $11.5 billion in the prior quarter. While earning assets were down at $1.07 trillion, the decline in core loans, the reduction in non-strategic assets and mortgage-backed securities reduced net interest income growth although net interest margin (NIM) increased to 4.27% from 4.16% year-over-year.
However, these declines were offset by significant growth in non-interest-bearing checking and savings deposits and wider new lending spreads, which are expected to be beneficial for net interest income over the long term.
Total non-interest income came in at $10.3 billion, up 7% year-over-year, primarily due to continued strength in trust and investment fees and insurance revenue. This was partially offset by a decline in mortgage banking, card and deposit service charges. Non-interest expense for the quarter came in at $12.1 billion, down from $12.8 billion in the prior quarter.
Total core deposits of $759.2 billion at Mar 31, 2010 were down from $770.8 billion at Dec 31, 2009. Growth in low-cost savings accounts and consumer checking accounts were offset by decline in mortgage escrow deposits.
Credit quality continued to deteriorate, although improvement was witnessed in net charge-offs that declined to $5.3 billion or 2.71% of average loans compared to $5.4 billion or 2.71% of average loans in the prior quarter. However, nonperforming assets increased to $31.5 billion or 4.00% of total loans compared to $27.64 billion or 3.12% of total loans in the prior quarter. Allowance for credit losses was $25.7 billion at Mar 31, 2010 compared to $25.0 billion at Dec 31, 2009.
Net unrealized gains on securities increased to $7.4 billion from $5.6 billion at Dec 31, 2009. Wells Fargo's total assets as of Mar 31, 2010, were $1.22 trillion and total loans were $781.4 billion.
At Mar 31, 2010, Wells Fargo shareholders equity was $116.1 billion, compared to $111.8 billion at Dec 31, 2009. Capital ratios remained strong with tier I capital and total capital ratios at 10.0% and 13.9%, respectively, compared to 8.3% and 12.3%, respectively, year-over-year. Book value per share improved to $20.79, up from $20.03 in the prior quarter and $16.28 year-over-year.
Business Update
During the reported quarter, the company converted 20 Wachovia banking stores in Arizona, Nevada and Illinois to Wells Fargo. The Wachovia merger integration remained on track and is expected to realize $5 billion of annual merger-related savings upon completion of the integration process in 2011. The company has achieved 70% of this targeted consolidated run-rate savings. Additionally, cumulative integration costs are now expected to be about $5 billion, of which $2 billion is expected to be incurred in 2010.
The company is on track with its loan modification programs and the Wachovia merger. However, the combined entity's large exposure to mortgage/real estate loans and the integration costs associated with the merger will continue to impact its earnings throughout 2010, even though Wells Fargo has not suffered as much from the current mortgage crisis as some of its peers due to its disciplined lending approach.
Although there is lot of uncertainty regarding the commercial sector, especially due to the credit crunch and regulatory and fiscal policy issues in the near term, we believe that Wells Fargo's cross-selling ability, strategic Wachovia cost-integration and a diverse business portfolio along with better-than-expected growth in investment banking will drive long-term growth and add to investors' confidence.
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