Record Earnings at Buffett's Bank, Yet Problems Prevail (WFC, BRK-A)

Wells Fargo & Company (NYSE: WFC) just posted a record quarter for earnings.  The headline numbers are considerably better than estimates. This might make Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) happy as he is a huge backer of Wells Fargo with some 302 million shares.  But interestingly enough, shares are trading down by more than 5% in the early reception to the trading as the details of the quarter are so far creating a sell-the-news mentality.

Wells Fargo showed net income up 81% from a year ago at $3.17 billion and net income applicable to the common stock was up 47% to $2.58 billion.  This comes to an 8% rise in earnings to $0.57 EPS.

That $0.57 EPS figure is also after $700 million credit reserve build, or $0.10 off earnings, after FDIC special assessment of $565 million, or $0.08 off, and after and merger and restructuring expenses of $244 million, or $0.03 off earnings. Revenue came in at a record as well up 28% to $22.5 billion.  The bank said that Wachovia contributed 39% of consolidated revenue and noted that some $206 billion of credit was extended to customers.

Thomson Reuters showed estimates of $0.34 EPS and $20.49 billion in revenues.  As with other financial institutions, no guidance was given.

Account balances were up 20% on average on an annualized basis and its net interest margin was 4.30%.  The problem is that charge-offs rose to $4.39 billion from $3.26 billion.  The tier-1 capital ratio was 9.8% and the tier-1 common equity ratio was 4.49%; the tangible common equity ratio was 5.24%.  Wells Fargo does expect credit losses and nonperforming assets to rise.  Charge offs came in at 2.11%.

The problem with the supreme headline beat is that close to a billion came from a hedging gain and much was tied to mortgages which many feel won’t be there this quarter.  The headline looks great, but the inner workings look soft.  Shares are down 6% at $23.55 in pre-market trading.  Warren Buffett might be happy, but he still wants another stimulus package.

JON C. OGG