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Wells' Profit Rises 11% on Loan Business

The bank cites its nonmortgage activities. Mortgage-dependent Downey Financial posts a 4% drop in net income.

October 18, 2006|E. Scott Reckard | Times Staff Writer

Wells Fargo & Co. reported 11% higher third-quarter profit Tuesday despite the slowing housing markets, with strength in commercial lending and nonmortgage consumer loans helping the San Francisco-based company.

Lower home-loan volume and rising provisions for losses drove earnings down 4% at Newport Beach-based Downey Financial Corp., whose Downey Savings is an adjustable-rate-mortgage specialist.

Wells Fargo, the fifth-largest U.S. bank, earned $2.19 billion, or 64 cents a share, up from $1.98 billion, or 58 cents, in the same quarter of 2005. Revenue rose 5% to $8.93 billion.

Excluding mortgage lending, which is declining, revenue rose 13%, Wells said.

"The stagecoach was running on the full horsepower of our diversified business model," Wells Chief Executive Richard Kovacevich said in a statement.

Double-digit revenue growth in such business lines as loans to consumers with credit problems, commercial banking and real estate finance, regional banking and credit cards offset a sharp decline at Wells Fargo Home Mortgage.

After adjusting for a special item, Wells' profit met Wall Street expectations and its revenue fell just short of estimates, analysts at Friedman, Billings & Ramsey noted. Wells shares rose 28 cents to $36.48.

Downey earned $57.2 million, or $2.05 a share, down from $59.7 million, or $2.14, a year earlier. Third-quarter loan originations, including purchases, totaled $1.61 billion, down 56% from $3.64 billion.

Revenue totaled $160.9 million during the quarter, up from $155.6 million in the third quarter of 2005.

Downey reported a $14.7-million decline in gains on sales of loans and mortgage-backed securities resulting from a lower volume of loans sold. It also recorded a $10.4-million increase in its provision for losses on loans.

Most of Downey's loans give borrowers the option of paying less than the full interest in the early years of a mortgage, with the difference added to the loan.

Analysts and consumer groups have criticized the loans as risky for financial institutions and potentially devastating for borrowers who aren't prepared for sharply higher payments when the easy-money period runs out. Longtime specialists in the loans, including Downey, have said they take care to advise borrowers of the risks and ensure they can handle the higher payments.

Like other federally insured banks and savings and loans, Downey has been pressured by regulators -- in its case the Office of Thrift Supervision -- to be more cautious in making the loans, especially when also allowing borrowers to provide limited documentation of their incomes.

In March, Downey raised its initial teaser rates, making its loans less risky but also less attractive to borrowers stretching to purchase homes.

In September, it lowered the teaser rates again -- but only for borrowers with high credit scores and large down payments.

Downey President Daniel D. Rosenthal said in the earnings statement that it was too early to project the long-term effect on earnings of those changes and of the regulators' concerns, recently formalized as "guidance" by the Federal Deposit Insurance Corp. Downey shares sank $1.20 to $68.23.

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scott.reckard@latimes.com

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