Wells Fargo & Company (NYSE:WFC):

Wells Fargo & Company (NYSE:WFC) reported diluted earnings per common share of $0.55 for second quarter 2010 compared with $0.45 for first quarter 2010 and $0.57 for second quarter 2009. Net income was $3.06 billion for second quarter 2010 compared with $2.55 billion in first quarter 2010 and $3.17 billion in second quarter 2009. For the six months ended June 30, 2010, the Company's net income was $5.6 billion, or $1.00 per share, compared with $6.2 billion, or $1.13 per share, a year ago.

?Over the course of the quarter, our 278,000 team members focused steadfastly on serving customers, generating strong earnings performance across our diverse lines of business and increasing market share across many of our businesses,? said Chairman and CEO John Stumpf. ?We also made strong progress in the successful integration of Wachovia. We have completed approximately half of the integration process, as we prepare to convert our eastern markets to Wells Fargo beginning in the fall.

?Wells Fargo's consistent business model and strong financial performance position us to serve a key role as our nation continues to recover from the recent financial crisis and regain its economic vibrancy and leadership. Having long supported a legal and regulatory environment that promotes consumer protections, financial reporting transparency and clarity, as well as prudent risk management, we support the general principles inherent in the financial reform bill, as they are consistent with how Wells Fargo operates. We remain concerned that some aspects of regulatory reform may have unintended negative impacts for America's financial system, consumers and businesses.

?Nevertheless, as this new chapter in financial services begins, we will remain true to our time-tested business model by deepening customer relationships, cross selling our array of financial products, increasing the number of accounts and providing superior customer service. We are encouraged by signs of continued improvement in the credit landscape. We remain confident about Wells Fargo's future and are optimistic about America's road to financial recovery.?

Financial Performance

?We were very pleased with the Company's financial results this quarter,? said Chief Financial Officer Howard Atkins. ?While economic recovery in the U.S. and abroad remained uneven, Wells Fargo earned record net income applicable to common stock of $2.9 billion, with net income of $3.06 billion – the fourth time since the merger that quarterly net income was greater than $3.0 billion. Despite declining loan demand since early last year and lower mortgage hedging results in second quarter, total revenue and pre-tax pre-provision profit remained strong at $21.4 billion and $8.6 billion, respectively, with linked-quarter growth in the franchise driven by businesses as diverse as commercial banking, investment banking, wealth management, asset-based lending, auto dealer services, debit card and global remittance. In the six quarters since the merger with Wachovia, Wells Fargo has earned cumulative profits of $17.9 billion reflecting the breadth of our business model and the power of the consolidation with Wachovia. The merger integration activities are proceeding on track and the combined company continues to produce financial results including revenue synergies better than our original expectations. We believe credit quality has indeed turned the corner, with net charge-offs declining to $4.5 billion, down 16 percent from first quarter and down 17 percent from last year's peak quarter, and we expect this positive trend will continue over the coming year. Our capital ratios continued to build rapidly, with Tier 1 common reaching 7.53 percent and Tier 1 capital at 10.42 percent, even with the purchase of $540 million of Wells Fargo warrants auctioned by the U.S. Treasury.?

Revenue

Revenue was $21.4 billion, essentially flat from first quarter, and pre-tax pre-provision profit was $8.6 billion. Reflecting the breadth and growth potential of the Company's business model, many businesses had double-digit revenue growth linked quarter including commercial and corporate banking (deposit growth, an increase in new loan commitments and higher loan resolution income), investment banking (syndication activity), commercial real estate brokerage (deal flow), asset-based lending (loan volume and syndications), international (customer foreign exchange activity), auto dealer services (loan growth), merchant service (processing volume), and debit cards (increased account activity).

Net Interest Income

Net interest income was $11.4 billion, up 11 percent (annualized) from $11.1 billion in first quarter 2010. The net interest margin increased 11 basis points from the prior quarter to 4.38 percent. Most of the increase in net interest margin in the quarter was due to additional PCI loan resolution income. Continued strong growth in consumer and commercial checking and savings accounts offset the impact on income and margin from the decline in loans.

Noninterest Income

Noninterest income was $9.9 billion compared with $10.3 billion in first quarter 2010 and $10.7 billion a year ago. The year-over-year decline was due to lower mortgage banking revenue. Linked quarter results reflected solid growth in deposit services (up 26 percent annualized on account growth), trust and investment fees (up 11 percent annualized on customer and balance growth), and card fees (up 21 percent annualized on seasonally higher customer activity). Trading revenue declined $428 million linked quarter, partially offset by a $245 million increase in net gains from equity investments.

Mortgage banking noninterest income of $2.0 billion included:

-- $793 million in revenue from mortgage loan originations/sales activities on $81 billion of originations. Mortgage applications were $143 billion and the mortgage application pipeline was $68 billion at quarter end, up $9 billion, or 15 percent, from prior quarter end. Second quarter origination revenue was reduced by a $382 million addition to the mortgage loan repurchase reserve compared with a $402 million addition in first quarter.

-- $1.2 billion of servicing income, down $148 million from the prior quarter. Net MSR hedge results were $626 million, down $363 million from prior quarter. Net hedge results in second quarter reflected a $2.7 billion decline in the fair value of MSR (due primarily to a 72 basis point decline in mortgage rates) offset by a $3.3 billion increase in the value of the hedge including carry income. MSRs as a percent of loans serviced for others declined 13 basis points to 0.76 percent, the lowest ratio since March 31, 2009, and the average note rate was 5.53 percent, the lowest since Wells Fargo reentered the servicing business. The reduction in net MSR hedge results was partially offset by lower servicing foreclosure costs due to an improvement in servicing portfolio delinquencies from loan modification and loss mitigation activities.

At June 30, 2010, the Company had net unrealized gains on securities available for sale of $8.6 billion, compared with $7.4 billion at March 31, 2010.

Noninterest Expense

Noninterest expense was $12.7 billion compared with $12.1 billion in first quarter 2010. Second quarter noninterest expense included $498 million of merger-related costs (up $118 million from prior quarter) and $137 million of severance costs related to the previously announced Wells Fargo Financial restructuring. Operating losses were $627 million, up $419 million from the prior quarter primarily due to additional litigation accruals. The efficiency ratio was 59.6 percent compared with 56.5 percent in the first quarter and 56.4 percent in second quarter 2009, with the increase largely due to additional merger expenses, litigation accruals and Wells Fargo Financial's restructuring costs.

Loans

Average total loans were $772.5 billion compared with $797.4 billion in first quarter 2010 and $833.9 billion a year ago reflecting continued lower demand for credit from consumer customers. ?Several consumer portfolios increased during the quarter, including auto dealer services, private student lending and Wealth, Brokerage and Retirement,? said Atkins. ?We saw other consumer portfolios declining at a lower rate, including Wells Fargo Home Mortgage, credit card, and consumer lines and loans. On the commercial side, for the first time this year, we saw an increase in lending activity and line usage. Of the $55 billion decline in total loans year over year, $26 billion were in higher-risk, non-strategic portfolios that were in run-off mode,? said Atkins.

Deposits

Average total core deposits were $761.8 billion compared with $759.2 billion in first quarter 2010 and $765.7 billion in second quarter 2009. Consumer checking accounts grew a net 7.4 percent from second quarter 2009. Average mortgage escrow deposits were $25.7 billion, compared with $24.6 billion in first quarter 2010. ?We're very pleased with our success in attracting and retaining customer deposits and by the characteristics of our deposit base,? said Atkins. ?By the end of the quarter, core deposits fully funded the Company's loan portfolio. Average consumer checking and savings deposits increased 10 percent from a year ago to $672 billion. Year over year, CDs declined $63 billion, primarily the result of $57 billion of higher-cost Wachovia CDs maturing, yet total core deposits were down only $3.9 billion from a year ago. Checking and savings deposits represented 88 percent of total core deposits. Our average deposit cost was 35 basis points.?

Capital

Capital ratios continued to increase in the second quarter reflecting strong internal capital generation. As a percentage of total risk-weighted assets, Tier 1 capital increased to 10.4 percent, total capital to 14.4 percent, Tier 1 leverage to 8.6 percent and Tier 1 common equity to 7.5 percent at June 30, 2010, up from 9.9 percent, 13.9 percent, 8.3 percent and 7.1 percent, respectively, at March 31, 2010. The Company repurchased $540 million of warrants from the U.S. Treasury during the quarter, which reduced the Tier 1 common ratio by approximately 5 basis points.

Credit Quality

?Last quarter we said we believed credit losses and provision expense had peaked,? said Chief Credit and Risk Officer Mike Loughlin. ?This quarter's significant reduction in credit losses confirmed our prior outlook and, in fact, we have seen credit quality improve earlier and to a greater extent than we had previously expected. Quarterly credit losses declined 16 percent to $4.49 billion in the second quarter from $5.33 billion in the first quarter. This improvement in losses was significant and broad based across the consumer portfolios, with reduced losses in the home equity, Wells Fargo Financial, Pick-a-Pay, consumer lines and loans, auto dealer services and credit card portfolios. Losses in the commercial portfolio continued to improve from the higher levels experienced last year, including a 10 percent linked-quarter reduction in commercial real estate losses. We also saw improvement in early indicators of credit quality, with improved 30 day delinquencies in many portfolios, including business direct, credit card, home equity, student lending and Wells Fargo Home Mortgage. Based on declining losses and across-the-board improved credit quality trends, the provision of $4.0 billion was $500 million less than net charge-offs in the second quarter. Absent significant deterioration in the economy, we currently expect future reductions in the allowance for loan losses.

?The continued improvement in credit performance is a result of a slowly improving economy coupled with actions taken by Wells Fargo over the past several years to improve underwriting standards and exit portfolios with unattractive credit metrics. We have seen the positive impact of these actions in the current quarter and in projected losses for future quarters.?

Credit Losses

Second quarter net charge-offs were $4.5 billion, or 2.33 percent of average loans (annualized), down from first quarter net charge-offs of $5.3 billion, or 2.71 percent. Total credit losses included $1.3 billion of commercial and commercial real estate losses (1.80 percent), down $30 million from first quarter, and $3.1 billion of consumer losses (2.79 percent), down $817 million from first quarter, as shown in the following table.