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Since peaking in 2009, Wells Fargo's (NYSE:WFC) annual revenue has declined. This year the firm's revenue is on pace to continue declining. The firm reported third quarter total interest income of $11.9 billion. That compares with $12.4 billion in 2012's second quarter. Interest income in the year-ago quarter was $12.2 billion.

On the other hand, net income has increased every year since at least 2008. Net income is on pace to increase this year. Net income in the third quarter was $4.9 billion. It was $4.6 billion in the second quarter and $4.1 billion in the year-ago quarter. The top-line may be declining, but cost cuts flowed to the bottom line. The firm can't continue to cut cost forever.

Net interest margin is declining. Net interest margin in the third quarter was 3.66 percent. That compares with 3.91 percent in the second quarter and 3.84 percent in the year-ago quarter.

Total equity has increased every year since at least 2008. Total equity at the end of the third quarter was $154.7 billion. That compares with $148.1 billion in second quarter and $145.5 billion at the end of the first quarter.

Cash remains below 2009's end-level $27 billion. Currently, the cash balance is stated as $17 at the end of the third quarter.

At the end of 2011, Wells Fargo's profit margin reached 32 percent. That is up from 23 percent at the end of 2010. In the third quarter of 2012, the net profit margin was an astounding 41.4 percent.

Financial leverage declined from 13.22 at the end of 2008 to 9.37 at the end of 2011. That means revenue growth won't have as much of an impact on EBIT growth.

At the end of 2011, Wells Fargo's return on equity was 12 percent. That is better than most of its peers in the industry.

Based on the estimates of intrinsic value, using a present value dividend discount model, Wells Fargo is fairly valued. The model assumes the dividend remains the same over the next year. That said, based on the recent multiplier model price-sales valuations Wells Fargo is pulling back from overvalued. I would consider Wells Fargo to be fairly valued-overvalued.

Segment Data

Revenue from community banking declined compared to the year-ago quarter and the second quarter. Revenue was $7.24 billion in the third quarter, $7.31 billion in the second quarter, and $7.27 billion in the year-ago quarter. Community banking revenue is trending lower.

Wholesale banking revenue is trending higher. That said, revenue declined sequentially and increased compared to the year-ago quarter. Revenue in the third quarter was $3.03 billion. Revenue in the second quarter was $3.35 billion.

Wealth, brokerage and retirement revenue is trending higher. That said, revenue declined compared to the year-ago quarter and the second quarter. Revenue in the third quarter was $680. Revenue in the second quarter was $698 million.

We are seeing some discouraging trends in segment revenue data. The largest segment's revenue is declining. Increases in revenue from wholesale banking are cushioning the decline in revenue from community banking. Investors will have to monitor revenue from both segments for declines.

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Conclusion

Overall, the financial performance of Wells Fargo is good. There are some disturbing trends in the data, but we'll have to see if those trends continue. I remain bullish on shares of Wells Fargo, however, investors may want to decrease long equity exposure as uncertainty stemming from the fiscal cliff, US elections, US corporate earnings, and US elections could weigh on shares. Further, the economic data has been excellent recently and may be due to disappoint investors.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus, his opinions may not be suitable for all investors.

Disclosure: I am short SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Wells Fargo Shares Still Fairly Valued To Overvalued