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Wells Fargo posts record 1Q earnings; in line with forecast

NEW YORK — Wells Fargo & Co. on Wednesday reported a record first-quarter profit in line with its forecast, easily beating the average analyst estimate.

Despite the record results, Wells Fargo, like many major banks, continues to report higher credit costs.

Still, investors found the report satisfactory and sent the stock up more than 6 percent in morning trading.

Wells Fargo is among a number of the largest U.S. banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., that have reported better-than-expected profits. Morgan Stanley, however, posted a quarterly loss on Wednesday that exceeded Wall Street’s estimates, due in part to weakening commercial real estate investments.

Like the others, Wells Fargo attributed much of its profit growth to a surge in mortgage revenue, thanks in no small part to historically low interest rates.

Wells Fargo originated $101 billion of mortgage loans during the quarter — the highest level since 2003. This included $83 billion in applications in the month of March alone. What’s more, the bank added 5,000 employees in its mortgage unit to handle the influx of activity — in sharp contrast with many of its peers that have been cutting thousands of jobs to save expenses.

Analysts have warned that the increase in mortgage banking activity is likely not sustainable over a long period of time.

Chief Financial Officer Howard Atkins told the Associated Press that the bank had $100 billion of unclosed mortgage applications in the pipeline at the end of the first quarter — signaling that the momentum will continue at least into the second quarter.

The bank’s results prove Wells Fargo continues to navigate the financial crisis much better than many of its peers, analysts said.

“Certainly Wells Fargo isn’t immune to the challenging environment, and they are impacted by the weakening economy and higher credit losses,” said Tom Kersting, a financial services analyst at Edward Jones. “But they have shown that their discipline has resulted in better loan quality and that has shown through in this quarter.”

Wells Fargo also gave investors a positive update on the status of Wachovia’s troubled loan portfolio: no more losses on the most troubled loans are expected so long as credit conditions don’t materially worsen.

Wells Fargo bought Charlotte, N.C.-based Wachovia last fall at the height of the credit crisis and many investors have been worried that the bank’s deteriorating mortgage portfolio could prove more problematic than originally estimated.

When Wells Fargo bought Wachovia, it split its loan portfolio up into two categories: high-risk, or impaired, and low-risk.

Wells Fargo took a massive $37.2 billion writedown on the high-risk portion of Wachovia’s loan portfolio in the fourth quarter, which saddled the bank with a loss of $2.83 billion. Essentially, the bank removed from its balance sheet the entire estimated amount of losses on the riskiest loans at year end.

What remains is the portion of loans considered low risk, which have much lower loss content, Wells said. During the first quarter, losses on these loans totaled $371 million.

Legacy Wells Fargo chargeoffs, or loans written off as unpaid, were $2.89 billion, or 2.82 percent of average loans, up slightly from $2.8 billion, or 2.69 percent, in the fourth quarter. Nonperforming assets, or loans past due, totaled $12.61 billion, or 1.5 percent of total loans.

Wells Fargo earned $2.38 billion, or 56 cents per share, in the January-March period. This compares with $2 billion, or 60 cents per share, a year earlier.

The decrease in the 2009 earnings-per-share figure from a year ago was due to an increase in average common shares outstanding.

Before paying preferred dividends, the company earned $3.05 billion. Revenue for the quarter totaled $21 billion.

The report gave investors few surprises, as results were in line with the bank’s most recent forecast. Wells Fargo had dazzled investors earlier this month when it said it would report a record first-quarter profit of $3 billion, much more than analysts had been expecting. That sent its shares soaring 31.7 percent.

Analysts, on average, had predicted a profit of 23 cents per share on revenue of $19 billion. Since the announcement, the average analyst estimate increased to 41 cents per share.

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