Mortgages power Wells Fargo

Origination fees helped earnings rise 13 percent from a year ago. CEO Stumpf says the U.S. housing market is near its "tipping point."

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Wells Fargo, the nation’s fourth-largest bank, posted earnings Friday that beat analysts’ expectations, but its stock still dropped $1.18 to $32.84.

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Wells Fargo & Co. posted another record-setting quarter on Friday, thanks in large part to the bank's mortgage machine.

The nation's No. 4 bank continues to barrel through the weak economic recovery, posting record profits of $4.2 billion in the first quarter, up 13 percent from a year earlier, on revenue of $21.6 billion, up 6 percent. Earnings of 75 cents per share topped Wall Street estimates of 73 cents. Profits got a $400 million boost from the bank reducing the reserves it sets aside for covering soured loans.

The strong performance, however, couldn't overpower Friday's market sell-off. With markets down, Wells Fargo shares closed Friday at $32.84, down 3.5 percent.

J.P. Morgan Chase & Co., which saw its first-quarter profit drop 3 percent to $5.4 billion, helped Wells Fargo kick off the earnings season for large banks Friday. Shares in the New York-based banking giant closed Friday at $43.21, down 3.6 percent.

Some of Wells Fargo's drop likely stemmed from general concerns dragging on markets, such as China's slowing growth, renewed fears about Europe's financial markets and an unexpected jump in new unemployment claims.

But there's also some skepticism, said Nancy Bush, a bank analyst and contributing editor of SNL Financial in Charlottesville, Va. Many banks continue to juice their earnings by releasing cash from loan loss reserves, she said.

Plus, Wells Fargo's results got a surprise lift from investment banking gains -- a line of business that hasn't been a major focus for the consumer-oriented bank. The bank's investment banking revenue from commercial customers leaped 20 percent from a year ago, it said.

"I think there is some doubt about whether banks can continue to show these numbers," Bush said.

Wells Fargo & Co., based in San Francisco, employs about 20,000 people in Minnesota.

The bank's net interest income of $10.9 billion was largely flat from the fourth quarter on slow loan growth, and up just about 2 percent from a year earlier. But the bank's $10.7 billion in non-interest income -- such as checking account fees, trading revenue and a variety of other revenue including mortgage fees -- jumped 11 percent from a year ago. The growth was largely driven by mortgage banking and a surprise lift from market-related activity, including investment banking.

Wells Fargo is now the country's top mortgage originator and servicer, and it's riding a wave of homeowners refinancing their mortgages, activity that's been goosed by some new government programs. The bank recorded $2.9 billion in non-interest income from mortgage banking, up 42 percent from a year earlier and up 21 percent from the previous quarter.

Market share is increasing

"Clearly Wells is taking market share away not only from Bank of America but probably J.P. Morgan Chase as well," Raymond James analyst Anthony Polini said.

In a conference call with analysts Friday, CEO John Stumpf said Wells Fargo is "seeing improvement" in the nation's housing market, particularly in Northern California, Texas and Washington, D.C. A combination of higher rents, lower home prices and low interest rates is gradually easing the housing market into recovery, he said.

"We're getting very close to that tipping point," Stumpf said.

Meanwhile, the lender continues to pay for its earlier mortgage operations. Wells Fargo was one of five banks that participated in the $25 billion mortgage servicing and foreclosure settlement with the federal government and state attorneys general announced in February.

It also faces other litigation regarding mortgage-backed securities -- mortgages that were bundled and sold to investors on the secondary market. On Friday, it said it set aside $430 million for mortgage loan repurchase losses, up from $404 million the previous quarter.

The bank bought back 7.6 million common shares during the quarter and Stumpf reiterated that it would buy back more this year but didn't specify the amount. Last month, Wells Fargo said it was boosting its quarterly dividend payout to shareholders by 83 percent to 22 cents, up a dime from 12 cents.

In a matter unrelated to its earnings announcement, the bank confirmed Friday that it is closing down a "business banking support group" that operated at 733 Marquette Av. S. in downtown Minneapolis, eliminating a number of jobs there. Wells Fargo spokeswoman Peggy Gunn wouldn't say how many employees are affected. They're being laid off in two phases, some in June, others in October, she said.

Jennifer Bjorhus • 612-673-4683

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