Wells Fargo has record quarter but concerns remain

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Wells Fargo & Co. (WFC) today became the latest financial institution to report record-setting earnings. Not all of the "records," however, are good.

Net income at the San Francisco-based company soared to $3.05 billion, or 56 cents a share, in the first quarter, up 53 percent from $1.99 billion, or 60 cents, a year earlier. The difference in the per-share figures is due to an increase in the number of shares outstanding.

Revenue almost doubled to $21 billion, as Wells Fargo benefited from the Wachovia acquisition and gains in legacy businesses. Analysts were expecting earnings of 41 cents per share on revenue of $19.37 billion, according to Thomson Reuters. Earlier this month, the bank stunned Wall Street by saying that first quarter earnings would be more than double analysts' expectations. Wells Fargo is trading down in pre-market action, perhaps on a "buy the rumor sell the news" move by investors.

Channeling the late John Houseman's ads for Smith Barney, Chief Executive John Strumpf bragged in the earnings press release "The best way to generate capital is to earn it." Chock that chestnut up right next to "buy low, sell high" in the business cliche hall of fame. But Strumpf, like many bank CEOs, feels entitled to feel a little cocky these days following the public relations beating they have taken for the past few months.

"This has long been the hallmark of our company and we're now seeing the initial signs of the earnings and capital-generating power of the combined Wells Fargo-Wachovia in our first quarter together," he said. "We are open for business and we're gaining wallet share and market share, as we've always done in economically challenging times, because we make fewer mistakes than our competitors in the so-called 'good times' and have fewer problems to fix."

Strumpf added in his "trash talk" by noting that Wells Fargo has extended $225 billion in credit, nine times the amount the U.S. Treasury invested in the combined company. Despite Strump's chest-thumping, these are hardly the days of wine and roses at the servicer of one out of every six mortgages in the U.S.

Net charge-offs for Wells Fargo were $3.3 billion, or 1.54 percent of average loans including $371 million in the Wachovia portfolio. But the scary part is what happened to the legacy Wells Fargo business where charge-offs rose to $2.9 billion from $2.8 billion in the fourth quarter results.

Though commercial and real estate losses remained at "relatively low levels," losses in residential real estate and credit cards rose modestly in the quarter, the company said. Wells Fargo may not be so lucky in the coming months.

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