Wells Fargo & Co. continued to deliver steady earnings growth, countering rising credit costs in the first quarter with solid loan growth and net interest margin expansion.
Wells' net interest margin expanded to 4.95% in the first quarter. Howard Atkins, the San Francisco company's chief financial officer, said its net interest margin is benefiting from deposit growth and balance-sheet adjustments over the past year.
"Selling all of our lower-yielding securities and our adjustable-rate mortgages has been a big factor in boosting our loan yields more than most other banks in the country, and therefore our net interest margin has been stabilized as a result," Mr. Atkins said in an interview Tuesday.
Wells Fargo's net interest margin improved 10 basis points from a year earlier and 2 basis points from the fourth quarter.
By comparison, Wachovia Corp. of Charlotte reported Monday that its margin contracted 20 basis points from a year earlier and 8 basis points from the fourth quarter, to 3.01%.
Wells reported average loans of $321.4 billion were up 3% from a year earlier and up an annualized 12% from the fourth quarter. Excluding residential mortgages, average loans rose 13% from a year earlier. Average commercial and commercial real estate loans of $123 billion were up 11% from a year earlier and 12% on an annualized basis from the fourth quarter.
"Commercial loan growth was very consistent this quarter with the prior couple of quarters, it was reasonably solid," Mr. Atkins said.
Wells said earnings per share were 66 cents, up 6 cents from a year earlier and a penny ahead of Wall Street expectations. Net income rose 11%, to $2.24 billion.
Mr. Atkins said the $486 billion-asset company did well in net new checking accounts and in deposits.
"We had very good deposit growth, again. Core deposit growth was 10% in the quarter," he said.
Net interest income increased 3% from a year earlier, lifted by a 1% rise in earning assets and the net interest margin expansion.
Compared with the fourth quarter, net interest income fell 3%. Wells said a decline in the mortgage warehouse was partly to blame and noted that the quarter had two fewer days than the fourth quarter.
Noninterest income rose 20% from a year earlier and 1.6% from the fourth quarter, to $4.43 billion. Big drivers included debit and credit card fees as well as mortgage servicing fees, which rose 41% with help from Wells' 2006 acquisition of a $140 billion servicing portfolio from Washington Mutual Inc.
Revenue of $9.44 billion rose 10% from a year earlier and 0.3% from the fourth quarter.
Analysts lauded the performance but were skeptical about Wells' near-term future.
"The loan growth in the quarter was very impressive, but most other facets were challenging," Richard X. Bove of Punk, Ziegel & Co. wrote in a client note issued Tuesday. "Next quarter could be a difficult one for Wells Fargo."
Frederick Cannon at KBW Inc.'s Keefe, Bruyette & Woods Inc. said: "It was overall a solid quarter hard to really criticize it. Loan growth remains strong."
But the results left questions about how much Wells may have benefited from an accounting change on mortgages held for sale, Mr. Cannon said.
In the quarter Wells adopted Financial Accounting standards 157 and 159 to apply fair-value accounting to residential mortgages held for sale.
"Wells is like the proverbial duck," Mr. Cannon said. "They just move along at a nice steady pace with 10% year-on-year earnings growth. But there's an awful lot of movement under the water that we can't see very well because of limited transparency."
Though credit costs are rising, analysts and the company said first-quarter trends held no surprises.
Provisions for credit losses jumped in the three banking units at Wells Fargo. In community banking the provision rose 62% from a year earlier, to $306 million; in wholesale banking the modest $13 million provision compared to a $2 million decline in the provision a year earlier; and in Wells Fargo Financial, the nonprime unit, the provision rose 61%, to $396 million.
"The aggregate credit quality trend here was pretty much in line with our expectations," Mr. Atkins said. He said the various portfolios show distinct trends, such as deterioration in home equity and improvement in auto loans. The auto loan portfolio began to deteriorate last summer.
Scott Siefers of Sandler O'Neill & Partners LP wrote in a report issued Tuesday: "Credit trends do not reflect any 'blowup' in the subprime portfolio.
"So some investors may therefore breathe a sigh of relief following this quarter's earnings announcement."
Wells Fargo shares closed down 0.73%.
