Not a great report after a 24% gain in the stock: Wells Fargo's earnings show good news on mortgages but no growth on loans

04/16/2012 2:26 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Half a loaf from Wells Fargo (WFC) Friday morning. The bank reported first quarter earnings of 75 cents a share. That was 3 cents a share above Wall Street estimates and a 12% increase from the 67 cents a share that the company earned in the first quarter of 2011. (Earnings were bolstered by $400 million release from reserves against bad loans in the quarter.) Revenue climbed—a novelty in the banking industry lately—by 5% from the first quarter of 2011 to $21.64. Wall Street analysts were expecting $20.5 billion in revenue.

But the strength of the story this quarter really depends on what part of Wells Fargo you looked at.

The mortgage business went great guns in the first quarter with the bank originating  $129 billion in mortgages. That was an increase of 7.5% from the $120 billion originated in the fourth quarter and a 54% increase from the $84 billion originated in the first quarter of 2011. This is the kind of performance from the bank’s mortgage unit that investors who have bid up the shares 24% for 2012 through the April 12 close were expecting. Wells Fargo’s mortgage business should be taking advantage of a retreat in the mortgage market from competitors such as Bank of America (BAC)—and it is.

The bank’s lending business wasn’t anywhere near that strong a story. Core loans grew by just 0.1% from the fourth quarter of 2011. Commercial loans were almost flat, growing by just 0.1%. Total consumer loans actually fell, albeit very slightly, in the quarter from the fourth quarter of 2011.

Shares fell on Friday by 3.5% but that doesn’t seem to be so much a result of disappointment as a reaction to the lack of any real good news surprises after a 24% gain in 2012. As of 2:15 p.m. New York time today, April 16, the stock is up 1.5%.

If you’re looking at Wells Fargo as an indicator on the economy, I think the take is this: These are the kind of numbers a good bank generates when the economy is growing slowly and regulators are tightening standards after a financial crisis.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Wells Fargo as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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