Wells Fargo & Co. surprised the markets Thursday morning in a good way, predicting record profits for the first quarter and reaffirming strong support for its Dec. 31 purchase of Wachovia Corp.

Some analysts had doubted Wells’ decision to buy Wachovia last year, as the latter struggled under toxic mortgage loans and suffered a silent run on deposits. But Thursday, Wells chief executive John Stumpf indicated that Wachovia’s customers are returning. Stumpf said the Wachovia purchase “has proven to be everything we thought it would be,” and that Wachovia’s “financial contributions” to first-quarter earnings had exceeded expectations.

Wachovia generated about $8 billion in first-quarter revenue, Wells estimated, and added checking accounts for consumers and small businesses. That represents a huge improvement from the fourth quarter, when Wachovia posted revenue of just $1.7 billion. That was down 70 percent over the quarter, as jittery consumers took their business to banks that they viewed as safer.

San Francisco-based Wells said it expects to earn about $3 billion in the first quarter – which would be a record for the bank, but this is also the first earnings period to measure Wells combined with Wachovia. Still, the figure would blow away analysts’ expectations of about $1.2 billion in profit for the combined bank, based on a survey of 20 analysts by Thomson One Analytics.

It would also be a huge improvement over the fourth quarter, when Wells lost more than $2.7 billion as it raised reserve levels to prepare for the Wachovia purchase. Those earnings would have been far worse if they had included Wachovia: The Charlotte-based bank lost $11 billion in the fourth quarter.

Wells didn’t give much guidance on how the integration of the two banks is proceeding. It reiterated that it expects to trim about 10 percent of the combined bank’s costs, but didn’t say how much of that could come from personnel. It said savings related to the Wachovia purchase will begin emerging in the second quarter, which started April 1.

Investors welcomed Wells’ announcement, sending the stock up 32 percent to $19.61 in the Thursday trading. Shares of other banks also rallied, though they’re still off sharply from a year ago.

Wells cited other factors for its strong showing in expected earnings, including:

– Mortgage business rose significantly, helped by low interest rates.

– Wachovia’s high interest-rate CDs are maturing, meaning the bank can renew them at lower rates – which hurts consumers but helps the bank.

– Net charge-offs, or loans the bank doesn’t expect to collect on, fell significantly. They’re expected to be $3.3 billion in the first quarter for the combined bank, compared to what would have been a combined $6.1 billion in the fourth quarter. Chief financial officer Howard Atkins said losses are lower because the bank charged off so much of its Wachovia-related losses on the date of the purchase.

Analysts said Wells is picking up customers from other banks, who feel secure with Wells because they view the Wachovia purchase as a success. In addition, Wells has benefited because of distractions at two of its major competitors, said Bart Narter, an analyst at Celent. Washington Mutual Inc. was bought out last fall, and Bank of America is busy with its purchase of Merrill Lynch & Co.

Wells has been viewed as one of the stronger banks throughout the financial crisis, but it hasn’t been immune. In addition to its fourth-quarter loss, it had to slash its quarterly shareholder dividend from 34 cents to 5 cents in March. Analysts say there’s still time for problems to emerge as Wells continues to examine Wachovia. They also worry that, as unemployment rises, Wells and other banks will see increasing losses on home-equity loans, credit cards and other consumer loans.

David George, an analyst at Baird, raised concerns about Wells’ concentration in California residential real estate, which essentially doubled with the Wachovia purchase.

He added: “While we are fans of the Wells Fargo track record and business model, we expect higher credit costs, slowing deposit growth, and lower levels of mortgage/home equity loan growth to incrementally affect earnings in 2009.”

© 2009, The Charlotte Observer. Source: McClatchy-Tribune Information Services.