Wells Fargo Earnings Ride Mortgage Wave (Update 1)

Wells Fargo earnings story updated with analyst commentary throughout.

• Wells Fargo reports second quarter earnings per share of $0.82.
• Revenue decreased 1.3% from the previous quarter, to $21.3 billion.
• Analysts were expecting EPS of $0.81 on revenues of $21.35 billion.

NEW YORK (TheStreet) --Wells Fargo (WFC) reported second quarter earnings that beat analyst estimates by a penny as the bank continued to benefit from strength in its mortgage business.

"While the economic recovery remains uneven, we continued to meet our customers' financial needs and benefited from signs of stabilization in the housing market," said chairman and CEO John Stumpf.

Second quarter earnings of $0.82 per share beat analyst estimates of $0.81.

Mortgage banking revenues were $2.89 billion, compared to $2.87 billion in the first quarter and $1.62 billion in the second quarter of 2011. That beat estimates of Oppenheimer analyst Chris Kotowski, who had predicted Wells Fargo would post mortgage banking revenues of $2.5 billion in the quarter. However it fell short of what Goldman Sachs analysts acknowledged were high expectations.

Low interest rates have been driving refinancing activity, and stabilizing prices have encouraged buyers to enter the housing market. Refinancing accounted for 69% of Wells Fargo loan applications compared to 76% in the prior quarter and 55% a year ago.

Jefferies analyst Ken Usdin, who recently initiated coverage of Wells Fargo with a "buy" rating, called it a "decent quarter." In a research note he cited "credit improvement, strong buybacks, and a bigger-than-expected balance sheet," as positives. Concerns Usdin highlighted were "elevated mortgage repurchase expense and core [net interest margin] compression (excluding purchase accounting)." He also noted an increase in expense guidance, but on higher revenue.

Bank of America Merrill Lynch analyst Erika Penala wrote that Wells Fargo "continues to hit on most cylinders," though she added that "bears may pick at 'non-recurring' levels of support to the margin, as well as the increased guidance on quarterly expenses." Penala has a "buy" rating on Wells.

Baird analyst David George, who also has a "buy" on the stock, described the quarter as "solid" in a note published after the earnings release.

"While mortgage revenue helped drive some of the revenue upside in the quarter, NIM and spread revenue trends were better than expected, capital continues to improve, expenses were well controlled and, and core loan growth showed improvement," George wrote.

On Thursday, Wells Fargo paid $125 million to settle a Justice Department claim that it discriminated against African-American and Hispanic borrowers from 2004 through 2009.

Wells Fargo also announced it would no longer fund mortgages originated by independent brokers--a practice known as wholesale lending. The bank said the move was not part of the settlement, and that Wells made the decision "on its own volition."

In exiting the wholesale lending business, Wells follows JPMorgan Chase (JPM) and Bank of America (BAC). Wholesale mortgage lending accounts for 5% of Wells Fargo's home loan volumes, the bank said.

-- Written by Dan Freed in New York.

Follow me on Twitter

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.