(Reuters) - A surge in mortgage banking income helped lift Wells Fargo & Co's (WFC.N) first-quarter profit by 13 percent, but its shares fell on concerns that the bank is falling behind on its drive to cut expenses.
Wells Fargo, the fourth largest U.S. bank and the country's biggest mortgage lender and servicer, said on Friday that net income increased to $4.25 billion, or 75 cents a share, from $3.76 billion, or 67 cents a share, a year earlier.
The results beat analysts' average forecast of 73 cents per share, according to Thomson Reuters I/B/E/S, but the bank's shares were off 2.4 percent at $33.19 in afternoon trading on a down day for the stock market.
Shares of JPMorgan Chase & Co (JPM.N), which also reported stronger-than-expected results on Friday, were down 2.8 percent and the KBW Banks Index .BKX was off 2.3 percent.
By another measure -- net income available to common shareholders after the payment of preferred dividends -- the bank earned $4 billion, compared with $3.6 billion a year earlier.
Total revenue at Wells rose to $21.6 billion, from $20.3 billion a year earlier, signaling stronger demand for consumer and commercial loans. The bank's executives said they continued to scout acquisitions with the potential to boost revenue.
The San Francisco-based bank's expenses rose to $13 billion from $12.5 billion in the fourth quarter, partly because of higher legal reserves and increased personnel costs related to mortgage banking compensation.
Wells said it is targeting expenses of $11.25 billion in the fourth quarter, at the upper end of the range set out in its efficiency program called Project Compass. The bank previously called for expenses to drop as low as $10.75 billion, but it said on Friday higher-than-expected revenue from its mortgage business and acquisitions would also result in higher costs.
Analysts peppered Chief Executive John Stumpf and Chief Financial Officer Tim Sloan throughout an analyst conference call with concerns that expenses were not failing as quickly as the bank previously signaled.
"Loan growth was softer than anticipated, while expenses were elevated," Barclays Capital analyst Jason Goldberg wrote in a note to clients. Goldberg has an "overweight" rating on Wells shares.
In an interview, Sloan said the bank's efforts to reduce expenses nearly $2 billion by the fourth quarter would be helped by a $476 million drop in seasonal personnel expenses and the elimination of $250 million in merger costs related its 2008 Wachovia Corp acquisition.
"Then, it's a little bit here and a little bit there," he said.
Echoing comments by CEO Stumpf in the call with analysts, Sloan said the bank would miss its expense target only if it were in pursuit of higher revenues.
Mortgage banking income at Well Fargo increased to $2.8 billion from $2 billion a year ago, as homeowners rushed to refinance home loans at low interest rates. About 15 percent of the bank's applications came through government programs designed to help homeowners who owe more on their mortgages than their homes are worth, the bank said.
Sloan said the bank's "pipeline" of mortgage applications was higher going into the second quarter than at the beginning of the first quarter. As other banks have pulled back from the home loans business amid concerns about losses and lawsuits stemming from the housing bust, Wells Fargo has been gaining market share, he noted.
"We think we made the right decision by being consistent, and it's paying off," he said.
Wells Fargo recorded a loan-loss provision of about $2 billion, down from about $2.2 billion a year earlier. The bank for the eighth straight quarter boosted results by freeing up cash reserves it had previously booked for bad loans.
Loan growth in the bank's core portfolios grew by $984 million in the first quarter, on gains in commercial, auto and student lending. However, some analysts noted that 87 percent of the increase reflected asset-based loans purchased by Wells during the quarter, instead of "organic" growth, a sign of fundamental improvement in the economy.
The bank's total loans at the end of the first quarter fell 4 percent from the previous three months to $766.5 billion.
In the analyst call, executives said they expect continued core loan growth this year through acquisitions and organic growth. The bank's previously announced purchase of an energy lending business from French bank BNP Paribas (BNPP.PA) could close as early as next week, giving Wells Fargo nearly $4 billion in additional loans.
Wells reported a slight improvement in net interest margin, the difference between what banks earn on their investments and what they pay for their funding. But CEO Stumpf said that yield would remain under pressure this year.
"It was a good quarter," said Gary Townsend, chief executive of Hill-Townsend Capital, but "I had actually expected them to do a bit better."
Wells Fargo and JPMorgan have emerged as two of the healthiest U.S. banks following the financial crisis. Both fared well in the Federal Reserve stress tests released last month and announced plans to increase their quarterly dividends and to buy back more of their own shares. Wells bought back 8 million shares during the quarter, primarily under a forward purchase contract it negotiated in the fourth quarter.
As some banks shed assets to build capital, Wells Fargo is "definitely looking at other acquisition opportunities," Sloan said. Because of a cap on deposit market share, the bank wouldn't be likely to buy a commercial bank, but it could purchase more loan portfolios or make non-depository acquisitions, he said.
Outside of the United States, the bank will continue to scout deals, but the likelihood of it buying a consumer or commercial bank is "pretty low," he said. The bank already has plans to open additional corporate banking offices overseas, he said.
"I would think about any sort of international acquisition being more consistent with our existing product set (rather) than something new or transformative," Sloan said.
Reporting By Rick Rothacker in Charlotte, North Carolina; Additional reporting by Jed Horowitz and Ilaina Jonas in New York; Editing by Gerald E. McCormick and Steve Orlofsky