Wells Fargo & Co. (WFC) posted a consolidated net income of $3.05bn, or 56 cents per share, for Q109 after losing $2.55bn, or 79 share, in Q408. Wells included acquired Wachovia's business for the first time in the quarter's earnings statement. Wells posted $2.5bn in consolidated revenue for mortgage banking, with $2.44bn from Wells Fargo's legacy business and $62m contributed by Wachovia's operations. Wells said it saw the best mortgage origination quarter since 2003, with $175bn in loan commitments, mortgage originations and mortgage securities purchases; $101bn of which were purchase or refinance mortgage loans for more than 450,000 homeowners. Wells also reported $190bn in mortgage applications lining the pipeline, including a record $83bn in applications in March alone. Wells hired 5,000 operations team members to process the influx in mortgage demand, chief financial officer Howard Atkins said in an investor conference call. The bank reported tangible common equity (TCE) of $41.1bn at quarter-end, an increase of $4.5bn during the quarter, allowing for a TCE ratio of 3.28% up from 2.86% at year-end. Wells said its credit-loss allowance totaled $22.8bn, or 2.7% of total loans, covering the bank's expected consumer losses for at least the next 12 months. “Results also reflected lower net charge-offs partly because Wachovia’s higher-risk loan portfolios already were written down at December 31, 2008, leaving the remainder of Wachovia’s loan portfolios with naturally lower loss content,” says Atkins. Wells' chief credit officer Mike Loughlin said the bank made $40bn in credit write-downs through purchase accounting adjustments at the time Wachovia was purchased. "As a result of having already written down Wachovia’s higher-risk portfolios for their expected losses, the remaining portfolio will have lower loss rates because of its reduced loss content," Loughlin said in the earnings statement. "As a result, Wachovia’s total net charge-offs in first quarter were only $371 million." Wells' net loan charge-offs for its legacy business totaled $2.89bn, slightly more than the $2.80bn in charge-offs recorded for Q408. Wells' legacy business consolidated with Wachovia's operations made for $3.258bn in total charge-offs. In the residential mortgage business specifically, Wells reported net loan charge-offs of $310m for residential first mortgages -- or 1.56% of average loans -- and $81m for Wachovia's residential first mortgages -- or 0.2% of average loans. Loughlin said Wells' higher-quality residential first mortgage portfolio continued to reflect relatively low loss rates, although he warned credit results will deteriorate until home prices fully stabilize. Wells' overall portfolio also shows some areas of concern as far as future credit costs are concerned. The lender posted $12.6bn in total nonperforming loans, or 1.5% of all loans in its portfolio, and said it expected this volume to grow. “As long as the U.S. economy remains weak, losses on the combined portfolio will increase,” Loughlin said. "In addition to the significant write-downs taken to reduce risk in the Wachovia portfolio at close, we ceased originations in and are liquidating certain higher-risk, lower-return portfolios, such as Pick-a-Pay." Wells released a pre-earnings expectation in early April, which generated a fair amount of cynicism. Critics said the jump in earnings pertain to FAS 160, an accounting rule first announced in 2007 that became effective on Jan. 1, 2009. The rule addresses accounting for minority interests, and mandates the ownership interests in subsidiaries held by parties other than the parent corporation be clearly identified and presented as equity for the purpose of consolidated reports. Until now, minority interests in the U.S. have been reported either as a liability or as a mezzanine line item between liability and equity. The effect of the new accounting rule allows certain liabilities to "jump over" to the asset book as non-cash transactions via paid-in capital, thereby rolling directly into earnings and boosting reported equity. But statements from Wells' CEO and president John Stumpf seem to argue against the criticism. “The best way to generate capital is to earn it,” Stumpf said. “This has long been the hallmark of our company and we’re now seeing the initial signs of the earnings and capital-generating power of the combined Wells Fargo-Wachovia in our first quarter together." Another school of criticism scrutinized Wells' reports they would absorb just $3.3bn in charge-offs on bad loans for the quarter and just $4.6 billion in loss provision expense; both numbers are well below most analyst estimates. Historically, Wells has justified its lower reserves by maintaining a comparatively higher-quality loan book, but critics say the argument may lose some of its strength in light of the option ARMs still lingering in Wachovia's books, regardless of the hefty write-downs taken at the time of purchase. Read the earnings statement. Write to Diana Golobay at diana.golobay@housingwire.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.