Accounting Change Boosts Wells Fargo

New Rules Let Bank Increase Capital Reserves By $4 Billion

Wells Fargo yesterday showed the potentially dramatic impact of the recent loosening of accounting rules as it reported a first-quarter profit of $3.05 billion.

The San Francisco company said the accounting change, which has generated controversy, allowed it to increase capital reserves by more than $4 billion. The increase could make a critical difference in the federal government's evaluation of the company's ability to withstand a deepening recession, accounting experts said.

"This makes them look a lot healthier in the eyes of the government and presumably other observers as well," said Robert Willens, who advises financial companies on tax and accounting issues. "And you would think therefore that they will have passed the stress test with flying colors."

Wells Fargo reported that first-quarter earnings fell 7 percent to 56 cents a share, from 60 cents a share or $2 billion during the first quarter of last year. The company had issued an unusual statement two weeks ago disclosing its bottom line but offering little explanation of how the result was achieved.

Yesterday, the company said its retail banking operations had outperformed those of its major rivals, Bank of America and J.P. Morgan Chase, in significant part because of Wells Fargo's position as the nation's largest mortgage lender. The company's income from mortgage lending surged fourfold to $2.5 billion as it benefited from a refinancing boom driven by federal efforts to hold down interest rates.

Wells Fargo took an investment of $25 billion from the Treasury Department. It also is the major beneficiary of a change in federal tax law last fall that shelters billions of dollars of its own profits from taxes based on losses incurred by Wachovia, the troubled bank it bought in December. The deal made Wells Fargo the largest banking firm in the Washington region by number of branches.

The Financial Accounting Standards Board, under intense pressure from banks and Congress, agreed in early April to let banks report higher values for some assets. Most large banks have made a point of saying that their results were achieved without this kind of accounting adjustment. Wells Fargo's action, however, underscored the room for maneuver available to other banks in future quarters.

Wells Fargo had set aside almost $10 billion from its capital, the pool of money banks are required to maintain as a reserve, to reflect a decline in the value of its investments. The decline was based on the prices that buyers were paying for similar assets. After the FASB change, which allows banks to substitute their own judgment in some cases, Wells Fargo decided market prices were too low by more than $4 billion, and it returned that amount to its capital pool.

Staff writer David S. Hilzenrath contributed to this report.