Wheels Stay on the Stagecoach at Wells Fargo

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One common thread in the collapse of the financial industry is that the survivors tend to be diversified banks -- the likes of Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C) -- partly because they can turn to other segments such as investment banking, sales and trading, wealth management, and other fee-based businesses when the lending market decides to fall apart.

From that standpoint, Wells Fargo (NYSE: WFC) is truly an anomaly. As the likes of WaMu and Wachovia have since vanished, Wells Fargo is one of the last remaining large, non-supermarket banks out there. And not only is it still standing, but it's about as strong as it's ever been.

Net income in the third quarter came in at $1.64 billion, or $0.49 per share, down from the $0.64 per share earned in the same period last year. The results included a $500 million buildup in its allowance for losses account, bringing the amount set aside for future losses up to a whopping $8 billion, or almost 2% of total loans. Take that as you wish -- it's either a sign that Wells is overly conservative, or that it expects the bottom to drop out of the housing market in the coming years.

How did everything else turn out? Take a gander at the numbers:

Metric	Q3 2008	Q3 2007
Revenue	$10.38 billion	$9.85 billion
Net Income	$1.64 billion	$2.17 billion
EPS	$0.49	$0.64
Total Deposits	$320 billion	$306 billion
Net Charge-offs	1.96%	1.01%
Nonperforming Assets	1.22%	0.58%
Net Interest Margin	4.79%	4.55%
Tier 1 Capital Ratio	8.58%	8.21%

As was the case with JPMorgan earlier this week, one of the keys to Wells Fargo's strength going forward will be growth in deposits, as both its pending acquisition of Wachovia (NYSE: WB) takes shape and customers from banks with sketchy reputations shift their money to the strength of Wells Fargo.

Oh, and about that Wachovia acquisition ... shareholders should be ecstatic over learning that the acquisition will double Wells Fargo's deposit base, making it a truly national franchise and practically guaranteeing it a spot as one of the top three premier banks once this credit chaos mellows out. That's likely most of the reason Wells was willing to outbid Citigroup 7-to-1 for a company littered with terrible loans.

Another big element that shareholders need to factor in going forward is the $20 billion-$25 billion the company will get from the Treasury, in exchange for less than $4 billion in warrants. Yes, there's dilution, but the company gets all that money for an initial 5% dividend. That's cheap, cheap money, and it's money Wells Fargo can use to (a) continue operating beyond the shadow of a doubt that it'll survive this credit crisis, and (b) use to loan out to the swarms of credit-worthy individuals and corporations starved of credit right now as other banks try to mend their losses.

For related Foolishness:

• JPMorgan: The Last Great Megabank
• Which Bank Will Cut Its Dividend Next?
• Panic 2008: A Little Perspective