I'm confused. I'm looking at the headlines of other articles talking about Wells Fargo's (NYSE:WFC) third-quarter results, and I see: "Wells Fargo Sees Subprime Storm Ahead," "Wells Fargo Hit by Credit Woes," "Wells Fargo Takes Its Lumps," and my favorite, "Wells Fargo's Stormy Future."

Hm. I actually thought the quarter was pretty decent. Let me explain.

A step above?
Nearly every large investment bank has reported stunning multibillion-dollar charge-offs, and the stock market barely yawned when Citigroup (NYSE:C), Merrill Lynch (NYSE:MER), and Bear Stearns (NYSE:BSC) revealed multibillion-dollar charges.

However, Wells Fargo's total credit charge-offs for the quarter were $892 million, or about 1% of loans annualized. That's a step up from the $720 million charge-off in the last quarter; net income rose only 4% year over year, but we're talking about the worst credit environment since Russia defaulted on its debt nearly 10 years ago. In light of the difficult environment, it seems Wells Fargo performed admirably.

Thou shalt not...
Like Motley Fool Income Investor selection US Bancorp (NYSE:USB), Wells Fargo has sidestepped much of the credit carnage because of what it does not do. According to its conference call, Wells Fargo has minimal exposure to collateralized loan obligations (CLOs) and does not hold any collateralized debt obligations (CDOs) or subprime loans in its money market mutual funds. The company also had minimal exposure to the extremely large leveraged buyouts that happened right before the credit debacle.

To continue, Wells Fargo doesn't do structured investment vehicles (SIVs), which are causing a lot of problems at other banks, and doesn't originate interest-only, stated income, option ARMs, or negative amortizing home loans.

The reason
One has to ask, what enabled Wells Fargo to stay so disciplined? After all, who wants to originate risky loans if they can originate less-risky loans just as profitably? The problem is, not all banks are created equal.

Wells Fargo has established meaningful relationships with its customers. For example, the average wholesale and middle market customer had a whopping average of 6.1 and 7.4 products, respectively, with Wells Fargo.

This is important because it lets banks know much more about their customers (they can see how much is in a banking account, a customer's bill payment history, etc). Wells Fargo's experience in home equity loans demonstrates this point.

Although correspondent home equity loans (where Wells Fargo purchases loans originated by third parties) only accounted for 7% of the total home equity loans, they accounted for 25% of the losses.

Thus, Wells Fargo's ability to originate a large percentage of its own loans and often to its own depositors represents a tremendous competitive advantage. In fact, Wells Fargo did very well in almost every category. Wholesale banking, asset-based lending, commercial real estate, and the mutual fund business all grew by double digits in the past quarter.

However, much of this growth was largely overshadowed by the increased credit losses. As Wells Fargo continues to tighten its underwriting guidelines (it exited the nonprime correspondent and wholesale channels in the past two quarters), its results should exhibit a lot of positive operating leverage and hopefully reward shareholders.

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