updated 4/18/2006 4:33:13 PM ET 2006-04-18T20:33:13

Wells Fargo & Co. and U.S. Bancorp posted record first-quarter profit on Tuesday, shrugging off a recent home mortgage slowdown caused by rising interest rates.

Profit at San Francisco-based Wells Fargo, the fifth-largest U.S. bank, rose 9 percent to $2.02 billion — marking the first time in the company’s 154-year old history it passed the $2 billion mark. Meanwhile, U.S. Bancorp posted a 7.7 percent increase in profit to $1.15 billion.

For both banks, the secret to earnings success was the same: diversification in their businesses. Both leaned on acquisitions and an expansion of their retail branch network to increase lending revenue despite the cooling of the mortgage market.

“We had solid, broad-based and, in many businesses, accelerating revenue growth, with revenue in businesses other than home mortgage up a combined 17 percent from a year ago,” Wells Fargo Chief Financial Officer Howard Atkins said in a statement.

Banks with large lending operations have seen margins squeezed after 15 straight Federal Reserve interest rate hikes, which have also curbed demand for refinancing and home loans. Banks make money from the spread between deposits and what they charge for loans.

Wells Fargo — the nation’s second-largest mortgage originator behind Calabasas, Calif.-based Countrywide Financial Corp. — reported earnings rose to $1.19 per share from $1.08 in the year-ago period. Revenue totaled $8.56 billion, a 6 percent increase from $8.09 billion a year ago.

The company’s home mortgage division posted revenue of $853 million, a 44 percent drop from $1.52 billion last year. Accounting adjustments to Wells Fargo’s home mortgage servicing portfolio contributed to the erosion.

Wells Fargo said it now sells an average of nearly five different products —from deposit accounts to home equity loans — to the households where it has at least one customer. Five years ago, the average was still below four different products per customer household.

This has helped Wells Fargo diversify and overcome the mortgage slowdown. Now that mortgage rates are higher, fewer homeowners are looking to refinance their existing loans.

Profit at U.S. Bancorp climbed to 63 cents a share, from $1.07 billion, or 57 cents, a year earlier. Revenue climbed 7 percent to $3.34 billion from last year’s $3.13 billion.

U.S. Bancorp Chief Executive Jerry Grundhofer has been steadily trying to increase profit in other areas of the bank, including installing more automated teller machines and increasing its fee-based businesses. He said the company will “continue to leverage our balanced business mix, advantaged scale, (and) reduced risk profile.”

For smaller banks without diversified businesses, the quarter was a tough one to show any earnings growth at all. Cleveland-based National City Corp., the nation’s eighth largest bank, reported profit fell 5 percent during the first quarter, slammed by a 77 percent drop in mortgage banking results.

Rival Fifth Third Bancorp said first-quarter profit dropped 10 percent because of the mortgage business decline, while Cleveland-based KeyCorp posted a 9.5 percent jump in profit due to strong results in its consumer banking division.

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