By Colin Barr
January 19, 2011

Wells Fargo posted a fourth-quarter profit that matched Wall Street estimates in spite of a 5% year-over-year revenue decline.

San Francisco-based Wells (WFC) made $3.4 billion, or 61 cents a share, up from the year-ago $2.8 billion, or 8 cents a share. The year-ago per-share profit was hit by costs tied to the bank’s repayment of government bailout loans.

“In 2010 Wells Fargo saw solid growth in a variety of businesses, with record net income for the full year as well as the fourth quarter,” said CEO John Stumpf. “As the U.S. economy showed continued signs of improvement, our diversified model continued to perform for our stakeholders, as demonstrated by growth in loans and deposits, solid capital levels and improving credit quality.”

Revenue dropped to $21.5 billion from $22.7 billion a year earlier, but rose at a 12% annual clip from third-quarter levels, as fee income from the bank’s mortgage, trust-and-investment and insurance businesses rolled in.

Core deposits rose at a 12% annualized rate to $795 billion. Wells has said its ability to attract low-cost deposits — its average deposit cost in the fourth quarter was 0.31% — is one key to its above-average profitability.

For instance, Wells’ latest quarter shows a 4.16% net interest margin, which measures the spread the bank makes borrowing funds from depositors and in the markets and lending that money to business and consumer borrowers.

That number is down from a year ago, as it has been at other big banks as higher-yielding loans made years ago run off and are replaced by lower-priced ones made recently. But Wells’ margin remains a full point above the comparable number at rivals such as Bank of America (bac) and Citigroup (C), thanks to Wells’ stable deposit base, the bank has said.

“I can’t stress enough the importance of the core deposit base at Wells Fargo to our financial results in terms of profit growth, margins and peer performance,” finance chief Howard Atkins said at an investor conference in November. “This gives us a huge cost advantage; it’s the main reason why our net interest margin is the highest among peers because we funded assets in higher interest-rate environments with the core deposits, which are still with us, not with funding from the capital markets.”

Wells said its latest quarter was aided by $317 million of realized equity gains, offset by $268 million of realized bond losses. Wells said it took those losses after deciding to “sell its lowest-yielding bonds, which were repositioned at the higher long-term interest rates prevailing late in the quarter.”

Wells shares were flat in premarket trading Wednesday.

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