NEW YORK (MarketWatch) -- Wells Fargo & Co. said Thursday that first-quarter earnings would surge to a record $3 billion, well ahead of analyst forecasts, as loan losses and loss provisions dropped from the difficult previous quarter and its mortgage business thrived.

Wells shares jumped 26% as the bank also said its Wachovia acquisition was exceeding expectations and reported another quarter of double-digit revenue growth.

"They didn't just beat estimates, they blew them out of the water," said Stuart Plesser, a financial-services analyst at Standard & Poor's Equity Research.

The results suggest Wells may be able to earn enough money this year to avoid having to raise new capital in private markets, he added, lifting his recommendation on the shares to buy from hold.

Shares of other large banks, including J.P. Morgan Chase JPM, +0.94% , Bank of America BAC, +1.01% and U.S. Bancorp USB, +0.99% , rallied more than 10% after the news. See full story.

Wells WFC, +1.50% said first-quarter net income would be roughly $3 billion, or 55 cents a share, after paying dividends on preferred securities, including $372 million to the Treasury Department. Analysts surveyed by FactSet Research on average expected a profit of 31 cents a share.

Combined net charge-offs in the first quarter will be $3.3 billion, compared with fourth-quarter net charge-offs of $2.8 billion at Wells Fargo and $3.3 billion at Wachovia.

Provisions will be about $4.6 billion in the quarter. That compares with $8.4 billion in provisions during the fourth quarter.

Mortgage applications strong

Wells bought Wachovia last year, in the midst of the financial crisis. Wells said Thursday that the acquisition was "exceeding expectations" and reiterated that it should save $5 billion a year by combining the businesses. About 40% of combined revenue came from Wachovia in the first quarter.

"Loan, deposit and client asset business activity has resumed [at Wachovia] and customers are returning," Wells said in a statement.

Wells Fargo said it expects total revenue for the quarter to be $20 billion. Excluding Wachovia, it said revenue would grow by an estimated 16%.

Wells Fargo said its consolidated net interest margin will be about 4.1%.

Chief Financial Officer Howard Atkins attributed the results in part to the mortgage business.

"[There were] $100 billion in mortgage originations, with a 41% increase in the unclosed application pipeline to $100 billion at quarter-end, an indication of strong second-quarter mortgage originations," said Atkins.

“ 'A lot of the losses from the Wachovia deal are behind us.' ” — -- Howard Atkins, Wells Fargo Chief Financial Officer

The bank received $190 billion in mortgage applications in the first quarter, up 64% from the previous quarter and including a record $83 billion in applications in March.

In a Thursday morning interview with the cable news channel CNBC, Atkins said that the results were also due to "good business flows, very good deposit inflows and extending credits."

He added that, when Wells Fargo closed its acquisition of Wachovia, "we wrote off Wachovia's losses in its loan portfolio."

"A lot of the losses from the Wachovia deal are behind us," said Atkins.

Capital

Wells Fargo also said that its dividend cut to 5 cents a share from 34 cents a share, announced on March 6, will benefit retained earnings by about $1.25 billion in additional common equity per quarter.

That will bring Wells' tangible common equity ratio, a conservative measure of banks' financial strength, to more than 3.1% at the end of March.

"Based on our revised earnings estimates, we think Wells Fargo can increase its tangible common equity ratio to above 3% by the end of 2009," said Plesser. "On lower expense assumptions driven by the recent Wachovia acquisition, we are raising our 2009 earnings per share estimate by 15 cents to $2.22."

Wells Fargo is scheduled to report first-quarter results April 22.