California lender Wells Fargo (NYSE: WFC) may well have produced record net income in the second quarter, beating the analysts' estimate along the way. A boom in mortgage refinancing, spurred by low interest rates, certainly didn't hurt the largest home lender in the U.S. However, investors shouldn't be distracted -- they need to keep their focus on the evolution of the bank's loan book, which is less cheery.

As Goldman Sachs (NYSE: GS) remarked: "Against the credit performance, the primary concern is NPAs [non-performing assets] up 45% on a linked quarter, which is among the highest rates of growth of any bank we cover and much higher than the 15-20% growth seen at most other big banks such as BAC, USB etc ..."

This suggests that greater-than-expected loan losses could pop up to upset earnings through the second half of the year and into 2010. Is that prospect priced into the shares?

How are the shares priced?
At yesterday's closing price of $25.35, Wells Fargo shares are valued at 1.41 times book value per share. While that is at the high end of its peer group (see the table below), the shares haven't traded at such a low multiple in over 15 years. Between March 1994 and the start of the credit crisis in July 2007, Wells' price-to-book value hit a low of 1.90 in December 1994. Since then, the shares have produced an annualized returned of 13.6% -- double the market return of 6.8% over the same period.

Bank

P/BV Multiple

% Return Since March 9 Market Low

US Bancorp (NYSE: USB)

1.67

79%

Wells Fargo

1.41

154%

JPMorgan Chase (NYSE: JPM)

1.01

132%

PNC Financial (NYSE: PNC)

0.91 Continued...