(Corrects first paragraph to show both Wells Fargo and U.S. Bancorp posted higher, not higher-than-expected, earnings)

CHARLOTTE, North Carolina - Wells Fargo & Co and US Bancorp said low interest rates were squeezing lending profits, but improving credit quality helped both banks post higher fourth-quarter earnings.

Analysts and investors shrugged off the bottom-line figures and focused on the impact of low interest rates and a reluctance by businesses to tap their credit lines.

It's a mixed bag looking at these banks, said Shannon Stemm, a St. Louis-based Edward Jones' financial services analyst. There's improving fee income, but loan demand and interest income still remains weak.

Shares of Wells Fargo, the No. 4 U.S. bank by assets, fell 2.1 percent to $31.78 in early afternoon trading, while US Bancorp, the fifth-largest U.S. commercial bank, was down 3.4 percent at $26.39.

The banking industry is making more new loans to consumers and businesses.

US Bancorp said average total loans increased 2 percent from fourth quarter 2009, and Wells Fargo said total loans grew 0.4 percent, or $3.6 billion, to $757.3 billion in fourth quarter from third quarter 2010.

Analysts and economists have said an uptick in business borrowing is a key cog in the continuing economic recovery. But early fourth-quarter figures suggest businesses -- while taking out new loans -- are hesitant to use them.

US Bancorp said companies were getting credit lines from the bank, but were not actively borrowing on them.

Commercial line utilization -- or the amount of money borrowers borrow under their available credit -- fell to 26 percent in fourth quarter, an all-time low and down from 30 percent in the third quarter.

We're looking forward to the day usage goes up, US Bancorp Chief Executive Officer Richard Davis said on a conference call with analysts.

ASSET QUALITY

Analysts said that despite the slow loan growth, bank's balance sheets were beginning to show signs of health after three years of crisis and recession.

The banks are building a foundation back to normal earnings, said Guggenheim Securities LLC analyst Marty Mosby. Right now, asset quality has to get healthy, and that's happening at a much faster rate than I think a lot of us expected.

Wells Fargo's fourth-quarter profit increase stemmed in part from the release of $850 million in loan loss reserves, as the bank said its problem loans continued to shrink. Net charge-offs declined 29 percent from a year earlier.

US Bancorp released $25 million in loan loss reserves during the period, the company's first such move since 2008.

Citigroup also took a large reserve release in its fourth quarter, raising concerns among analysts about the quality of the quarterly results.

MARGIN PRESSURE

But improving credit did not offset the squeeze in net interest margin, or the money a bank receives in interest from loans against what it pays for deposits.

As the Federal Reserve continues to hold U.S. interest rates at record low levels, banks have little leeway on what they charge for loans and what they pay out for deposits.

Heading into 2011, both US Bancorp and Wells Fargo said net interest margin will remain stagnant or shrink.

Davis said US Bancorp's net interest margin of 3.83 percent, which declined from 3.91 percent in third quarter, would continue to contract at the same rate in the first three months of 2011.

Wells Fargo's net interest margin also shrank, to 4.16 percent from 4.25 percent in third quarter.

The bank posted a 21 percent increase in fourth-quarter profit to $3.4 billion, or 61 cents a share, meeting analysts' expectations, according to Thomson Reuters I/B/E/S.

US Bancorp posted a 61 percent jump in net income. Earnings per share of 49 cents beat the analysts' average estimate by 3 cents.

Hudson City Bancorp also reported results on Wednesday, beating expectations, but warning that net interest margins in 2011 may decline from fourth-quarter levels. Hudson shares sank 7.5 percent in afternoon trading.

(Reporting by Joe Rauch and Jonathan Spicer; writing by Ben Berkowitz and Joe Rauch; Editing by Lisa Von Ahn and John Wallace)

U.S. Bancorp Wachovia U.S.