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Wells Fargo posts record earnings of $4.9B in first quarter

Wells Fargo’s first-quarter earnings report Friday beat analysts’ estimates and narrowly edged out the bank’s performance at the end of last year. But the bank’s widely watched mortgage business showed more signs of slowing.

Wells earned $4.93 billion for common shareholders, or 92 cents per share versus the consensus guess of 88 cents. The results were up 23 percent from the same period a year ago and mark the 13th straight quarter of record earnings.

Revenue, however, fell as the San Francisco-based bank’s mortgage business began to taper off. Mortgage banking brought in $2.8 billion, down nearly 9 percent from the fourth quarter for the largest U.S. residential mortgage lender and servicing company.

Executives continued to cite the bank’s mortgage strength Friday despite the downturn in performance.

Last year, Wells funded one in four U.S. home mortgages, CEO John Stumpf said on a conference call with analysts. But the company’s mortgage applications fell by $12 billion from the previous quarter, originations declined for the second straight quarter and the pipeline of business it brought into the current quarter again shrank – raising more questions about the strength of the mortgage business going forward.

Marty Mosby, a bank analyst for Guggenheim Securities, said Wells’ decline in originations was expected as the first three months of the year tend to be slower for the mortgage industry in general. But he expects further mortgage declines for Wells this year as refinancing activity drops.

Stumpf didn’t dispute that: “No question that there’ll be less refinancing,” he said.

But he said he’s optimistic about the overall housing market and said Wells expects new home purchases to pick up as refinancings fall.

“Housing’s improving every day,” he said. “More people have more equity in their homes. Americans have not lost their emotional attachment to home ownership.

“We like this business a lot. If anything, there’s probably a shortage of housing on the market.”

To that end, Wells is pouring more resources into its mortgage business. Chief Financial Officer Tim Sloan said Friday that Wells “added to the number of team members in the mortgage business in the fourth quarter.”

The reason, he said, is the company wants to improve customer service in that line of business. As a result, he said, the amount of time it takes for a mortgage to go from application to closing has fallen from about 90 days to 60 days, “which we view as a real positive and a competitive advantage.”

“We are very bullish on the (mortgage) business,” he said. “That said, our expectation is that it’s probably likely that revenues and margins will come down a little bit.”

Some analysts, though, say they are not seeing a substantial increase in new home loans being originated by U.S. lenders, even though the housing market is showing signs of strengthening, with new homes being built and houses selling faster.

Cost cutting

To continue its record earnings streak, Wells was able to cut its costs more than its revenue fell. Expenses were down 5 percent year over year, while revenue fell 2 percent.

But Sloan said Friday that the company’s expenses remain too high. In the first quarter, the company reported higher personnel costs, which it attributed in part to seasonal factors. Year-end bonuses and 401(k) matches tend to be paid in the first quarter.

Wells reported Friday that second-quarter expenses are expected to decline from first-quarter levels. “There’s no one kind of magic change we can make” to reduce expenses, Sloan said. “It’s improving the efficiency of our corporate properties and all of our square footage. It’s using technology to reduce costs. It’s continuing to make sure that our folks are all in the appropriate locations.”

The company has reduced its square footage. Stumpf said on the earnings call that the company had roughly 116 million square feet four years ago. That’s down to 95 million square feet, he said. He did not elaborate on what type of space was lost.

In the fourth quarter, Wells earned $4.86 billion for shareholders, or 91 cents per share. Mortgage banking again proved to be a major income driver, accounting for about $3 billion. The decline was not unexpected: Sloan forecast a drop in the bank’s mortgage revenue during an investor presentation last month.

Wells joined JPMorgan Chase & Co., the nation’s largest bank by assets, in kicking off the quarterly bank earnings season. JPMorgan posted a record $1.59 earnings per share in the first quarter, up 34 percent from the year before. It, too, saw revenue declines.

Wells Fargo employs about 20,500 at its East Coast headquarters in Charlotte. Its shares closed Friday at $37.21, down less than 1 percent.

Dunn: 704-358-5235 Twitter: @andrew_dunn
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