5 takeaways from Wells Fargo’s 4th-quarter results

Wells Fargo said Wednesday its fourth-quarter profit rose from the same quarter a year ago, even as the country’s largest home lender continued to deal with a slowdown in its mortgage business.

The San Francisco-based bank reported earning $5.38 billion for common shareholders in the quarter, up less than 1 percent from a year earlier. The $1.02 per share it earned precisely matched analysts’ expectations. The lender also reported Wednesday record income in 2014 of $23.1 billion, up 5.4 percent from the year before.

But Wells Fargo’s mortgage operation is still feeling the effects of the slowdown in U.S. home-loan refinancing activity that began when interest rates started rising in 2013.

Here are five takeaways from Wells Fargo’s numbers:

1. REVENUE UP: Wells Fargo’s fourth-quarter revenue of $21.4 billion beat analysts’ expectations of $21.2 billion. The company’s executives pointed to signs of strength in the U.S. economy, as revenue rose in all three of Wells Fargo’s primary business segments: community banking; wholesale banking; and wealth, brokerage and retirement.

CEO John Stumpf, speaking on a conference call with investors, gave an overall upbeat assessment of the economy. He cited, among other things, consumer confidence being at its highest level since the recession.

Stumpf said the pace of U.S. economic growth is not at a “break-out” level. “There’s volatility, clearly.”

But: “The way I read the tea leaves, I’m optimistic.”

2. MORTGAGE LENDING STILL DOWN: Because it’s such a large home-loan lender, Wells Fargo is seen as a bellwether for the U.S. housing market. Like other lenders, it continues to cope with overall lower mortgage originations following the drop in demand to originate refinancing loans.

Wells Fargo said it originated $44 billion in home loans in the fourth quarter, including those for purchases and refinancings, a decline of 12 percent from the same quarter a year ago. That’s also down 8 percent from the third quarter of this year. To put that in some perspective, mortgage banking fees made up 15 percent of the bank’s total fee income in the fourth quarter.

3. LENDING PROFITABILITY SQUEEZED: Wells Fargo grew its total average loans by 4 percent from a year earlier and its average core deposits by 7.3 percent. All that deposit growth sounds good, but it has hurt the bank’s net interest margin, a key measure of lending profitability. The figure represents the difference between what a banks pays on deposits and receives for loans.

The net interest margin of a bank can shrink when deposits grow faster than loans. Sluggish loan growth and low interest rates have been squeezing net interest margins at banks.

Chief Financial Officer John Shrewsberry said Wednesday that if Wells Fargo sees more high deposit growth and lending doesn’t keep pace, more pressure will be put on the net interest margin.

4. RESERVE RELEASES ARE FALLING: Wells Fargo, like other lenders, continues to rely less on using so-called “reserve” releases as a tool to help boost its earnings.

As borrowers have done a better job of repaying loans, banks have been able to “release” the money they’ve set aside to cover bad loans. But the amount that banks are releasing continues to fall and it remains unclear whether they will be able to continue releasing reserves.

In the fourth quarter, Wells Fargo released $250 million, down from $600 million a year earlier. Shrewsberry said it’s possible the bank could have more reserve releases in the future but also that it might need to do the opposite: add to its reserves to cover possible losses as it grows its loans.

5. FALLING OIL PRICES NOT A CONCERN: Some analysts Wednesday asked Stumpf and Shrewsberry whether falling oil prices would hurt Wells Fargo.

Falling oil prices have been good for consumers, lowering gasoline prices. But as oil prices have fallen, investors have wondered whether it could lead to losses on loans banks have made to the energy industry.

Stumpf said only about 2 percent of Wells Fargo’s loans are tied to the oil and gas industry. He said the drop in oil prices is “a real benefit” to Wells Fargo’s millions of customers.

“We think it’s a positive for the U.S. economy,” he said. “We think net/net it’s an opportunity.”

Wells Fargo, the fourth-largest U.S. bank, was among the first lenders to kick off the latest earnings season for the largest U.S. financial institutions, giving investors a glimpse of what they might expect from their big-bank peers.

New York-based JPMorgan Chase & Co. also reported fourth-quarter results Wednesday. JPMorgan, the largest U.S. bank, posted a 6.6 percent decline in profit, as its legal costs rose.

Charlotte remains Wells Fargo’s largest employment base, the result of its 2008 purchase of Charlotte-based Wachovia. Wells Fargo grew its Charlotte-area employment by about 1,400 positions last year, bringing the figure to 22,100.

Shares in Wells Fargo fell more than 1 percent Wednesday, closing at $51.25.