Wells Fargo executives, who
“We’re very bullish on the business,” said chief financial officer Tim Sloan. But he added it is likely that revenue and margins could “come down a little bit.”
When asked how this might affect staffing, executives noted that staffing has been important in supporting a reduction in turn times that could help increase originations, and reiterated assurances that they and their staff will adjust to cyclical fluctuations if needed as they have in the past.
They said cost-cutting at Wells which helped it to set an earnings record in the first quarter despite a drop in revenue, is occurring throughout the company and not in any particular areas. Executives stressed in the call that the company’s business lines are diversified.
“Expected cyclicality in the mortgage business” was one of three factors cited as primary causes of a slight consecutive quarterly drop in revenue at the company to $21.3 billion from $21.9 billion during the quarter.
“Noninterest income was $10.8 billion, compared with $11.3 billion in fourth quarter 2012. The decline was primarily driven by lower mortgage banking revenue as well as reduced gains on equity investments, which were elevated in the fourth quarter,” Wells said in its earnings statement.
Mortgage banking noninterest income during the first quarter dropped to $2.8 billion by $274 million compared to the fourth quarter of 2012. As Sloan noted during the call, the mortgage business historically tends to be weaker in the first quarter and relatively stronger in the fourth.
Wells’ mortgage volume fell in consecutive three-month periods during
When asked about the potential for the Home Affordable Refinance Program’s extension to add to volumes in the future, company executives indicated that this would likely be limited but still a positive move.
During the first quarter, the company indicated that it retained on balance sheet $3.4 billion in one-to-four family conforming first mortgages, “forgoing approximately $112 million of revenue that could have been generated had the loans been originated for sale during the quarter along with other agency conforming loan production.”
Sloan said in the earnings call that the company does not currently plan to retain additional production, although the company has the capacity to do so if conditions change, i.e., rate direction changes in a way conducive to such a move.
On a year-over-year basis, nine “loan” categories at the company—including mortgages and real estate capital markets—experienced double-digit growth during the quarter.
Opportunistic purchases of $17.8 billion in agency mortgage-backed securities during periods of higher interest rates during the first quarter contributed to a modest increase in interest income from the available-for-sales securities portfolio, according to the company.
“The benefit of these purchases outweighed the impact of continued runoff of higher-yielding securities within the portfolio,” Wells said in a press release. “In addition, organic growth in consumer and commercial loans and the retention of $3.4 billion in high-quality, conforming first real estate mortgages in the first quarter largely offset reduced income from portfolio repricing.”
At Wells, mortgage escrow deposits during the first quarter averaged $38.8 billion, up from $33 billion during the comparable year-ago period and $42.2 billion in fourth quarter 2012.
The company during the first quarter provided $309 million for mortgage repurchase losses down from $379 million in fourth quarter 2012 (included in net gains from mortgage origination/sales activities).
Absent a significant deterioration in economy, Sloan said the company expects future reserve releases.
He said consent order costs would “fully eliminated” next quarter, but also noted that some foreclosure timelines continue to extend, which could add to costs.
Net mortgage servicing rights at the company during the first quarter fell to $129 million in the first quarter from $220 million in fourth quarter 2012, “due primarily to MSR valuation adjustments made in the first quarter for the impact of improving housing prices on estimated prepayment speeds.”
The company recently sold some reverse mortgage servicing, executives said, noting that this was from some discontinued operations in this area and was opportunistic rather than reflective of any broader MSR strategies it may have.
Net mortgage charge-offs as a percentage of average loans on an annualized basis were lower on the commercial and consumer side of the business in the first quarter compared to the fourth quarter of last year.
