First-quarter mortgage banking results at Wells Fargo and JPMorgan Chase were weaker than Keefe, Bruyette & Woods forecast due to lower-than-expected gain-on-sale margins.

Those weaker results mean "we would see the read-through for the sector as negative," a report from KBW analysts Bose George, Thomas McJoynt-Griffith and Eric Hagen said.

Loan origination volumes were also weaker than forecast with JPMorgan Chase down 25% and Wells Fargo down 19% quarter-to-quarter from the Mortgage Bankers Association's expectation of a 16% decline for the industry, the analysts said. Mortgage servicing rights values increased by mid-to-high single digits, which was within the expected range.

"We think some of the weakness could have been driven by hedge losses, which was a trend we saw among mortgage lenders in 4Q16, reflecting the difficulty of hedging the mortgage origination pipeline when rates move up sharply," the analysts said.

Other banks also reported lower origination volume and income from one year ago but increased servicing income.

First-quarter mortgage banking results

Wells Fargo
Wells Fargo's noninterest income from its mortgage banking business in the first quarter was $934 million, up slightly from the fourth quarter's $928 million but down 24% when compared with $1.23 billion earned in the first quarter of 2016. Servicing income for the quarter was $468 million, up 3% from one year prior, but origination income was down 40% to $466 million.

Wells Fargo originated $43 billion in the first quarter, down from $53 billion in the fourth quarter and $44 billion for the first quarter of 2016.

JPMorgan Chase
Net revenue for JPMorgan Chase's residential mortgage lending business was $1.51 billion, up 5% from $1.4 billion in the fourth quarter but down 1% from $1.53 billion a year ago. The year-over-year decline was driven by portfolio loan spread and margin compression that was predominantly offset by higher net mortgage servicing income.

Net production revenue was down 33% from the first quarter last year to $95 million, while net mortgage servicing revenue of $370 million was up 40% from the prior year.

Chase originated $18.2 billion, down 25% from the fourth quarter's $24.4 billion and 19% from the first quarter's $22.4 billion.

Citigroup
Citigroup reported its combined net servicing and gain-on-sale income dropped 47% from the first quarter in 2017. It reported $33.4 million of servicing and gain-on-sale income, down from $69.1 million in the fourth quarter and $63.1 million one year prior. In January 2017, it sold the bulk of its mortgage servicing rights to New Residential Investment Corp.

Citi originated $2.3 billion of mortgages in the first quarter, down from $3 billion in the fourth quarter and $3.8 billion in the first quarter of 2017. The company recently revamped the leadership in its mortgage business.

First Republic
First Republic Bank originated $2.3 billion of residential mortgages in the first quarter, compared with $3 billion in the fourth quarter and $2.5 billion in the first quarter of 2017.

During the quarter, it sold $161.4 million of loans and recorded a gain on sale of $689,000, compared to loan sales of $645.8 million and a gain of $3.4 million during the first quarter of last year.

PNC
PNC reported residential mortgage noninterest income of $97 million, up from $29 million in the fourth quarter. The company took a $71 million charge for the fair value assumption of its residential mortgage servicing rights in the fourth quarter. For the first quarter of 2017, mortgage noninterest income was $113 million, down 14%, because of lower loan sales revenue.

PNC originated $1.7 billion in the first quarter, down from $2.4 billion in the fourth quarter and $1.9 billion for the first quarter of 2017.

Servicing income for the quarter was $51 million, compared with $45 million in the fourth quarter and $52 million one year prior. Its loan sale margin of 2.83% was down from 2.96% in the first quarter last year.

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