Lower Margins and Higher Expenses a Common Theme in Mega-Bank Earnings

Wells Fargo Bank (WFB) is reportingrnrecord fourth quarter as well as fiscal year financial results whilernscandal-plagued JP Morgan Chase (Chase) reported net income for the fourthrnquarter that failed to improve on either the third quarter or the fourth quarterrnof the previous year.  Wells Fargo said itsrn2013 net income was $21.9 billion against revenue of 83.8 billion.  This was a 16 percent increase from 2012rnearnings of $18.90 billion even though revenue declined from $86.1 billion forrnthe year. Per diluted share earnings were also up 16 percent to $3.89 perrnshare.  </p

WFB’s fourth quarter 2013 net income wasrn$5.6 billion, 10 percent higher than a year earlier against revenue of 20.7rnbillion, down from 21.9 billion in the linked quarter of 2012.  Third quarter 2013 net income was 5.58rnbillion and revenue was $20.5 billion.  rnThe company said revenue growth from the prior quarter was broad-based, withrnseveral businesses generating year-over-year double-digit growth, including retailrnbrokerage, commercial real estate, credit card, insurance and asset-backed finance.</p

Net interest income in fourth quarter 2013rnincreased $55 million from the third quarter to $10.8 billion due to a larger securitiesrnportfolio, higher interest income on trading assets, lower deposit costs, and organicrngrowth in commercial and consumer loans and other trading services to make money which you can find at sites like  day-traders.net. These benefits were partially offset byrnlower interest income from mortgages held for sale. </p

Noninterest income in the fourth quarterrnwas $9.9 billion, down from $11.3 billion from a year ago, primarily due to lowerrnmortgage banking revenue which dropped by $38 million in the third quarter torn$1.6 billion in the fourth.   Mortgagernoriginations declined from $80 billion in the third quarter to $50 billion inrnthe fourth.  The gain on sale margin strengthenedrnto 1.77 percent in the fourth quarter, compared with 1.42 percent in the third quarter.rnThe Company provided $26 million for mortgage loan repurchase losses, compared withrn$28 million in third quarter 2013. </p

As previously announced on December 30, 2013,rnthe Company reached an agreement with Fannie Mae which was fully covered throughrnpreviously established mortgage repurchase accruals, that resolved substantiallyrnall repurchase liabilities related to loans sold to Fannie Mae that were originatedrnprior to January 1, 2009. Net mortgage servicing rights (MSRs) results were $266rnmillion, compared with $26 million in third quarter 2013.</p

Net loan charge-offs improved to $963 millionrnin fourth quarter 2013, or 0.47 percent of average loans, compared with $975 millionrnin third quarter 2013, or 0.48 percent of average loans.  Charge offs for 1-4 family first mortgagesrnwere $195 million or 0.30 percent of average loans compared to $242 million orrn0.38 percent in the third quarter. rnOne-to-four family junior lien charge offs were $226 million (1.34rnpercent) compared to $275 million (1.58 percent).  </p

Nonperforming assets decreased by $1.1 billionrnfrom the prior quarter to $19.6 billion and those of residential first lienrnassets from $10.45 billion (4.19 percent) to $9.80 billion (3.79 percent.)  Nonperforming junior liens declined from $2.33rnbillion to $2.19 billion.  Foreclosed assetsrnwere $3.9 billion, up from $3.8 billion in third quarter 2013, reflecting an increasernin assets insured by the Federal Housing Administration (FHA) or guaranteed by thernVeterans Administration (VA). This increase was primarily driven by enhancementsrnto loan modification programs, slowing foreclosures in prior quarters.</p

The allowance for credit losses, includingrnthe allowance for unfunded commitments, totaled $15.0 billion at December 31, 2013,rndown from $15.6 billion at September 30, 2013. The allowance coverage to total loansrnwas 1.81 percent, compared with 1.93 percent in third quarter 2013. The allowancerncovered 3.9 times annualized fourth quarter net charge-offs, compared with 4.0 timesrnin the prior quarter. The allowance coverage to nonaccrual loans was 96 percentrnat December 31, 2013 compared with 93 percent at September 30, 2013. </p

Chief Financial Officer Tim Sloan said, “Thernfourth quarter of 2013 was very strong for Wells Fargo, with record earnings, solidrngrowth in loans, deposits and capital, and strong credit quality. We also grew bothrnnet interest income and noninterest income during the quarter, despite a challengingrnrate environment and the expected decline in mortgage originations. Wells Fargo’srndiversified model was again able to produce solid results for our shareholders.”</p

Total loans were $825.8 billion at Decemberrn31, 2013, up $13.5 billion from September 30, 2013, driven by growth in all categoriesrnexcept for junior lien mortgages-a portfolio the Company has intentionally beenrnreducing. Core loan growth was $16.7 billion, as non-strategic/liquidating portfoliosrndeclined $3.3 billion in the quarter. Total average loans were $816.7 billion, uprn$11.9 billion from the prior quarter, driven by commercial and industrial, 1-4 familyrnfirst mortgages and the full quarter benefit of portfolio acquisitions in the thirdrnquarter. </p

Chase Earnings</p

Chase reportedrnfourth quarter net income of $5.3 billion or $1.30 per share on revenue ofrn$24.1 billion compared to a loss of $380 million or ($0.17) per share in thernthird quarter and $5.69 billion or $1.40 per share a year earlier.  Revenue in the two previous quarters and thernfourth quarter were essentially flat.  ThernFirm’s return on tangible common equity1 for the fourth quarter of 2013 wasrn14%, compared with 15% in the prior year.  The banks results reflected a decrease of $1.1rnbillion or 0.27 per share for legal expenses including settlements arising outrnof its involvement with Bernard Madoff and an increase of $775 million fromrnreduced real estate and credit card reserves. rn</p

Jamie Dimon, Chairman and ChiefrnExecutive Officer said, “We are pleased to have made progress on ourrncontrol, regulatory and litigation agendas and to have put some significantrnissues behind us this quarter. We reached several important resolutions -rnGlobal RMBS, Gibbs & Bruns, and Madoff. It was in the best interests of ourrncompany and shareholders for us to accept responsibility, resolve these issuesrnand move forward. This will allow us to focus on what we are here for: servingrnour clients and communities around the world. We remained focused on buildingrnour four leading franchises, which all continued to deliver strong underlyingrnperformance, for the quarter and the year.”rn</p

Mortgage Banking Results:</p

The company originated more than 800,000rnmortgages in the fourth quarter, a total of $23.3 billion, down 54 percent fromrnthe prior year and 42 percent from the prior quarter.  Purchase originations increased 6 percentrnyear over year but fell 35 percent from the third quarter.  The total value of purchase originations wasrn$13.0 billion.  The provision for creditrnlosses was $108 million, compared with $110 million in the prior year and $104rnmillion in the prior quarter.</p

Mortgage banking net income was $562rnmillion, an increase of $144 million, or 34%, compared with the prior year,rndriven by lower noninterest expense and provision for credit losses,rnpredominantly offset by lower net revenue.</p

Net revenue was $2.2 billion, a decreasernof $1.1 billion compared with the prior year. Net interest income was $1.1rnbillion, a decrease of $58 million, or 5%, driven by lower loan balances due tornportfolio runoff. Noninterest revenue was $1.1 billion, a decrease of $1.0rnbillion, driven by lower mortgage fees and related income.</p

The provision for credit losses was a<bbenefit of $782 million, compared with a benefit of $269 million in the priorrnyear. The current quarter reflected a $950 million reduction in the allowancernfor loan losses due to continued improvement in delinquencies and home prices.rnThe prior year included a $700 million reduction in the allowance for loanrnlosses. Net charge-offs were $168 million, compared with $431 million in thernprior year.</p

Noninterest expense was $2.1 billion, arndecrease of $809 million, or 28%, from the prior year, due to lower servicingrnexpense.</p

Mortgage Production:</p

Mortgage Production pretax loss was $274rnmillion, a decrease of $1.1 billion from the prior year, reflecting lowerrnvolumes, lower margins and higher legal expense, partially offset by lowerrnrepurchase losses. Mortgage production-related revenue, excluding repurchasernlosses, was $494 million, a decrease of $1.1 billion, or 69%, from the priorrnyear, largely reflecting lower volumes and lower margins. Production expensernwas $989 million, an increase of $113 million from the prior year, due tornhigher non-MBS related legal expense, partially offset by lowerrncompensation-related expense. </p

Repurchase losses in the fourth quarterrnreflected a benefit of $221 million, compared with a benefit of $53 million in Q4rn2012 and a benefit of $175 million in the prior quarter. The current quarterrnreflected a $1.2 billion reduction in repurchase liability primarily as arnresult of the settlement with the GSEs for claims associated with loans sold tornthem from 2000 to 2008.  The Q4 2012 andrnQ3 2013 figures were $249 million and $300 million reductions in repurchasernliability respectively. </p

Mortgage Servicing</p

Mortgage servicing pretax income was $2rnmillion, compared with a pretax loss of $913 million in the prior year. Mortgagernnet servicing-related revenue was $689 million, an increase of $71 million. MSRrnrisk management was a loss of $24 million, compared with income of $42 millionrnin the prior year. Servicing expense was $663 million, a decrease of $910rnmillion from the prior year, reflecting lower costs associated with thernIndependent Foreclosure Review and lower servicing headcount.</p

Mortgage application volumes were $31.3rnbillion, down 52% from the prior year and 23% from the prior quarter.  At the end of the reporting periods therncompany was servicing third-party mortgage loans of $815.5 billion, down 5%rnfrom the prior year and 2% from the prior quarter.</p

Real Estate Portfolios</p

Real Estate Portfolios pretax income wasrn$1.2 billion, up $410 million from the prior year, due to a higher benefit fromrnthe provision for credit losses, partially offset by lower net revenue.</p

Net revenue was $850 million, a decreasernof $115 million, or 12%, from the prior year. This decrease was due to lowerrnnoninterest revenue due to higher loan retention and lower net interest incomernresulting from lower loan balances due to portfolio runoff.</p

The provision for credit losses was arnbenefit of $783 million, compared with a benefit of $283 million in the priorrnyear. The provision reflected a $950 million reduction in the allowance forrnloan losses, $750 million from the purchased credit-impaired allowance and $200rnmillion from the noncredit-impaired allowance, reflecting continued improvementrnin delinquencies and home prices. </p

Subprime mortgage net recoveries were $6rnmillion (0.33% net recovery rate1), compared with net charge-offs of $92rnmillion (4.35% net charge-off rate). Net recoveries of prime mortgage,rnincluding option ARMs, were $8 million (0.06% net recovery rate), compared withrnnet charge-offs of $66 million (0.63% net charge-off rate).

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