Wells Fargo beats expectations with 3Q revenue of $21.88B

Mortgage banking income declines

Wells Fargo (WFC) posted third quarter earnings better than analysts' expectations and shares of the bank were trading up in premarket activity on news of that third quarter revenue rose to $21.88 billion from $21.21 billion a year ago.

Wells Fargo reported net income of $5.8 billion, or $1.05 per diluted common share, for third quarter 2015, compared with $5.7 billion, or $1.02 per share, for third quarter 2014, and $5.7 billion, or $1.03 per share, for second quarter 2015.

"Wells Fargo's strong third quarter results reflected the ability of our diversified business model to generate consistent financial performance in an uneven economic environment while continuing to meet our customers' financial needs," said Chairman and CEO John Stumpf. "Compared with a year ago, we grew loans, deposits and capital, and returned more capital to shareholders through dividends and share buybacks. Our balance sheet and credit results remained strong and our 265,000 team members continue to focus on helping our customers succeed financially."

Net interest income increased $187 million from second quarter 2015 to $11.5 billion, primarily driven by growth in investment securities and loans, including the full quarter benefit of the GE Capital loan purchase and related financing transaction that settled late in the second quarter. The third quarter also included one additional day, accounting for approximately one third of the increase in net interest income relative to the second quarter.

Net interest margin was 2.96%, down 1 basis point from second quarter 2015. Balance sheet growth and repricing, driven by securities purchases and higher loan balances, improved the net interest margin by approximately 5 basis points linked-quarter.

Mortgage banking noninterest income was $1.6 billion, down $116 million from second quarter. During the third quarter, residential mortgage originations were $55 billion, down $7 billion linked quarter.

The production margin on residential held-for-sale mortgage originations was 1.88%, compared with 1.75% in second quarter. Net mortgage servicing rights results were $253 million, compared with $107 million in second quarter 2015.

"Wells Fargo reported a solid $5.8 billion of net income for the third quarter. Revenue increased on both a linked quarter and year over year basis, on growth in both net interest income and noninterest income,” said Chief Financial Officer John Shrewsberry. “We generated positive operating leverage in the quarter, as our expenses declined, and we remained within our targeted efficiency ratio range. Our return on equity and return on assets also remained within our targeted ranges, and we increased our net payout ratio to shareholders to 60% from 54% in second quarter."

Earlier this quarter, Wells stopped offering closed-end home equity loans in light of the upcoming TILA-RESPA Integrated Disclosure Rule that took effect on Oct. 3.  

“Because closed-end loans were a small percentage of our overall home equity volume, we chose to focus on our line-of-credit offering and not to expend the resources required to retool our closed-end home equity disclosures to meet the new TRID regulations,” said Kelly Kockos, SVP, Home Equity Product Manager at Wells Fargo.

Total loans were $903.2 billion at September 30, 2015, up $14.8 billion from June 30, 2015. Growth was broad- based and was driven by commercial and industrial, and 1-4 family first mortgage loans. Core loan growth was $17.1 billion, as non-strategic/liquidating portfolios declined $2.3 billion in the quarter. Total average loans were $895.1 billion in the third quarter, up $24.6 billion from the prior quarter, and included the benefit of the GE Capital loan purchase and related financing transaction that settled late in the second quarter.

Nonperforming assets declined by $1.1 billion from second quarter 2015 to $13.3 billion. Nonaccrual loans decreased $906 million to $11.5 billion on improvements in several loan categories, including a $718 million decline in consumer real estate. Foreclosed assets were $1.8 billion, down from $2 billion in second quarter 2015.

Loans 90 days or more past due and still accruing (excluding government insured/guaranteed) totaled $872 million at September 30, 2015, up from $756 million at June 30, 2015. Loans 90 days or more past due and still accruing with repayments insured by the Federal Housing Administration or predominantly guaranteed by the Department of Veterans Affairs for mortgages and the U.S. Department of Education for student loans under the Federal Family Education Loan Program were $13.5 billion at September 30, 2015, down from $14.4 billion at June 30, 2015.

Investment securities were $345.1 billion at September 30, 2015, up $4.3 billion from second quarter. Purchases of approximately $19 billion (primarily federal agency mortgage-backed securities and U.S. Treasury securities), were partially offset by maturities, amortization and sales.

Community Banking reported net income of $3.7 billion, up $336 million, or 10%, from second quarter 2015. Revenue of $13.6 billion increased $973 million, or 8%, from second quarter 2015 due to gains from sale of equity investments, as well as higher net interest income, deposit service charges, and other income, partially offset by lower mortgage banking fees. Noninterest expense increased $58 million, or 1%, primarily due to a donation to the Wells Fargo Foundation, partially offset by lower advertising costs and operating losses. The provision for credit losses increased $295 million from the prior quarter primarily due to the absence of a reserve release in the quarter.

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