Well Fargo Hits Record Earnings on Mortgage Volume (Update 2)

  • Wells Fargo reports first-quarter earnings per share of 75 cents.
  • Revenue increased 5% from the previous quarter, to $21.6 billion.
  • Analysts were expecting EPS of 73 cents on revenue of $20.51 billion.

Updated with Well's Fargo's increase in noninterest expenses, declining credit costs, comments from CFO Tim Sloan, and a comment from Atlantic Equities analyst Richard Staite.

NEW YORK ( TheStreet) - Wells Fargo on Friday reported a 21% quarter-over-quarter increase in mortgage banking revenue, pushing profits to record levels.

The company earned $4.2 billion, or a record 75 cents a share during the first quarter, compared to fourth-quarter earnings of $4.1 billion, or 73 cents a share, and earnings of $3.8 billion, or 67 cents a share, during the first quarter of 2011.

The first-quarter results beat the 73-cent consensus estimate, among analysts polled by Thomson Reuters.

First quarter revenue totaled $21.6 billion, beating the consensus estimate of $20.51 billion, mainly reflecting the strong mortgage origination volume. In comparison, Wells Fargo reported total revenue of $20.6 billion during the fourth quarter, and $20.3 billion, during the first quarter of 2011.

The company reported $129 billion in mortgage loan originations during the first quarter, increasing from $120 billion the previous quarter, and $84 billion a year earlier. Noninterest mortgage revenue totaled $2.9 billion during the fourth quarter, growing from $2.4 billion during the fourth quarter, and $2.0 billion, during the first quarter of 2011.

During Wells Fargo's earnings conference call CFO Tim Sloan said that "only 15%" of the company's first-quarter mortgage volume came from President Obama's expanded Home Affordable Refinance Program, or HARP 2, which allows certain mortgage loan borrowers to refinance their homes at the current low rates, no matter how much the value of the home has declined.

Looking ahead to the second quarter, Sloan said that "the unclosed mortgage pipeline was solid at $79 billion at quarter-end."

The first-quarter bottom line was boosted by a $400 million release of loan loss reserves. Wells Fargo's credit costs continued to decline, with first-quarter net loan charge-offs of $2.4 billion, compared to $2.4 billion the previous quarter and $3.2 billion a year earlier.

Wells Fargo continued its strong overall earnings performance, with a first-quarter return on average assets of 1.31%, improving from 1.25% in the fourth quarter and 1.23% during the first quarter of 2011. Sloan said the ROA "was the highest since first quarter 2008," while the ROA "was the highest since second quarter 2009."

The company reported a first-quarter return on equity of 12.14%, increasing from 11.07% the previous quarter, and 11.98% a year earlier.

Wells Fargo reported total first-quarter noninterest expenses of 13.0 billion, increasing from $12.5 billion in the fourth quarter, and $12.7 billion during the first quarter of 2011. Sloan said that the company expects "a $500-$700 million overall reduction in noninterest expense during the second quarter."

Wells Fargo's shares closed at $34.02 Thursday, returning 24% year-to-date, following a 10% decline during 2011.

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At Thursday's close, the shares were trading for nine times the consensus 2013 EPS estimate of $3.67. The consensus earnings estimate for all of 2012 is $3.24 a share.

Based on a quarterly payout of 22 cents, the shares had a dividend yield of 2.59%.

Atlantic Equities analyst Richard Staite called Wells Fargo's first-quarter results "a solid set of numbers," but said that in addition to beating earnings and revenue estimates, "operating costs were also ahead of expectation and may cause some concern."

State rates Wells Fargo "Overweight," with a $40 price target.

The shares were down over 2% in mid-day trading to $33.27.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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