Well Fargo Follows Through With Layoffs

NEW YORK ( TheStreet) -- When Wells Fargo's ( WFC) head of mortgage origination Franklyn Codel said at a conference in May that the company was staying on top of its staffing levels, he wasn't kidding.

Citing an internal company memo, Reuters late on Wednesday reported the nation's leading mortgage loan originator would cut 2,300 jobs because of a decline in refinancing activity, brought about by an increase in long-term interest rates.

The Mortgage Bankers Association had said early on Wednesday that its Refinance Index had declined 62% from its peak in May. The MBA also said that mortgage loan applications for the week ended Aug. 16 were down 4.6% from a week earlier.

The average interest rate for a 30-year fixed-rate conforming mortgage loan with a balance of $417,000 or less increased to 4.68% from 4.56% just a week earlier, with points paid at closing, including origination fees, increasing to 0.42 from 0.39, according to the MBA. The above figures are for loans with loan-to-value ratios of 80 percent.

The increase in mortgage interest rates and decline in gain-on-sale margins for newly originated loans, has been driven by an overall increase in long-term rates, as investors anticipate a lowering of monthly bond purchases by the Federal Reserve. The Fed has been buying a net $40 billion in long-term mortgage-backed securities and $45 billion in long-term U.S. Treasury bonds each month since last September, in an effort to hold long-term rates down.

But the market always looks ahead, and has pushed the yield on 10-year U.S. Treasury bonds up to 2.87% Wednesday, from 1.70% at the end of April.

Wells Fargo reported second-quarter mortgage banking revenue of $2.802 billion, increasing slightly from $2.794 billion the previous quarter, but declining from $2.893 billion a year earlier. Some other large banks had reported larger declines during the second quarter, but Wells Fargo tends to lag industry reporting by one quarter, since it books revenue at the time a loan is actually made, rather than at the point a new loan's interest rate is locked.

So investors can be pretty sure to see the bank report a significant decline in third-quarter mortgage revenue.

According to Citigroup analyst Keith Horowitz, Codel in May at an industry forum emphasized that Wells Fargo's mortgage business model was ideal in any market environment.

Paraphrasing Codel in a note to clients, Horowitz wrote "WFC has a natural offset in falling commission expense as the sales staff is 100% commission-based... and he meets with his management team every 3 weeks to review potential staff and location reductions so that WFC is prepared to act quickly as volumes change."

Codel at that time also said that there are other offsets that can mitigate declines in mortgage loan origination volume, including higher interest rates on loans held for sale, and "other WFC business levered to rising rates, such as community banking," according to Horowitz.

While it's terrible to see anyone lose their job, Wells Fargo is doing what it must do to contain costs. The company's efficiency ratio improved to 57.3% in the second quarter, from 58.3% the previous quarter and 58.2% a year earlier. During the company's second-quarter earnings conference call, Wells Fargo CFO Timothy Sloan said "We expect our efficiency ratio to remain within our target range of 55% to 59%." The efficiency ratio is, essentially, the number of pennies of overhead expenses for each dollar of revenue.

The company has long been the strongest earnings performer among the "big four" U.S. banks. Its second-quarter return on average assets (ROA) was 1.54% and its return on average tangible common equity (ROTCE) was 16.99%, according to Thomson Reuters Bank Insight. Well Fargo's ROA over the past five quarters had ranged from 1.40% to 1.54% over the past five quarters, while its ROTCE has ranged from 16.27% to 16.99%.

Here's how those numbers compare to the rest of the "big four" club:
  • JPMorgan Chase's (JPM) ROA has ranged from 0.88% to 1.12% over the past five quarters, while its ROTCE has ranged from 14.24% to 16.82%, according to Thomson Reuters Bank Insight.
  • For Citigroup (C), the ROA has ranged from 0.10% to 0.88% over the past five quarters, while the ROTCE has ranged from 1.22% to 10.19%.
  • Bank of America's (BAC) ROA has ranged from 0.06% to 0.73%, while its ROTCE has ranged from 0.85% to 10.16% over the past five quarters.

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

>Contact by Email.

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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