Wells Fargo's profit jumped 13 percent in the first three months of the year, thanks to strong mortgage lending and a drop in delinquent loans, the bank said Friday.
Net income available to common shareholders climbed to $4.02 billion from $3.57 billion a year ago. On a per-share basis, earnings were 75 cents, beating the 73 cents expected by analysts polled by FactSet. The bank also beat on revenue, bringing in $21.6 billion instead of the predicted $20.4 billion.
The San Francisco-based bank, the country's fourth-largest, has fared better than many of its peers throughout the global economic meltdown, muscling its way to become both the biggest mortgage lender and servicer as rival Bank of America dramatically scaled back its own mortgage business. Nearly a third of mortgages made in the U.S. now come from Wells, according to Guy Cecala of Inside Mortgage Finance.
That distinction has brought revenue gains but also legal and public-relations headaches. Friday, the bank said it set aside more money to pay investors who allege they were misled about mortgage-backed securities the bank sold them before the financial crisis imploded in the fall of 2008. Wells also said it set aside more money for litigation expenses, though it didn't give specifics.
In February, Wells and other banks agreed to settle allegations that the banks had bungled some foreclosure filings. The Securities and Exchange Commission is also examining whether it properly disclosed risks about its mortgage-backed securities shortly before the financial crisis.
R.W. Baird analyst David George said Wells had "a solid quarter" and predicted it would be able to trim expenses and raise its capital level throughout the year. But he also said he expected the stock price would be flat given its previous run-up. As of Thursday's close, Wells' stock was up 23 percent for the year. It fell 3.5 percent Friday.
Stifel Nicolaus analyst Christopher Mutascio noted the lack of loan growth and called it "concerning." Total loans were up about 2 percent compared to the previous year, and down 0.4 percent from the previous quarter. An increase in commercial and industrial loans, as well as foreign loans, helped offset a slight decline in consumer loans over the year.
But Mutascio said Wells' strong mortgage banking would help it bridge the gap until lending picks up throughout the country.
In mortgages, noninterest income soared 42 percent from the year before to $2.9 billion, far greater than the $2.1 billion that Mutascio was predicting. The bank's portfolio of mortgage application loans jumped 20 from the previous quarter, and its application pipeline jumped 10 percent. About a quarter of the bank's fee income came from making new mortgage loans.
Gains on trading and stock investments also helped drive the results.
Expenses increased as Wells set aside more money for commissions and bonuses in mortgage lending and other business areas, but the bank said it expects to trim expenses this quarter. Its headcount stands at 264,900 employees, down 5,300 from a year ago but up 700 from the previous quarter.
There were encouraging signs about ability of borrowers to pay back their loans. The percentage of loans that were charge-offs, meaning the bank doesn't expect to collect on them, dropped to 1.25 percent from 1.73 percent a year ago. The bank said that was the lowest since 2007, before the financial crisis imploded. The bank also set aside less money for future potential losses.
Chief risk officer Mike Loughlin said in a statement that he expected "continued but slower improvement" in losses for the rest of the year, "absent significant deterioration in the economy."
Wells paid a 22-cent dividend in the first quarter, up from 12 cents a year ago, after passing the government's most recent round of stress tests. That compares with token dividends of just 1 cent at Bank of America and Citigroup.
"Our shareholders have been very patient, and we are pleased to reward them with an additional return on their investment," chief financial officer Tim Sloan said in a statement.
There are still challenges for Wells Fargo on the horizon. The bank's net-interest margin, which measures its profitability in lending, fell slightly from a year ago, to 3.91 percent from 4.05 percent. Low interest rates will continue to be a challenge, and the mortgage windfall will eventually run out of steam.
Like other banks, Wells is also navigating a tricky new environment of greater government oversight. Some of its key sources of revenue, like fees that stores pay for debit card transactions, have been shattered by new rules. Wells and other banks are looking for new fees to charge without alienating its customers.
Wells Fargo's stock fell $1.18, or 3.5 percent, to close at $32.84 Friday.