Chase, Wells Fargo Report Solid Profits, Credit Improvements in Mortgage Portfolios

Two of the nation’s largest banks came in with first quarter earnings above estimates today, due in part to improvements in their respective mortgage portfolios.  Wells Fargo reported record quarterly net income of $4.2 billion on revenue of $21.6 billion and JPMorgan Chase had net income of $5.4 billion on revenue of $27.4 billion. 

Wells Fargo’s revenue was up $1 billion from the fourth quarter of 2011, due the bank said to growth in noninterest income which was also up $1 billion to 10.7 billion driven by increases of $506 million in mortgage banking, $458 million in market sensitive revenue, and $181 million in trust and investment fees.

Mortgage banking noninterest income was $2.9 billion in revenue based on $129 billion of originations compared to $120 billion in the fourth quarter.  The company provided $430 million for mortgage loan repurchase losses compared with $404 million in the fourth quarter.  Net mortgage servicing rights (MSR) resulted in losses of $58 million compared to a $201 million gain in the previous quarter due to a reduction in the value of the MSRs from incorporating a higher discount rate.  The ratio of MSRs to related loans serviced for others was 77 basis points and the average note rate on the servicing portfolio was 5.05 percent.  The unclosed pipeline at the end of the quarter was $79 billion compared to $72 billion at the end of the fourth quarter.

The company had net charge offs during the quarter of $791 million in first mortgage loans and $763 million in junior mortgage liens, 1.39 percent and 3.62 percent of average loans respectively.  In the fourth quarter net charge offs for senior liens were $844 million (1.46 percent) and junior liens were $800 million (3.64 percent.)  Total non-performing assets at the end of the quarter totaled $26.6 billion, up from $26.0 billion and nonaccrual loans increased to $22.0 billion from $21.3 billion “with the increase exclusively tied to industry-wide supervisory guidance pertaining to the junior lien portfolio” in which 1.7 billion of performing junior liens with associated delinquent first liens were reclassified to nonaccrual status in the first quarter.  The bank said this had minimal financial impact as the expected loss content of these loans was already considered in the loan loss allowance.

Wells Fargo’s earnings equaled $0.75 per common share, up 11 percent from the prior quarter.  Bloomberg reported that analysts had expected earnings of $0.73 cents.  The bank also announced it would be increasing its quarterly common stock dividend to $0.22 per share effective with the first quarter.   

Chase’s first quarter net income of $5.38 billion was down from the record $5.56 billion it earned a year earlier.  Income per share however was up to $1.31 per share from $1.28 a year earlier when there were more shares outstanding.  According to Bloomberg, analysts were expecting earnings of $1.17 per share.

Chase reported that its first quarter results included $1.8 billion in pretax benefits from reduced loan loss reserves related to mortgages and credit cards.  The company also reported $1.1 billion pretax benefit from the Washington Mutual bankruptcy settlement and $2.5 billion in pretax expenses for additional litigation reserves primarily related to mortgage-related matters.

Chase’s real estate portfolio generated net income of $518 million compared to a net loss of $162 million a year earlier, primarily from improving credit trends reflected in the provision for credit losses.  Net revenue was 1.1 billion, down 7 percent from the previous year because of a decline in net interest income from lower loan balances due to portfolio runoff.

The provision for credit losses reflected a benefit of $192 million compared to 2.2 billion a year earlier reflecting lower charge-offs and a $1 billion reduction in loan loss allowances as delinquency trends improved. 

Home equity net charge-offs were $542 million (2.85 percent net charge-off rate) compared with $720 million (3.36 net charge-off rate) in Q1 2011.  Subprime mortgage net charge-offs were down to $130 million (5.51 percent) from $186 million (6.8 percent); prime mortgage charge-offs including option ARMS were $131 million (1.21 percent) compared with $151 million (1.32 percent). 

Nonaccrual loans totaled $7.0 billion, unchanged from a year earlier and up from $5.9 billion in the fourth quarter due to the reporting of $1.6 billion in performing junior liens as non-accruing under the same supervisory guidance that impacted Wells Fargo.

There was net income of $461 million from mortgage production and servicing compared to a net loss of $1.1 billion a year earlier.  Mortgage production generated $1.6 billion in revenue, an 80 percent increase from the prior year, partly from the impact of the Home Affordable Refinance Programs (HARP).  Production expenses increased $149 million to $573 million reflecting higher volumes and a “strategic shift” to the Retail channel including branches where origination costs and margins are traditionally higher.    Repurchase losses were down from $420 million to $302 million. 

Mortgage servicing related revenue was $1.2 billion, down 5 percent from the previous year because of fewer third party loans serviced and expense declined by $175 million to $1.2 billion.  Servicing had a pretax loss of $160 million compared to a loss of $1.9 billion a year earlier.

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