May 2016 - Rise and Fall

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52 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SERVICING Major Servicer Wells Fargo Posts Dismal First Quarter WHILE NET INCOME DECLINED OVER THE FIRST QUARTER OF THE YEAR, SERVICING INCOME WAS ON THE RISE AT THE LARGE BANK. CALIFORNIA // With intense pressure stemming from falling oil prices, historically low interest rates, and volatile financial mar - kets, profits at San Francisco-based Wells Fargo did not come in strong for the first quarter of 2016. Wells Fargo & Company re - ported in its earnings state- ment, released in April, net income at the bank reached $5.5 billion, or $0.99 per diluted com- mon share, for the first quarter of 2016. Last year, during this time, the bank reported a net income of $5.8 billion, or $1.04 per share; and in the fourth quarter of 2015 it reported $5.6 billion in income, or $1.00 per share. Chairman and CEO of Wells Fargo, John Stumpf, said, "Wells Fargo's first quarter results reflected the benefit of our diversified business model as we managed challenges presented by a volatile operating environ - ment for our industry. We again generated solid growth in the fundamental drivers of long-term value creation: loans, deposits and capital. We also completed two important acquisitions from GE Capital, which are great additions to our company and demonstrate the benefit of our strong financial position. We remain focused on meeting the financial needs of our consumer and business custom - ers, and I believe we are well positioned for the future." The statement showed net inter- est income in first quarter of 2016 rose $79 million from fourth quarter 2015 to $11.7 billion. The bank attri- butes this increase to "earning asset growth, including a partial quarter impact from the assets acquired from GE Capital, the benefit of the fourth quarter increase in the federal funds rate and disciplined deposit pricing." However, the net interest income increase was partially offset by reduced income from variable sources (periodic dividends and loans fees) and one less day in the quarter. Wells Fargo reported that mortgage banking noninterest in - come was $1.6 billion in the first quarter of 2016, down $62 million from fourth quarter 2015. This decline was "primarily driven by a decrease in mortgage origina- tions and production margins in the first quarter, partially offset by higher servicing income." Residential mortgage loan originations decreased $3 billion to $44 billion in the first quarter, and the production margin on residential held-for-sale mortgage loan originations was 1.68 percent, compared with 1.83 percent in the fourth quarter. Servicing income, however, expe - rienced an increase, rising from $730 million in fourth quarter to $850 million in the first quarter. Total loans were $947.3 billion at March 31, 2016, up $30.7 billion, or 3 percent, from December 31, 2015, the report stated. This total includes $24.9 billion from the GE Capital acquisi - tions. Total average loans were $927.2 billion in the first quarter, up $14.9 billion from the prior quarter, and included an $8.8 billion impact from the GE Capital acquisitions. "Our first quarter results demonstrated an ability to produce consistent revenue and net income across economic and interest rate cycles. While challenges in the energy industry and persistent low rates impacted our bottom line, our diversi- fied business model was again beneficial to our results. We were disciplined in deploying liquid- ity into investment securities in the quarter, with gross purchases well below recent quarters," said CFO of Wells Fargo John Shrewsberry. "This was partially responsible for the $30 billion increase in our federal funds and short-term investment balances compared with the prior quarter. Our capital remained very strong with Common Equity Tier 1 (fully phased-in) of $142.7 billion. Our net payout ratio was 60 percent in the quarter, as we re- turned $3.0 billion to shareholders through common stock dividends and net share repurchases." Net Income, Servicing Income Shrink in Q1 at BofA LOWER SERVICING FEES AND MORTGAGE SERVICING RIGHTS CONTRIBUTED TO THE DECLINE IN SERVICING INCOME OVER THE FIRST QUARTER. NORTH CAROLINA // It was a tough first quarter for Bank of America, as the bank experienced a year-over-year decline of 13 per- cent in net income down to $2.7 billion, or earnings per diluted share of $0.21, according to the bank's Q1 earnings statement re- leased in April. The bank's net income was also down by $0.6 billion over the quarter from Q 4's net income of $3.3 billion, according to Bank of America. Consumer banking performed well for Bank of American in Q1, with net income jumping by 22 percent up to $1.8 billion as posi - tive operating leverage was created by higher revenue from increased customer activity combined with lower expenses. The bank's sales and trading revenue were down by 16 percent in Q1, however. "This quarter, we ben - efited from good consumer and commercial banking activity," said Brian Moynihan, CEO at Bank of America. "Our business segments earned $4.5 billion, up 16 percent from the year-ago quarter. This was partially offset by valuation adjustments from lower long-term interest rates and annual compensation expenses. Despite volatile markets, our Global Markets business produced solid earnings. As always, we are fo - cused on loan and deposit growth and managing expenses. By doing that, we continue to improve on what we do best: helping consumers live their financial lives and helping businesses grow and employ more people." Bank of America's legacy assets and servicing revenue was down by $235 million, from $914 million down to $669 million due to a decline in net interest income on lower loan balances and a drop in non-interest income. The bank's mortgage banking income declined due to lower servicing fees and mortgage servicing rights net of hedge results were partially offset by gains on certain loan sales. The factors causing the decline were partially offset by gains on certain loan sales, according to the earn - ings statement. The number of residential loans serviced by Bank of America that were 60-plus days delinquent declined over-the-year by 42 percent, down to 88,000 during Q1. Non-interest expense declined by $1 billion down to $14.8 billion. SERVICING LOCAL EDITION "Our first quarter results demonstrated an ability to produce consistent revenue and net income across economic and interest rate cycles." —John Shrewsberry, CFO, Wells Fargo

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