Wells Fargo CFO expects drop in mortgage revenue

Wells Fargo's chief financial officer said he expects the company's mortgage revenues to decline in the first quarter compared with the fourth. That drop would come on the heels of what Timothy Sloan called "very strong" mortgage-related third- and fourth-quarter earnings for San Francisco-based Wells.

Wells is the largest residential mortgage lender and servicing company in the U.S. Roughly 13 percent of the company's revenue stems from its mortgage business, Sloan said Tuesday at an investor conference broadcast online.

The first-quarter decline, Sloan said, won't be because "business isn't great. It's a great business."

"Our expectation is that volumes are coming down," he said. "You're seeing that in the industry data."

Residential mortgage originations are expected to decline in 2013. The Mortgage Bankers Association has forecast a decline in refinance and purchase activity to $1.41 trillion in 2013 from $1.75 trillion in 2012, a drop of 19 percent.

In 2012, Wells posted earnings of $18.9 billion, up 19 percent from $15.9 billion in 2011. Revenue rose 6 percent in 2012, to $86.1 billion.

But industry observers have wondered whether Wells can continue to see such gains, especially if mortgage rates were to increase. Addressing those concerns, Sloan said the company is focused on diversifying its revenue streams outside of its mortgage business. During the investor conference, he also pointed to increases in fee revenue and the company's push for cross-selling its products and services.

Sloan boasted that, despite the economic downturn and changes to regulations affecting the banking industry, Wells has had 12 consecutive quarters of growth in diluted earnings per common share.

"Our ability to grow through all of those challenges reflects the benefit of our diversified model," he said.

But concerns remain, especially about operating costs, Sloan said. Some expenses in 2012 related to foreclosure reviews, which were required under a consent order involving the U.S. Office of the Comptroller of the Currency and eight mortgage servicers, including Wells and Bank of America.

In the fourth quarter, Wells saw $125 million in expenses related to foreclosure reviews and roughly $500 million in such costs for all of 2012, Sloan said, adding that those costs are expected to go away by the second quarter; in January, the OCC said it had reached a settlement with 10 mortgage-servicing companies, including Wells and Bank of America.

Sloan also said during the investor conference:

• Growing net interest income remains the company's focus. "We believe we can continue to grow net interest income even in this low-rate environment."

• In the fourth quarter, Wells had record cross-selling performance. It's retail banking business cross-sold 6.05 products per household.

• In 2012 alone, Wells originated $524 billion in mortgages. "We love the mortgage business," Sloan said.