Bank Stocks and the Secret of NIM (Update 2)

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The company said that "the primary driver of the decline, approximately 8 basis points, was strong deposit growth of $30 billion in the quarter," with the incoming money invested in short-term securities, so that the new deposits "were essentially neutral to net interest income."

Wells Fargo said that during the fourth quarter, loan-portfolio income "rose slightly from prior quarter, reflecting both organic growth in consumer and commercial loans and the retention of $9.7 billion in high-quality, conforming first real estate mortgages in the fourth quarter." That would indicate that the company didn't sell as much newly originated mortgage product to Fannie Mae (FNMA) and Freddie Mac (FMCC) as it could have.

Wells Fargo also said that interest "income continued to be impacted by runoff in federal agency mortgage-backed securities (MBS) and a decision to replace that runoff with shorter duration securities," and that "interest income from the AFS securities portfolio declined by $69 million." In addition, "interest income from the mortgage warehouse was down $63 million in the quarter as the size of the warehouse declined in line with lower origination volume."

So despite taking those hits and seeing the margin decline, Wells Fargo did a pretty good job defending its net interest income, and its focus on reinvesting the MBS runoff in short-term securities will bode well when rates eventually rise. The company's guidance for 2013 calls for

Meanwhile the company's mortgage banking revenue, which includes loan origination fees and gains on the quick sale of new loans to the government-sponsored enterprises, rose to $3.1 billion in the fourth quarter, from $2.8 billion the previous quarter.

CFO Tim Sloan said that "the important thing when you think about Wells Fargo is not to be overly focused on the net interest margin," and that the company "saw a diversified growth on the spread income side in terms of loans, the best that we've had in a long time."

Wells Fargo Tuesday's market close raised its quarterly dividend by three cents to 25 cents, for a dividend yield of 2.85%, based on a closing price of $35.04. The company said that this dividend increase had been approved as part of the Federal Reserve's 2012 stress test process. CEO John Stumpf said that the company had "requested an increase in capital distributions in our 2013 Capital Plan as compared to our 2012 plan," meaning that another dividend increase could be announced soon after the Fed completes the 2013 stress tests in March.

NIM Improves; Net Interest Income Improves More


Fourth-quarter earnings for Bank of America were nearly wiped-out by the company's large mortgage putback settlement with Fannie Mae (FNMA) and its portion of the $8.5 billion foreclosure settlement between federal regulators and the largest mortgage loan servicers.