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Why Wells Fargo’s Earnings Declined Slightly in 1Q 2015

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Earnings beat expectations

Wells Fargo (WFC) reported its first-quarter earnings on April 14, 2015. The company reported $5.8 billion in net income, or $1.04 per share. This was higher than analysts’ expectations of $0.98 per share but slightly lower than the $1.05 per share earned in 1Q 2014.

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Stock declines temporarily on slight earnings decline

Even though earnings beat analysts’ expectations, Wells Fargo’s stock tumbled during the day of the earnings announcement. This sentiment was in part due to the bank’s reporting an earnings decline for the first time since 2008.

The stock price declined as much as 1.9% after the announcement, but it recovered to close 0.7% down at $54.19 from the previous close of $54.59. The stock closed up at $54.81 on April 15. J.P. Morgan (JPM), which reported earnings on the same day, closed 1.6% up.

Bank of America (BAC) reported earnings of 27 cents per share on $21.4 billion in revenues on April 16. Citigroup (C) will report 1Q earnings on April 16. Together, these two banks form ~10.9% of the Financial Select Sector SPDR ETF (XLF).

Net income declines on increased expenses

Though earnings were up by $95 million compared to the previous quarter, they were down $89 million year-over-year. The above graph shows the company’s net income and earnings per share over the last five quarters.

Both net interest and non-interest income were up compared to the same quarter last year. The company attributed the decline in net income to the increase in expenses, which primarily related to commission, incentive compensation, employee benefits, and salaries. The bank’s first-quarter expenses included seasonally higher employee benefits expenses on account of higher payroll taxes and 401k matching. It also included annual equity awards to retirement-eligible employees.

The efficiency ratio increased from 57.9 in 1Q 2014 to 58.8 in the first quarter of 2015. The ratio, however, improved compared to 59 in the fourth quarter of 2014.

The bank expects some expenses, such as outside professional services and advertising expenses, to increase in the second quarter.

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