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Wells Fargo’s Non-Interest Income Increases in 1Q 2015

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Interest income declines compared to 4Q 2014

Wells Fargo & Company’s (WFC) net interest income grew 4% from a year ago, reflecting strong growth in average earning assets. Net interest income declined $190 million from the fourth quarter due to two fewer days in the first quarter and lower variable income.

The decline was partially offset by growth in commercial and consumer loan balances, a modest increase in the duration of the commercial loan portfolio, and lower deposit and long-term debt costs.

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Net interest margin declines

Wells Fargo’s net interest margin (or NIM) was 2.95%, down 9 basis points from 4Q 2014. About 5 basis points of the decrease was due to deposit growth, which had an insignificant impact on net interest income but affected NIM. The above graph shows the company’s NIM over the last five quarters.

NIMs across banks, including peers Bank of America (BAC) and Citigroup (C), are declining in the sustained low-rate environment. Together, these two banks form ~10.9% of Financial Select Sector SPDR ETF (XLF).

Non-interest income increases

Non-interest income was up $29 million from the prior quarter. Higher revenue from trading activities, debt security gains, mortgage origination gains, and insurance contributed to the growth. The increase was partially offset by lower mortgage servicing income and seasonally lower card fees and deposit service charges.

Other income declined compared to 4Q 2014, which included a $217 million gain on the sale of government-guaranteed student loans. The above figure shows the firm’s non-interest income growth over the last five quarters.

Peer J.P. Morgan (JPM) also benefitted from higher trading revenues in 1Q 2015.

Mortgage banking income increases

Wells Fargo’s mortgage banking non-interest income was up $32 million compared to 4Q 2014. During the first quarter, residential mortgage originations increased by $5 billion compared to 4Q 2014. Net mortgage servicing rights results declined. The decrease reflected higher prepayment expectations associated with reductions in FHA (Federal Housing Administration) mortgage insurance premiums.

The bank expects strong mortgage banking performance in the second quarter based on a solid application pipeline and expanded pricing margins.

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