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Wells Fargo’s latest challenge? $1B expense for mortgage probes

In this file photo, commuters walk by a Wells Fargo ATM location at New York's Penn Station.
In this file photo, commuters walk by a Wells Fargo ATM location at New York's Penn Station. AP

Still working to move past its fake accounts scandal, Wells Fargo on Friday said its third-quarter earnings took a hit from an older problem: legal costs from mortgage practices that led to the financial crisis.

The San Francisco-based bank said its earnings fell 18 percent from a year ago to $4.6 billion, after it set aside $1 billion to cover expenses associated with previously disclosed mortgage investigations.

Beyond the litigation expense, Wells Fargo also faced another obstacle: falling revenue at a time when other banks were reporting growth. Total revenue at Wells declined about 2 percent to $21.9 billion, while income at Charlotte-based Bank of America climbed 1 percent to $21.8 billion, helped by rising interest rates.

“We had pretty low expectations for the quarter, and results still fell a little short,” Edward Jones analyst Kyle Sanders said Friday in a research note on Wells. “For us, the biggest negative was on the revenue side.”

In early afternoon trading, Wells shares were down more than 3 percent to $53.48. The bank’s quarterly profit lagged results this week from New York-based JPMorgan Chase ($6.7 billion) and Charlotte-based Bank of America ($5.6 billion) and barely bested New York-based Citigroup ($4.1 billion).

Wells Fargo blamed the revenue decline partly on lower loan balances and diminished income from its mortgage business. Total loans dipped 1 percent from a year ago to about $952 billion, a drop that chief financial officer John Shrewsberry attributed partly to a planned reduction in auto loans and expected repayments of commercial loans.

In addition to “softness across the industry” in some lending areas, Shrewsberry told analysts in a conference call Friday “there are also specific actions we have taken, primarily driven by our own risk discipline.”

The lending weakness comes as Wells is still wrestling with a sales scandal that erupted last fall over allegations that its employees may have created as many as 3.5 million potentially unauthorized accounts over a nearly eight-year period to meet aggressive sales goals. The fallout has included an $185 million settlement with regulators, congressional inquiries and the departure a year ago of CEO John Stumpf.

Asked by an analyst whether the scandal has also affected the bank’s loan book, CEO Tim Sloan, a bank veteran who replaced Stumpf just over a year ago, said reduced referrals from branches have hurt credit card, mortgage and personal loans but not lending in the bank’s commercial and wealth management units.

“That’s really where the impact has been,” Sloan said.

In its report Friday, Wells provided few details about the $1 billion mortgage expense – other than it being associated with “previously disclosed mortgage-related regulatory investigations.”

In its most recent quarterly filing in August, Wells Fargo said federal and state agencies, including the U.S. Justice Department, were examining certain mortgage-related activities of the bank and predecessor companies. The bank has responded to requests for information about “the origination, underwriting and securitization of residential mortgages, including subprime mortgages,” the filing says.

The bank has discussed a potential settlement with the Justice Department, Wells said in the filing, noting other banks have reached similar agreements. In August 2014, for example, Bank of America agreed to a record $16.65 billion settlement with the U.S. government over toxic mortgage bonds, largely due to its 2008 purchase of subprime lender Countrywide Financial.

Wells has its biggest employment hub in Charlotte, with more than 24,000 workers. Companywide, Wells reported 270,600 employees at the end of the quarter, down 2,200 from three months earlier amid ongoing cost-cutting efforts.

Rick Rothacker: 704-358-5170, @rickrothacker

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