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Wells Fargo’s looming $1 billion mortgage litigation settlement brings down 3Q earnings

Mortgage banking spirals down by 37%

Wells Fargo saw a drop in its third-quarter earnings from both the previous quarter and the previous year due to its previously disclosed $1 billion pre-crisis mortgage litigation regulatory investigation.

An article by Laura Keller and Dakin Campbell for Bloomberg explained Wells Fargo is of the last of the global lenders to reach an accord with the U.S. Department of Justice over alleged wrongdoing in selling mortgage bonds prior to the crisis..

From the article:

“We are now having a negotiation, so it’s a matter of probably months or quarters, not anything more than that,” (Wells Fargo Chief Financial Officer John) Shrewsberry said in a Friday telephone interview. The bank took the $1 billion charge for regulatory investigations into its pre-crisis mortgage activity because it has “gotten to the point in our negotiations where you could say that an outcome like this is both probable and estimable,” he said.

Now, that settlement has affected the bank’s bottom line. Wells Fargo reported that it accrued $1 billion in litigation expenses in the third quarter, presumably setting aside the money to pay off the settlement. Wells Fargo also reported revenue of $21.9 billion, down 2% from $22.3 billion in the third quarter 2016. This is also down from $22.2 billion in the second quarter.

Net income also decreased, dropping 18% from $5.64 billion last year and 21% from $5.81 billion in the second quarter to $4.6 billion in the third quarter.

Diluted earnings per common share dropped to just $0.84 in the third quarter, down 18% from $1.03 per share last year and 21% from $1.07 per share last quarter.

“Over the past year we have made fundamental changes to transform Wells Fargo as part of our effort to rebuild trust and build a better bank,” Wells Fargo CEO Tim Sloan said. “While our financial performance in the third quarter included the impact of a litigation accrual for previously disclosed, pre-crisis mortgage-related regulatory investigations, I am proud of the commitment of our 268,000 team members who put our customers first.”

“We saw total average deposit growth; loan growth in our residential mortgage, credit card and subscription finance portfolios; as well as higher assets under management in wealth and investment management,” Sloan said.

However, mortgage banking income plummeted 37% from last year, dropping from $1.7 billion in the third quarter 2016 to just over $1 billion. This is also down from $1.1 billion in the second quarter this year.

Wells Fargo reported net servicing income decreased 14% from last year’s $359 million to $309 million in the third quarter.

But despite all of these setbacks, the company’s leadership continues to face the year ahead with a positive outlook.

“Wells Fargo reported $4.6 billion of net income in the third quarter, which included the impact of the $1 billion, or -$0.20 per share, discrete litigation accrual,” said John Shrewsberry, Wells Fargo chief financial officer. “We continued to see good credit performance and our liquidity and capital remained exceptionally strong.”

“During the quarter, our first under our 2017 Capital Plan, we returned $4 billion to shareholders through common stock dividends and net share repurchases, up from $3.4 billion in the second quarter,” Shrewsberry said. “We remain committed to our target of $2 billion of expense reductions by the end of 2018 which will be reinvested in the business and an additional $2 billion by the end of 2019 intended to go to the bottom line.”

[Update: This article is updated to reference the reason for Wells Fargo booking the $1 billion in legal expenses during the third quarter.]

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