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Wells Fargo earnings fall as bank reports a tax hit, fewer loans and deposits

Wells Fargo earnings fall as bank reports a tax hit, fewer loans and deposits
The Wells Fargo logo appears above a trading post on the floor of the New York Stock Exchange on May 17. (Richard Drew / Associated Press)

Wells Fargo & Co. on Friday reported lower-than-expected earnings for the second quarter and said it set aside nearly half a billion dollars to pay additional state taxes in the wake of a recent U.S. Supreme Court decision.

The San Francisco financial giant reported net income of $5.2 billion, or 98 cents per share, on revenue of $21.6 billion for the quarter ended June 30, both declines from the same quarter a year ago. Earnings fell short of Wall Street expectations of $1.12 a share for the quarter.

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The bank said earnings would have been closer to estimates, at $1.08 a share, if not for a $481-million expense related to state taxes. Wells Fargo reported that it put more money aside for those taxes after the Supreme Court ruled last month that states can demand sales taxes from online retailers and other companies that do not have a physical presence in those states.

John Shrewsberry, the bank’s chief financial officer, said on a conference call that while the decision deals mostly with sales taxes, it could also mean some Wells Fargo subsidiaries — specifically business entities that hold pools of loans — will have to start paying income taxes in states where they own assets but have no physical presence. He said the $481-million figure is based on potential taxes over a seven-year period.

The bank also said it spent $619 million in the quarter on refunds and other costs related to bad practices in its consumer businesses that have come to light over the last year. That includes forcing auto-loan customers to pay for insurance policies they did not need, charging improper fees to some mortgage borrowers and overcharging some trust accounts.

Shrewsberry said that the bank may have to shell out more refunds to trust accounts, but that he expects the bank is otherwise done making big scandal-related payouts, which started when the bank was fined $185 million in 2016 for creating millions of unauthorized checking, savings and other accounts.

He said the bank is “pretty far along or perhaps done” with a sweeping review of practices across its different business lines. “I would be surprised if anything material emerged,” he said.

The bank also reported shrinking loan balances and deposits. It held loans totaling $944 billion at the end of the quarter, down $3 billion from the end of the prior quarter, with declines in both consumer and commercial loans. Deposits fell by nearly $26 billion to $1.3 trillion.

The bank said much of the decline in deposits stems from actions it has taken in response to sanctions from the Federal Reserve. The Fed in February ordered Wells Fargo to cap its assets at about $1.9 trillion, where they stood at the end of last year.

That cap is a punishment for a wide range of misdeeds by the bank, including its unauthorized-accounts scandal as well as the auto-loan and mortgage issues.

Wells Fargo Chief Executive Tim Sloan said Friday that the bank is working with Fed officials to get the order lifted, but expects to operate under the cap into the first half of next year.

Wells Fargo shares closed down 66 cents, or 1.2%, to $55.36 for the day.

Rivals JPMorgan Chase and Citigroup also reported earnings Friday. Both topped analysts’ estimates, but Citi shares were down 1.8% after the bank reported lower bond-trading revenue. JPMorgan shares were up a fraction of a percent.

Bank of America reports earnings next week.

Bloomberg contributed to this report.

3:45 p.m.: This article was updated with Wells Fargo’s closing stock price.

10:35 a.m.: This article was updated with additional comments from Wells Fargo’s chief financial officer, John Shrewsberry..

6:45 a.m.: This article was updated throughout with additional details from the report and background.

This article was originally published at 6:10 a.m.

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