Wells Fargo:

Earnings beat estimates, but stock price falls in wake of recent scandal.

Wells Fargo’s first-quarter earnings beat estimates by a few cents per share, but its stock price fell 3.3 percent Thursday on concerns about the direct and indirect costs of the sham-account scandal that has rocked the bank.

Wells Fargo earned $5.5 billion, or $1 per share, for the first quarter of 2017, beating expectations by 3 cents per share and roughly matching last year’s first-quarter earnings of $5.5 billion or 99 cents per share.

Revenue was $22.1 billion, down slightly from $22.2 billion the same quarter last year and also coming in shy of analysts’ estimates of $22.3 billion for the quarter.

Current management and the board “have done some things right but I think they are guilty of that classic corporate tone-deafness,” said Cathy Seifert, an analyst with CFRA Research. For example, the San Francisco bank responded to a “sales and marketing” scandal

by “unveiling a new marketing campaign.” The slogan: “Building better every day.”

She also thought the company should have launched a truly independent investigation of its sales practices, rather than leaving it to the board’s independent directors. A 110-page report on the investigation, issued Monday, largely exonerated the board while throwing former CEO John Stumpf and former retail banking head Carrie Tolstedt further under the bus.

The next big test will come at Well Fargo’s annual meeting on April 25, which is inconveniently located in Ponte Vedra Beach, Fla., outside Jacksonville.

Last week, Institutional Shareholder Services, which advises large investors on how to vote in corporate elections, recommended voting against 12 of Wells Fargo’s 15 directors at the meeting for failing “to provide a timely and sufficient risk oversight process.”

Wells Fargo lambasted ISS for issuing its “extreme and unprecedented” recommendation before the board issued its report. After reading the report this week, ISS reiterated its recommendation.

The bank’s non-retail operations have fared better than its consumer side, which has suffered since September when the bank disclosed in a $185 million settlement agreement with regulators that it had fired 5,300 employees over several years because they may have opened more than 2 million deposit, credit card and debit card accounts without customers’ knowledge or approval.

In a call with analysts Thursday, Wells Fargo CEO Tim Sloan said that retail banking metrics the company has been releasing monthly since October have come off their lows but are “certainly not back to presettlement levels.”

For example, consumer checking account openings were up 7 percent in March compared with February, but down 35 percent from March 2016. And new consumer credit card applications were up 22 percent in March from February, but still down 42 percent from last March.

By and large, customers are not leaving the bank, but “the number of new customers has dropped dramatically,” Morningstar analyst Jim Sinegal said in an email. “Most customers weren’t directly affected by the sales issues, so the hassle to move to another, possibly less convenient bank is not worth the trouble. Someone searching for a new bank has probably moved Wells to the bottom of the list in recent months, though.”

The bank’s noninterest expense — basically its overhead — was up 6 percent year over year. The company spent about $80 million on legal, compliance and other fees related to the scandal in the first quarter and expects to spend $70 million to $80 million per quarter the rest of the year. In February, the company said these costs would reach only $50 million to $60 million per quarter.

Asked to aggregate the cost of the scandal, Sloan said he could not pinpoint an exact number. However, the bank’s efficiency ratio, which is overhead expenses divided by revenues, has risen to 62.7 percent in the first quarter from 58.7 percent the same quarter last year.

“Operating at this level is not acceptable,” Sloan said, adding that the bank hopes to reduce expenses by $2 billion a year by the end of 2018. The bank closed 39 branches in the first quarter and is on track to close a total of 200 this year and 200 next year.

The bank had $958.4 billion in total loans outstanding at the end of the quarter. That was down $9.2 billion from the previous quarter, but up $11.1 billion from the previous year.

Consumer loans were the big problem. They were $7.7 billion lower than last quarter and down $5.7 billion yearover-year. But it’s hard to say how much of that was related to the economy — rising interest rates have decreased mortgage-loan volume — and how much was specific to Wells Fargo.

Commercial loans were down $1.5 billion since last quarter, which concerned some analysts, but were up $16.8 billion since last year.

On the bright side, the firm’s wealth and investment management business generated a 22 percent increase in income over the past 12 months on a 9 percent increase in client assets, Sinegal said in a note. However, some of that was a result of the strong U.S. stock market.

On Wednesday, the state of California hired Wells Fargo to underwrite a $636 million offering of general obligation bonds. This news came less than seven months after state Treasurer John Chiang announced he was banning the company from underwriting state debt or handling its banking business for 12 months. However, it turns out that ban applied to negotiated, but not competitive, bids and Wells submitted the lowest bid.

In an email, the treasurer’s office said, “State law requires that a competitive sale of State of California General Obligation bonds be awarded ‘to the bidder whose bid will result in the lowest interest cost on account of those bonds.’ The Attorney General’s Office has advised us that we can’t prohibit a bank from bidding on a competitive sale of State GO bonds.”

Also on Wednesday, Warren Buffett’s Berkshire Hathaway disclosed in a regulatory filing that it sold about 7.1 million shares of Wells Fargo for $384 million this week and plans to sell almost 1.9 million more shares.

Because Wells Fargo has been buying back stock (reducing its shares outstanding below 5 billion for the first time since 2009), Berkshire’s stake had risen above 10 percent. According to the Federal Reserve, an ownership interest above 10 percent “would materially restrict our commercial activity with Wells Fargo,” Berkshire said in a press release. So it decided to reduce its stake below 10 percent. “These sales are not being made because of investment or valuation considerations,” it added.

Wells stock closed at $51.35 Thursday, down $1.77 or 3.3 percent on a day when the broad market fell about 0.67 percent.