Recently, Wells Fargo (WFC 0.89%) entered into a $3.7 billion settlement with the Consumer Financial Protection Bureau (CFPB) for past violations including assessing illegal fees to its mortgage and auto loan customers and wrongfully repossessing vehicles.

It's the latest in a wave of fines and punishments the bank has had to deal with since its phony-accounts scandal came to light in 2016. The $3.7 billion settlement included a $1.7 billion civil fine to Wells Fargo, the largest in history. Now, one might think that after such a big fine the bank may be in the clear, or at least be able to chill for a while.

But looking at the way Wells Fargo accounts for these kinds of losses and considering the amount of outstanding regulatory consent orders the bank is dealing with, there could be more fines to come in the near future. Should investors be worried?

Operating loss expenses

Since the fake-accounts scandal came to light, in which bank employees were opening bank and credit card accounts without the consent of customers, Wells Fargo has faced a litany of fines and litigation.

These costs go into the operating loss expense category, a line item in the bank's noninterest expenses, which impact earnings. Normally, operating loss expenses are those a bank incurs while dealing with day-to-day issues like fraud.

For instance, if a customer gets their debit card stolen and the thief is able to charge $100 before the card can be canceled, a bank will normally reimburse the customer and take this as an operating loss. But Wells Fargo's operating loss expenses now include big charges for regulatory matters, litigation, and customer remediation as a result of the phony-accounts scandal and other issues stemming from it.

Wells Fargo non-interest expense.

Image source: Wells Fargo.

Interestingly, operating losses spiked in the third quarter. While normally ranging between $500 million and $700 million over the past year, they jumped to about $2.2 billion in the third quarter. Along with its announcement about the settlement, Wells Fargo said in a press release that it would take operating losses of $3.5 billion in the fourth quarter, which includes "the incremental costs of the CFPB civil penalty and related customer remediation as well as amounts related to outstanding litigation matters and other customer remediation."

I also think it's a good idea to look at how the bank determines when it should book operating losses. Wells Fargo CEO Charlie Scharf said on the company's most recent earnings call that the accounting rules dictate that when you accrue a charge for something, that means the bank has a fairly good idea that the charge is coming and can therefore put an estimate on it.

Probable and estimable losses

Another way that investors can gauge how much potential future operating losses Wells Fargo is looking at is through reasonably possible potential losses (RPL) in excess of its accrual for probable and estimable losses, which the company updates in its quarterly regulatory filings.

While operating losses hit Wells Fargo's income statement, the RPL is just an estimate, and no reserves or charges are taken at the time. In Wells Fargo's Q3 quarterly filing, the company said its RPL was $3.7 billion.

It's an interesting number because it happens to be the same amount as the CFPB settlement. But the RPL does not appear to solely cover the $3.7 billion settlement. For one thing, Wells Fargo said the $3.5 billion of operating losses next quarter only includes "incremental costs" related to the CFPB settlement. 

Jefferies analyst Ken Usdin confirmed this as well, saying in a recent research note that "today's $3.7 [billion] settlement does not mean that the RPL will go to zero or anywhere close to it." He added that "we would hope that the RPL would decline somewhat after 4Q given the magnitude of today's settlement, WFC's incremental $3.5B of 4Q op. losses, and severity of the actions." Usdin also said he thinks some of the $2 billion in the CFPB settlement that will go to customers may have already been taken as a charge by Wells Fargo and potentially paid out as well.

Should investors be concerned?

Not everything can be gathered from the operating loss and RPL numbers, but Wells Fargo will now have taken $5.7 billion of operating expenses between the third and fourth quarters, which is more than the CFPB settlement amount. Furthermore, a portion of the CFPB settlement might have been covered by operating loss expenses in the third quarter.

We know that Wells Fargo accrues these expenses when it is probable that a charge is coming, and Scharf has said "it's in our best interest to get as much behind us as quickly as we possibly can." The bank also has several other outstanding consent orders.

While these settlements result in near-term hits to earnings, I do view them as a positive step forward. The bank has now been dealing with these issues for almost seven years and has paid billions in fines. Wells Fargo is also operating under an asset cap imposed by the Federal Reserve, which has cost it billions in lost profits because the cap prevents it from growing its balance sheet.

The more consent orders Wells Fargo clears up, the closer it is getting to finally getting its regulatory infrastructure to a place that regulators are satisfied with. And when that happens, it's more likely the asset cap can be lifted. Wells Fargo is very well capitalized and can handle these fines. The best thing for the stock is if the bank clears them up as soon as possible.