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Oct 13, 8:49 AM EDT

Wells Fargo is reporting an 18 percent decline in third-quarter profits, caused by a significant increase in the bank's legal expenses


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AP Photo/Swayne B. Hall

NEW YORK (AP) -- Wells Fargo's third-quarter profits dropped 18 percent, caused by a significant increase in the bank's legal expenses tied to its mortgage practices before the financial crisis.

The increase in legal expenses comes as the San Francisco-based bank tries to move beyond its recent phony account scandal and the recent scandal tied to its auto lending business.

Wells Fargo said Friday that it earned $4.6 billion in the third quarter, or 84 cents a share, down from $5.64 billion, or $1.03 a share, in the same period a year earlier. The bank's results missed the forecasts of Wall Street analysts, who were looking for the bank to post a profit of $1.02 a share, according to FactSet.

Wells Fargo's expenses jumped in the quarter, mostly due to the money it had to set aside to cover legal settlements. The bank says the additional $1 billion for potential legal expenses is tied to investigations into Wells' pre-crisis mortgage practices.

Wells has been trying to move beyond the recent problems that have turned it from one of the banking industry's most beloved brands into one of its most tarnished. The bank has acknowledged that its employees, fueled by unrealistic sales goals, opened as many as 3.5 million bank accounts without customers' permission.

Wells also admitted that it sold auto insurance to auto loan customers who did not need it, and a significant number of those customers were unable to afford both their car loan and the insurance, which resulted in those cars being repossessed.

It's not clear whether time has healed Wells' reputational wounds. Wells Fargo CEO Tim Sloan appeared in front of Congress earlier this month where he faced hostility from both political parties.

Under the weight of those scandals, Wells Fargo's consumer banking division has struggled. The bank's biggest division had net income of $2.23 billion, compared with $3.23 billion in the same period a year earlier. Most of that was tied to the legal expenses, but the division's revenue declined and so did its number of loans. In comparison, Bank of America, Citigroup and JPMorgan Chase all grew revenue and loans in their consumer banking businesses. Wells said the decline was also impacted by a decline in mortgage banking revenue as well.

Quarterly revenue was $21.9 billion, which also missed analysts' forecasts of $22.38 billion.

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