Wells Fargo & Co reported record quarterly profit on Friday on a surge in mortgage lending, but revenue and a key banking measure fell short of analysts' estimates, sending shares down 3.3 percent.
Wells Fargo posted third-quarter earnings of 88 cents per share, topping the analysts' consensus estimate of 87 cents, according to Thomson Reuters I/B/E/S.
But total revenue of $21.2 billion missed the $21.47 billion that analysts had expected.
Net income in the quarter rose 22 percent from a year ago to a record $4.9 billion.
The largest U.S. home lender reported that mortgage banking revenue jumped more than 50 percent from a year ago to $2.8 billion. The bank said it decided to hold onto $9.8 billion in mortgages it could have sold to Fannie Mae and Freddie Mac , giving up $200 million in potential fee income but boosting total loans.
Banks are experiencing a jump in home lending as borrowers refinance their homes at low interest rates. Wells Fargo made $139 billion in mortgages versus $89 billion a year ago, but up only slightly from the second quarter.
The bank's net interest margin - the spread it makes on what it pays on deposits and makes on loans - fell to 3.66 percent from 3.91 percent in the second quarter, a bigger drop than it had warned of last month. Banks are seeing the margin shrink as older loans with higher interest rates are paid down.
"The margin came in much worse than we expected, but mortgage banking was better," Keefe, Bruyette & Woods analyst Frederick Cannon wrote in a note to clients. "Overall, this was a slight beat this quarter, but the margin matters more."
The bank blamed the margin decline on a drop in fee income compared with the second quarter, a cautious approach in its investment portfolio and low interest rates.
Shares in the fourth largest U.S. bank dropped 3.3 percent to $34.02.
TOTAL LOANS UP
Total loans increased by $7.4 billion, or about 1 percent, from June 30 to $782.6 billion.
The bank said the addition of $9.8 billion in mortgages drove $11.9 billion in core loan growth, excluding a $4.5 billion decrease in a portfolio of loans that it no longer makes.
Wells Fargo also saw increases in auto, credit card, student and commercial loans.
The bank set aside less money for future loan losses than it actually charged off in the third quarter - a sign that it believes credit quality is improving.
Wells Fargo said some of the third-quarter loan losses resulted from new regulations that will not have an effect in future quarters.
JPMorgan Chase & Co , the largest U.S. bank, also reported results on Friday. It said profits rose 34 percent to a record $5.71 billion.
Wells Fargo has emerged from the financial crisis as the dominant U.S. mortgage lender, making three times as many loans as its nearest competitor. But it has also faced headaches in the business lately.
This week, the U.S. Attorney in Manhattan filed a lawsuit accusing the bank of recklessly underwriting government-insured home loans. The bank has denied the allegations.
The bank also needed to set aside more money to cover investor requests to buy back soured mortgage loans it sold off during the housing boom. It added $462 million to those reserves in the third quarter, down from $669 million in the second quarter but up from $390 million a year ago.
(Reporting By Rick Rothacker in Charlotte, N.C.; Editing by Jeffrey Benkoe)