UPDATE 3-Wells Fargo posts record qtrly profit, revs disappoint


* Bank posts profit of $4.9 billion

* Tops analysts' estimates on EPS, misses on revenue

* Net interest margin falls on low rates

(Adds details on loan growth, reserves, mortgage repurchases)

By Rick Rothacker

Oct 12 (Reuters) - Wells Fargo & Co reported recordquarterly profit on Friday on a surge in mortgage lending, butrevenue 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 pershare, 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 billionthat analysts had expected.

Net income in the quarter rose 22 percent from a year ago toa record $4.9 billion.

The largest U.S. home lender reported that mortgage bankingrevenue jumped more than 50 percent from a year ago to $2.8billion. The bank said it decided to hold onto $9.8 billion inmortgages it could have sold to Fannie Mae and FreddieMac , giving up $200 million in potential fee incomebut boosting total loans.

Banks are experiencing a jump in home lending as borrowersrefinance their homes at low interest rates. Wells Fargo made$139 billion in mortgages versus $89 billion a year ago, but uponly slightly from the second quarter.

The bank's net interest margin - the spread it makes on whatit pays on deposits and makes on loans - fell to 3.66 percentfrom 3.91 percent in the second quarter, a bigger drop than ithad warned of last month. Banks are seeing the margin shrink asolder loans with higher interest rates are paid down.

"The margin came in much worse than we expected, butmortgage banking was better," Keefe, Bruyette & Woods analystFrederick Cannon wrote in a note to clients. "Overall, this wasa slight beat this quarter, but the margin matters more."

The bank blamed the margin decline on a drop in fee incomecompared with the second quarter, a cautious approach in itsinvestment portfolio and low interest rates.

Shares in the fourth largest U.S. bank dropped 3.3 percentto $34.02.


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 mortgagesdrove $11.9 billion in core loan growth, excluding a $4.5billion decrease in a portfolio of loans that it no longermakes.

Wells Fargo also saw increases in auto, credit card, studentand commercial loans.

The bank set aside less money for future loan losses than itactually charged off in the third quarter - a sign that itbelieves credit quality is improving.

Wells Fargo said some of the third-quarter loan lossesresulted from new regulations that will not have an effect infuture quarters.

JPMorgan Chase & Co , the largest U.S. bank, alsoreported results on Friday. It said profits rose 34 percent to arecord $5.71 billion.

Wells Fargo has emerged from the financial crisis as thedominant U.S. mortgage lender, making three times as many loansas its nearest competitor. But it has also faced headaches inthe business lately.

This week, the U.S. Attorney in Manhattan filed a lawsuitaccusing the bank of recklessly underwriting government-insuredhome loans. The bank has denied the allegations.

The bank also needed to set aside more money to coverinvestor requests to buy back soured mortgage loans it sold offduring the housing boom. It added $462 million to those reservesin the third quarter, down from $669 million in the secondquarter but up from $390 million a year ago.

(Reporting By Rick Rothacker in Charlotte, N.C.; Editing byJeffrey Benkoe)

((rick.rothacker@thomsonreuters.com)(+1 704 998 2504)(ReutersMessaging: rick.rothacker.reuters.com@reuters.net))