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UPDATE 4-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 comments from CFO, CEO, updates stock price)

By Rick Rothacker and Jed Horowitz

Oct 12 (Reuters) - Low interest rates both hurt and helpedthird-quarter earnings at Wells Fargo & Co , boostingmortgage lending but squeezing core profitability more thananalysts expected.

Third-quarter net income rose 22 percent from a year ago toa record $4.9 billion, or 88 cents per share, the bank reportedon Friday, topping the analysts' consensus estimate of 87 cents,as compiled by Thomson Reuters I/B/E/S.

But total revenue of $21.2 billion missed the $21.47 billionanalysts expected.

Net interest margin - the spread between what the bank payson deposits and makes on loans - fell to 3.66 percent from 3.91percent in the second quarter, a bigger drop than it warned oflast month.

Wells Fargo executives urged investors to focus on itsoverall profit rather than the shrinking net interest margin.Wall Street didn't appear to listen as the stock fell more than3 percent at midday.

"We could easily have increased net interest margin bymaking bad decisions," such as buying high-interest loans thatare likely to default, Chief Financial Officer Tim Sloan said ona conference call with analysts. "We don't spend a lot of timefocused on managing to that margin."

Chief Executive John Stumpf said the bank, the biggestmortgage lender in the United States, is also rapidly boostingfee income by selling products and services that don't depend oninterest rates for loans.

"Overall revenue is up 8 percent this year," Stumpf said,while deposit growth is strong and bad loans and other expensesare declining. "Those are pretty good numbers."

Sloan conceded there "is no question that in this slow rateenvironment," interest margin is under pressure and the trendcould extend through next year.

Shares in the fourth largest U.S. bank were off 3.4 percentat $34 at midday on the New York Stock Exchange. The KBW BankIndex of large banks, which includes Wells Fargo, was off2.6 percent.

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

SHRINKING MARGINS

Banks are experiencing shrinking margins as older loans withhigher interest rates are paid down and they find fewer placesto invest growing deposits.

"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."

Wells Fargo's mortgage banking revenue jumped more than 50percent from a year ago to $2.8 billion. The bank said itdecided to retain $9.8 billion in mortgages it could have soldto Fannie Mae and Freddie Mac . It said itcan make more on them than the potential $200 million of feeincome it could have received.

"Holding these mortgages today doesn't preclude us (from)selling them in the future," Sloan said, when asked if havingthem on the balance sheet could hurt its capital strength.

The executives touted improvements in credit quality. Stumpfsaid he anticipates regulators will give the bank the go-aheadto continue returning capital to shareholders in the form ofshare buybacks and dividend payments after they review an annualstress test starting in March.

Stumpf said his first priority for excess capital, however,is to increase loans.

Wells Fargo made $139 billion in mortgages versus $89billion a year ago, but up only slightly from the secondquarter.

TOTAL LOANS UP

Total loans increased by $7.4 billion, or about 1 percent,from June 30 to $782.6 billion.

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 it believescredit quality is improving. Some of the third-quarter loanlosses resulted from new regulations that will not have aneffect in future quarters.

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 also has had mortgage-relatedheadaches.

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

The bank also set aside more money to cover investor demandsto buy back soured mortgage loans it sold to them during thehousing boom. It added $462 million to those reserves in thethird quarter, down from $669 million in the second quarter butup from $390 million a year ago.

(Reporting By Rick Rothacker in Charlotte, N.C.; Additionalreporting by Jed Horowitz in New York; Editing by JeffreyBenkoe)

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

Keywords: WELLSFARGO EARNINGS/