Wells Fargo posted record earnings in the third quarter as the bank increased mortgage lending and pocketed more fees.
Wells, the nation's biggest mortgage lender, expanded its loan portfolio by making new loans to consumers. It collected more interest on loans than in the same period a year earlier.
Revenue was lower than analysts were expecting, however, and Wells' stock fell 3 percent.
Wells' booming mortgage business accounted for much of its strength in the quarter. Fees from the bank's booming mortgage business added to its revenue. New mortgage loans originations rose to $139 billion from $89 billion in last year's third quarter.
"Real estate is getting better," Wells Fargo chairman, CEO John Stumpf said on a call with analysts. "We saw it in housing, and every quarter we have more confidence."
Wells' net income in the quarter ended Sept. 30 rose 23 percent, to $4.72 billion from $3.84 billion in the same period last year.
That amounts to 88 cents per share, a penny higher than the average estimate of analysts surveyed by FactSet. Wells earned 72 cents per share in last year's third quarter.
Overall revenue rose 8 percent to $21.21 billion, slightly lower than analysts expected. Wells' stock fell $1.07, or 3 percent, to $34.11.
Net interest income, which includes interest on loans, edged up 1 percent to $10.66 billion from $10.54 billion.
Non-interest income, which includes fees, insurance and mortgage banking revenue, rose 16 percent. Card fees rose modestly, while mortgage banking accounted for the bulk of the increase.
That category also includes trading gains, another bright spot for Wells this quarter. Wells reported net gains from trading of $529 million, compared with a loss of $442 million a year earlier. Wells' trading business is smaller than those of its big competitors on Wall Street.
The stock fell mainly because analysts are concerned about Wells' ability make money on interest from loans that it originates. In a call with executives, most analysts focused on Wells' shrinking net interest margin — the difference between interest it collects on loans and interest it must pay to depositors and other lenders. Wells' net interest margin fell to 3.66 percent from 3.84 percent a year earlier.
Wells said it offered $139 billion in new mortgages, compared with $131 billion in the second quarter and only $89 billion in last year's third quarter.
The bank decided to hold $9.8 billion of new, high-quality mortgages on its books instead of bundling and reselling them. Executives said the loans will generate better, safer returns over time than alternative investments like mortgage-backed securities.
Because it kept more loans, the bank's average outstanding loans to consumers rose 4 percent from the prior quarter, to $335.28 billion from $322.30 billion in the period ended June 30.
Wells also offered consumers more loans for autos, credit cards and education.
Average loans to companies rose from a year earlier, but declined slightly from the previous quarter.
More people parked their money at Wells, boosting core deposits by 7 percent from a year earlier, $895.4 billion from $836.8 billion a year earlier.
With more deposits on hand, banks have a stronger capital position and can lend more easily.
Wells, based in San Francisco, appears more confident that those loans will be repaid. It released $200 million that it had set aside earlier to cover possible loan losses.
One sign that loan repayments are improving: Wells gave up on collecting 1.2 percent of its average loan balance, down from 1.4 percent a year earlier.
On Tuesday, the federal government sued Wells Fargo, accusing it of misleading regulators about the quality of thousands of loans in order to qualify for federal loan insurance. The lawsuit seeks to recover hundreds of millions of dollars paid to Wells by the Federal Housing Administration after borrowers defaulted on their loans.
The earnings don't include dividend payments to preferred stockholders.
Daniel Wagner can be reached at www.twitter.com/wagnerreports.