Wells Fargo & Co (WFC.N) on Friday said fourth-quarter profit rose 24 percent to a record high as the bank set aside less money to cover bad loans and made more fees from mortgages.
But net interest margin declined and the bank made fewer mortgage loans than in the third quarter, and its shares fell 1 percent in mid-morning trading.
Wells Fargo, the fourth-biggest U.S. bank and the nation's largest home lender, said fees from mortgages climbed nearly 30 percent from a year ago to $3.1 billion as homeowners continued to refinance their homes at low interest rates.
In a sign that the refinancing boom could be slowing, the bank's pipeline of unclosed home loans was $81 billion at the end of the fourth quarter, down from $97 billion at the end of the third quarter. Wells issued $125 billion in mortgages during the fourth quarter, compared with $139 billion in the third quarter.
The bank's net interest margin - a closely watched measure of how much money banks make from their loans - fell to 3.56 percent from 3.66 percent a year ago, but the decline was less severe than in the third quarter. Banks are seeing their margins shrink as older loans with higher interest rates are paid down.
Wells Fargo's provision for loan losses fell to $1.8 billion from about $2 billion as borrowers continued to do a better job of making their payments.
Net income was $5.1 billion, or 91 cents a share, compared with $4.1 billion, or 73 cents a share, a year earlier.
The latest results included a previously announced pre-tax charge of $644 million for Wells Fargo's share of an $8.5 billion settlement that ends a U.S. government-mandated review of financial crisis-era foreclosures.
Analysts' average earnings forecast on Friday was 89 cents per share, excluding gains from equity investments and expenses from several one-time items, according to Thomson Reuters I/B/E/S. On that basis, Wells earned 92 cents, according to I/B/E/S.
Investors may be concerned about the declines in mortgage revenue and net interest margin, Atlantic Equities analyst Richard Staite wrote in an early report on Friday. Further shrinkage is likely in 2013, so "this means continuing concern about revenue momentum for the foreseeable future," Staite wrote.
Wells is the first big U.S. bank to report fourth-quarter results. Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) report next week.
HOLDING ONTO MORTGAGES
Wells Fargo's total loans increased 2 percent from the third quarter to $799.6 billion, helped by a decision to hold onto $9.7 billion in mortgages that it could have sold to mortgage finance companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).
That move cost the bank $340 million in fees in the fourth quarter - mortgage fees it would have received from Fannie and Freddie - but will provide it with interest income over the longer term. Wells took a similar action in the third quarter, saying the mortgages would provide a better return than other investments it could make.
With over 30 percent market share through the first nine months of 2012, Wells was the top U.S. mortgage lender, according to Inside Mortgage Finance, a publication that tracks the industry. JPMorgan Chase was second with 10 percent.
Loan growth is critical for banks as they try to boost their net interest margins.
Wells Fargo's total fourth-quarter revenue rose 7 percent to $21.9 billion, driven by an increase in fees. Income from interest fell.
Total expenses were up 3 percent to $12.9 billion. The bank blamed the foreclosure-related charge and a contribution to its charitable foundation. Wells last year backed off a target of reducing fourth-quarter expenses to around $11.25 billion because its booming mortgage business was producing higher incentive pay.
In the fourth quarter, the bank was at the high end of its targeted efficiency range of 57 to 59 percent. It said it was "well positioned" to stay within its target numbers in 2013.
Wells repurchased 42 million of its shares during the quarter and has a contract to buy back another 6 million in the current quarter. Big U.S. banks are undergoing Federal Reserve stress tests that will determine whether they can raise dividends and buy back more shares this year.