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Wells Fargo Gets a Housing Bump

Updated to reflect Stifel Financial comments and updated share prices

NEW YORK ( TheStreet) - Wells Fargo (WFC - Get Report), the nation's largest mortgage lender, released earnings Friday that beat expectations and give new data into a widespread housing rebound.

However, a larger than expected drop in the bank's interest rate-based earnings pushed shares sharply lower in early trading and cloud the bank's outlook.

While mortgage lending continued to add loans, adding $11.9 billion in core loans during the quarter, the bank reported new pressure to interest rate-based earnings, which fell as margins were pressured. Interest margins fell by 25 basis points, a larger amount than the 17 basis point drop chief financial officer Tim Sloan forecast in September.

Overall, the San Francisco- based lender reported third quarter earnings of $4.94 billion or 88 cents a share, beating estimates of 87 cents, according to analyst forecasts compiled by Bloomberg. Revenue came in at 21.2 billion, slightly beating estimates of $20.9 billion.

For Wells Fargo investors, falling interest margins may prove a worrying sign for the bank's 2013 earnings; however, onlookers reading into a housing market rebound may take solace in the bank's continued loan growth.

"In the third quarter, core loans grew by $11.9 billion and we saw continued strength in our mortgage and deposit businesses," John Stumpf, chief executive of Wells Fargo said in a statement released with earnings. The bank's commentary was mixed between positive language on the housing market and banking industry specific headwinds like falling interest rates.

"While the economic and interest rate environments continue to present challenges for us and our industry, our diversified model and focus on our customers continued to produce strong quarterly results," noted CFO Sloan, in the earnings release.

In early Friday trading Wells Fargo shares fell over 3% to $33.98, on concerns over a bigger than expected drop in interest margins.

Still, the bank's earnings add new insight into the health of a housing market rebound. In earnings also released on Friday, JPMorgan (JPM - Get Report), the largest bank in the U.S. beat estimates on record third quarter earnings of $5.7 billion, or $1.40 a share, beating the consensus estimate of $1.24, among analysts polled by Thomson Reuters. In earnings, JPMorgan chief executive Jamie Dimon said a housing has turned the quarter.

Some analysts downplayed Wells Fargo's earnings beat and honed in on what could be a troubling dynamic between slowing mortgage origination growth and falling interest rates. "The beat relative to our expectations was entirely driven by lower loan loss provisioning - rather than higher mortgage banking income," wrote Stifel Nicolaus analyst Christopher Mutascio in a Friday note to clients.

The analyst stressed the importance of continued loan growth on Wells Fargo's earnings outlook. "More importantly, mortgage banking income is not offsetting the impact of [net interest margin] compression," wrote Mutascio.

Heading into third quarter earnings, many bank analysts on Wall Street pointed to a pickup in mortgage lending and refinancing as a key driver of industry wide profits. As the nation's largest mortgage lender, Wells Fargo is most levered to a pickup in housing market activity and its shares have gained nearly 30% year-to-date on strong overall loan growth.
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