Wachovia

(WB) - Get Report

is not meeting expectations when it comes to churning out revenue, and that sent investors fleeing from the stock Monday.

The Charlotte, N.C., bank said it posted a 13% gain in third-quarter profits compared with the year-ago period. Wachovia made $1.88 billion, or $1.17 a share, up from $1.66 billion, or $1.06 a share, in the year-ago period. Excluding merger-related costs, operating earnings were $1.19 a share, in line with the Thomson Financial consensus estimate.

But revenues at the nation's fourth-largest bank, while up 5.2% to $7 billion, fell considerably short of the $7.28 billion that Wall Street had been expecting. And that sent investors scrambling for the exits and wondering whether other big banks would similarly disappoint over the next two weeks.

In afternoon trading, shares of Wachovia were down $1.72, or 3%, to $54.75. Shares of other big banks, such as

Citigroup

(C) - Get Report

,

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

were also down. The Philadelphia KBW Bank Index was off .65%, even though all the major market averages were trading in the green.

Lower net interest income -- the profit the bank generates from its lending and deposit operations -- and poorer results from its investment banking business were the main items that contributed to the quarter-over-quarter revenue decline.

Net interest income rose by 4% from a year ago, but fell by 6.8% from the second quarter, to $3.6 billion. Wachovia's net interest margin fell 15 basis points from the second quarter, to 3.03%.

"We're not satisfied with our linked-quarter revenue trends," says Wachovia Chairman and CEO Ken Thompson, on a conference call. "Both net interest income and fees were lower than what we would expect from our franchise."

Wachovia funded its expanding loan portfolio with wholesale borrowings at high interest rates. The weaker net interest margin caused its net interest income to fall from the second quarter.

Fee revenue rose 6% from a year earlier, but also fell 3.3%, to $3.46 billion.

"The benefit of our larger balance sheet was muted by net margin compression due to the mix of our loan portfolio and growth in lower spread commercial loans, a shift in deposit mix and the effects of a more inverted yield curve," Thompson says.

Wachovia says loans at the end of the second quarter rose 21% from a year ago and by 2.8% to $291 billion. Middle-market and business banking, commercial real estate and large corporate lending contributed to commercial-loan growth, it says. Higher real estate-secured loans and its March acquisition of Westcorp contributed to its consumer-loan growth.

The bank says that its deposit mix continues to shift from demand deposits to certificates of deposit and money market accounts. Deposits squeaked higher by 1% from a year ago, but fell from the second quarter by 1.5%, to $323 billion. Average core deposits from Wachovia's general banking operations -- where the bulk of its deposits come from -- rose 6.7% from the third quarter of last year, to $216 billion.

The company also expects to have up to 4 cents a share of dilution in the fourth quarter from its Oct. 1 acquisition of Golden West. The news surprised some investors, who were expecting the integration to be relatively neutral in the quarter.

In a way, Wachovia "took down guidance from what the Street was expecting for future quarters," says Jefferson Harralson, an analyst at Keefe, Bruyette & Woods. "I just don't think the Street was incorporating the initial dilution of Golden West very well."

The average earnings estimate for the fourth quarter was $1.21, according to Thomson Financial.

Wachovia's net charge-offs doubled from the year-ago quarter and from the second quarter, to $116 million. The bank also increased its provision for loan losses by 31%, to $108 million as a result of its "growth in auto lending and other consumer loans as well as lower commercial-loan recoveries," it says.

Those loans the company considers "nonperforming" fell by 15% from a year ago to $759 million, it says.

Richard Bove, an analyst at Punk Ziegel downgraded Wachovia to market perform from buy and lowered his earnings estimates for this year and next year. In regard to the wholesale borrowing that Wachovia used, "there does not seem to be any reason why this situation will change near-term," Bove writes in a note.

But at the same time, Wachovia will not be able to maintain its loan-growth momentum or its cost-cutting benefits, and improvement in investment banking "may not be able to offset this," he writes.

Noninterest expenses rose 1%, to $4 billion.