(Bloomberg) -- Wells Fargo & Co., the largest U.S. home lender, reported a 24 percent rise in fourth-quarter earnings as the bank extended more credit. The shares slipped as margins narrowed and mortgage applications waned.

Net income advanced to a record $5.09 billion, or 91 cents a share, from $4.11 billion, or 73 cents, a year earlier, the San Francisco-based bank said today in a statement. Results beat the 89-cent average estimate of 27 analysts surveyed by Bloomberg. Revenue increased 7 percent to $21.9 billion, outpacing the 3 percent gain in noninterest expense.

Chief Executive Officer John Stumpf, 59, has used deposits to lower the bank’s cost of funding as it makes more loans, softening the impact of meager yields. The narrower margins have come as the bank takes a bigger share of mortgage and commercial markets while betting on an economic turnaround.

“They are relatively aggressive on the lending side,” said Bill Smead, who oversees about $280 million including Wells Fargo shares, as chief investment officer at Seattle-based Smead Capital Management Inc. “Why grab a big market share at lousy interest rates unless you thought things were going to be a lot better in 5 or 10 years?”

Segment Results

The stock declined 1.1 percent to $35 as of 12:07 p.m. in New York.

Quarterly profit at the community-banking division, which includes the branch network and mortgage business, rose 14 percent to $2.87 billion. Net income in wholesale banking jumped 24 percent to $2.03 billion from a year earlier, while profit from the wealth and brokerage unit climbed 13 percent to $351 million. Average loans and deposits both showed gains, even as net interest margins narrowed more than some analysts predicted.

The margin, which represents the gap between what banks pay depositors and what’s earned on loans, fell 10 basis points from the third quarter to 3.56 percent.

The decline was due in part to “outsized deposit growth” that came toward the end of the quarter, Chief Financial Officer Timothy J. Sloan said. The lender can continue to build interest income, helping the margin, he said.

“Growing net interest income remains our focus and we believe we can continue to generate growth even in this low-rate environment,” Sloan said on the company’s conference call.

For the full year, profit rose 19 percent to $18.9 billion on a 6.4 percent revenue gain to $86.1 billion.

Wells Fargo may not be able to count as much on two trends that aided earnings in 2012 -- a boom in refinancing and releasing reserves that had been put aside for bad loans.

Home Lending

Originations dropped 10 percent to $125 billion in the quarter, and applications -- a barometer of future results -- slid 19 percent, the bank said. Wells Fargo kept $9.7 billion in mortgages in the quarter instead of selling them, forgoing about $340 million in fee revenue. Net interest income fell 2 percent.

While the bank released $250 million of reserves into income, Chief Risk Officer Michael Loughlin said in the statement that future releases won’t be as much.

The bank told investors this week it’s taking a $644 million pretax charge as part of a settlement with regulators to end loan-by-loan reviews at 10 of the largest mortgage servicing firms and provide relief to borrowers. Wells Fargo agreed to pay $766 million in cash and provide another $1.2 billion in aid as part of the $8.5 billion accord. Mortgage servicers perform billing and collections and handle foreclosures.

Capital Plan

Wells Fargo will ask Federal Reserve officials to let the bank return more capital to shareholders, Stumpf told investors in December. That’s industry lingo for raising the dividend or buying back common stock. Wells Fargo already pays a quarterly dividend of 22 cents, yielding about 2.5 percent annually.

Wells Fargo gained 24 percent in 2012, trailing the 30 percent average for the 24-company KBW Bank Index. The stock added 3.6 percent this year through yesterday. Berkshire Hathaway Inc., controlled by billionaire Warren Buffett, is the biggest stockholder.

Banks could face lower profits on home loans this year as minutes of the Fed’s December meeting, released Jan. 3, showed policy makers may end $85 billion monthly bond purchases in 2013. That could “spoil the party” for lenders that profited from a more than 20 percent jump in mortgage originations last year, according to Deutsche Bank AG.

Mortgage Forecast

Wells Fargo may be hurt more than other lenders because mortgage banking accounts for 13 percent of revenue, compared with an average of 8 percent at peers, Goldman Sachs Group Inc. analysts led by Richard Ramsden wrote in a Jan. 3 report. The analysts downgraded the stock from buy to neutral.

“While we still believe that WFC is uniquely positioned to take advantage of the refinance wave, exposure to mortgage banking should be less of a benefit,” Goldman Sachs wrote, referring to the company by its stock ticker. “We forecast a gradual decline in mortgage-banking revenues.”

Full-year revenue from commercial and corporate customers at the investment bank jumped 30 percent, with the statement citing attractive capital markets and selling more products to existing customers.

The bank has been expanding its securities business, headed by John Shrewsberry, where competitors have scaled back or quit the market. In October, Wells Fargo restructured the sales and trading business to make it easier to serve clients, and in December beefed up its mortgage research with the hiring of Freddie Mac’s Greg Reiter.

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