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SAN FRANCISCO — Wells Fargo & Co. reported Tuesday that its third-quarter profit surged by 42 percent, as the West’s biggest bank cashed in on a home-loan boom fueled by falling interest rates. 

The San Francisco-based company earned $1.16 billion, or 67 cents per share — up from $821 million, or 47 cents per share, at the same time last year. 

If not for the bank’s acquisition of Utah-based First Security Corp., Wells said its earnings per share would have improved by 5 percent. 

The results lagged the consensus earnings estimate of 69 cents per share among analysts surveyed by Thomson Financial/First Call. The shortfall clipped Wells’ stock, which fell 58 cents to close at $40.19 Tuesday on the New York Stock Exchange. 

Wells’ mortgage division propelled the bank’s third-quarter performance. 

From July through September, Wells funded $48 billion in mortgages. That raised its home lending volume through the first nine months of the year to $122 billion — more than it has recorded in any other previous full year. The bank, the nation’s biggest headquartered west of the Mississippi, financed $109 billion in mortgages in 1998. 

The bank ended the quarter with another $38 billion in mortgages in its processing pipeline and $476 billion in its mortgage servicing portfolio, which is a source of reliable fee income. 

Wells is benefiting from the economic weakness that has pushed mortgage rates well below 7 percent, prompting millions of homeowners to refinance existing loans and making it easier for prospective home buyers to qualify for new loans. 

“With mortgage rates at historically low levels, we are seeing unprecedented levels of applications,” said Mark Oman, Wells’ executive vice president of mortgage and home equity. 

The mortgage flurry helped lift Wells’ community banking division to a third-quarter profit of $931 million, a 51 percent improvement from the same time last year. 

The refinancing craze also means that some of Wells’ outstanding mortgages will be paid off earlier than expected. The bank increased its reserves slightly more than expected in the quarter to offset revenue losses from the anticipated payoff of mortgages, said industry analyst Joseph Morford of Dain Rauscher Wessels. 

Like other banks, the frail economy hurts Wells, as businesses and consumers begin to default on loans. The bank’s non-performing assets increased 9.5 percent, or $155 million, during the third quarter to $1.79 billion as of Sept. 30. The bank’s problem loans totaled $1.62 billion at the end of the third quarter, a 67 percent increase from last year. 

The trends are “consistent with our view that there is continuing weakness in the overall economy,” said Ely Licht, Wells’ chief credit officer. 

The credit problems are slightly worse than analysts expected, but remain in a manageable range, Morford said. 

The bank said it is still assessing its exposure to businesses hardest hit by the economic ripple effects of the Sept. 11 terrorist attacks. 

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On The Net: 

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