Wells Fargo third-quarter net up on strong mortgage lending Fri Oct 12, 2012 9:14am EDT (Reuters) - Wells Fargo & Co (WFC.N) reported a 22 percent increase in its third-quarter profit on Friday on a surge in mortgage lending, but fell short of analysts' revenue estimates. Shares in the fourth largest U.S. bank dropped 3.3 percent to $34.02 in premarket trading. Wells Fargo posted earnings per share of 88 cents, topping the analysts' consensus estimate of 87 cents, according to Thomson Reuters I/B/E/S. But total revenue of $21.2 billion missed the $21.47 billion that analysts had expected. Net income in the quarter was a record $4.9 billion. The largest U.S. home lender reported that mortgage banking revenue jumped more than 50 percent from a year ago to $2.8 billion. The bank said it held on to some loans it could have sold to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), giving up $200 million in potential fee income. Banks are experiencing a jump in home lending as borrowers refinance their homes at low interest rates. Wells made $139 billion in mortgages versus $89 billion a year ago, but up only slightly from the second quarter. The bank's net interest margin - the spread it makes on what it pays on deposits and makes on loans - fell to 3.66 percent from 3.91 percent in the second quarter, a bigger drop than it had warned of last month. Banks are seeing the margin shrink as older loans with higher interest rates are paid down. The bank blamed the margin decline on a drop in fee income compared with the second quarter, a cautious approach in its investment portfolio and low interest rates. Wells Fargo reported its results on the same day as JPMorgan Chase & Co (JPM.N), launching the earnings season for big banks. Profits at JPMorgan Chase, the largest U.S. bank. rose 34 percent to a record $5.71 billion. Reporting By Rick Rothacker in Charlotte, N.C.; Editing by Jeffrey Benkoe