Oct. 16 (Bloomberg) -- Wells Fargo & Co., the second- largest U.S. mortgage lender, said third-quarter profit rose less than estimated after losses from home equity and consumer loans climbed.

Net income advanced 4 percent to $2.28 billion, or 68 cents a share, from $2.19 billion, or 64 cents, a year earlier, the San Francisco-based bank said today in a statement. Wells Fargo fell the most in two months in New York trading.

Profit grew at the slowest pace since at least 2002 for Wells Fargo amid the worst housing slump in 16 years, and the weakness also will hurt fourth-quarter results, the company said. The report may signal that Wells Fargo can't meet its target of 10 percent annual earnings growth, said KBW Inc. analyst Frederick Cannon.

``Investors have become complacent and not delved too much below the surface,'' Cannon said. ``While Wells Fargo is an exceptional bank, they are not immune from what's going on in the markets.''

The bank's shares fell $1.40, or 3.9 percent, to $34.55 at 4:03 p.m. in New York Stock Exchange composite trading. Wells Fargo's stock gained 1.3 percent during the quarter, third-best in the KBW Bank Index behind Bank of America Corp. and Northern Trust Corp. Only Countrywide Financial Corp. made more home loans than Wells Fargo as of midyear.

Fourth-Quarter Outlook

Weak housing prices and tighter credit standards that limit borrowing will also hurt fourth-quarter results, Chief Financial Officer Howard Atkins said in an interview. He wouldn't provide estimates.

``The decline in home prices accelerated'' in the third quarter, ``which produced somewhat higher losses than we anticipated,'' Atkins said. ``The housing market inevitably goes through cycles and we are in the down phase of that cycle.''

Wells expects losses in its home equity business to remain higher than normal in 2008, Gary Townsend, an analyst at Friedman Billings & Ramsey Group, Inc. in Arlington Virginia, said in a report today. Housing prices remain stable in California, Wells' biggest market, except in the depressed Central Valley region around Sacramento, Atkins said.

Per-share profit was a penny less than the average estimate of 19 analysts surveyed by Bloomberg. Revenue advanced 10 percent to $9.85 billion.

The bank reported net credit losses of $892 million, up 35 percent from a year earlier. About half of the increase stemmed from home equity loans, where lower property prices caused steeper-than-expected losses, Chief Credit Officer Mike Loughlin said.

Home Equity Loans

Wells said about a fourth of its overdue home equity loans were originated by independent brokers, a source of business that it eliminated during the quarter. It had made up about 7 percent of the company's $83 billion home equity portfolio, David Hendler, an analyst at CreditSights Inc. said in a report today.

``They didn't get into the unusual and abstract products like some of their competitors, but in this kind of environment nobody is going to be completely immune,'' Scott Siefers, associate director at Sandler O'Neill & Partners LP in New York, said in an interview.

The net interest margin, or the difference between what the bank pays to attract deposits and what it earns on loans, narrowed to 4.55 percent from 4.79 percent a year earlier.

Cross-Selling

Cross-selling among the bank's units is propelling revenue growth, Atkins said. Fees from trust and investments increased 17 percent, while credit-card fees gained 21 percent. Mortgage banking increased as growth from servicing mortgages and a hedging gain outpaced a 12 percent decline in new home loans.

The company has been using services such as electronic payroll and bill-paying to attract business clients. Wells Fargo bought CIT's construction finance unit in August, adding 235 people who serve contractors that build and repair infrastructure. Clients also include manufacturers, distributors and dealers of construction equipment.

Average commercial loans increased 20 percent, pushing total average loans up 15 percent.

At least 100 home lenders have sought buyers, halted loans or left the business this year, according to Bloomberg data, as U.S. foreclosures set a record in the second quarter and overdue payments on subprime home loans reached a five-year high, according to the Mortgage Bankers Association.

Wells Fargo responded in July by halting some subprime home loans at its own branches, shutting a business that bought such loans from other lenders and cutting off subprime mortgages offered by independent brokers.

The next month, Wells Fargo curtailed loans to customers whose credit scores were higher than subprime and lower than prime. That included Alt-A mortgages, which are given to people who don't document their income or use the loans for second homes and investment properties.

``Most of our nonperforming loans are either secured by real estate or autos so we've got collateral,'' Atkins said.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: October 16, 2007 16:13 EDT