SAN FRANCISCO -- Wells Fargo on Friday posted record profit of $5.32 billion for its third quarter, but also reported that its mortgage business has dwindled amid rising interest rates and fewer refinancing loans.

Wells said its profit jumped 13 percent during the third quarter that ended in September compared with the year-ago quarter, saying diversified businesses, a strong housing market and modest economic growth have bolstered its financial performance.

"The housing market continues to demonstrate strong momentum," John Stumpf, Wells Fargo's CEO, said during a conference call with analysts. "While, as expected, higher rates reduced mortgage refinancing activity this quarter, home price appreciation remains strong and affordability remains excellent."

In this Jan. 19, 2010 photo, a banking customer walks into a Wells Fargo Bank in Los Altos, Calif.
In this Jan. 19, 2010 photo, a banking customer walks into a Wells Fargo Bank in Los Altos, Calif. (Paul Sakuma/AP Photo)

But San Francisco-based Wells said its mortgage banking income tumbled 43 percent and mortgage originations fell 29 percent.

"We're in a transitional period in our mortgage business," Chief Financial Officer Tim Sloan told the analysts. "Our mortgage origination volume declined this quarter, particularly refinance activity. We have managed through many refi cycles in the past and remain committed to the mortgage business."

Refinancing volume in the July-September quarter declined to 41 percent of originations, down from 56 percent in the April-June quarter, Sloan said.

"For a lot of banks, this would be a huge challenge, but because Wells Fargo produces one-third of the nation's mortgage business, they will continue to be in good shape," said Ken Thomas, a Miami-based independent bank analyst and operator of BranchLocation.com. "If the housing market continues to come back, Wells Fargo will be in excellent shape."

Wells Fargo generated $1.6 billion in mortgage noninterest income during the third quarter, compared with $2.8 billion in the year-ago quarter. Mortgage originations totaled $80 billion in this year's third quarter compared with $112 billion a year ago, Wells reported.

Concerns about the mortgage business caused the bank's shares to plunge in early trading, but they rallied to close down just a penny at $41.43 on Friday.

The quality of the Wells loan portfolio has improved. Loan losses totaled $975 million in the third quarter, down 59 percent from $2.4 billion a year ago. That's allowed the bank to release $900 million from its reserves to cover sour loans.

"Mortgage volume is slowing and will continue to decelerate," said Michael Yoshikami, president of Walnut Creek-based investment firm Destination Wealth Management. "But the other parts of Wells Fargo's business will make up for that slowdown."

The bank said some economic challenges remain, and fresh ones have surfaced from the government shutdown and the potential of a government debt default.

"Before these recent events, the economy had continued its pace of moderate growth with gains in consumer spending, business investment and employment," Stumpf told the analysts. "The recovery remains uneven."

Contact George Avalos at 408-859-5167 or 408-373-3556. Follow him at Twitter.com/georgeavalos.