Wells Fargo & Co. on Wednesday reported a $2.6 billion third-quarter profit as the company's retail banking operations, including the businesses it acquired with the purchase of Wachovia Corp., offset rising loan losses.

San Francisco-based Wells Fargo joined other big banks in reporting continuing heavy losses from failed loans as a growing number of consumers were unable to pay their bills. The bank said credit losses climbed to $5.1 billion, or 2.5 percent of its loan portfolio. That is up from $2 billion a year ago and $4.4 billion in the second quarter.

The amount of loans that are past due but have not yet been written off totaled $23.5 billion, nearly four times higher than in the same period last year and 28 percent higher than in the second quarter.

Wells Fargo's loan losses were balanced out by its traditional banking business, which includes the big mortgage operation it took on when it bought Wachovia at the height of the credit crisis a year ago. Net interest income, or what the bank makes on loans and other assets, rose 43 percent to $5.57 billion after setting aside $6.1 billion to cover credit losses.

Noninterest income, the money a bank earns on fees and other charges, more than tripled from a year ago to $10.78 billion as Wells Fargo reported strong mortgage banking activity. Mortgage banking income jumped to $3.07 billion from $892 million in the third quarter of 2008. The bank lent $96 billion in new residential mortgages.

Total revenue more than doubled from the same period last year to $22.47 billion, but was roughly flat with the second quarter.

The spike in revenue drove the nation's fourth-largest bank to report a third-quarter profit of $2.64 billion, or 56 cents per share, after paying preferred dividends. That compares with earnings of $1.64 billion, or 49 cents per share, a year ago. Analysts, on average, were expecting earnings of 37 cents per share.

Wells Fargo has long been considered one of the stronger, more conservatively managed big banks. But investors have been worried about the deteriorating credit quality in the huge loan portfolio it acquired from Wachovia, after the Charlotte, N.C.-based bank nearly collapsed under the weight of shaky mortgage loans and other bad bets on the housing industry.

Nearly a third of the loan losses during the quarter come from Wachovia loans. Among consumer loans, charge-offs in Wachovia's portfolio totaled nearly $1.11 billion, compared with $2.48 billion from Wells Fargo's original portfolio.

Chief Financial Officer Howard Atkins, in an interview with The Associated Press, said Wells Fargo's results should quell any lingering concerns investors have about the Wachovia deal. Wachovia is adding to the bank's earnings and capital growth earlier and more significantly than anticipated, he said, and integration costs should be less than originally expected.

"The risks are kind of behind us and now we're enjoying the revenue synergies and the expense synergies," Atkins said.

Wells Fargo also offered a more upbeat credit outlook than some of the other banks, saying it expects credit losses to peak in 2010, with consumer losses possibly even peaking by the first half of the year. Credit cards, a problem area at many large banks, make up only about 3 percent of Wells Fargo's total loan portfolio. Continued...