But lending margins declined and the bank made fewer mortgage loans than in the third quarter, and its shares closed down 0.8 percent at $35.10.

Wells is the first big U.S. bank to report fourth-quarter results, and its report reflects how banks are relying more on fees from mortgages and service charges to increase revenue, and less on interest income. Low interest rates are pressing on the profit banks make from interest.

But fees from mortgages may help the bank less in the future. The bank's pipeline of applications for home loans that have not yet closed was $81 billion at the end of the fourth quarter, down from $97 billion at the end of the third quarter. Wells issued $125 billion in mortgages during the fourth quarter, compared with $139 billion in the third quarter.

In an interview, Wells Chief Financial Officer Tim Sloan said the bank made fewer mortgage loans in the fourth quarter mostly due to a decision to stop making loans through brokers. The volume of loans under way but not yet closed is still among the highest in the bank's history, he said.

"Assuming rates stay about where they are or even pick up just a little bit, it's reasonable to assume we will still have healthy, strong originations in the mortgage business," Sloan said.

Wells, the fourth-biggest U.S. bank and the nation's largest home lender, said fees from mortgages climbed nearly 30 percent from a year ago to $3.1 billion as homeowners continued to refinance their homes at low interest rates.

The Mortgage Bankers Association has forecast that banks will make fewer loans in 2013 than 2012, and then fewer again in 2014, with a drop in refinancings more than offsetting an increase in loans to purchase homes.

Wells' lower mortgage applications and originations are "a wake-up call to the investment community that this isn't going to go on forever," said Scott Siefers, analyst with Sandler O'Neill. "It's a mounting headwind no doubt about that."

Wells Fargo's net interest margin - a closely watched measure of loan profitability - fell to 3.56 percent from 3.66 percent in the third quarter, but the decline was less severe than the drop from the second to the third quarter. Banks are seeing their margins shrink as older loans with higher interest rates are paid down.

Wells Fargo provision for loan losses fell to $1.8 billion from about $2 billion as borrowers continued to do a better job of making their payments.

Net income was $5.1 billion, or 91 cents a share, compared with $4.1 billion, or 73 cents a share, a year earlier.

The latest results included a previously announced pre-tax charge of $644 million for Wells Fargo's share of an $8.5 billion settlement that ends a U.S. government-mandated review of financial crisis-era foreclosures.

Analysts' average earnings forecast on Friday was 89 cents per share, excluding gains from equity investments and expenses from several one-time items, according to Thomson Reuters I/B/E/S. On that basis, Wells earned 92 cents, according to I/B/E/S.

Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) report quarterly results next week.

HOLDING ONTO MORTGAGES

Wells Fargo's total loans increased 2 percent from the third quarter to $799.6 billion, helped by a decision to hold onto $9.7 billion in mortgages that it could have sold to mortgage finance companies Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB).

That move cost the bank $340 million in fees in the fourth quarter - mortgage fees it would have received from Fannie and Freddie - but will provide it with interest income over the longer term. Wells took a similar action in the third quarter, saying the mortgages would provide a better return than other investments it could make.

With over 30 percent market share through the first nine months of 2012, Wells was the top U.S. mortgage lender, according to Inside Mortgage Finance, a publication that tracks the industry. JPMorgan Chase was second with 10 percent.

Wells Fargo's total fourth-quarter revenue rose 7 percent to $21.9 billion, driven by an increase in fees. The bank, which has added new monthly fees on checking accounts that were once free, brought in $159 million more in service charges from deposit accounts in the fourth quarter than a year ago. Income from interest fell.

Total expenses were up 3 percent to $12.9 billion. The bank blamed the foreclosure-related charge and a contribution to its charitable foundation.

Wells repurchased 42 million of its shares during the quarter and has a contract to buy back another 6 million in the current quarter. Big U.S. banks are undergoing Federal Reserve stress tests that will determine whether they can raise dividends and buy back more shares this year.

In a conference call with analysts, Sloan said the bank had asked the Fed for permission to return more capital to shareholders in 2013 than in 2012.

(Reporting By Rick Rothacker in Charlotte, North Carolina; editing by John Wallace and Marguerita Choy)

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