Wells Fargo & Co
But it is not clear how long that bonanza will last.
U.S. mortgage applications have fallen 15 percent so far this month, according to an industry trade group. Declining application volume usually translates to lower underwriting activity.
At both Wells Fargo and U.S. Bancorp, third-quarter fees from mortgage underwriting were up dramatically from a year earlier but down from the second quarter.
On the whole, mortgage operations probably won't be as profitable going forward; so the question is, what gives them growth next, said Blake Howells, head of stock research at Becker Capital Management, which owns U.S. Bancorp shares.
For U.S. Bancorp, revenue growth could come from processing transactions, Howells said. The Minneapolis-based bank generates substantial revenue every quarter from credit and debit card transactions and other payments.
For Wells Fargo, improving markets could trigger higher revenue for businesses ranging from wealth management to investment banking, said Alan Villalon, senior research analyst at First American Funds, which owns Wells Fargo shares.
The San Francisco-based bank picked up those businesses last year when it snatched Wachovia Corp away from Citigroup Inc
As Wells Fargo generates more profit, it should move closer to repaying the $25 billion it borrowed under the government's Troubled Asset Relief Program, Villalon said.
Wells Fargo has expressed interest in repaying TARP soon. The bank said on Wednesday that it is earning 35 percent more money -- before taxes and funds set aside for bad loans -- than the government had forecast when it tested banks' capital strength under adverse scenarios earlier this year.
But the bank said its overall nonperforming assets had risen by $5.1 billion from the second quarter, more than some analysts had hoped. The bank's tier 1 capital ratio, a measure of its capital strength, is lower than those of Citigroup Inc
Wells Fargo is improving, but it's happening slowly, Villalon said.
These credit difficulties helped push Wells Fargo's shares down 1.4 percent in afternoon trading, to $30.03.
For U.S. Bancorp, nonperforming loans and assets were virtually unchanged from the second quarter. The company's shares rose 6.0 percent to $25.23 in afternoon trading.
Mortgage rates have headed higher in recent weeks but are still below their average level for the third quarter, according to data from the Mortgage Bankers Association. That means banks could still see solid underwriting volume in the fourth quarter.
In an interview with Reuters, Wells Fargo Chief Financial Officer Howard Atkins said, We're actually seeing mortgage application volume pick up in October so far. But he added that if rates keep rising, volume would ultimately be dampened.
Wells Fargo reported net income for common shareholders of $2.6 billion, or 56 cents a share. That compares with analysts' average estimate of 37 cents a share, according to Thomson Reuters I/B/E/S. It earned $1.6 billion, or 49 cents, in the year-ago quarter.
U.S. Bancorp posted $276 million of mortgage banking revenue, up 350 percent from a year earlier.
The bank posted net income for common shareholders of $583 million, or 30 cents a share. That compares with $557 million, or 32 cents a share, in the year-ago quarter.
Analysts had forecast 27 cents a share.
(Reporting by Dan Wilchins; editing by John Wallace)