Jan. 28 (Bloomberg) -- Wells Fargo & Co., the second-biggest U.S. home lender, reported its first quarterly loss since 2001 after acquiring Wachovia Corp. The stock surged 31 percent in New York trading after the bank maintained its dividend and said it doesn’t need more federal aid.

The fourth-quarter net loss of $2.55 billion, or 79 cents a share, compares with profit of $1.36 billion, or 41 cents, a year earlier, the San Francisco-based company said today in a statement. Wachovia recorded a loss of $11.2 billion. Excluding one-time items, profit was 41 cents a share, beating the 33-cent average estimate of analysts surveyed by Bloomberg.

Wells Fargo averted the worst of the 2008 financial meltdown, enabling Chairman Richard Kovacevich and Chief Executive Officer John Stumpf to buy Wachovia for $12.7 billion. While the bank built reserves to deal with defaults on Wachovia’s $122 billion in option adjustable-rate mortgages, it didn’t cut its 34-cent dividend or ask for a second injection of U.S. capital like Bank of America Corp., which was saddled with greater-than-expected losses after buying Merrill Lynch & Co.

“When we get this worked out, Wells Fargo will be in great shape,” said Adam Seitchik, co-chief executive officer at Boston-based Trillium Asset Management, on Bloomberg Television. “There is certainly room to pay the dividend,” he said. The firm oversees $1 billion and owns Wells Fargo shares.

Bad Bank Plan

Wells Fargo rose $5 to $21.19 at 4:10 p.m. in New York Stock Exchange composite trading, the biggest gain in six months. The results and President Barack Obama’s plan to set up a so-called bad bank to absorb toxic investments bolstered financial stocks with Citigroup Inc. jumping 19 percent.

Wells Fargo shares had tumbled 45 percent in 2009 through yesterday, after slipping 2.4 percent last year. The company’s biggest shareholder is billionaire Warren Buffett’s Berkshire Hathaway Inc.

The loss included a $294 million pretax charge tied to clients affected by Bernard Madoff’s alleged Ponzi scheme, the bank said. Some of Wells Fargo’s customers were wiped out by Madoff and unable to pay their loans, Chief Financial Officer Howard Atkins said in an interview.

For the full year, net income fell 65 percent to $2.84 billion, the bank said. Revenue increased 7 percent to $42.2 billion, after a 4 percent decline in the fourth quarter. The company said it built credit reserves by $5.6 billion, including a $3.9 billion provision.

Market Share

Wells Fargo is the last of the four biggest U.S. banks to report fourth-quarter results. Of its three top rivals, only JPMorgan Chase & Co. reported a profit, with earnings declining 76 percent. Citigroup posted an $8.29 billion loss and was forced to split apart, while Bank of America lost $1.79 billion, excluding a $15.3 billion deficit at Merrill Lynch.

While competitors reduced their lending in the quarter, Wells Fargo added $50 billion in mortgage originations and has $22 billion in new loan commitments, the company said. Net interest margin, which measures lending profitability, increased to 4.9 percent from 4.62 percent a year earlier.

“We have been very diligent to try and provide credit to the markets at a time when many other banks have been retrenching,” Atkins said. “We’re picking up market share.”

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With the purchase of Charlotte, North Carolina-based Wachovia, Wells Fargo adds $450 billion in deposits and branches along the East Coast and ranks second in mortgage lending and deposits behind Bank of America.

The bank must prove the company can handle overdue loans from Wachovia’s option-ARMs, which let borrowers skip some interest payments and add them to the principal of the loan. The decline in housing prices left some customers owing more than the value of their homes.

“They’ve navigated the environment pretty well,” said Jennifer Thompson, an analyst at Portales Partners LLC in New York, who recommends holding Wells Fargo shares. “They’ve done a good job in managing the businesses that they have, but that doesn’t mean profitability isn’t going to come under pressure.”

Wachovia’s loss included a $2.8 billion deferred tax asset writedown, $4.2 billion to build credit reserves and $4.3 billion in “market disruption,” losses, Wells Fargo said. The company said Wachovia has resumed originating loans and taking deposits.

Loss Assumptions

Wells Fargo said today that it is comfortable with previous assumptions of losses expected from Wachovia. The lender took a $37.2 billion credit writedown on Dec. 31 tied to $93.9 billion of loans classified as “high-risk,” mostly option-ARMs. Loans and other assets no longer collecting interest fell to 1.04 percent of total loans from 1.53 percent in the third quarter.

The California Association of Realtors said yesterday that housing prices plunged 42 percent last month from the same period a year earlier. U.S. foreclosure filings surged 81 percent in 2008 as more than 2.3 million properties got a default or auction notice or were seized by lenders, according to RealtyTrac Inc., an Irvine, California-based seller of default data. Three of the top four areas for foreclosures in the country were in California, RealtyTrac said.

After writing down bad loans, Wells Fargo’s Tier 1 capital, a measure of solvency, fell 230 basis points to 7.9 percent from the previous quarter.

Government Money

Wells Fargo received $25 billion in October as part of the Treasury’s industry bailout and raised $12.6 billion in a stock offering the following month. To maintain adequate capital and fund Wachovia’s mortgages including those acquired in the 2006 purchase of California’s Golden West Financial Corp., Wells Fargo may need to cut its dividend and raise an additional $10 billion, Atlantic Equities LLP analyst Richard Staite wrote on Jan. 14. Citigroup and Bank of America each slashed their quarterly dividend to a penny a share this month.

The bank’s 2009 net income available to shareholders will likely be about even with the dividend payment, wrote Sanford C. Bernstein & Co. analyst John McDonald, who rates Wells Fargo shares “market perform,” in a note today.

“We expect the question of dividend sustainability to remain a hot button for investors.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net.

Last Updated: January 28, 2009 16:11 EST