Jan. 29 (Bloomberg) -- Wells Fargo & Co., the biggest bank on the U.S. West Coast, is using the year-old U.S. recession and deepening financial crisis as a chance to boost lending and take customers from troubled competitors.

While JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. reduced lending in the fourth quarter by a combined $86.4 billion, Wells Fargo said yesterday that loans increased $9.7 billion in the period, not including assets acquired in the purchase of Wachovia Corp.

Wells Fargo, based in San Francisco, is making more loans to homebuyers and businesses even with unemployment at a 16-year high and housing prices in its home state down 42 percent in the past year. The bank is seeking to add clients that may also become depositors and retail-brokerage customers as it expands into East Coast markets where Wachovia has been among the biggest lenders.

“Any time you can take market share at the expense of weaker competitors, it’s probably a good thing,” said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which oversees $375 billion and has been buying Wells Fargo shares. “I would hope that Wells will continue its disciplined lending standards that it has applied to loans in the past.”

Wells Fargo surged 31 percent yesterday to $21.19 on the New York Stock Exchange after maintaining its dividend and saying it doesn’t need additional government funding. The shares have dropped 33 percent in the past year, while Citigroup and Bank of America have each lost more than 80 percent of their value and JPMorgan has fallen 39 percent. The 24-member KBW Bank Index has plunged 64 percent.

New Loans

Wells Fargo said yesterday that it received $22 billion in new loan commitments in the quarter and had $50 billion in mortgage originations. The number of mortgage applications being reviewed is at the highest since the second quarter of 2005, Chief Financial Officer Howard Atkins said in an interview.

Between 2006 and 2007, Wells Fargo lost business because it was unwilling to offer the riskiest types of loans like option adjustable-rate mortgages, Atkins said. The biggest option-ARM providers -- Wachovia, Washington Mutual Inc., Countrywide Financial Corp., IndyMac Bancorp and Downey Financial Corp. --all failed or were bought in the past year.

“There have been times when we lost market share because the business was not being priced correctly or others were taking risks that we felt were inappropriate,” Atkins said. “At this point in time, we like the way the business is being priced.”

Mortgages

The average 30-year fixed mortgage rate fell below 5 percent this month for the first time since Freddie Mac started keeping records in 1971, yet the real rate that banks charge customers reached the highest in more than two decades.

Citigroup, based in New York, and Charlotte, North Carolina- based Bank of America cut their lending in the quarter, reported losses, and required a second round of capital injections from the government. JPMorgan Chase & Co. in New York scaled back amid losses related to acquisitions of Bears Stearns Cos. and WaMu.

Wells Fargo added loans on top of its purchase of Wachovia, which brings with it $122 billion in option-ARMs. The acquisition makes Wells Fargo the second-biggest U.S. bank by deposits and the No. 2 retail brokerage, both areas that Atkins said present growth opportunities.

‘Challenging Earnings Environment’

The risks are on the lending side, after the company’s Tier 1 capital, a measure of solvency, fell below 8 percent and the lender built its reserves by $3.9 billion, wrote CreditSights Inc. analyst David Hendler, in a report. Wells Fargo maintained its dividend, an aggressive policy “in light of the company being at the lower end of capital ratios and in a challenging earnings environment,” the New York-based analyst wrote.

Wells Fargo reported a $2.55 billion loss yesterday because of an $11.2 billion deficit at Charlotte-based Wachovia. The bank also took a $37.2 billion writedown tied to Wachovia’s “high- risk” loans.

Wells Fargo shares fell $1.07, or 5 percent, to $20.12 at 12:30 p.m. New York time today.

To unfreeze the credit markets, Wells Fargo, Citigroup, Bank of America and JPMorgan were all given billions of dollars from the Treasury last year as part of the Troubled Asset Relief Program. President Barack Obama’s administration is now moving closer to creating a so-called bad bank, which would buy toxic assets, and may use the Federal Deposit Insurance Corp. to manage it, two people familiar with the matter said yesterday.

Wells Fargo is the only one of the top four banks that’s currently using government funds to help shore up the economy, said James Barth, former chief economist at the Office of Thrift Supervision and professor of finance at Auburn University in Alabama.

“Banks should lend money, particularly banks that receive money through the TARP program,” said Barth, in an interview. “Wells Fargo is apparently doing what members of Congress and government officials would like them to do.”

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

Last Updated: January 29, 2009 12:32 EST