updated 7/16/2008 11:57:53 AM ET 2008-07-16T15:57:53

Wells Fargo gave anxious investors a pleasant surprise Wednesday, reporting a profit drop that was milder than anticipated and lifting its quarterly dividend by 10 percent.

Wells Fargo's second-quarter profit fell 22 percent as more customers at the nation's fifth-largest bank failed to pay back their loans. But it raised its dividend to 34 cents from 31 cents — at a time when many other financial institutions are slashing theirs to preserve capital.

The San Francisco-based company's shares soared $4.63, or 22.5 percent, to $25.14 by midday, after tumbling alongside other financial stocks over the last several days on worries about more U.S. mortgage losses and bank failures.

Wells Fargo has now logged three straight quarters of profit declines. But the bank has been weathering one of the nation's worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector. That means it hasn't been forced to take the huge number of write-downs that other banks have needed.

"This is the first fairly positive data point that we've had for the banking industry — we haven't seen any really strong results in the first half," said Byron MacLeod of Gradient Analytics. "This is where you're going to begin to see some stratification between those that are conservatively positioned, and those that aren't."

Wells Fargo & Co. earned $1.75 billion, or 53 cents per share, in the April to June period, down from $2.28 billion, or 67 cents per share, in the same timeframe last year. Analysts polled by Thomson Financial had predicted, on average, a profit of 50 cents per share on revenue of $10.65 billion.

The bank took a provision for credit losses of $3 billion. That provision included total charge-offs of $1.5 billion, and an increase in reserves for future losses of $1.5 billion. Wells Fargo's total allowance for credit losses now stands at $7.52 billion, up from $6.01 billion at the end of the first quarter.

Revenue soared 16 percent to a record $11.5 billion, on strength in the bank's deposits, mortgage banking, credit card, and wealth management businesses.

While Wells Fargo's results appeared to cheer up its shareholders Wednesday, the bank is not exactly coasting.

Wells Fargo still has about $8.4 billion in home equity loans, which executives expect to keep posting losses until home prices stabilize. Meanwhile, charge-offs for credit cards and small business loans increased, though Howard Atkins, Wells Fargo's chief financial officer, attributed the losses to "growth and seasoning" of those portfolios.

Goldman Sachs analysts Richard Ramsden and Brian Foran wrote in a note to clients that Wells Fargo reported a lower percentage of defaulting loans than they expected. But, they said, mortgage-banking fees were twice what they anticipated and a dividend increase is questionable "in an environment when capital is extremely scarce."

Furthermore, Wells Fargo's unrealized securities losses jumped to $2.1 billion due to its exposure to mortgage-backed securities, Mike Mayo of Deutsche Bank pointed out in a note. Mayo added, though: "Wells has issues, but the magnitude is less than peers."

Executives say they are continuing with a safe approach.

"Higher-risk businesses are going to become a less important part of the company," Atkins said in an interview with The Associated Press.

Of the mortgages that the bank issued last quarter, "the vast bulk were very plain-vanilla, fixed- and adjustable-rate mortgages, originated through our retail system," Atkins said. "And it was almost exclusively conforming business, as opposed to big jumbo loans."

Conforming loans follow the guidelines established by the government-sponsored lenders Fannie Mae and Freddie Mac; jumbo loans exceed the maximum loan amount.

The mortgage lending climate remains tough, but Wells Fargo managed to keep total retail mortgage originations at $31 billion, the same as last year, despite tightening its pricing and underwriting standards.

"We were able to lend more to current customers where we believed it was prudent and properly priced," said President and Chief Executive John Stumpf in a statement. He added that the company gained more business and customers through acquisitions.

"I'm hopeful that we can continue ... We haven't really changed at all our strategy around acquisitions. We're still very focused on doing smaller transactions," Atkins said.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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