By Jonathan Stempel

Still, Wells Fargo shares soared 30 percent on Wednesday after the bank maintained its dividend and said it does not need more federal aid to absorb Wachovia, which it bought for $12.7 billion on December 31.

Analysts had speculated Wells Fargo would need more capital and might cut its quarterly dividend of 34 cents per share.

"They can grow even as other rivals are unable to lend," said Thomas Russo, a partner at Pennsylvania-based Gardner Russo & Gardner, which invests more than $3 billion and owns Wells Fargo shares. "They are also still on track with Wachovia and expecting significant savings."

Wells Fargo said it remains comfortable with its original assumptions about Wachovia, and expects the merger to eventually boost earnings per share by at least 20 percent.

The purchase created the nation's fourth-largest bank by assets, with $1.31 trillion, and the biggest branch network, with more than 6,600 branches.

Bank stocks rose broadly on optimism the government might soon create a "bad bank" to absorb the industry's toxic assets. Industry sources said the idea is gaining steam with the Obama administration, and that Federal Deposit Insurance Corp Chairman Sheila Bair has floated the idea of her agency running such a bank.

In afternoon trading, Wells Fargo shares were up $4.87 at $21.06 on the New York Stock Exchange.

'SIGH OF RELIEF'

Excluding Wachovia, Wells Fargo reported a fourth-quarter loss of $2.55 billion, or 79 cents per share, compared with a profit of $1.36 billion, or 41 cents, a year earlier. The quarterly loss was Wells Fargo's first since 2001.

Revenue fell 4 percent to $9.82 billion.

The latest results reflected a $5.6 billion addition to its credit reserve, or 99 cents per share, bring the total reserve for credit losses to $21.7 billion. They also include 21 cents per share from other charges, including a $294 million writedown from the alleged fraud by investment adviser Bernard Madoff.

Analysts, on average, expected profit of 32 cents per share, excluding items, on revenue of $10.96 billion, according to Reuters Estimates. Andrew Marquardt, an analyst at Fox-Pitt Kelton, estimated "core" profit at 12 cents per share.

Wachovia lost $11.17 billion in the quarter, largely from loan losses and investment writedowns, boosting its full-year loss to nearly $45 billion. The bank nearly collapsed from losses on troubled loans, especially "option" adjustable-rate mortgages (ARMs).

"The positive in the results was a significant increase in reserve levels to protect the balance sheet from the deteriorating economy," wrote Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc in San Francisco.

San Francisco-based Wells Fargo last year received $25 billion from the government's Troubled Asset Relief Program (TARP), and said it does not need more, despite the latest losses.

The bank's results generated "a well-deserved sigh of relief," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston. "For me, the 'one-liner' is that they don't need to go back to the TARP well to remain in business."

In an interview, Chief Financial Officer Howard Atkins said Wells Fargo is adding customers, who are fleeing weaker rivals. He said the bank got $116 billion in mortgage applications in the fourth quarter, the most in three quarters.

"Everyone is retrenching from commercial and small business lending, and we're seeing very good business come our way," he said. "We're prepared to do the business, and others are not."

CAPITAL 'VERY STRONG'

Wells Fargo was once considered conservative in how it assessed the quality of Wachovia's loans, including the big pool of "option" ARMs.

But investors and analysts had grown more worried about the bank's assumptions as market conditions deteriorated rapidly.

Analysts have been concerned about whether Wells Fargo would have enough equity to absorb Wachovia, measured by its ratio of tangible common equity to tangible assets, or TCE ratio.

CFO Atkins said the ratio is "just under 3 percent," below the 5 percent or more that some analysts prefer. But, he said, the ratio does not take into account the benefits of the Wachovia merger, or recent moves to reduce risk.

He said the bank's capital is "very strong," adding that "TCE is a flawed measure of capital adequacy."

Wells Fargo said $35.5 billion of Wachovia's remaining $93.2 billion of option ARMs are "credit impaired" and were marked down by 41 percent. The remaining $57.7 billion "has dramatically better credit performance," Atkins said.

(Reporting by Jonathan Stempel; Additional reporting by Leah Schnurr in New York, and John Poirier and Karey Wutkowski in Washington, D.C.; editing by John Wallace and Jeffrey Benkoe)