Wells Fargo & Co.'s performance this year has established it as one of the industry standouts with respect to consumer credit quality.

And still, each time it completes a quarter, a subset of analysts who follow the company repeat their observation that there are cracks in its balance sheet, and that succumbing to the forces that have dragged down competitors is a matter of when, not if.

Only time will tell, of course, whether the $609 billion-asset San Francisco company will emerge as a beneficiary or victim of the cycle. For now, debate over its vulnerability often seems to be as much about perspective as about the underlying facts.

Wells is certainly aware of the skeptics' case. During a television interview last week, John G. Stumpf, its chief executive officer, addressed some of the concerns enunciated by analysts in recent weeks. His main point: The company's strengths far outweigh its weaknesses.

Meredith Whitney, an analyst at Oppenheimer & Co., has an "underperform" rating on the stock and is one of Wells' critics. In a research note issued after its second-quarter earnings report last month, she wrote that Wells extended by two months the period it allows home equity loans to stay bad before writing them off, to 180 days.

The extension, according to Ms. Whitney, minimized second-quarter chargeoffs and may have masked deeper loan problems.

Also, Wells disclosed a surge this month in "level-three assets," primarily mortgage servicing rights that cannot be valued according to pricing in the open market. These illiquid holdings are often prone to markdowns, and without a market price, a company's level-three figure is simply an in-house estimate. However, to date Wells has reported only a slim writedown on these assets. Analysts say this makes it difficult to gauge the severity of the issue — a scenario that inevitably elicits skepticism.

"It could be accurate, or it might be completely off," Jack Ciesielski, publisher of The Analyst's Accounting Observer, a newsletter from R.G. Associates Inc. of Baltimore, said in an interview last week. "But for an investor, it's something that creates a lot of uncertainty."

Through a spokeswoman, Mr. Stumpf declined an American Banker request for an interview. But he told CNBC that Wells extended its delinquency period on home equity loans to fall in line with the industry standard and to give its bankers more time to help some customers refinance or set up other new conditions to avoid default.

The change kept Wells from charging off nearly $270 million of loans in the quarter. But Mr. Stumpf said Wells set aside $3 billion for loan losses in the quarter — half of that to cover chargeoffs and the other half to guard against possible future losses, particularly in home equity.

"So it was actually a customer advocacy, not anything about the income statement," he said. "It was in no way to any way impact or minimize or some way overstate the earnings of the second quarter. Just the opposite."

In its quarterly filing this month, Wells said that its level-three assets rose about 60% from the first quarter, to $5.28 billion, yet it reported a loss of only $43 million on these assets. The level-three figure also included collateralized debt obligations, but Wells has yet to report any losses from them.

It did not say in its filing how big that portfolio was, but at the end of last year Wells held about $860 million of CDOs. That would put the portfolio at 0.14% of the company's balance sheet.

Mr. Stumpf said Wells' exposure is much lower than that of other banking companies that have suffered big CDO losses. "These are very small numbers in the overall scheme of things."

Wells' second-quarter nonperforming assets nearly doubled from a year earlier, to $5.2 billion. Commercial and commercial real estate chargeoffs increased 28% from the first quarter, to $342 million, including $30 million of new chargeoffs on loans originated through the small-business lending group and $18 million of new losses on credit cards.

When the economy improves, Mr. Stumpf said, Wells will be well positioned to increase its profits. "We're bullish on this country."

On July 16, Wells posted a $1.75 billion second-quarter profit and boosted its dividend 10%. That show of strength helped drive up the KBW Bank Index 17%, the biggest one-day gain in its 16-year history.

In an interview that day, Howard A. Atkins, Wells' chief financial officer, cited a "flight to quality" after his company reported that core deposits rose 6% from a year earlier, and that average loans grew 18%.

Equally important, according to analysts bullish on the company, it continues to pursue bank deals to grow in strong markets. Its Tier 1 capital ratio rose 32 basis points from a quarter earlier, to 8.24% at June 30, and this month it announced a deal to buy the $1.4 billion-asset Century Bancshares Inc. of Dallas. The deal is expected to close this year.

Century would be the second banking company bought by Wells this year and the fourth over the past two years.

"We are very comfortable" buying Century, John Gavin, Wells' regional president for Dallas-Fort Worth, said in an interview last week. "We look at this part of the country like we do anywhere. If there's a good opportunity, we'll take a hard look at it."

Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, has an "outperform" rating on Wells' stock. "There is no doubt Wells Fargo is among the strongest in this environment," he said in an interview last week, even though it is certainly susceptible to the slumping housing market and weak economy. "The balance sheet strength and capital strength are evident in the fact that they are still able to post positive results, able to actually raise the dividend, and still able to do deals."

Mr. Gavin said the Century deal is evidence of Wells' optimism and its unwavering commitment to growth. In the second quarter it bought the $1.7 billion-asset United Bancorp. of Jackson, Wyo. Last year Wells acquired the $7.4 billion-asset Greater Bay Bancorp in East Palo Alto, Calif., and the $2.6 billion-asset Placer Sierra Bancshares of Sacramento.

David Hendler, a CreditSights Inc. analyst, said in an interview last week that Wells' vulnerabilities are tied almost exclusively to a weak housing market, though credit losses are sure to be a sore spot the rest of this year.

Despite elevated credit provisions, Wells "has a plentiful capital cushion" and should be able to forge ahead with growth plans, he said.

"Everyone's focused on when the next shoe will drop, but what you want to know is, can they take a licking and keep on ticking? And when you look at Wells, the answer is yes, because money flows in from a lot of directions," Mr. Hendler said. "They might have some wounds, but they can heal quickly, because they make a lot of money."

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