Wells Fargo (NYSE:WFC) enjoys a reputation as one of the best-run lenders in the country. Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) is the largest shareholder, arguably the finest endorsement a company can obtain. I own a few shares myself. And yet …

I think that we have yet to see Wells Fargo bear the real toll of the housing crisis. There are reasons to believe the bank has put off taking its medicine over the last couple of quarters. If that is the case, the reckoning will only be more painful, and it could come as early as this Wednesday, when the bank releases its fourth quarter results.

Going back to Q2 2008
Let me take you back to sunnier days. Wells Fargo's second quarter of 2008 earnings announcement on July 16 last year sent the stock soaring 33% on the day. The California-based lender had beaten the analysts' consensus by $0.03, earning $0.53 per share. Bank stocks, which were trading at depressed levels not seen in over 10 years, rode this jolt of optimism, as the KBW Bank Index gained 26% that week.

Fixated on the headline number, many investors may not have noticed that Wells Fargo had previously announced it was changing the way it recognized losses on home equity loans in the second quarter. Where it had previously taken a charge once a borrower was 120 days past due, the bank pushed that period out to up to 180 days.

What effect did the change have? $265 million in charge-offs were deferred in the second quarter -- losses that would have wiped an estimated $0.05 from Wells' EPS, turning a "beat" into a "miss."

On to Q3 2008
Wells Fargo also achieved a positive earnings surprise regarding the third quarter, earning $0.49 per share against analysts' forecast of $0.41. Inspecting the company's numbers revealed a less happy surprise.

Banks establish reserves, an accounting charge, in anticipation of future loan losses. In the third quarter, Wells ratio of loan-loss reserves to past-due loans fell from 181% to 157%. The higher the ratio, the more conservative a bank is being in accounting for future losses. Had the bank maintained its reserve ratio at its second-quarter level, this would have wiped off $1.18 billion from earnings, or $0.24 per share after-tax -- almost half the reported earnings-per-share!

Let me be quite clear: loan portfolios change over the course of the quarter, and so do the assumptions that produce reserve estimates. I don't think that Wells Fargo set a specific target for this ratio on a top-down basis; it's the product of multiple bottom-up decisions concerning the different loan books. Still, lower aggregate reserves don't look like a natural outcome in what is a good bet to become the longest recession since the Great Depression.

So, what about Q4?
By the way, Wells Fargo's reserves to past-due loans ratio was well below the one recently reported by another bank that has navigated the crisis rather better than its peers. At the end of the fourth quarter, JPMorgan Chase's (NYSE:JPM) ratio of loan-loss reserves to past-due loans stood at 260%.

If Wells were to raise their ratio to that level, and assuming the amount of past-due loans remained constant with respect to the third quarter, that would entail a $13 billion charge in the fourth quarter. If that weren't problematic enough, this figure ignores the fact that Wells Fargo's balance sheet now includes the loan book of the former Wachovia bank (the acquisition closed in December).

Wachovia is no detail
Speak of the devil, the Wachovia acquisition is hardly incidental to the discussion. Wells Fargo estimates that its total assets will have more than doubled during the second half of 2008, owing essentially to the purchase. In this deal, the target is more significant relative to the acquirer than in the Bank of America (NYSE:BAC) / Merrill Lynch or the JPMorgan Chase / Washington Mutual transactions. So far, the record of these distressed acquisitions is mixed (B of A CEO Ken Lewis's wounds are still quite fresh) and unpleasant surprises can't be ruled out for Wells Fargo.

It's not surprising that analysts have been reducing their estimates for Wells' fourth quarter earnings -- the consensus forecast for EPS has come down by 25% within the last 90 days to $0.33. The recent bank stock bloodletting shows investors have also lowered their expectations for the sector, and they made no exception for Wells Fargo -- the stock has lost nearly half its value in 2009, underperforming the KBW Bank Index.

Bottom line: Near term vs. the long term
At these prices, I think Wells Fargo offers good value for investors with a minimum 10-year holding period. However, at 1.1 times book value per share and 4 times tangible book value, the shares are trading at a substantial premium to peers that include JPMorgan, Bank of America, and Citigroup (NYSE:C). (Only US Bancorp (NYSE:USB) sports a similar valuation.) If, despite investors' reduced expectations, Wells Fargo disappoints on Wednesday, I think it's entirely possible that the shares could drop further.

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Alex Dumortier, CFA has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. US Bancorp and JPMorgan Chase are Motley Fool Income Investor recommendations. Bank of America is a former Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.