When Wells Fargo reported third-quarter earnings last week – which beat Wall Street expectations by a few pennies – investors cheered, and watched the bank’s shares keep most of the 9 percent gain they had pocketed the previous day.

But banking and mortgage-sector analysts cast a wary eye on the San Francisco-based bank.

That’s because Wells Fargo, despite booking a near $1 billion increase in non-performing loans in the third quarter compared to the previous three-month period, cut its loan-loss reserve by $500 million.

The slick accounting moves, while perfectly legal, gave a false impression of just how strong Wells Fargo’s balance sheet actually was, the analysts said in separate interviews and reports last week.

“Wells Fargo are pretenders,” said a trader at one top hedge fund, who spoke on condition of anonymity because he is afraid of trouble from the Securities and Exchange Commission, in light of the regulatory body’s recent threat to prosecute short sellers.

The trader said trimming the loan-loss reserves had the effect of boosting profits, which in turn boosted its share price, which in turn made it easier for the bank to successfully move forward with a move it announced this week to raise $20 billion of capital.

Meredith Whitney, a banking analyst with Oppenheimer, maintained a sell rating on Wells Fargo, even after the surprise third-quarter profit, in large part because she feels it is not adequately prepared for losses on its residential-mortgage portfolio.

The Field Check Group, which measures real-time residential defaults in California – where Wells Fargo has over 30 percent of its $74 billion first-lien mortgage portfolio – reports the default rate on loans originated by Wells Fargo’s in 2008 is running 237 percent above last year.

That is just under the increases seen by Indymac Bank (239 percent) and over Countrywide (226 percent). IndyMac was seized by regulators, and Countrywide was forced into a takeover by Bank of America.

Because of the eroding quality of its loan portfolio, Paul Miller, an analyst for Friedman, Billings, Ramsey & Co., believes Well Fargo will have to add up to $2 billion in provision expenses next quarter – money set aside to cover bad loans.

On Friday, Moody’s, the ratings agency which has Wells Fargo on review for a possible downgrade, said it was looking at the quality of the bank’s loan portfolio and its future capital structure.

Moody’s noted that Wells Fargo’s loan-loss reserves are at 101% of annualized quarterly credit losses, which is below some of its peers.

The cut in the loan-loss reserve in the face of an increase in non-performing loans is not the first thing Wells Fargo has done this year to raise eyebrows on Wall Street.

Earlier this year, Wells Fargo increased to 180 days from 120 days the amount of time they take to book second-lien loans, that is, home-equity loans, as not paying. The move helped keep down the default rate in the second quarter.

Martin Weiss, of Weiss Research, which covers the mortgage industry, says Wells Fargo’s loan-loss reserves are thin, but in line with what their actual losses were in the third quarter.

The issue, he said, is “with market conditions changing in weeks instead of months or years, real-time defaults on mortgages are the most important measure that banks and analyst should be looking at now to measure future losses.”

Weiss points out, after reviewing Wells third-quarter earnings and the call reports the bank publishes on defaults and losses to its regulators, “Wells is not being proactive enough in its estimates for future losses, and it should be.”

Wells Fargo refused to comment specifically about the analysts comments and referred questions to the company’s third quarter results.