Lloyds Banking Group has reported a 7% fall in annual pre-tax profits to £1.6bn compared with £1.8bn a year earlier.
The bank increased provisions for payment protection insurance (PPI) compensation in the year to £4bn.
That was after the City watchdog said it was considering a deadline on compensation claims.
Lloyds shares closed up 13% to 70.57p, making the bank the biggest riser on the FTSE 100.
Lloyds Banking Group has faced the largest amount of PPI compensation claims. The new provisions takes the total the bank has set aside to pay compensation to £16bn.
The bank said it welcomed "the decision of the Financial Conduct Authority to consult on a deadline for PPI complaints and the certainty that this will bring for both customers and shareholders".
The FCA has proposed a time bar that will allow people to claim compensation for mis-sold PPI until 2018 before drawing a line under the affair.
The bank also said it incurred a charge of £837m relating to complaints about packaged bank accounts and "a number of other product rectifications primarily in retail, insurance and commercial banking".
The bank, which restarted dividend payments to shareholders last year after a six year break, announced it would pay shareholders an ordinary dividend of 2.25p per share, plus a special dividend of 0.5p giving a total payout to shareholders of £2bn.
Lloyds Banking Group chief executive, Antonio Horta-Osorio said: "We made a strong start in 2015 to the next phase of our strategy and have delivered a robust financial performance, enabling increased dividend payments."
The bank announced he had been awarded a deferred bonus of 723,977 shares and his salary had risen by 6% to £1.3 million.
'Worst is over'
Ian Gordon, an analyst at Investec, said today's results suggested that "the storm clouds are really clearing at last."
He said investors were now looking at Lloyds as "an increasingly safe, but boring, regular bank with with little or no balance sheet growth but a strong outlook for further dividend growth."
And market analyst, Michael Hewson of CMC Markets said the share price was also boosted by the perception that the payouts for PPI were coming to an end.
"It really does seem the worst is behind us and that there can't be much more left to pay out for customers mis-sold these policies."
Paying out a dividend, despite the fall in profits, he said, was a sign of confidence from the bank's management.
The bank's annual results come a month after the Treasury announced it was postponing plans for a sale of Lloyds' shares to retail investors worth £2bn until global stock market volatility had eased.
The government, which held 43% of Lloyds after its rescue in 2008 has reduced the taxpayer's stake in the bank to around 9% now.