Wells Fargo & Co. is enjoying fat times in what looks to be a lean year industrywide thanks to an ongoing payoff from its Wachovia Corp. acquisition.

Wells' $3.1 billion of earnings in the second quarter handily outpaced analyst expectations, and its unchanged revenue outdid many of its peers' performance. The bank highlighted incremental growth in its private student lending, auto, and asset management divisions, but gains in its investment banking business and a substantial reserve release on former Wachovia assets fed the bottom line even more.

"On the revenue side, a flat linked quarter is a pretty significant accomplishment given that most of the other [largest commercial banks] are down 30% quarter to quarter," Chief Financial Officer Howard Atkins said in an interview.

Though the Wachovia merger is entering its delicate East Coast phase and integration costs are slightly higher than previously expected, Wells is squeezing new revenue out of Wachovia's commercial and investment banking business and mining its hefty loss reserves on the former bank's "toxic" loan portfolio for what may be years of gains.

"They're recognizing the economic benefit of picking up Wachovia on the cheap," said Paul Miller, an analyst at FBR Capital Markets.

Wells, which bought Wachovia at the end of 2008, wrung 45% of its second-quarter earnings from the "wholesale banking" unit that reprises Wachovia's investment bank and larger commercial lending operations. It realized a $506 million profit by selling Wachovia commercial real estate at prices above the properties' crisis-time purchase valuations.

And because of the better-than-expected performance of its Pick-a-Pay option adjustable-rate mortgage portfolio, Wells announced it would draw down its loss provisions by $1.8 billion, a boon that will be spread over the next eight years. With increasing stability in the California residential market, Atkins explained to analysts in a conference, that portfolio will likely keep giving.

"With the passage of time and our success at modifying that portfolio, that tends to increase our confidence," he said. "You have to release reserves to a certain extent when the loss content drops as it did."

In the interview after the conference call, Atkins argued that the markups of asset values were less of a factor in the company's results and outlook than its ability to take advantage of Wachovia business lines. Overall cross-sell is up 7% since the acquisition, he noted, and much of the growth in Wells' wholesale banking unit came from providing investment banking services to current Wells' customers. Focusing on such services instead of trading, he said, allowed Wells to avoid the disappointing investment banking results of the other large commercial banks.

"With Wachovia, we doubled the size of our company, we doubled the size of our customer base. That's given us the opportunity to cross-sell between two large organizations, and that's a forever opportunity," Atkins said.

Along with unrealized gains from Wachovia, Wells may also be carrying some in its mortgage servicing portfolio. The company is valuing its mortgage servicing portfolio at a far lower fair value than its peers — 73 basis points on the dollar compared to values as high as 114 for JPMorgan Chase & Co.

Though Atkins defended Wells' valuations as appropriate both on Wells' earnings call and in a subsequent interview, there's no doubt that the portfolio will appreciate more than at other banks should interest rates rise.

"Earnings from Wachovia, reserve releases, and the mortgage servicing portfolio are sustainable for the next couple of years," Miller said.

Aside from the merger, Wells' showed some of the same lending stresses as the nation's other biggest banks, even if it wore them more lightly.

Its overall average loan portfolio shrank 3% quarter over quarter, and while Wells highlighted growth in its auto dealer services, private student lending and asset management businesses, the gains were small. The good news, as it were, was that other, larger sectors are "declining at a lower rate," Atkins said.

Likewise, nonperforming assets rose 20 basis points, to 4.27%, though the bank lowered both its provisioning and overall allowance. The mismatch occurred, Wells Chairman and CEO John Stumpf said, because federal and state involvement in the mortgage crisis has slowed asset disposal.

All in all, however, the quarter was strong enough to get both analysts and Wells' management talking about dividends, a subject on which other institutions have been reticent to talk about this quarter.

The company's Tier 1 equity capital ratio exceeds 7.5%, "as high as it's ever been," Stumpf said. "And frankly, it's time we start rewarding our owners with a more representative dividend given the performance of this company. That's job one around here, and we want to get it done."