Wells Fargo & Co.'s even progress in integrating Wachovia Corp. says a lot about the company. That Wells' revenues still dropped to the lowest levels since last March says just as much about its industry.

From an operational perspective, Wells' first-quarter results were sound, adding to the case that the company has a solid grasp on the business lines and credit exposures, many of them unfamiliar, that it had inherited from Wachovia. Wells' former peer came cheaply because of its outsized exposure to such morasses as condo development, structured finance and option adjustable-rate mortgages.

Evidence that integration is going swimmingly peppered Wells' earnings, with fee-based businesses such as treasury services, retail brokerage operations and investment banking picking up the slack from retail banking, where revenue, two-thirds of Wells' total, was down 2% from a year earlier.

Reflecting the tough environment, key lending metrics like nonperforming assets (more than 4% of assets) and total loans (down $58 billion over 12 months) worsened. With good lending opportunities scarce and the bank unwilling to take on more interest rate risk, Wells has stockpiled an astounding $41 billion in short-term securities, the financial equivalent of treading water.

When presenting the company's results (net income fell 25%), Wells executives walked a fine line between talking up the potential of its core retail franchise and highlighting its increasing ability to compensate for the broader banking environment's weakness.

"Though the signs of strength we're seeing in the economy are encouraging, we're not counting on them alone to deliver the performance you've come to expect from Wells Fargo," said John Stumpf, Wells' chief executive.

Economic drag is hardly a concern solely for Wells, even if the other three coast-to-coast institutions — Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. — compensated for lending weakness with big capital markets trading gains.

"If [retail banking] is attractive anywhere in the country, it will be attractive for them because of the markets they're in and their skill in serving them," said Credit Suisse's Moshe Orenbuch. "Loans are down across the industry, and the mortgage business is starting to cool. You just have to recognize the reality of that."

Wells has far exceeded the low bar it set for itself in the form of a $37 billion allowance for losses at the time of the Wachovia purchase. Its modified Wachovia mortgages significantly outperform the industry average redefault rates. It has switched Wachovia's funding away from high-cost certificates of deposit to cheap deposits, expanded its retail brokerage operations and significantly boosted revenue in Wachovia's Charlotte-based capital markets operation.

And the company has further boosted one of its favorite stats, cross-selling. Mentioned every chance Wells gets, the number grew faster than it has at any point in the past year, to six products per legacy Wells customer and 4.85 for legacy Wachovia.

In an interview after Wells' earnings call, Chief Financial Officer Howard Atkins argued that those kind of results show Wells is where it wants to be. "Nobody has the kind of community banking business we have," he said. "We think we've got a better shot at [sustainable earnings growth] than someone else who has 80% of their revenue coming from investment banking or any single source."

To Orenbuch, it may make sense to value the company's retail and middle-market franchises above the notably abrupt and possibly unsustainable capital markets gains of banks like Citi and B of A. But it leaves Wells temporarily reliant on noninterest income, up 7% from a year earlier.

Wachovia's old brokerage operations stand out, with profits up 60% year over year, to $282 million. Another star was its wholesale banking group, which increased its revenue to $5.3 billion from $4.9 billion even as the unit's average loans fell by 17%. While data on revenue breakdown is scarce, Wells has not and will not build up its proprietary trading, Atkins said. Instead, the wholesale bank's gains came from offering Wachovia's capital markets services to Wells' business clients.

"We're not interested in building out the risk side of this business," Atkins said in the interview. "The growth is going to come from selling more widgets to our existing client base."

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