) --

Wells Fargo's

(WFC) - Get Report

Wachovia merger is on track -- and in some ways beating expectations -- but costing much more than expected just a few months ago.

While reporting a strong profit for the second quarter, the San Francisco-based bank also lifted its merger cost estimate by 14% to $5.7 billion from $5 billion the previous quarter. Wells now expects to record $2.1 billion of those costs in 2010, vs. a $2 billion estimate three months ago.

"It costs money to change systems, change signs and all those things," CEO John Stumpf explained on a

second-quarter conference call Wednesday morning.

Wells announced its plan

to acquire Wachovia in October 2008 as its target tottered under the weight of subprime mortgage debt. At the time, Wells management estimated that it would cost $7.9 billion to integrate Wachovia into its folds, and took deep write-downs on Wachovia's toxic loan portfolio.

Wells also assumed $5 billion worth of cost savings once the merger was complete -- an estimate it stands by today, saying that 90% of those savings will be evident by year-end. The bank is also seeing better so-called "revenue synergies" than initially expected.

Still, the $700 million bump in expense estimates in such a short time frame was unexpected. It may have something to do with either the expense of rebranding and consolidation, or higher loan-losses than expected at the end of the first quarter.

CFO Howard Atkins said the added costs had a "negligible impact on the bottom-line results" and that savings will be more evident once "you actually mush the branches together."

So far, Wells has converted Wachovia branches in Arizona, Illinois, Nevada and California. Texas and Kansas are now being integrated and Wells plans to start on the East Coast network in the fall. It has also converted Wachovia's credit-card business to the Wells Fargo system this year.

Additionally, the bank has run off 21% of Wachovia's high-interest rate deposits and retained more customers than expected.

The worst portfolio of Wachovia's bad mortgages, called "Pick-A-Pay" has also been tracking better than expected, with Wells Fargo moving $1.8 billion of the book from non-performing to performing status. Wells reduced the overall portfolio by about $15.1 billion and made progress on exiting other businesses, like structured products.

Overall, Stumpf said management had "made strong progress" on the integration to date. The combined franchise has earned $17.9 billion since the deal closed.

"This merger is exceeding my expectations," Stumpf said. "I couldn't be more excited about the opportunities ahead."

Wells shares were trading up 6.1% at $27.50 in morning action, following a

second-quarter earnings report that far exceeded expectations. In that period, Wells posted $498 million of merger integration expenses.

-- Written by Lauren Tara LaCapra in New York


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.