Wells Fargo & Co. (NYSE: WFC) is expected to report a big jump in quarterly earnings and a small rise in revenue on increasing mortgage activity during the first three months of this year.

The San Francisco-based bank reports Friday before the market opens. Analysts polled by Thomson Reuters expect earnings of 72 cents a share and revenue of $20.4 billion, compared with earnings of 67 cents a share and revenue of $20.3 billion in the same period a year earlier.

Estimates vary widely but regardless of specific numbers, bank analysts agree the quarterly financial results for Wells Fargo -- which entered the financial crisis as a large retail servicer and emerged from it as a much more sophisticated, larger, too-big-too-fail megabank -- will hinge on one thing: mortgages.

Mortgages make up more than 10 percent of Wells Fargo's revenues, and equity research firm Trefis estimates earnings from mortgage servicing contributes to determining 20.6 percent of the firm's share price, the largest component.

The upside view

"We expect mortgage refinance activity to remain elevated throughout the first half of 2012 and mortgage purchase volume to rebound in the latter half. As long as origination margins remain wide, mortgage origination fees should remain above $2 billion per quarter," Marty Mosby, an analyst at Guggenheim Securities, wrote in a note to clients, making the bull case for Wells Fargo.

"Additionally, WFC's mortgage servicing hedging should start to perform better as interest rates stabilize and the yield curve begins to steepen," he added.

Further adding to the upside view, the implementation of a new federal government program to help homeowners who owe more on their mortgages than the notional value of their homes -- a second installment of the Home Affordable Modification Program for "underwater" homeowners -- went into effect in the quarter. Optimists believe the program could turn many delinquent loans into current ones, and at least some data seems to support that theory. On April 9, the company noted it was conducting slightly over 7,000 modifications per month.

Fixed-income traders seem to believe the company is on increasingly solid financial footing and have driven down the cost of insuring Wells Fargo's bonds to lows not seen since May of last year.

The "Greatest Risk"

But not everyone sees the Wells Fargo mortgage business as totally rosy.

For one thing, Wells Fargo stands out as being one of the few banks on the Street that has not reduced the percentage of its loan book serviced by third-party originators (TPO), a worrisome sign as loans made by non-bank agents historically perform worse than other mortgages.

"TPO concentration varies significantly across servicers. Among the large lenders, Chase and Bank of America have scaled back their TPO operations while Wells has maintained theirs," Ajay Rajadhyaksha, an analyst at Barclays Capital, wrote in a recent research report.

Observers note that the high level of outside origination is occurring because the bank has been unable to keep up with recent growth in demand for its mortgage services. And while growth is generally a good thing, even optimists have pointed out there is a real possibility bank management will tap on the brakes in this particular business segment, making sure the institution is able to absorb it more smoothly.

"The greatest risk is if management holds earnings growth back in order to set up a consistent future growth trend," Guggenheim's Mosby writes.

Capital, Wachovia and other factors

Outside of mortgages, most of the other factors that could affect Wells Fargo's financial results are wildcards that the market sees mostly as having upside.

Efficiency gains as the bank continues to integrate units acquired during the late-2008 shotgun wedding with Wachovia Securities.

There could also be efficiency gains from the fact that Wells Fargo, unlike some of its large bank peers, is not looking between the sofa cushions to satisfy regulatory requirements for capital levels, meaning it has more spare cash to invest in the business.

"We estimate that WFC will reach Basel III minimums by yearend 2012 without much need for mitigation and will get there through earnings power," Moshe Orenbuch of Credit Suisse wrote in an early April note, contrasting that timeline to that of most other large banks, which stretch beyond 2013.

The long and short of it

A handful of analysts have upgraded price targets for shares of Wells Fargo in the past week, citing both optimistic expectations for earnings plus an imminent and substantial stock buyback program.

Such expectations contrast with a longer-term outlook that includes worrisome headlines of the company being investigated or sued by various governmental entities and advocacy groups for its mortgage- and foreclosure-related practices. Further, Wells Fargo could face earnings volatility as it extends its global footprint.

Analyst advice, whether from bullish or bearish perspectives, on Wells Fargo shares boils down to two phrases. The long of it: Be careful. The short of it: Buy.