富國銀行 (WFC) 2015 Q1 法說會逐字稿

Good morning.

My name is Regina, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Wells Fargo First-Quarter Earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Jim Rowe, Director of Investor Relations.

Mr. Rowe, you may begin your conference.

Thank you, Regina, and good morning, everyone.

Thank you for joining our call today, where our Chairman and CEO, John Stumpf, and our CFO, John Shrewsberry will discuss first-quarter results and answer your questions.

Before we get started, I would like to remind you that our first-quarter earnings release and quarterly supplement are available on our website at wellsfargo.com.

I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement.

Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website.

I will turn the call over to our Chairman and CEO, John Stumpf.

Thank you, Jim.

Good morning, and thank you for joining us today.

We earned $5.8 billion in the first quarter, which reflected the benefit of our diversified business model and our continued focus on the real economy.

By building relationships with our existing customers and successfully generating new relationships, during the past year we were able to grow loans and deposits and increase our revenue.

Our capital levels remained strong, and we continued to focus on rewarding our shareholders by increasing our dividend and reducing our shares outstanding.

Let me highlight our growth during the quarter compared with a year ago.

We generated $21.3 billion of revenue, up 3% from a year ago, with growth in both net interest income and non-interest income.

We had broad-based loan growth, with our core loan portfolio increasing by $54.2 billion or 7%.

Our deposit franchise continued to generate strong customer and balanced growth, with total deposits reaching a record $1.2 trillion, up $102.1 billion or 9%.

And we grew the number of primary consumer checking customers by 5.7%.

Our credit performance continued to be very strong, with net charge-offs down $117 million and our net charge-off ratio declined to 33 basis points.

Our financial performance resulted in strong capital generation, and returning capital to our shareholders remains a priority.

Our net pay out ratio was 61% in the first quarter.

We're extremely pleased that our 2015 capital plan allows us to increase our quarterly dividend by 7% to $0.375 per common share for the second quarter of this year, of course subject to Board approval.

Our ability to increase our dividend every year since 2011 demonstrates the benefits of our diversified business model and conservative risk management, as well as our disciplined capital management process.

We have over 90 different businesses that are benefiting from the continued strength in the US economy.

While the first-quarter economic headlines, again, demonstrated that the economic recovery has been uneven, I believe the underlying economic expansion that is approaching its sixth anniversary remains largely on track.

Interest rates remain low, homes are affordable, consumer and small business confidence remains high.

And the labor market is approaching full employment after a record 54 consecutive monthly payroll gains.

I'm optimistic that the improving US economy will continue to provide Wells Fargo with many opportunities to better serve our customers, our communities, and reward our shareholders.

John Shrewsberry, our Chief Financial Officer, will now provide more details on our first-quarter results.

John?

Thanks, John, and good morning, everyone.

My comments will follow the presentation included in the quarterly supplement, starting on page 2. John and I will then answer your questions.

Well Fargo had another strong quarter earning $5.8 billion and $1.04 in EPS in the first quarter, and returning net $3.3 billion of capital to shareholders.

Our results were driven by average loan and deposit growth and lower expenses, while we maintained our strong capital and liquidity positions.

Our results also benefited from a net $359 million discrete tax benefit in the first quarter primarily from a reduction in the reserve for uncertain tax positions, due to the resolution of prior-period matters with US federal and state taxing authorities.

As a reminder, we also had a $423 million discrete tax benefit in the first quarter of last year.

We take a prudent approach in accounting for our tax liability, which can result in discrete tax benefits depending on the resolution of prior-period matters with taxing authorities.

Page 3 highlights our results compared with a year ago.

Including increased revenue and pretax pre-provision profit, strong loan and deposit growth, and lower share count reflecting net share repurchases.

Page 4 highlights our revenue diversification, and the balance between spread and fee income in the first quarter.

The benefit of the diversity of our 90-plus businesses was demonstrated by our ability to grow both net interest income and non-interest income in first quarter compared with a year ago, which was a key driver of our performance.

As I've highlighted in the past, the drivers of our fee generation vary based on interest rates and economic conditions.

For example, market-sensitive revenue, which includes trading and gains from debt and equity investments, declined 22% from a year ago, dropping from 14% of fee income to 11%.

However, other businesses had strong growth and we generated higher trust in investment, card and mortgage banking fee income.

With this broad-based growth we were able to grow fee income 3% from a year ago.

So let me highlight some key drivers of our first-quarter results from a balance sheet and income statement perspective, starting on page 5. I believe our balance sheet has never been stronger.

We generated core loan and deposit growth and have increased liquidity and capital to record levels.

Let me take a minute to describe how we're managing in the current rate environment.

We've been able to perform well across a variety of rate cycles over time, because of the diversification of the business model.

We're often asked about how we manage our interest rate risk, in particular the timing of making investments in a lower rate environment.

As you might imagine, we evaluate our interest rate risk position continuously, and frequently weigh options to alter the overall sensitivity of the balance sheet.

We consider factors such as the expected growth in loans and deposits, performance under a wide range of rate scenarios, and the tradeoffs between the protection from lower rates afforded by adding duration and the consequences of those actions in higher rate scenarios.

Based upon these analyses, we then make decisions about the kind of instruments we use.

We can purchase securities outright, or extend the duration of variable rate loans with interest rate swaps, and the magnitude and profile of the duration we add.

All in all, we try to balance a number of considerations and maintain flexibility as conditions evolve.

Turning to the income statement on page 6. Revenue declined from the fourth quarter as net interest income was lower, reflecting two fewer days in the first quarter and lower income from variable sources.

However, non-interest income grew from the fourth quarter, even though the fourth quarter included the $217 million gain on the sale of government guaranteed student loans.

The growth in fee income reflected momentum across our businesses, which I'll highlight throughout the call.

As shown on page 7, we continued to have strong broad-based loan growth in the first quarter; our 15th consecutive quarter of year-over-year growth.

Our core loan portfolio grew by $54.2 billion or 7% from a year ago and was up $914 million from the fourth quarter.

Linked quarter commercial loan growth was driven by real estate construction and lease financing.

Consumer loans grew slightly as growth in non-conforming mortgage, auto, security-based lending, and student loans was largely offset by pay-offs in the junior lien portfolio and seasonality in credit card.

On page 8 we highlight our loan portfolios that had strong year-over-year growth.

C&I loans were up $31.9 billion or 13% from a year ago, with broad-based growth across most of our wholesale businesses.

Core 1 - 4 family first mortgage loans grew $13 billion or 7% from a year ago reflecting continued growth in high quality non-conforming mortgages primarily jumbo loans.

The credit quality of our core mortgage portfolio remains strong with only 7 basis points of credit losses in the first quarter.

Credit card balances were up $4 billion or 15% from a year ago, benefiting from strong new account growth and the Dillard's portfolio acquisition in the fourth quarter.

Auto loans were up $3.7 billion or 7% from last year.

While we continued to benefit from the strong auto market, new originations were down 10% from a year ago, reflecting our continued risk in pricing discipline in a competitive market.

As you can see on page 9, we had $1.2 trillion of average deposits in the first quarter, up $97.5 billion from a year ago and up $25 billion from fourth quarter.

Our average deposit cost was 9 basis points, consistent with the fourth quarter and down 2 basis points from a year ago.

We successfully grew primary consumer checking customers by 5.7% from a year ago and primary small business and business banking checking customers increased 5.5%.

Our ability to consistently grow primary checking customers is important because these customers have more interactions with us, have higher cross sell, and are more than twice as profitable as non-primary checking customers.

We grew net interest income on a tax equivalent basis by $396 million or 4% from a year ago reflecting strong growth in average earning assets, up $170 billion or 12%.

Net interest income declined $190 million from fourth quarter, due to two fewer days in the first quarter and lower variable income.

The net interest margin declined 9 basis points from the fourth quarter due to strong customer-driven deposit growth.

This reduced the margin by 5 basis points but had minimal impact to net interest income.

Lower interest income from variable sources due to reduced loan fees and PCI loan recoveries decreased the margin by 3 basis points.

Liquidity-related activity, which was not LCR-related but taken to demonstrate market access and the liquidity of our securities portfolio, reduced the margin by 1 basis point.

All other balance sheet growth and repricing did not impact the margin in the first quarter.

Our balance sheet remained asset-sensitive and we're well-positioned to benefit from higher rates.

We believe we can grow net interest income in 2015 compared with 2014, even if rates remain low as we demonstrated last year.

Total non-interest income increased $29 million from fourth quarter and grew $282 million from a year ago, up 3%.

Trading gains increased $229 million from fourth quarter, primarily from higher customer accommodation trading, reflecting better markets in high grade, high yield and RMBS, as well as seasonality.

Mortgage banking revenue increased $32 million from the fourth quarter on higher origination volume, up $5 billion or 11%.

55% of originations were for refinancing, up from 40% in the fourth quarter, as rates declined.

We ended the quarter with a $44 billion application pipeline, the highest pipeline since the second quarter of 2013.

And we expect funding volumes to increase in the second quarter, given the size of the pipeline and the seasonal home buying that typically occurs during the second-quarter Spring buying season.

Our gain on sale ratio increased to 2.06% in first quarter, as pricing margins expanded, reflecting strong refinance volume and lenders priced to balance volumes and capacity.

We currently expect the second quarter gain on sale ratio to be at the higher end of the range we've seen over the past five quarters, 140 basis points to 206 basis points.

Servicing income declined $162 million from the fourth quarter as MSR results declined $127 million, reflecting higher prepayment expectations associated with reductions in FHA mortgage insurance premiums.

This valuation adjustment directly reduced our servicing results in the quarter.

As shown on page 12, expenses were down $140 million from the fourth quarter.

Our first-quarter expenses included $452 million of seasonally higher employee benefits expenses from higher payroll taxes and 401(k )matching as well as $236 million for annual equity awards to retirement-eligible team members.

These seasonally higher expenses were offset by lower salaries, reflecting two fewer days in the quarter, lower revenue-based incentive compensation and reduced outside professional services, equipment, travel and entertainment, and advertising expenses.

While we will not have the seasonally higher personnel expenses in the second quarter, there are certain expenses that will increase, including salary expense, reflecting higher day count and annual merit increases, and certain expenses that are typically lower in the first quarter such as outside professional services and advertising expenses are also expected to increase.

Our efficiency ratio improved to 58.8% in the first quarter and we expect the efficiency ratio for the full year 2015 to remain within our targeted range of 55% to 59%.

Turning to our business segment starting on page 13.

Community Banking earned $3.7 billion in the first quarter, down 5% from a year ago and up 7% from the fourth quarter.

As I highlighted earlier, we had continued strong growth in primary consumer checking customers, up 5.7% from a year ago.

Our broad-based and industry-leading distribution channels are one reason for this growth.

While our customers actively use all of our channels, including more than 75% of our deposit customers visiting a banking store at least once within the last six months, mobile banking is growing the fastest.

We had 14.9 million active mobile customers, up 19% from a year ago.

Our customers are increasingly using this channel with mobile banking sessions up 38% in 2014, while customer usage of our stores has remained stable.

We also continued to successfully grow retail bank households.

February was our highest monthly net gain of retail bank households in four years.

These new households provide us with growth opportunities as we focus on meeting their financial needs through our diversified product line.

An example of how we're capturing this opportunity is in our debit and credit card businesses with card fees up 11% from a year ago.

Debit card purchase volume was up 8% and credit card purchase volume increased 16% from a year ago.

Our credit card business continued to have strong new account growth and active account growth.

Wholesale Banking earned $1.8 billion in the first quarter, up 3% from a year ago and down 9% from fourth quarter.

Loan growth continued to be strong with average loans up $35.7 billion or 12% from a year ago, with broad-based growth across many businesses.

We're excited about our announcement last week regarding the purchase of $9 billion of commercial real estate mortgage loans from GE Capital.

This is a portfolio of performing loans, primarily in the US, the United Kingdom and Canada, which are active lending markets for us.

We also agreed to provide $4 billion of financing to Blackstone Mortgage Trust for their purchase of a commercial mortgage portfolio.

We expect these transactions to close in the second and third quarters of this year.

This is an excellent example of how the combination of our balance sheet strength, the expertise of our team members and our relationship focus positions us to capture opportunities for growth, both organically and through acquisition.

While we remain disciplined in deposit pricing, we continued to benefit from strong deposit growth, with average core deposits up $44.4 billion or 17% from a year ago.

Wholesale banking also had broad-based fee growth, up 11% from a year ago, with many of our diversified businesses growing at double digits.

Investment banking fees grew 44% from a year ago, and we increased our market share to 4.9%.

This growth reflected continued improvement in our equity capital markets and investment-grade originations.

Treasury and management revenue grew 11%, reflecting new product sales and repricing.

Wealth, Brokerage and Retirement earned a record $561 million in the first quarter, up 18% from a year ago and up 9% from fourth quarter.

WBR's pretax margin was 24% in the first quarter, close to their long term target of 25%.

These strong results reflected 8% revenue growth from a year ago, driven by 12% growth in net interest income and 8% growth in asset-based fees.

The partnership between WBR and Community Banking has been successful, generating over $1 billion a month in closed referred investment assets.

During the past year, 58% of referred assets were from new investment clients of Wells Fargo.

We're also benefiting from increasing our licensed private bankers in our banking stores by 15% from a year ago.

This partnership has also contributed to the growth in brokerage advisory assets, which were $435 billion, up 12% from a year ago.

WBR's strong loan growth continued, up 14% from a year ago, the seventh consecutive quarter of double-digit year-over-year growth.

This growth was driven primarily by an increase in high quality non-conforming mortgage loans and security-based lending.

Turning to page 16, credit quality in the first quarter remained strong with our net charge-off ratio declining to 33 basis points of average loans.

Non-performing assets have declined for 10 consecutive quarters and were down $618 million from fourth quarter.

Non-accrual loans declined $338 million and foreclosed assets declined $280 million.

The reserve release was $100 million in the first quarter, down $150 million from the fourth quarter and down $400 million from a year ago.

Let me update you on our energy portfolio.

We had $18.5 billion of oil and gas loans at the end of the first quarter or 2% of total loans outstanding.

The size of this portfolio was relatively stable from fourth quarter, up only $65 million.

Approximately 55% of our portfolio was in the exploration and production or upstream sector.

We've been an industry leader in the energy sector for over 40 years, and we take a disciplined approach to not only underwriting but also managing these loans and relationships.

Our teams constantly monitor and evaluate this portfolio on a loan by loan basis.

In the first quarter, we performed an even greater review of each loan in this portfolio and in March we began the Spring redetermination process for our reserve-based loans.

We realized minimal credit losses related to energy loans in the first quarter, and our allowance at the end of the first quarter contemplated the inherent credit losses associated with our oil and gas exposure.

Our capital levels remain strong, with our estimated common equity tier 1 ratio under Basel III using the Advanced Approach, fully phased-in, at 10.53% in the first quarter.

Last month, the Federal Reserve and the OCC announced that we may begin using the advanced approaches capital framework starting in the second quarter.

This approval did not include stipulations requiring us to increase our current advanced approach RWA.

We returned $3.3 billion to shareholders in the first quarter through dividends and net share repurchases.

Our common shares outstanding declined by 7 million shares in the first quarter reflecting 48 million shares purchased during the quarter, partially offset by 41 million shares issued, primarily through employee benefit plans which are seasonally high in the first quarter.

In addition, we entered into a $750 million forward repurchase contract that settled earlier this month for 14 million shares.

We expect to reduce our common shares outstanding through share repurchases throughout the remainder of the year.

As John noted earlier on the call, our 2015 capital plan included a proposed increase to our second-quarter dividend to $0.375 per common share, subject to Board approval.

In summary, the first quarter demonstrated the benefit of our diversified business model as shown by the results we highlight on slide 19.

Through our consistent focus on serving our customers in the real economy, we have realized growth across many of our businesses that will help drive future momentum.

We've grown primary consumer checking and small business and business banking checking customers.

We've added new credit card accounts, increased debit card purchase volume, and achieved strong retail bank household growth.

Mortgage originations have grown, commercial card volume has increased, and we've grown investment banking market share.

Treasury management fees have grown at a double-digit rate, we've increased Assets Under Management, and we have higher retail brokerage managed account assets.

I'm optimistic that our diversified business model will continue to generate opportunities for growth, and will enable us to continue to invest in our businesses.

We will now be happy to answer your questions.

(Operator Instructions)

Our first question will come from the line of Erika Najarian with Bank of America.

Yes, good morning.

Good morning, Erika.

Thank you so much for giving us the detail rundown in terms of how you're thinking about your liquidity strategy.

And I also appreciate that the $28.4 billion in deposit growth came from consumer and escrow.

But taking a step back, of the $1.2 trillion in [puritan] deposits, how much would you classify as non-operational corporate?

And I guess we're just wondering, is adopting a similar strategy as your other large bank peers and non-operating deposits, will that be able to alleviate some of the liquidity pressure on the NIM without much give up on the LCR?

It's a good question.

And I'd say the answer is, we're not impacted in the same way as some of the other banks who have gone to the measures that they've announced to discourage those types of deposits.

We're not constrained by the leverage ratio at this point.

We're not meaningfully impacted by institutional non-operational deposits and our GFIB score.

And so, we're serving institutional customers, and in some cases, taking their deposits if it makes sense in the context of the bigger relationship.

But we're not in the same position as the couple of banks who have had to go out of their way to drive down either leverage, or change their leverage outcome, or drive down their GFIB score.

So we will -- we're thinking about those relationships in a way where we can do the most good for Wells Fargo shareholders.

So if other people are charging more or are consolidating business activity to be willing to take those deposits, there's an opportunity for us to improve our business with those same types of customers.

But it's not quite as urgent, because we don't have those problems.

I guess a better way to think about it is, a lot of this excess deposit growth is going to be positive for your LCR and NSFR given that it looks like it's mostly retail.

So low out flow, high ASF factor type of deposits.

That's correct.

And, Erica, the other thing that I know you're aware of, we love the entire relationship.

So surely on the retail side, but it's even true on the wholesale side.

When we become the primary account holder or think of it as a financial partner with a customer, and the deposits lead with that, good things happen.

So that's all part of serving customers broadly and deeply.

And just as a follow-up and I'll step back.

You've been very consistent in terms of falling in that 55% to 59% efficiency ratio range, and you're consistent in terms of your forward guidance.

I guess, again, given some of the other large bank guidance and efficiency out there, will it take rates for Wells Fargo to move further down to the 55% portion of that range?

Well that would be one way to do it.

An increase in rates, which would have an increase in revenue without a lot of associated expense, would do that.

There are other ways to move a little bit lower in the range, depending on the mix of where revenue comes from and the initiatives that we have to manage expenses.

But we're comfortable in the range, we're at the higher end of the range today which is still an industry-leading level.

And these other folks who are enacting their efficiency plans are coming toward us, so we're going to keep doing what we're doing.

But we're not standing still.

We watch every expense around here.

As we repurpose dollars, we save into things we have to invest in.

Got it.

Thank you for taking my questions.

Thank you.

Your next question will come from the line of Bill Carcache with Nomura.

Thank you, good morning.

Can you put into context for us whether the investment opportunities that you discussed that you see before you at the moment are -- do you see them as growing or are they getting harder to identify as you look ahead at say the next 12 months versus the last 12 months?

And then relating to these investment opportunities, how should we be thinking about the trajectory of your payout ratio longer term?

As you generate more capital going forward, is it fair just to view your payout ratio as being inversely related to your investment opportunities?

I guess I'm asking from the perspective of this general overall view that higher payout ratios are better.

But I'm wondering if that's how we should be thinking about it for Wells Fargo, given that your capital position is largely optimized and you're not sitting on a lot of excess capital at the moment?

So when and how we should be thinking about that?

So by investment opportunities, are you referring to our deployment of liquidity or are you referring to the GE Capital case, where we're buying a portfolio of loans with customers?

I think the GE Capital case and the other RWA growth for attractive return generation.

So serving our customers and deploying our capital in that way is the first call on our capital.

We're trying to grow earning assets with customers with cross sell benefit, and create new and bigger relationships with customers that we have.

So it certainly, a certain amount of that factored into our capital plans so that we're imagining doing that while returning capital to shareholders at a high level.

But if the landscape were to shift so that the opportunity became more meaningful for us to originate more assets, and in some cases acquire more assets that are good for us, then I think we'd be looking long and hard at that.

As far as the return on capital to shareholders, I think our record speaks for itself.

And I know John mentioned it in his comments, that we very much appreciate the investment our shareholders have made in us and that we're stewards of their capital.

And returning as much of that as prudent is what we plan on doing and want to do.

There's no reason for us just to keep adding capital.

On the other hand, first call is to grow the business, as John mentioned, and we will return as much, as I mentioned, as we prudently can.

As you just saw recently with our increase in our dividend, or at least the ability to increase the dividend.

And the trick, of course, is to only take advantage of investment opportunities that are capable of generating the kind of return on equity that we've been generating.

And to keep distributions up to keep our capital level at the point, we've used the term optimized, so that we're not carrying excess capital that's harder to produce that return on.

That's the balance.

That's very helpful.

My last question is on a dynamic that we're seeing with loan growth outpacing deposit growth across the banking system as a whole.

But for the larger banks, including Wells Fargo, I guess we're still seeing deposit growth outpacing loan growth.

I was hoping that you could just talk about what you think may be driving that, and do you see anything on the horizon that you think could change that?

I guess in other words, just lead to loan growth outpacing deposit growth at the large banks as well?

Well I think every large bank has a slightly different business mix, and so whatever accounts for their loan growth is going to be unique to them.

In our case, because we've done such a good job at attracting retail households and attracting wholesale relationships that are bringing meaningful liquidity in, deposit growth has been outpacing loan growth for some time.

And then we take a big move in loan growth, which could include utilization of existing credit facilities or incremental funded loans in order to catch up with that.

We'd have to be in a higher economic growth environment I think for loan growth to get into the 9% range, which is where deposits have been.

Now, if we're buying portfolios of loans, like we are in the next couple of quarters, that will certainly have an impact on that.

But that's not probably something that you would project into the future at that same pace.

So I don't see that turning around in the near term.

Got it.

In fact, these are some of the strongest deposit growth years I've seen in my 30 some years with the Company.

And I think it's partly because of the way we work together as a Company, our distribution, the convenience we provide for customers, our focus on this.

So it's been very strong, and all signs are that we'll continue to have a very strong deposit growth profile.

And at 9 basis points, it's not as though we're overpaying.

No, exactly.

That's very helpful.

Thank you for taking my questions.

You're welcome.

Your next question comes from the line of John McDonald with Bernstein.

Hello, good morning.

John, we wanted to ask -- just go back to the efficiency ratio.

Is it reasonable to expect as long as rates stay low and credit is as good as it is right now, you're likely to stay at the upper end of your targeted range?

I think, John Shrewsberry, you said last call, you'd be okay staying at the higher end in this kind of environment, and is there any expenses that are still cyclically elevated?

Maybe just give a little more color there.

Yes, we're continuing to -- we're always looking for ways to be, as John said, as efficient as we can, and to make the most of every dollar we spend.

At the same time, now is the time when there are big demands in information security and compliance and risk management.

And so if we're finding dollars on the efficiency side of the ledger, we're reinvesting them either in products and services for our customers or in becoming a best-in-class across all risk management aspects.

And so, that's probably going to keep us here at the higher end of the range, unless we have a break out in some revenue category or we have an increase in rates, which is fine.

At 58%, 59% it's still an attractive level to be performing at, and we're improving our Company every day.

Okay.

And on [TLECs], John, is there some thoughts that you could share in terms of preparing for TLEC?

The rules obviously aren't finished yet.

But are you taking steps to prepare for your assessment of the most likely proposal that you'd see on that front?

Sure.

So we've got a variety of analyses of most likely or best case worst case, and they look a lot like what's out there in the public domain.

We're going to end up issuing more term debt during the phase-in period, and we'll probably start in the relatively near term to leg into it so that we don't end up with an enormous overhang that has to be issued in a short amount of time.

There's still a lot to know.

Go ahead.

I was just going to say is preferred as well if you could [wary] just go on preferred relative to where you think you might need to be.

Well there's a little bit of preferred left to leg into our capital plan, but not much.

And of course, there might be more if there's RWA growth and the whole capital stack expands pro rata.

I think we're at 149 basis points of preferred today and our target is 150, so we're pretty close there.

But if we grow RWA, then there's an opportunity for more of that.

The big job to do is going to be on the senior unsecured side.

And so we need to know what the total quantum is as the result of where we end up in the [16% to 20%] range as a base.

We need to know what's included and excluded, and there's still things on that list that are being resolved both in the international and domestic standard.

And then we need to know the exact phase-in period, which we think we know.

So when you look at those calculations with what we have maturing or otherwise running off.

And then as I mentioned growth in RWA, that will lead us to what our annual issuance has to be to get there on time when the rule is final.

Okay, thank you.

Your next question comes from the line of Ken Usdin with Jefferies.

Hello, good morning.

John, I was wondering if you could provide any color to help us understand.

On the new loan purchases, is there any way to put in context either the yield of the portfolio relative to the existing yield of the Wells Fargo book?

And do you bring over expenses with it, or is it largely just interest income coming over as has happened in your prior acquisitions of loan books?

So the yield on the portfolio looks a lot like our commercial real estate portfolio today, because the loans look a lot like our commercial real estate loan portfolio today.

And it's not coming over with material expense.

So I think we probably will have to add some small number of incremental people.

But we have, as you know, we're the largest commercial real estate lender in the US today.

We've got a big seasoned team all over the country that's close to borrowers and close to properties, and that's the core team that were managing the portfolio.

If we're adding people, it's in the tens or maybe dozens of incremental professionals in order to help with asset management, but not a big number in the context of the size of the portfolio.

Okay.

And then as a follow-up, with regards to potential other portfolios that GE had talked about, given your positioning in terms of helping them through the structure as you mentioned.

Do you guys get a different look, or have you already taken a look at other parts of the book and this is just the first tranche of what could be more?

Or what's your general perception of the opportunity set that could come forth for Wells Fargo?

They're a great customer, and we're trying to continue to help them and work together like we did here.

They had mentioned in their announcement that there is more to do, and we'll go through in any way that we can be helpful to them in ways that are good for our shareholders as well.

So there is opportunity there.

I can't really be specific about it, because there are competitive processes at work and this is their balance sheet after all.

But we will definitely be working closely together to see if there are other ways that we can help them.

Okay.

And then one little follow-up on your credit comments.

Understanding that energy is baked into this quarter and that you still met release reserves, can you give us the pushes and pulls within the credit buckets in terms of how much more improvement do you continue to see on the rest of the books, ex the energy side?

Or have we really just gotten to the end of the natural improvement?

Well there is still a meaningful improvement in first mortgage, in particular.

You've seen charge-offs, they continue to come down.

NPLs are down, the portfolio is performing very, very well.

So as a result, there was room to take stock of what we think the issues are with the energy portfolio and end up with a net reserve release.

A modest one, but a net reserve release.

So it's quarter by quarter, and we'll look at it at the end of the second quarter and see what the numbers tell us.

But things did continue to improve.

But, Ken, I think we should also add that while there's still more improvement to be had on residential, on the other hand, our commercial side has been close to or even in a recovery position.

That won't last forever.

So there's always pushes and pulls here, but overall, credit is really doing well here.

And that's an industry phenomenon, but especially at Wells.

Understood.

Thank you, guys.

Your next question comes from the line of Scott Siefers with Sandler O'Neill & Partners.

Morning, guys.

Just a couple quick questions.

So, John, the tax rate has kind of bumped around, and this quarter obviously had the discrete issue that you called out.

But what's the appropriate FTE tax rate to use going forward?

The best way to think about the remainder of the year tax rate is to take the $359 million discrete tax benefit out of the first quarter, and then recalculate the tax rate.

Which would get you to the mid 32%s.

Yes, exactly.

Okay, thank you.

And then the other one, when you had been talking about the mobile growth, you had noted also that branch use has not been declining.

Just from your guys' perspective, who's coming in and what kind of stuff are they doing?

And just as you look at overall branch traffic and the need for branches, is it a good thing that people are still coming in and that it makes for an easier more direct cross sell?

Or is it more of a negative in that you have to make mobile investments, but you can't really leverage via fewer branches necessarily?

Or as much branch reduction as you might hope, how do you think about that dynamic?

Here's how we think about that.

We start out with the customer, and customers tell us branches are important.

We hear that every day.

And while our other channels are growing, in fact, if you think about the 12,000 consumer interactions we have a minute in this Company, 80% or so are what I would call digitally supported.

Either at say online or a mobile, and mobile being our fastest growing, but our stores, our 6,200 stores, are still busy.

75% of our customers come into a store once every six months.

Even millenials or our most advanced on the digital side visit our stores, visit ATM's, and about 85% of our growth sales happen there providing solutions.

So it doesn't mean we have to build 5,000 or 6,000 square foot stores.

As you probably know and we've talked in the past, we've tried some different concepts where we have 1,000 square foot stores that at night become an ATM vestibule, in the daytime the walls fold in and become a full functioning digitally enabled store.

So we're doing that kind of thing.

But our most loyal customer today is not necessarily the one who has the most products.

It's the customer who does the most things with us, uses the most channels most often.

So we're increasingly becoming an information provider.

We're in the information business as much as we're on the retail side in the financial services business.

So this is really about connecting all the channels, not about trying to drive customers into what's cheaper for us.

That's not how we think about that.

We think about what's best for them, and branches still remain an enormously important part in that.

Okay, that's good color.

I appreciate it.

Thanks a lot, guys.

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Good morning, guys.

Hey, Joe.

First, compared to the fourth quarter, the commercial loan growth was a little slower outside of real estate construction.

Was some of that seasonal or were there other factors in play there?

And just in general, how do you feel about the current levels of demand on the commercial set?

So it big Q4 to Q1 changes that we closed at the sale of the student loan portfolio in Q4, which created a big C&I loan that happened toward the end of the quarter.

So the step off there was from a pretty elevated place.

That has an impact in the calculation.

I think in the first quarter, we feel good.

Pipelines look pretty good.

We talked to the leadership of the business and people are active, so from one quarter to the next it's tough to tell.

The year-over-year trend in C&I loans is really, really healthy.

And then that step off calculation is a little disadvantageous to the math, but business is good.

Okay.

And then I guess the other question was curious what your early read is on the Spring selling season this year, and are you starting to see any signs of return of the first time home buyer?

Well, Joe, since we're a big retail originator, that's obviously a big opportunity for us.

As your question would suggest that the first time home buyer had been a bit absent in this recovery compared to what it's been in previous recoveries.

But I think some of the work that the industry did, along with the GSEs in understanding put back risk and transfer of risk, makes credit a little bit more available.

There's a little bit more activity going on.

Wage increases and increases in employment have been helpful, affordability is really -- it's a good time to buy a home, so you never know.

We're hopeful we're going into the quarter with the highest pipeline, $44 billion, than we've had in a couple of years.

So we're well positioned and we'll have to see what the numbers show, but we're on our front feet here.

Sounds good.

Thanks very much.

Thank you.

Your next question comes from the line of Mike Mayo with CLSA.

Hello.

Can you hear me?

Yes, hello, Mike, good morning.

Hey can you talk a little bit more on the housing backlog?

How does it look by region, and what are the areas of strength?

It's hard to say.

The mortgage business that we're looking at right now, we're talking about national statistics.

I guess obviously when we're talking about affordability, and particularly for first time home buyers or people who are most likely to benefit from the easing of the credit box that John just referred to.

They're probably would have the hardest time in the hottest markets, which, no surprise are coastal markets in big cities sitting here in San Francisco and many of you in New York.

So things are more affordable in the middle of the country.

That wouldn't come as any surprise.

Most of what we're referring to are just the national pipeline and statistics.

And as far as I can tell, the production is pretty balanced from our various mortgage offices.

Mike, just a couple things that you probably already know.

As John mentioned, there are certain markets where the biggest challenge for housing is the lack of inventory.

It's still, the entire Bay Area, is bid market where you bid for houses.

My daughter and son-in-law bought a house recently.

You have to write a letter and tell them how nice you are, and how many children you have.

And a nice letter plus a lot of money will get you in the bidding process.

That's not true of course everywhere.

But I was in Miami recently, and that markets -- it's stunning how that market is really doing so well, and you would have looked back six years ago and you couldn't imagine what's going on today.

So it just depends, and it's a bit about what's happening in those local economies.

In the Bay Area, of course, with what's happening with in migration, technology, and so forth has really created a lot of activity here.

So it's a bit of a mixed bag, but all-in all, we're optimistic about the second quarter here.

All right.

Thank you.

Thank you, Mike.

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Yes, thank you very much.

You talk very positive about your mobile banking, your online banking, which I think everybody is having the same trend.

But I know you opened a couple express branches or whatever you want to call them in the Washington DC area.

How are they working out?

Are you planning to expand those type of branches?

Yes.

The first one there was NoMa, north of Massachusetts, and we had a second now we're doing a couple others in other markets.

But I don't want to suggest for a minute that you'll see 6,200 NoMas with 1,000 square feet across the franchise.

I think it's a bit of everything, meaning that there is some hub-and-spoke where you have a larger established branch or a store that's been there for many years.

And then you have others around that maybe wouldn't be as large.

You have some like the case in north of Massachusetts where you couldn't get 5,000 square feet and 1,000 square feet is optimal for that market.

So, this is really about looking at our distribution, and we call actually health of your distribution.

Are you in the right location, with the right hours, the right people, the right footprint?

And does the store or the branch work in concert with all the other channels of distribution?

So customers can start transactions at one place, finish another place.

Is there ubiquity?

Is there one version of the truth around information, and how customers serve themselves or want service from us?

So it's a whole bunch of things that really matter in this, and I think the proof in the pudding is our ability to grow primary checking accounts.

I've never seen growth at 5.7%, and like John mentioned, it's not that we overpay on deposits, 9 basis points.

This is the magic of how this thing all works together.

And also over by NoMa, you also opened up one in the Safeway.

I think it was a Safeway out there.

I know a lot of people moving away from supermarket banking.

I don't think you were a big player in that area, but is that working out also?

At one-time, this goes back a number of years, in 1998 when the former NorWest decided the family I came from and Wells merged, Wells was hugely indexed, over indexed to grocery stores.

And then we've been adjusting that since that time, but again, we think of it as density within a market.

And sometimes to fill up that density, a freestanding ATM machines, sometimes it's in store.

Sometimes it's a NoMa 1,000 square foot.

So it all fits into what we call the S curve, and maybe I'll just digress for a second.

If a community has, let's say, 500 banking locations.

That's optimal for a community.

And you have 20% of those, 100, and that's the optimal amount, you'll actually get more than 20% of the business, you'll get 25% of the business.

Because certain compares will have 10% of the stores, and they'll get 8% of the business.

So there's a magic to the density and where the density is and how it works together, and that's just part of our learnings after many, many years.

So sometimes grocery stores fit into that, sometimes they don't.

It surely would not be a lead only strategy, but as an augment, it's very powerful.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Nancy Bush with NAB Research LLC.

Good morning, guys.

How are you?

Nancy, hello.

I have a question for you, John S Stumpf.

Oh, yes you've got to -- there's two John S' around here.

John S doesn't go any more.

The risk -- there have been several articles recently, one a couple of days ago I think maybe in the Wall Street Journal or somewhere, about the changing risk profile at Wells Fargo.

And they look at increased percentage of revenues coming from investment banking, and assign a risk premium to that.

Could you just address the whole issue, and just frame out for us how big you want investment banking and/or capital markets activities to be there?

It's a good question.

We think of customer, Nancy, and I'll get to the specific question.

But the way we think about the business here is around relationships.

Relationships with team members.

My 11 direct reports have 28 years with the Company.

We think of relationships with our customers, our communities, our shareholders.

Buffet has been an owner of ours for 25 years, or we love long term things.

So as it gets to investment banking activities, we think of that as another solution, another product, another service.

And most of the revenue that comes from that business is from existing customers who have been doing business for a long, long time.

When you are the number one middle market bank, when you have leadership positions in energy and ag and commercial real estate, and you do business with 80% plus or 90% of the Fortune 500, you're going to get opportunities to serve customers deeply and broadly.

And if that means that through our skills, and our people, and our value proposition that customers, corporate customers, want us to help with valuation, issuing debt, issuing equity, wonderful.

If we're not good enough to get that and it goes someplace else, we just have to work harder.

So I don't really look at lead tables.

I guess I read where -- in fact, I read for the first time, when I read the Journal that we were number seven or eight or nine, I can't remember the number, I could have cared less, absolutely cared less.

I only care we do the right thing for customers, and if that means we're moving up, terrific.

If that means that others are growing faster because they're taking risks or doing things that don't make sense to us, God bless them.

So that's how we think about it.

Not as a standalone business, as one more way to help customers succeed.

So I guess that it may or may not grow?

Exactly.

Just based on our skills and the market availability.

I've got a couple of data points that I'd give you, Nancy, just to help you dimension it.

But if you look at Wells Fargo compared to the peer group on the risks that we run that we report in our 10-Qs and 10K, we've got a more modest set of trading businesses with a very low risk profile.

At least as measured by VAR, which is the popular public version of that.

Our investment banking fees, while we're thrilled and happy to have them, amount to $2 billion a year or something like that on a $90 billion revenue base.

We've got -- I think this quarter we were in the $420 million to $430 million range for trading revenue, which is appropriate for the needs that we have for customer accommodation and for managing our own risks.

But still, in the scheme of a $1.7 trillion balance sheet, the equity that we carry, and $90 billion worth of revenue, it's just a couple of the 90 plus businesses that we referred to.

And it's not imagined to grow in an outsized way from where it is today.

We're always trying to do more, serve customers better.

We have great people.

But imagine if we doubled the size of the business over some period of time while the Firm grew at its steady organic rate, we'd still be in a relatively modest percentage of the overall Firm.

And, Nancy, the risk really would be if you ever saw where the market is shrinking, let's say, in investment banking or capital markets.

And we're outsized growing because we're taking on risks with customers relationship that we have not known, that's where you see the imbalance.

And that's, again, just not who we are.

Okay.

The second question for John number two.

In mortgage banking, if you could just repeat what you said about gain on sale.

I was writing as fast as I could but I missed the number, and where you expect it to be in the second quarter?

So the first quarter was at about 2%, a little more 2.06%, which is the high end of the five quarter range.

And the second quarter is operating in that neighborhood.

So we feel like we're going to be at the high end of the range in the second quarter as well.

There's a lot more discipline this time around, Nancy, with gain on sale margins as you well know because you've been around, you've seen this industry over a long time.

And that's a healthy thing.

Okay.

All right.

Thank you very much.

Thank you.

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

Morning.

Hello, Matt.

Just to follow-up on the mortgage competitive landscape here.

It's interesting, we saw JP Morgan out earlier today with a big increase in correspondent originations versus a year ago.

And I think maybe you've been a little more consistent in that business, so maybe it's just some ebbs and flows.

But if you could just remind us on the correspondent and maybe talk about the mix you're going after right now?

I don't know if it's a mix of going after as much as a mix of what's coming in.

We've been very consistent, as you said.

What happens when rates pop down and refis spike up is that our own servicing portfolio results in a lot more applications.

Because the easiest thing for somebody to do when they want to take advantage of a rate rally is call Wells Fargo, because we probably already have their mortgage.

And so that's going to have a bigger influence on a strategy that we might have around correspondent.

And I think you can see in the supplement that retail was $28 billion and correspondent $20 billion of this quarter's activity.

And that's not an inconsistent blend versus the last several quarters.

There are more correspondents these days, as you know, that go direct to the agencies.

Because the agencies have opened the window to them, and that's also a lower margin business for us.

So all things being equal, we're happy to be a retail lender but we do serve a big correspondent constituency.

And, Matt, if you go back in time, we actually had a larger share of the correspondent, because there was a number of compares who backed away walked away from that market.

Who come and go from time to time.

So that will ebb and flow as participants either stay in or get out or whatever.

And then just circling back on expenses.

And I guess I'm focused on, call it, the people costs, the salaries, commissions, incentive comp, employee benefit.

If you sum those three lines, it's up I think 6%, 7% versus a year ago.

I know there's the trading nuance that we need to adjust for, but is there impact of the mortgage pipeline impact on those numbers as you staff up in anticipation of a higher volume?

Or I'm trying to reconcile why that growth might be so much versus revenue and some of the categories and fees.

Yes, I wouldn't look toward mortgage.

I would look toward risk management and investments that we're making and along those lines.

The beauty about mortgage in the first quarter was that this refi pipeline helps use the capacity that we would have needed in the fourth quarter and we anticipate needing in the second quarter.

So it was a greater level of utilization.

For better or worse, the changes in year-over-year are a variety of other things.

Including business mix, by the way, in terms of how commissions get paid and other revenue-related incentives.

But it would be that plus investments made in compliance and risk management, cyber and information, security, things like that.

We have the best people, and those are not inexpensive.

Any way to size that either on an absolute basis or versus say a year ago?

Just that overall bucket of, call it, non-revenue related costs?

I don't have an accurate number.

I think we've talked about $100 million a quarter.

A couple quarters ago as having been an observable increase in that category, and it's not any lower than that today.

Maybe we'll see if next time around we can put a finer point on that.

Okay.

All right.

Thank you very much.

You're welcome.

(Operator Instructions)

Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities.

Thanks very much.

John, just to follow-up on your energy-related comments, and I appreciate the detail you provided.

But can you just clarify, was there in fact any increase in general or specific reserves for that portfolio, or any downward migration, internal risk ratings, or anything of that nature?

There was a little bit of downward migration.

Not enough to meaningfully drive the reserve.

There's a little bit of an increase in NPAs, but negligible.

And we realized minimal losses in the quarter in the energy portfolio.

Okay.

But the change in reserve reflects all of what the actual migration and the actual observation of performance in the energy portfolio.

Understood.

And one of the other institutions indicated that based on the forward price curve, they would expect some of the pressure on the E&P sector to subside.

Is that a view that you share?

I'd have to say yes.

We're in the middle of our Spring redetermination process for the borrowing based loans, so we'll have a better feeling afterwards.

We have noticed a lot of capital raising going on in the space.

We talked last quarter about the risk to our investment banking income around energy related firms, because we're large in that space.

And we had a great first quarter in energy and investment banking, because lots of equity was raised, lots of firms went to the debt market to turn themselves out.

So that's a very positive sign there's people taking steps, and changing their balance sheets, and improving their risk profiles.

So that and the combination of where the forward curve demonstrates the energy prices might be going is helpful, but that's, again, that's reflected in our early view of our allowance.

And it will be better informed once we finish our borrowing base redeterminations.

And typically when is that?

During this quarter.

Great.

Thanks very much.

Your next question comes from the line of Marty Mosby with Vining Sparks.

Thank you.

I wanted to drill into the mortgage banking a little bit more.

In that when we managed ours, and we had this recognition or origination at close and not interest rate lock.

Whenever prepayments kicked in, servicing income was compressed as you had to write down the servicing for the expected prepayments.

But origination income wasn't at its full run with refi.

So in my mind, I was just trying to look at this first quarter as the launching pad going into a much stronger, and not to quantify that, but just a stronger return on revenues and mortgage from that timing effect.

Actually, I think that's a pretty astute observation.

Because we would be valuing the MSR on the prepayment expectations, which reflect that lower interest rate.

And we have been taking the gain on the pipeline and what's locked, and insulated the close in the second quarter.

Two follow-ups to that thought process.

71 basis points on the servicing portfolio has to be close to an all-time low.

Are we getting to the point that even with prepayments, we wouldn't need much more reevaluation given that you've already incorporated a lot of the expected prepayments into the current evaluation?

It's a good observation, but it's tough to say.

We look at that calculation regularly, but in connection with our preparation of our financial statements on a quarterly basis.

And take everything into account that's available then, and that's when we strike the value.

And then lastly, when you convert your unclosed pipeline of $44 billion into what would be a normal pull through into originations in the next quarter, I guess it's something like $75 billion to $80 billion.

Does that seem about right in a sense that that's the kind of run rate you're getting into at this point?

Tough to know.

We don't know what hasn't happened yet, and that's what's going to the applications that will be received and pulled through in the quarter.

So, too early to speculate.

The good thing is that half of it's already done in the unclosed pipeline, so you at least know that part.

That's right.

Thank you.

Our final question will come from the line of John Pancari with Evercore ISI.

Thanks for taking my questions.

A quick question on the margin.

Wanted to get some color on the 13 basis point decline in commercial loan yields, I know you indicated that was partly impacted by fees.

Did the lower loan fees account for all of that, or how much of it was downward pressure on yields from pricing pressure?

It's more PCI loan recoveries and lower loan fees than competitive pricing pressure.

So those things that we call the variable components of interest income are harder to predict.

And when a loan gets resolved that's been sitting in work out, sometimes it comes through the margin line.

And then if a loan prepays or there's loan fee hung up in its carrying value, then that sometimes comes through interest income as well.

It's those types of items that are tough to plan for, tough to budget.

And in this particular quarter, we're lower than the prior quarters.

Okay.

And then how does that play into your margin outlook?

Is it fair to assume still mid single digit basis points compression per quarter as we move through 2015?

It's too tough to call, because it depends on what happens with deposit growth.

It depends on what happens with loan growth, and then other investments that we make in the securities portfolio.

That's what's going to drive it.

It's lead by what happens to deposit growth.

And, of course, if there were a move in interest rates, that would have an impact as well.

We're not trying to forecast it in this instance.

Okay, all right.

Our real focus is on generating growth in net interest income, and the margin is more the result not the reason.

Right.

Okay.

And then on that front then, John, I guess if you could just talk a little bit about loan growth expectations.

I know you gave some good color on what you're seeing on C&I, but CRE you saw still declines in your total CRE book.

Wanted to get some thoughts around a sustained inflection in that portfolio organically.

And then, is it also fair to assume that the loan growth overall should remain in the mid single digit range at this point?

Tough to call, because it depends on the mix.

We've got a variety of commercial and consumer asset types here that each have their own market and cyclical dynamics.

I think we expect cards were probably at a seasonal low in the first quarter.

So between seasonality and issuing new cards, that business probably grows.

Auto, we've kept -- its grown, but kept relatively stable.

It's gotten to be a more competitive market, and we've picked our spots, I think, a little bit more delicately.

In commercial real estate, it's going to be tough to spot the organic component of it.

Because the purchase of the GE portfolio and this incremental loan to Blackstone Mortgage Trust is going to have a big impact in the second and the third Quarters.

But if I'd add anything to that, it's that now the competitive dynamic in commercial real estate lending is a little bit different because a big competitor is exiting the business.

So that probably means something for us organically.

If that's helpful.

Okay, thank you.

And then my last question is just on the credit side.

The oil and gas reserve post, what you did this quarter, can you quantify where that reserve stands right now?

We don't call it out specifically.

We capture the whole portfolio in our overall allowance for loan losses, and feel that that is absolutely adequate for the loan book that we have.

Which incidentally, has never been better overall.

Oil and gas loans are approximately 2% to the total portfolio.

Right.

Okay, thanks again for taking my questions.

Thank you.

Okay, this concludes our call, so thanks.

First of all, I want to say thank you to all 265,000 team members for a very, very good first quarter, and thanks for all of you on the line.

We will see you next quarter.

Bye-bye.

Ladies and gentlemen, this does conclude today's conference.

Thank you all for participating.

You may now disconnect.