富國銀行 (WFC) 2016 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.

This call is being recorded.

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'll now turn the call over to our Chairman and CEO, John Stumpf.

Thank you, Jim.

Good morning, and thank you for joining us today.

Our performance in the first quarter once again benefited from our diversified business model and our continued focus on meeting our customers' financial needs.

While the persistent low rate environment, market volatility, and continued weakness in the oil and gas industry provided some near-term headwinds, our long-term results continue to be driven by our focus on the real economy.

For example, we are the largest lender in the US, and our loan and deposit balances are at an all-time high.

We continued to grow our customer base, both organically and through acquisitions, and February was the strongest month for retail bank household growth in five years.

We work to make every relationship, new and existing, a lasting one.

And our focus on providing outstanding customer service was recognized, with Wells Fargo ranking number one in customer loyalty among large banks in the 2016 customer loyalty engagement index, conducted by the firm, Brand Keys.

Let me now highlight our results in the first quarter.

We generated earnings of $5.5 billion and EPS of $0.99.

We grew revenue compared with a year ago by 4%, with growth in both net interest income and non-interest income, and our pre-tax, pre-provision profit grew 5%.

Average loans grew $64 billion or 7% from a year ago.

Our deposit franchise once again generated strong customer and balance growth, with average deposits up $44.6 billion or 4% from a year ago.

And we grew the number of primary consumer checking customers by 5%.

While deterioration in the oil and gas portfolio drove a $200 million reserve build, the rest of our loan portfolio continued to have strong credit results, with our total net charge-off rate remaining near historical lows at 38 basis points annualized, reflecting the benefit of our diversified loan portfolio.

Our strong capital position enabled us to acquire assets from GE Capital.

And we returned $3 billion to our shareholders through common stock dividends and net share repurchases in the first quarter.

As you know, yesterday the Federal Reserve and FDIC announced their response to the 2015 resolution plan submitted by eight banks, including Wells Fargo.

While we were disappointed to learn that our submission was determined to have deficiencies in certain areas, we are focused on fully addressing these issues as part of our 2016 submission.

Turning to the economic environment, while signs of economic uncertainty remain in the global economy, as well as volatility in the capital markets, the US economy, which is the primary driver of Wells Fargo's results, continues to be resilient.

For example, while low energy prices have negatively impacted the oil and gas industry, the US is still a net energy importer, and the benefits of falling prices have outweighed the costs for consumers and most businesses.

Job creation in the US remains robust with 2.7 million jobs added over the past year alone.

Consumers have also benefited from low interest rates and modest borrowing.

In fact, servicing financial obligations required just 15% of household income at the start of the year, more than 1 percentage point lower than the long-term average, and several percentage points lower than what the pre-recession level was in late 2007.

The housing market continues to do well, with steady gains in sales, construction and prices.

This improvement has continued to benefit our consumer real estate portfolio, where net charge-offs were down 41% from a year ago.

Commercial real estate also remains strong, with vacancy rates low in apartment, industrial and retail sectors.

And our CRE portfolio continued to generate net recoveries.

So, while the start of 2016 has shown that the economic recovery remains slow and uneven, we remain focused on the long-term drivers of our success, namely increasing customers, loans, deposits, and building capital.

This unwavering focus on our diversified business model positions us well to benefit from future growth opportunities.

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.

We had another quarter of solid results.

We have now generated quarterly earnings of more than $5 billion for 14 consecutive quarters, one of only two companies in the country to do so, demonstrating the strength of our diversified business model and our consistent risk discipline.

While earnings declined from a year ago, our results in the first quarter last year included a discrete tax benefit of $359 million, or $0.07 per share, and a $100 million reserve release.

Our results this quarter included a number of noteworthy items.

Our revenue benefited from the previously announced sale of our crop insurance business, resulting in a $381 million gain recorded in all other non-interest income.

All other income also included $379 million of hedge ineffectiveness, primarily on our own long-term debt hedges, reflecting the impact of lower rates and foreign exchange rate fluctuations during the quarter.

We would expect the hedge ineffectiveness to be neutral to our results over the life of the hedge relationship, but the impact in every quarter will vary.

We had $124 million of other than temporary impairment, OTTI, in our debt and equity securities related to oil and gas in the first quarter.

The deterioration in the oil and gas portfolio drove the $200 million credit reserve build in the quarter also.

I will get into more detail on oil and gas later in the call.

Expenses included $752 million of seasonally higher employee benefit expenses from higher payroll taxes and 401(k) matching, as well as annual equity awards to retirement-eligible team members.

Our first-quarter results also included the GE Capital acquisitions we completed during the quarter.

On page 4, we show the strong year-over-year growth John highlighted, including increases in revenue; pre-tax, pre-provision profit; loans; and deposits.

Turning to page 5, let me highlight a few balance sheet trends.

Investment securities declined $12.7 billion from fourth quarter, as we paused most of our purchase activity due to the volatility in the bond market.

We had $5 billion of gross purchases during the first quarter compared with last year's average of $26 billion per quarter.

Long-term debt increased $28.4 billion, with $23.8 billion of issuances, including $11 billion raised in advance of closing the GE Capital acquisitions.

We also assumed $3.6 billion of debt from previous GE Capital securitizations.

Short-term investments and Fed funds sold increased $30.4 billion, reflecting growth in deposits, long-term debt, and our disciplined approach in managing liquidity in investment securities during the quarter.

Turning to the income statement overview on page 6, revenue increased $609 million from the fourth quarter, with growth in both net interest and non-interest income.

I will highlight the drivers of this growth throughout the call.

As shown on page 7, we had continued strong loan growth through the first quarter, up 10% from a year ago, and 3% from the fourth quarter.

Commercial loans grew $31.6 billion from the fourth quarter, including $24.9 billion from the GE Capital acquisitions and broad-based organic growth.

Consumer loans declined $923 million from the fourth quarter, as growth in first mortgage loans, auto, and securities-based lending and student lending was more than offset by reductions in junior lien mortgage and seasonal declines in credit card.

Our total average loan yield increased 8 basis points from the fourth quarter, reflecting the GE Capital acquisitions, as well as the benefit of floating-rate loan repricing.

We added a total of $30.8 billion of loans and leases from the GE Capital acquisitions.

The benefit of our strong balance sheet and industry expertise enabled us to add these high-quality businesses, including talented new team members and valuable customer relationships.

This is our largest acquisition since 2008.

The integration is on track, and we continue to expect it will be modestly accretive in 2016.

We completed the GE Rail Car Services acquisition on January 1, which included $918 million of loans and interest-earning leases, and $3.2 billion of operating leases reported in other assets.

Most of the revenue from this business is reflected in non-interest income as lease income.

On March 1 we acquired the North American-based portion of GE Capital's C&I loans and leases, which included $24 billion of loans and interest-earning leases, and $2.7 billion of operating leases.

The remaining $2 billion of assets is expected to close in the second half of the year.

The loans and leases we acquired were marked to fair value under the purchase method of accounting, so there was no associated allowance added as a result of these transactions.

Slide 9 highlights our broad-based loan growth.

C&I loans were up $50.5 billion or 19% from a year ago, driven by the GE Capital acquisitions and broad-based organic growth.

Core 1-4 Family First mortgage loans grew $17.3 billion or 8% from a year ago, and reflected continued growth in high-quality, non-conforming mortgage loans.

Commercial real estate loans grew $15.8 billion or 12% from a year ago, benefiting from the second-quarter GE Capital acquisition and organic growth.

Auto loans were up $4.3 billion or 8% from last year.

We've consistently grown this portfolio in the upper-single digits over the past year, reflecting the strong auto market, while we've remained disciplined in our approach to credit and pricing.

Credit card balances were up $3.1 billion or 10% from a year ago, reflecting new accounts and increases in active accounts.

Other revolving credit and installment loans were up $2.7 billion or 8% from a year ago, with growth in securities-based lending, personal lines and loans, and student loans.

As highlighted on page 10, we had $1.2 trillion of average deposits in the first quarter, up $44.6 billion or 4% from a year ago.

Our average deposit cost was 10 basis points, up 1 basis point from a year ago, and up 2 basis points from the fourth quarter.

This slight increase in deposit cost reflected an increase in deposit pricing for some wholesale banking customers.

We continue to believe that deposit beta's will be lower during this rate cycle than they have been in past periods of rising rates, especially if the outlook for future rate increases remains uncertain.

Page 11 highlights our revenue diversification.

Our revenue continued to be relatively balanced between net interest and non-interest income.

We grew net interest income $79 million from fourth quarter, reflecting growth in earning assets, including the partial-quarter impact from the assets acquired from GE Capital, the benefit from higher short-term rates, and disciplined deposit pricing.

These increases were partially offset by reduced income from variable sources, including periodic dividends and loan fees, and one less day in the quarter.

The net interest margin declined 2 basis points from the fourth quarter, with lower variable income.

All other growth and repricing were essentially neutral to the NIM.

We grew net interest income in the first quarter by 6% from a year ago, and we continue to believe that we can grow net interest income on a full-year basis in 2016 compared with 2015, even if there are no additional rate increases.

Total non-interest income increased $530 million from the fourth quarter, driven by the increase in all other non-interest income that I highlighted at the start of the call.

Non-interest income also benefited from the increase in lease income related to the GE Capital acquisitions we completed in the quarter, which also included related lease depreciation expense.

The linked-quarter increase in trading gains was due to higher customer accommodation trading results across our markets' businesses.

The volatile markets we experienced in the first quarter impacted our trust and investment fees, which declined $126 million from the fourth quarter.

We also had lower debt and equity investment gains, down $281 million from the fourth quarter.

While linked-quarter trends in deposit service charges and card fees were negatively impacted by seasonality, both of these fees grew 8% from a year ago, driven by account growth.

Mortgage banking revenue declined $62 million from the fourth quarter.

Origination volume was $44 billion, down 6% from the fourth quarter due to seasonality, but purchase originations were up 13% from a year ago, reflecting a stronger housing market.

Applications were up 20% from the fourth quarter, and we ended the quarter with a $39 billion application pipeline, up 34% from the fourth quarter.

We expect origination volume to increase in the second quarter, reflecting normal seasonality and strength in the housing market.

Our production margin on residential held-for-sale mortgage originations was 168 basis points in the first quarter, down 15 basis points from the fourth quarter due to a higher mix of corresponding originations in the first quarter.

Releases of our mortgage loan repurchase liability declined $107 million from fourth quarter, which also contributed to lower production revenue.

Servicing income increased $120 million from fourth quarter from higher net MSR servicing hedge results and lower unreimbursed servicing costs.

As shown on page 14, expenses increased $429 million from fourth quarter.

As I highlighted at the start of the call, the increase was primarily driven by $752 million of seasonally higher personnel expenses in the first quarter.

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 annual merit increases, which became effective late in the first quarter, and certain expenses that are typically lower in the first quarter, such as outside professional services and advertising costs, which are also expected to increase.

We had $454 million of operating losses, primarily driven by litigation expense in the first quarter.

Now that the FDIC has issued their final rule, I want to update you on the expected impact of the FDIC surcharge that I mentioned on our call last quarter, which is lower than we previously expected.

We currently estimate that the surcharge, along with the previously approved base rate reduction, will increase our total FDIC assessment by approximately $100 million per quarter, starting in the third quarter of 2016.

Our efficiency ratio was 58.7% in the first quarter, and we currently expect to operate at the higher end of our efficiency ratio range of 55% to 59% for the full-year 2016.

Turning to our business segments starting on page 15, community banking earned $3.3 billion in the first quarter, down 7% from a year ago due to the discrete tax benefit we had in the first quarter of 2015, and up 4% from the fourth quarter.

We continue to successfully grow retail bank households, and increased our primary consumer checking customers, which were up 5% from a year ago.

This growth, along with increased usage in new product offerings, benefited our debit and credit card businesses.

Debit card purchase volume was $72.4 billion in the first quarter, up 9% from a year ago.

And credit card purchase volume was $17.5 billion, up 13% from a year ago.

Customers are increasingly using our award-winning digital offerings, with digital active customers up 6% from a year ago, including 17.7 million mobile active users, with continued double-digit growth in mobile adoption.

Wholesale banking earned $1.9 billion in the first quarter, down 3% from a year ago, and down 9% from the fourth quarter.

The decline was driven by the higher provision expense in our oil and gas portfolio.

Revenue grew 6% from the fourth quarter, with growth in both net interest and non-interest income.

This growth was driven by the gain on the sale of our crop insurance business, and the benefit of the GE Capital acquisitions.

Investment banking declined on overall market weakness.

And some of our commercial real estate-related businesses had weaker results, coming off a very strong fourth-quarter performance.

Loan growth remained strong, driven by acquisitions and broad-based organic growth, with average loans up $49.8 billion or 13% from a year ago, the sixth consecutive quarter of double-digit, year-over-year growth.

Average deposit balances declined $3.7 billion from a year ago, reflecting lower international deposits from market volatility, and the competitive rate environment.

Wealth and investment management earned $512 million in the first quarter, down 3% from a year ago, and down 14% from the fourth quarter.

Year-over-year results reflected strong balance sheet growth, with net interest income up 14%, offset by the impact of weak equity market conditions on fee income.

The decline in linked-quarter results was primarily driven by seasonally higher personnel costs.

Balance sheet growth remained strong, with average deposits up 8% from a year ago and loans up 13%, the 11th consecutive quarter of double-digit, year-over-year loan growth, with continued growth in non-conforming mortgage loans and securities-based lending.

We have successfully completed our recruiting of financial advisors pursuant to our agreement with Credit Suisse.

We were able to recruit substantially all of the advisors that we targeted.

We are pleased with the success we've had with recruiting these financial advisors, and look forward to their contributions to our continued growth in wealth management.

Turning to page 18, credit results continued to benefit from our diversified portfolio, with only 38 basis points of annualized net charge-offs.

Net charge-offs increased $55 million from the fourth quarter, including an increase of $87 million from our oil and gas portfolio.

While our oil and gas portfolio remains under stress due to low prices and excess leverage in the industry, the rest of our loan portfolios have performed well.

Non-performing assets increased $706 million from the fourth quarter.

We had $1.1 billion in higher oil and gas non-accruals, and $343 million of non-accrual loans from the GE Capital acquisitions, which was within our acquisition underwriting assumptions.

These increases were partially offset by lower residential and commercial real estate non-accruals, and lower foreclosed assets.

As I mentioned earlier, we had a $200 million reserve build during the quarter, as continued improvements in our residential real estate portfolio were more than offset by higher oil and gas reserves.

Since first-quarter 2015, we have released $1.8 billion of allowance that was allocated to our residential real estate portfolios, while providing $1.4 billion of additional allowance allocated to our oil and gas portfolio, demonstrating the advantage of our diversified loan portfolio.

The total allowance now stands at $12.7 billion.

Slide 19 highlights the characteristics of our oil and gas portfolio, which is less than 2% of total loans outstanding.

We had $17.8 billion of oil and gas loans outstanding at the end of the first quarter, up $474 million from the fourth quarter, including $236 million in loans acquired from GE Capital.

The remaining increase was driven by utilization of existing lines, primarily in the E&P sector.

The composition of our portfolio has remained relatively stable, with 55% of our outstandings to the E&P sector, 21% to midstream, and 24% to service companies.

Approximately 7%, or $1.2 billion, of our outstandings are to investment-grade companies based on public ratings.

However, there are other factors that are important to consider when assessing the quality of these loans.

Our loans are primarily to middle-market companies that we know well and have worked closely with across cycles.

Of the approximately 100 bankruptcies that have occurred in the industry since the start of 2015, only 11 of our borrowers have filed during that time.

Our outstandings also included $819 million of second lien and $374 million of mezzanine loans.

Our total oil and gas loan exposure, which includes unfunded commitments and loans outstanding, was down $1.3 billion or 3% from the fourth quarter, with declines across all three sectors.

This decline reflected reductions to existing credit facilities, in part from spring redeterminations and net charge-offs.

Approximately 34% of our unfunded commitments were to investment-grade companies, as their line utilization is generally lower.

In addition to our exposure to oil and gas in our loan portfolio, we also had a total of $2.4 billion in our securities portfolio.

Slide 20 highlights the credit performance of our oil and gas portfolio as we work through this cycle.

The sector's performance has been driven by a number of factors that cumulatively have impacted loan quality.

In addition to low oil and gas prices, cash flows and collateral values have been impacted by a reduced production, runoff of hedges, and limited additional cost levers.

Reduced access to capital markets has also impacted borrowers' financial condition.

As a result of these factors, we had $204 million of net charge-offs in the first quarter.

There were no losses from the midstream sector during the quarter.

Non-accrual loans were $1.9 billion.

We reviewed our loan portfolio on a loan-by-loan basis, and placed loans on non-accrual status when the full and timely collection of contractual interest or principal becomes uncertain, and loans are written down to net realizable value when appropriate.

Approximately 90% of the non-accruals were current on interest and principal.

Payments received on these loans are applied to reducing principal, which decreases future losses.

Substantially all of our non-accrual loans are senior secured.

Given the conditions in the industry, criticized loans, which include non-accrual loans, increased to 57% of the portfolio, reflecting continued downward credit migration.

This migration reflects changes in the borrowers' financial condition.

Reflecting the downward credit migration, our allocated allowance for the oil and gas portfolio increased $504 million to $1.7 billion.

This portion of the allowance was 9.3% of total oil and gas loans outstanding.

But as I've noted before, the entire $12.7 billion allowance is available to absorb credit losses inherent in the total loan portfolio.

Turning to slide 21, in addition to building allowance for our oil and gas portfolio, we continue to focus on other areas where the trends in the oil and gas industry may impact performance as we manage through this cycle.

For example, we have assessed regions of the country, and have been monitoring 15 regions in eight states where greater than 3% of employment is directly tied to oil production.

And are also monitoring performance in Houston and Alaska, neither of which have 3% of employment directly tied to oil production.

We are tracking changes in outstandings, utilization, delinquency rates, FICO scores and LTV migration across our consumer portfolios in these regions.

And having outperformed the rest of our portfolio for the past several years, consumer delinquencies in oil-dependent regions have increased and are roughly in line with the performance in non-oil-concentrated communities.

We currently anticipate further deterioration.

And while we remain committed to serving our customers, we have tightened our underwriting standards across our consumer portfolios in oil-dependent regions.

We are also actively monitoring commercial real estate exposure on a loan-by-loan basis in geographies highly correlated to the oil and gas industry.

Our CRE and energy management teams are working closely together, and coordinating monitoring activities.

Our total exposure is manageable, and these loans are generally structured with significant cash equity and various other credit enhancements.

In summary, we are actively monitoring the impact from the disruption in the oil and gas industry in all areas of our Business, and we're working closely with all impacted customers.

We've increased the size of our work-out team, and the senior members of our credit team are devoting significant time to monitoring our exposures.

We've started the spring redeterminations, and are decreasing borrowing bases.

We are proactively reviewing credit agreements, and modifying credit terms and commitment amounts accordingly.

While the level of losses we have in our oil and gas portfolio will continue to be impacted by the volatility and stress in the industry, and it will take time to move through this part of the cycle, the experience of managing through many cycles will continue to be beneficial to our overall performance.

Turning to page 22, our capital levels remain strong, with our estimated common equity tier 1 ratio fully phased in at 10.6% in the first quarter, well above the regulatory minimum end buffers and our internal buffer.

Our strong capital generation positioned us to deploy capital for the assets acquired from GE, while continuing to return capital to our shareholders.

We issued 35.5 million common shares in the first quarter, reflecting seasonally higher employee benefit plan activity.

But we still reduced our common shares outstanding by 16.2 million shares through share repurchases of 51.7 million.

Our net pay-out ratio was 60% in the first quarter.

In summary, our first-quarter results demonstrated the benefit of our diversified business model, as we continue to produce strong financial results in an environment that included some near-term headwinds.

Our consistent focus on executing on our vision continued to benefit our fundamental drivers of long-term growth, including adding customers, loans and deposits, while maintaining our strong capital position.

We look forward to providing you more details on the strength of our business model, while highlighting the quality of our team, at our Investor Day on May 24.

John and I will now answer your questions.

(Operator Instructions)

Our first question will come from the line of Ken Usdin from Jefferies.

Thanks, good morning, guys, how are you?

On the reserving and energy question, thanks for the color, John.

It seems like you've had a little bit more of the acceleration that we've seen so far out of those who have reported, as far as the actual losses and the reserve build as well.

How do we get the understanding from here of the kind of pace of potential reserve additions?

And then underneath that, are we effectively at the point where many benefits from lingering consumer reserve have moved past?

Thanks.

On the second part of your question, it is tough to say.

We are analyzing the reserve every quarter.

And to the extent that there is continued improvement in consumer real estate in particular, it is certainly possible that produces incremental benefit that absorbs some of what is happening on the oil and gas side.

That has been true for a while and it may continue to be true for a while.

Housing has been strong and that doesn't feel likely to reverse course right now.

But again, we'll only know at the end of the quarter.

With respect to the pace or the trend of incremental reserving throughout the year, we are constantly reassessing borrower quality.

We're doing a semi-annual borrowing base redetermination on E&P loans.

We are in the middle of the spring redetermination period right now.

Call it 20%, 25% have been completed so we'll have the rest of that information.

That's name by name, capital structure by capital structure.

That will continue to inform things.

We have definitely taken steps, for example, categorized loans as non-performing, even if we haven't completed their spring redetermination.

But my sense is there's more information there.

This is going to go on for a while.

We're in the $40 context today.

We were in the $30s for a while.

Some of these capital structures need to be restructured; that will take some time.

My assumption is that we're going to be talking about this all year.

I don't know that we will continue to reserve at this pace all year because we feel great about our reserve at the end of the first quarter and it reflects everything that we know.

But I would be hesitant to tell you that this was the big quarter, or this was the quarter.

Things will unfold as they are going to unfold depending on what happens with prices, both spot and forward, and the pace of restructurings of services and E&P companies.

Ken, I'd just like to remind you, I mentioned that residential real estate losses were down 41% year over year.

And I think that sometimes goes a bit unnoticed.

When we went into the downturn, we had over $100 billion of pick and pay loans and over $100 billion of home equity loans.

And those were the two toughest residential portfolios.

Today those portfolios are less than half of what we started with and the performance is really, really good.

So there is a lot of momentum on that side that has happened over the last few years but especially in the last year or two.

That's a fair point, John, thanks for that.

And one follow-up on the redetermination and the structuring.

John, how far ahead can you get a redetermination?

I get your point that we are only 25% through the spring, but have you already been able to get ahead of that in terms of anticipation?

Or you can only make those adjustments when we get there?

Also, with the price back up do we go into spring redetermination using a 40-hour plus starting point?

Or do you still end up being much more punitive in terms of how you discount and how you redetermine?

I think the price deck for this cycle, the front month is more in the mid $30s context and it is a curve that you are using, not just the spot price.

We're probably 20% lower across our price deck curve in the spring versus where we were six months ago.

And believe me, that's not the only item that impacts the outcome.

It's what's been going on with incremental exploration, what are the reserves in terms of quantity and a variety of other things.

In terms of getting in front of it, as I said, we are categorizing loans as non-performing.

We are recognizing loss.

These loss determinations, the $200 million we have taken, that is our own credit folks determining that there is something to be done.

It's not as the result of a final resolution or a workout or the completion of a bankruptcy plan.

And we can do that even before we've completed a redetermination.

From an impact to Wells Fargo point of view, we are always trying to stay out in front of it.

Thanks for all that, appreciate it.

You bet.

It's probably the last oil and gas question we'll get.

(laughter)

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

Hi, I will switch it up.

In terms of net interest income, John, how much have you benefited from the December hike in the first quarter?

Have all the variable loans repriced?

And will there be additional pull-through benefit from that December hike into the second quarter?

Our estimation is that we've gotten the full benefit of the December rate hike.

The benefit on the asset side, the cost on the liability side.

We talked about the impact on deposits which has been negligible.

I think that is in the run rate at this point.

Okay.

And then a question for John Stumpf, what is the market like, John, for additional portfolio purchases?

That's part one.

Part two is in terms of broader M&A.

Because of your size and favored-nation status, you are the preferred name for news reporters and others that speculate on M&A for big financial companies.

Since a lot's changed around the environment the last few years, can you remind us your strategy around M&A?

How it is different than when you were smaller and how Dodd-Frank and Too Big To Fail might affect your view on acquisitions going forward?

Sure.

As you probably know, and those are know as well, 97% of the revenue we produce is from US-based customers, consumers, small businessmen and women, middle-market large customers.

While we love our international business, it is mostly in support of our US-based businesses.

We have leadership positions in most of the businesses in which we do.

We don't set out to be number one just to be number one, we work really hard.

And if we do really, we provide great products and services and great value, and we grow because of that.

There's a couple areas where we are sub-optimized that we are working hard to grow.

One of those, I think the most attractive area would be the area that David Carroll runs in wealth investment management.

You've heard me say a number of times where we have 11% of the deposits or so in the country and just a fraction of that in terms of wealth assets here.

Even though we have a powerful, wonderful group of leaders and advisers across the geography, we could still do a lot more business, a lot of our customers who call us their bank who have their wealth away.

So we are working hard organically.

That business has been growing double-digits.

If there was an opportunity to add something in that area that would make sense, terrific.

If there's not, that is also terrific.

On the consumer side, we have leadership in terms of distribution of our online activity, of our checking activity, our debit activity.

But not our credit card activity even though we have grown that significantly internally.

Over 43% of our customers who have their primary account here have a credit card but that is an area that would be opportunistic.

We've been doing a great job organically.

If they would be some opportunities along the line that would make sense, we would surely consider that.

I would think of it this way, John.

I would think of it that we have all that we need right now.

If something became available that we thought would be a bolt-on that would help us in those areas specifically, but other areas generally, sure we'd look at that.

Our focus right now, our best opportunity to grow long-term shareholder value here -- value creation -- is doing more of what we are doing, just doing it better.

Okay, thank you.

Your next question comes from the line of Paul Miller with FBR & Company.

Thank you very much.

A lot of clients, a lot of questions that I have been getting is that, yes, energy -- a lot of people might be reserved good for energy but the second or third derivative of energy was a lot of the growth of this economy over the last year or two.

Since energy is starting to struggle, that the economy is going into recession.

I know you've heard of it, but what are you seeing on the second and third derivatives on the credit book?

Are you seeing any real deterioration in CRE markets in some of these areas like Texas where probably energy has hit them the hardest?

As I mentioned in the prepared remarks, in the consumer portfolios all of them were going MSA by MSA in comparing the performance of our borrowers in the areas that are highly levered to energy.

The greater than 3% employment is one measure that we used but we've also included Houston, for example, to your point about Texas being hard hit even though it doesn't qualify with the 3% employment trigger.

What we've discovered is those areas have been performing better than average for a long time.

No surprise, because that is where all the growth has been coming from, and they are starting to look more average.

So whether it's measures of delinquency, in some cases measures of LTV based on what is changing in asset values, they look a little bit more average.

It doesn't feel like it's a -- at least at this point -- that it's another shoe to drop in the short term.

But as you expect, less employment, loans will perform differently.

In commercial real estate, where we have a big presence, we've recently done a deep dive in Texas in particular.

Office vacancies are somewhat higher in the Houston area, no surprise.

I think about 20%, including sublease space, multi-family, is a little bit weaker.

We are looking at that first and foremost, frankly, with respect to what it means to our risks, to our loan portfolio and feel fine about what our exposures are there.

But those are things that those regions are going to have to grapple with.

When it comes to growth rates or people who have more concentrated exposures, then that probably is the first second-order outcome that people are going to have to look out for.

More broadly speaking, I think we still feel we are in a 2% environment.

There are obvious pockets of strength around the country but when you move out of oil and gas, we are in the same low growth, better consumer, strong employment environment that we've been operating in for couple of years.

Not enough to make it feel like rates are going to move as a result of it, but not enough to feel like we are stalling either.

Paul, if I can give you an anecdotal.

I lived in Texas for six years in the mid to late 1990s, so 20 years ago.

There was a period of time there where there was volatility in the oil and gas space and there was some challenges.

I've been back -- I was just in Houston last week -- and I've been back a number of times in the last year, and things do feel different 20 years later.

It is a much more diverse economy with Texas generally but Houston specifically, and it feels different this time around.

Downturns are always hard, volatile markets always have an impact.

But this feels different this time because of what the state has done to diversify their economy.

Okay, guys, thank you very much.

Your next question comes from the line of Erika Najarian with Bank of America.

Hi, good morning.

My first question is actually a follow-up to John's question.

My conversations with investors have often paired well, to be frank, with either large credit card companies or there is clearly the rumor for Wells potentially buying a large investment bank which you formally denied.

As we think about what you were saying, John, about looking at bolt-on opportunities, should we think about the deal size as sizes that are manageable enough that the real stop here is Wells Fargo not moving up a SIFI surcharge?

As we think about the opportunity for non-organic growth, should we think about the hard stop in terms of size being that you would like to keep your SIFI surcharge where it is today?

Erika, here's how I'd think about it.

I'd think about Wells Fargo as an organic growth Company.

I've been here almost 35 years and I've probably been involved in -- if there is 250 acquisitions we have done with all different companies as we've come to the modern Wells Fargo, I have probably been involved in half of those because it happened during my career time.

They are hard to do.

There is a lot of work in those things and we now have a Company that is the best Company I've ever worked for.

The strongest brand, the best people, the furthest reach, the deepest relationships, the long-enduring customer.

We are very, very careful buyers.

I see us as a lot of opportunity to grow, as I said, organically.

If something -- and what we've done in the last four or five years have been largely bolt-on, I would say GE was a little bigger bolt-on.

Those are the kind of opportunistic things that make sense for our team, for our customers and ultimately for our shareholders.

After all, this is your money, our investors' money, that we are the stewards of.

It would be out of character for us to do something that would have a high degree of risk and a low degree of shareholder reward on it.

That's just not who we are.

Thank you, John, that was very clear.

My second question is looking to capital return.

Since you've been CCAR participants, it seems like your GAAP earnings volatility is the least among your large peers.

As we look forward, obviously you can't tell us about this year's CCAR submission, but as you look forward, how are you feeling about potentially continuing to push on that 30% implicit dividend ceiling?

It's hard to comment on that during the middle of a CCAR cycle but I admire you for asking.

(laughter)

I tried.

Thanks for taking my questions.

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

Good morning.

I want to delve into a couple of potential earnings levers going forward.

The first one would be as we think about the liquidity that you've built since you chose not to reinvest as much in the securities book, how are you thinking about that pool of funds going forward?

There's not really any signs that rates are going to rise materially as we think about market rates.

We are obviously off the bottom but what is your approach to managing that liquidity from here?

It will be informed week by week, quarter by quarter as we assess the likelihood of increases in both short and consequently long-term rates.

We won't sit idly on continued increases and cash forever.

We are going to have to put some of it to work.

We are very cautious about what it means entering at these levels in terms of capital impact in the future.

If a subsequent rate does occur, that is obviously a big issue for us and we'd like to be smart about our entry points.

If we're going to hover in the 170s, just to pick a number, on the 10-year and with mortgage rates where they are, then there will be some amount of redeployment.

We will probably talk about it a little bit more at Investor Day.

But it was really the abrupt market volatility that happened after the first of the year that caused us to say let's take a pause here and figure out where this is going to settle out.

It happens to have settled out not much above the low points, at least again, on the 10-year, from January, early February.

But that is an earnings lever, when and if we redeploy.

Separately on the expenses, talk about is there any kind of change or even tweak on the approach to expense management, given weaker revenues and some of the ongoing pressures and energy likely lingering?

There is a continuous drum beat and a high level of vigilance around how we spend all of our business's usual types of dollars.

We are constantly trying to find levers and ways to be more efficient, to streamline, to make things consistent.

We've provided some examples of that in the past in certain areas.

At the same time, we've talked about the investment that we are making in technology, the investments that we're making in product capability, the investments that we're making in risk management and compliance and being a better firm.

Those are going to be elevated for some time and they have been for some time.

We are still comfortable in our 55% to 59% range which is where we've guided.

I don't need to remind you but that is a very attractive level for a firm of our size.

We think we are pretty lean overall but it's because we take this seriously day in and day out, looking for ways to be efficient.

Okay, thank you very much.

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

Thank you, good morning.

Of your borrowers who drew on their oil and gas lines this quarter, was there any notable deterioration in their credit profile?

I was just trying to understand the extent to which heightened degrees of financial stress is a factor leading your borrowers to draw down their lines.

Although you mentioned that your current reserve reflects everything that you currently know today, I was wondering how you are thinking about the probability that more and more of your unfunded exposure will eventually become funded as we move deeper into the credit cycle?

Sure, that's a good question and of course we absolutely have to make estimates about what we think the exposure at default would be for any borrower who's got a remaining unfunded commitment.

That is how the process works.

In the quarter there were some of these, what you might characterize as defensive draws, that we've observed, not that many of them.

You can see the increase in the total outstandings in oil and gas rose by about $400 million and about half of that was from, frankly, leases that we picked up from GE that have a credit mark in them, incidentally.

It didn't really amount to that much but it is a phenomenon we have seen, that we've read about.

It isn't having that big of an impact today but we do think that we are capturing that risk as we assess what the appropriate size is of our allowance for both funded and unfunded commitments in this space.

So when a previously unfunded energy loan commitment becomes funded, how does that transition from unfunded to funded impact your allowance?

I think generally the reserve rate on unfunded commitments is lower than it is on funded commitments, but I was trying to understand the reserving dynamics there of shifting from one bucket to the other.

In the calculation of the allowance and the migration of credit that leads up to what we would consider a borrower relationship to be non-performing or what status we are marketing it, we are imagining on a credit-by-credit basis what the exposure at default would be, meaning that it could be greater than the currently outstanding amount.

That is a part of the loan-by-loan process analysis-by-analysis that we do when re-rating loans every quarter and building up for the allowance.

There are some estimation of what today is currently unfunded will become funded in the future.

Okay, thank you.

If I can ask a final follow-up, can you discuss whether the methodology underlying your energy reserve is based more on the ability of borrowers to repay their loans through cash flow generation?

Or is it more reliant on collateral coverage based on reserves in the ground?

There are some reports suggesting that regulators are less happy with collateral coverage and I was wondering if you could speak specifically to the approach that Wells Fargo has taken?

It is a combination of both and they are highly correlated for E&P companies, in particular.

It is their sources of repayment, both principal and interest in full and on time.

And we are taking into account there our projections of their cash flows and we are taking into account our projections of the value of collateral that we might have to liquidate in order to get paid back, or they might have to liquidate in order to pay us back.

Understood, thank you so much for taking my questions.

Your next question comes from the line of Kevin Barker with Piper Jaffray.

Good morning, thanks for taking my questions.

I want to switch gears here and look at your auto exposure.

You're obviously one of the largest auto lenders in the country and have grown that portfolio by roughly 30% over the last three years.

Given what we've seen in the industry and some deterioration in the sub-prime portfolios, could you help us gain an understanding of what your expectations are through the rest of this year and into 2017, given the state of the auto industry and how hot it has been over the last couple of years?

Sure.

I think we've been pretty public with the fact that we are going to hold our ground with respect to what we think are quality loan terms and borrower profile.

We've actually seen our share slip a little bit as the overall size of the auto finance market has kept pace with the sale of autos, new cars in particular, that has been at a record level now for a few years.

We were number one and I think we are number two right now.

We are bidding on buying the loans that we like at terms that we think are a good risk reward and we are passing on those that we don't.

Some of the things that feel a little bit different right now, seasonally obviously we're in a better place in Q1 than Q4 because those loans behave that way.

Collections and losses are lower in the first quarter than they are in the fourth quarter.

Things are a little bit elevated first quarter to first quarter but we are still, from a risk-adjusted basis, well within the bands to which we underwrite each level of credit risk in autos that we buy.

Where we've always had our eye on the elevated level of used car auction prices, the Manheim Index in particular is evidence that we point to, to get a sense for whether loss given default is going to be worse in the future than it is today or in the recent past.

That index has been down, I think 3% linked-quarter, 2% year over year.

So all things being equal, we would expect severity to be a little bit worse when repossessions occur.

Having said that, we are still not in a bad place.

We've allowed our market-leading position to slip a little bit, let other people buy the loans that don't make sense for us.

It is still a great business for us, it has been for a long time.

We work very closely with dealers, we have a big floor plan business, we have a big commercial banking business with the dealership community.

We are in this for the long haul.

One more thing we've observed is because the ABS market has been under pressure, some of the probably most aggressive players in the sub-prime space have a little bit of a funding challenge, I think, in this environment.

That may soften things up a little bit.

Those are my current observations.

So to follow-up on that, are you seeing better risk-adjusted returns in sub-prime auto versus prime auto right now?

And are you growing the sub-prime auto portfolio at a faster rate?

No, we've held the line.

Using our own approach to what a sub-prime borrower and sub-prime deal is, we've limited ourselves to about 10% of our originations which has amounted to about 10% of our outstandings that we'd consider to be sub-prime.

There's often an opportunity to grow that if we wanted to; we've chosen not to.

We like the risk return that we get in where we choose to participate in that space.

It has performed very well; it's priced for the risk.

Frankly, it doesn't compete directly with some of the specialty finance companies that are in that space.

They tend to be a little bit deeper and they're running a different business.

Okay, thank you for taking my questions.

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

Thanks, good morning, guys.

First, a quick follow-up on Ken's question at the outset.

I was curious how much of the increased oil and gas reserving or provision this quarter can be attributed to the shared national credit exam?

I would say very little.

The exam came and went and I think it worked out fine.

There weren't a lot of disagreements on how we rate loans.

And also the guidance around leverage levels, et cetera, was introduced and that didn't have much of an impact either.

These are our folks using consistent methodology, making determinations on when loans should be non-performing, when we should take loss, et cetera.

Okay, that's very helpful, thanks.

The other question was I wonder if you could talk a bit more about how the GE Capital business integrations are going and how you are feeling currently about the potential for cross-selling or revenue synergies.

Also wondering if you can quantify the impact we may see in the second quarter from a full run rate of expenses?

I like the first part of the question better.

There is a big opportunity.

This is early stages.

This is important and a big integration, so it will take a full year to get where we need to go and to transition all of the services away from GE and over to Wells Fargo and get things running.

I'm happy to say that the early reports are that we are doing great with customers and team members.

I think we imagine that there is a real opportunity with these customers.

These are businesses where GE has been an absolute leader and they have done that with credit.

Now we've got that credit capability and that credit willingness and the perfect business model for that.

But we also have all of the other wholesale banking products and services, wealth management services, et cetera, to bring to bear on this client group.

It will take a while to work with each relationship and find out what they are doing that might be done at Wells Fargo in addition to their credit.

But my sense is that we will get graded option over time and that is part of what makes it such a high-value opportunity for Wells Fargo.

Okay, thanks so much.

Your next question comes from the line of John Pancari with Evercore ISI.

Good morning.

A couple more questions on energy and then one on expenses.

On energy, what percentage of that $1.2 billion in second lien exposure that you provided is non-performing?

Do you have that?

Let's see, $113 million of the combined second lien and mezzanine today is categorized as non- accrual.

All right.

What is your energy criticized ratio as of March 31?

I know last quarter it was 38% approximately.

It is 57% now.

five-seven?

Five-seven.

Okay.

And that reflects the environment that we are in and that reflects what's going on with the stress of the borrowers.

That migration is what leads us to provide more reserve.

Okay.

Through the 25% of the spring redeterminations that you completed, what's been the average reduction in borrowing base that you have seen?

I would start by saying that 50%, 60% have actually had a reduction in the borrowing base.

A quarter had no change in the borrowing base.

And the balance actually had an increase in the borrowing base because of more reserves that were included in the borrowing base.

Without getting too specific on the amount of the reserve for people who had a reduction, it was relatively significant and, frankly, reflected the curve that we are using today versus where we would have been a quarter ago.

Got it.

Lastly, on the expense side, could you give us a little more color on why the incentive comp increased as much as it did this quarter, particularly on the backdrop of some of the revenue headwinds?

Sure.

It's not really incentive comp so much.

Think about FICA resetting in the first quarter, contributions to our 4O1(k) happen in the first quarter.

For people who are retirement eligible, there's lots of people at Wells Fargo who get an annual equity incentive as part of their pay.

For most people it vests over a few years and the impact bleeds in over the vesting period.

If you are already retirement eligible, it all hits in the quarter that it's granted because it's immediately vested and that is why the first quarter has that extra impact.

It's not so much about -- commissions and incentive are a piece of it, but it reflects the actual business activity that's happening.

Okay, thank you.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Hi, good morning.

A couple of questions.

One, and I will get the energy one out of the way first.

I think you mentioned 25% of your loans went through the redetermination process in the quarter, is that right?

That is just where we happen to be to date for the spring redetermination.

The rest of them are underway.

It's a borrower-by-borrower analysis.

As of the ones that finished during the quarter, how much incremental reserve was required?

Is that what drove the reserve up?

What drives the reserve up is our categorization of the loan, generally speaking, as non-accrual or non-performing, meaning that we think there is a chance that we won't get full and timely repayment of every dollar of principal and interest.

That can certainly come about in connection with the redetermination but it can come about for other reasons as well, in terms of our review of the company's overall performance, the value of their collateral, what their prospects are.

It's not really a linear -- you can't really draw a line between the redetermination specifically and the change in reserves.

Okay, it could have some impact but not -- (multiple speakers)

It would definitely have an impact.

If we reduce somebody's availability and if they were drawn above their availability and we actually had a moment of reckoning where they have to write a check, that will accelerate that analysis because they will have something that they have to do right then and there.

There aren't that many instances of that.

It's just that as we go through the rest of the 75% of the redetermination for this spring, that could drive some more expense and reserve requirements.

It could.

We capture a lot of that in our general assessment and our risk rating before having the actual results of the redetermination, but it certainly could.

Okay.

Then a question on recent balance sheet.

You brought down Fed funds a bit, is that right?

We are $30 billion higher in cash and cash equivalents at the end of the quarter because we were less active in the bond market.

Right.

That was mostly because of your view on rates and where you wanted to reinvest?

Yes.

So a 25bps increase in rates today -- are you in a more asset-sensitive position now because of that?

I think that's right, it could be true.

Okay.

Any sizing?

No, we are more asset-sensitive as a result.

We also have more long-term debt that came under in the quarter.

There is a handful of things going on at the same time but at the margin we are probably a little bit more asset-sensitive.

Okay.

On the redeployment into securities, I know you might want to have a higher rate to redeploy into, but is there a point where you say I want it to but it has been 1.7% for five, six, seven, eight months, whatever it is, I'm going to start to be redeploy some of my cash into longer-duration paper.

Can you give us a sense as to how you think about that?

That is the discussion that we are having regularly in our ALCO meetings with the Board, et cetera.

My sense is that in this low rate environment we probably not go as far out in terms of duration so that we were taking less capital risk, even though the dollar-for-dollar return would be a little bit lower.

It is the trade-off between forgone earnings, capital sensitivity and a handful of other things that we are having to assess.

And we're doing it with our best estimate of where we think rates are going and what happens if they don't go there.

The long and short of it is, I don't think that we're going to continue to build cash balances like we did in the first quarter.

We are reassessing every day to make a determination on at what entry point and at what point in the curve we are interested in putting on more duration risk.

Okay, got it, thanks a lot.

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

Hey.

How much did the GE acquisitions add to EPS this quarter and what do you expect it to add for the rest of the year?

We are not breaking out what it added during the quarter and what we are saying is we think it will be modestly accretive for the rest of the year.

Really it's about what it costs to transition people, technology, premises, et cetera throughout the remaining of the year.

We will update that as we move along and we have got more information about how those costs are actually coming in and being spent.

But I will tell you that the average asset yield for those assets reflects the same kind of loan mix that we have in wholesale banking in general.

And the expectation once they are fully integrated and we've finished our process is that they will carry the same type of efficiency ratio as the average wholesale lending business.

Actually, Mike, in the first quarter it was a little bit -- there's a couple moving parts here.

We actually, if you will, pre-funded the liability side, meaning that we raised debt to fund this.

And that was on the books at the start of the quarter and most of the loans only came on March 1. There's a lot of stuff going on in the first quarter.

But there's one month worth of, really, revenue, if you will.

So three months of funding, one month of revenues, so you will see the full benefit in the second quarter.

I was wondering if you could size that a little bit more?

We're talking about $30 billion-ish worth of assets and the same type of loan yields that we have on average in wholesale which gets you to a revenue number.

What we are not specifically breaking out is what the expense impact is, until we understand what the full integration expenses are.

But you'll see $300 million, $350 million per quarter of NII from the loans and leases themselves.

How much of that did you have in the first quarter, the $300 million, $350 million?

As John said, we had one month of the revenue side of it.

We had not quite three months worth of the funding costs because we weren't fully funded for those three months.

But more than one month's worth of funding cost, how about that?

Okay.

Then separately, John, did I hear you correctly?

You said benefits of falling oil prices offset the costs.

I think you said that at the start of the call.

Yes.

Since we are still a net importer of energy, what is interesting, Mike, is that much of those savings at the consumer level had been saved, if you will.

They've not yet been spent.

So not all the savings at pump.

What consumers have done -- and not exclusively -- but they're saving more of that what's happening at the pump as opposed to spending it.

Okay.

How do you see that?

In other words, when oil prices go down, the stock market declines, bank stock fell off.

And you are saying the market is wrong with that.

What are you seeing in your business that you think maybe the market has wrong in how they think about oil prices?

I have long stopped trying to figure out the market and why stocks generally seem to move in concert with commodity prices, especially oil prices.

But be that as it may, the consumer -- much of this economy, 60%, 70% is consumer-based in retail.

And the consumers have never been in better shape.

I mentioned in my comments just the debt service requirements is 15% of their earnings.

Wages are starting to go up a little bit and we are seeing savings rates go up.

These are some of the strongest savings rates we have seen in some time.

I don't know if that is a statement about confidence or whatever, but consumers are benefiting from putting -- they're filling their tank at $1-something a gallon or $2 a gallon versus $3 or $4 and not all of it has been spent.

The last question, if you can give a sneak preview of the investor conference.

What do you hope to achieve at the investor conference?

And do you think you will have a Director show up again at it?

Thank you, Mike, for reminding everybody of that.

Steve Sanger, a lead Director, showed up last time.

Obviously we invite our Directors and this will give me a chance to invite all of you.

It's on the 24th of next month; it's a Tuesday.

We have an exciting day to share with you.

We will get fairly granular about how we think about distribution, how we think about our businesses.

It will give us a chance to showcase next generation leaders in the Company.

So we are looking forward to it.

We also will think about guard rails around our three bag metrics we talk about: ROA, ROE and efficiency ratio.

We might talk about that.

It is a bunch of things.

Also, everybody talks about FIN tax and clearly there is a good reason for that.

I think our Company specifically and our industry generally have been innovators for a whole long time.

If we weren't, we would have stage coaches on the freeway right now.

(laughter) And we will talk a little bit about that.

Great, thank you.

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

Thanks very much.

There's been some recent media attention to the build-out you've been doing in some of your advisory and capital markets' capacities.

And I'm wondering how you view that now in light of, of course, the broader marketplace for those services which may be under some pressure.

And then also the fact that your exposure specifically to the energy industry within those business lines was a bit higher than peers.

Is that changing your interest in investment in those areas?

Not really.

The pattern has been the same since the merger of Wells and Wachovia, to make sure that we have got the right level of capability for capital raising and advisory activity and hedging and risk management activity for our corporate and commercial customers and other customers of Wells Fargo who need it.

We think our risks are well sized; we think our capabilities are well sized.

There's always -- as you point out -- there are things to add here and there.

But from a return point of view, from an ability to service our customers point of view, we like the trajectory we have taken.

That's why it's so easy to respond pretty quickly when people speculate that we might be thinking about adding an investment bank to our mix or something.

That's not what we need.

What we need is what we have today and more great people like it to serve more customers.

But we are not thinking much differently about it.

Our results, frankly, we think were pretty good in the first quarter.

As you say, we've been a leader in capital raising and advisory work for the energy industry for a while.

There will be plenty more need for that as the industry repairs itself and being in a position to provide that is actually good for us.

We've got industry-leading positions in a handful of other industries as well, energy is just one of them.

But like others, it is a cyclical business and while there is less capital raising going on there right now, there is more going on in other spaces and a lot of advisory work to do.

So it fits together very nicely with our wholesale bank.

Is your intent to continue to add personnel into business lines?

I think so.

As I say, some industries come and go with respect to their capital needs and advisory needs, so we want to make sure that we have got the right people in position to do the right thing.

We have become an employer of choice for lots of those activities.

Wells Fargo is a very nice place to work.

We've got a great customer franchise.

Who wouldn't want to work here in those businesses compared to some of the places that they might be coming from.

We are always adding good people.

Thanks very much.

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

Good morning.

John, it kind of got lost in the hoopla yesterday about the living will, but there was Reuters news item that says Wells Fargo has become significantly more important to the health of the global financial system in the past few years, says a report by the Office of Financial Research.

It strikes me with what came out in the resolution letters yesterday that maybe being too important to the global financial system may not be an entirely good thing.

I'm wondering if you feel at this point that your growth or lines of business, your plans for those, might be impacted by these findings?

Sure.

Nancy, we went and looked at that report after that wacky headline hit the tape.

It reported the same thing it reported a year ago, which is that we are number 17 among GSIBs, in the lowest risk category among globally systemically important banks.

There is no basis for that story.

We are a big bank, we are globally systemically important and we are used to being measured.

But we ended up toward the bottom of that list, so that was a funny conclusion that was drawn.

With respect to the feedback we got in the living will, there were some actionable things that we're going to get right on.

But there is nothing about size, about complexity, about the nature of our business model, about our capital, about our liquidity.

Really, it was much more around proper governance and maturation of the process, et cetera, which are things that are addressable.

Frankly, I don't think we are being criticized by our regulators for the types of things that work their way into the financial press.

But surely we are disappointed in the result and all hands on deck here.

We value the feedback we got from the Fed and the FDIC and we are committed to have a great submission later this year.

Nancy, one thing I'd like to share for a few minutes, even though our Company has grown significantly organically, principally organically, over the last seven or eight years, we have continued to simplify our business.

We shed businesses quietly that either didn't have scale for us or provided or had a risk-reward relationship that was not consistent.

Let me just check off a few, I was thinking while John was talking.

We are no longer in the wholesale mortgage business.

We are not in the joint venture business.

We are not in the reverse mortgage business.

We are not in the mortgage consolidation business.

We have FHA overlays, so we are not as deep in that business as we had been in the past.

We just sold our RCIS insurance business.

The direct deposit advance business is no longer here.

We are not in the government student lending business, not a lot are.

We used to have a Wells Fargo financial business that it's very different today.

So yes, we've grown in deposits.

We've grown in our corporate loans at all and wealth management and all those other kind of things that we are involved in.

But a much simpler Company, say, in many respects.

If I may ask, you've opened up the living will issue.

If I may ask if there are any of this feedback you got yesterday that you feel is related to residual issues that are left over from the Wachovia deal.

I will say, as an analyst, it was no great secret in the industry that they were not the best on the reporting side.

Are there any tasks left undone that were related to that merger that may have played into your feedback yesterday?

No, we own this and we're going to get this right.

Okay.

If I could ask a totally unrelated question, home-equity lines of credit seem to be coming back into favor, both at the banks and among consumers.

Can you speak to that business?

You have always been important in it.

Is it growing now and how do you feel about it?

Because of the starting point that Wells Fargo has had, the numbers have really only been going in one direction, which is down, down, down.

The product that we have today where we do sell it, is an amortizing product right out of the gate.

So it is very different than it was in the old days where it was more incremental leverage that, frankly, didn't come down until it might hit an amortization point in the future.

We certainly offer that amortizing product to our customers but I don't think you will see it make a difference in our reported consumer real estate assets.

Really, on our balance sheet it is more about prime jumbo and nonconforming by balance types of loans to prime borrowers.

Okay, thank you.

Your final question will come from the line of Marty Mosby with Vining Sparks.

Thanks.

John, I've done a little bit of the math when you look at the cost of the liabilities on the GE and then the delay in the assets.

It looks like from a net NII standpoint you pick up close to $200 million as you move into next quarter just from the balance sheet side.

Just trying to piece it together best I could.

Was there any timing effect on the expenses?

So as you came in and brought the operations on board, did you have a pretty full run rate on the expense side versus next quarter?

That is my real question, is there any also leverage in a sense that the expenses were already place for this quarter going into next quarter?

Right, the big expenses that's related are people expenses.

The bulk of the people joined on March 1, in the last month of the quarter.

There are some people in the rail business that joined at the beginning of the year.

Another meaningful expense will be depreciation expense on the lease assets that we are picking up and that begins when the assets are in place.

Importantly, one of the reasons that we are describing this as modestly accretive in the year, is there is a whole lot of integration expense that needs to occur, including what we are paying for transition services that we are still getting from GE that will shift over to Wells Fargo at some point in the future, or at different points in the future.

And then there is technology work to do.

There is some loan file work to do, some paperwork to do.

There's a lot of things that it takes to make all of those assets Wells Fargo assets in the regulated environment that we are operating in.

And we will pay incremental dollars in the near-term to do that.

I'd be hesitant to offer you up a run rate from March that reflects what Q2 or the rest of the year is going to look like.

Would you be, on the expense side, isolating those as integration costs so we can know, not the total, but just as integration like you would do with any other kind of merger?

And when we look at the seasonal uptick that we have in those employee-related expenses, typically you don't see a net benefit as it goes down because there's other expenses that offset that.

But would you expect in the core expenses to see somewhat of a roll-down, given how high the seasonal expenses were this first quarter?

Just two things on that side.

I expect that we'll be between 55% and 59% in our efficiency ratio for the rest of the year, on the high side of that.

That would capture the change in seasonal expenses.

It's a good point that not all that seasonal comp expense disappears and the whole net benefit doesn't come back.

We call out in our deck that there are some other things that are seasonally depressed in the first quarter that pick up in the second quarter.

Not as big but that are seasonal in that way.

We will see how material it is, but if it becomes appropriate to provide clarity on the GE transition-related expenses, we might consider calling that out.

But we haven't begun to yet because we are still developing those expenses.

We are still coming into -- we're at the early stage of execution on some of the technology-oriented things that I mentioned and some other chunky early expenses that will start to run off after a bit.

John, lastly trying to climb into your head a little bit, as you were looking at the first quarter and you had the gain from selling the crop insurance business and rates were going down and you had so much market disruption, were you thinking, since I have this gain over here, I don't really feel comfortable putting my liquidity to work because of what is going on in the market.

That gives me some breathing room to see where things fall and then start reinvesting in the second quarter, recreating the income that you gave up in the first quarter.

Investing in relatively risk-free assets doesn't produce that much P&L in the quarter that we invest.

It really wasn't much of a trade-off in the first quarter between the gain that reflects this business, that we agreed to sell a few quarters ago, that closed this quarter.

It's really that the threshold issues on reinvestment are more around our capital sensitivity because we are going to be living with the valuation consequences of buying duration at a low-yield entry point.

That really is more where the trade-off occurred.

Thinking about the whole-year impact on interest income but also our OCI sensitivity if rates ultimately back up.

Thanks.

Thank you all for joining us.

Also, I want to say thank you to our 268,000 team members for serving our customers and producing $5.5 billion of quarterly earnings.

It is just a wonderful result on their behalf.

One more shout out all of you, please join us on the 24th, Tuesday, May 24, in San Francisco for our Investor Day.

Thank you much.

Bye, bye.

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

Thank you all for joining and you may now disconnect.