富國銀行 (WFC) 2016 Q2 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 second 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 the 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 second quarter results, and answer your questions.

Please remember that this call is being recorded.

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

I would 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 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 diversified business model and continued focus on meeting our customer's financial needs drove our performance in the second quarter, our 15th consecutive quarter of generating earnings greater than $5 billion.

We produced strong performance during a period that has had included persistent low rates, market volatility and economic volatility.

And we did it by focusing on the core building blocks of long-term shareholder value creation, that is, growing relationships, loans, investments and deposits.

Our loan and investment and deposit balances are all at record levels, and we've maintained our strong risk discipline.

Let me highlight our results for the second quarter.

We generated earnings of $5.6 billion and earnings per share of $1.01.

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%.

We generated positive operating leverage, while we continued to make investments throughout our businesses.

Average loans grew over $80 billion or 9% from a year ago.

Average deposits increased $51.4 billion or 4% from a year ago, and we grew the primary -- the number of primary consumer checking customers by 4.7%.

Net charge-offs remained near historical lows at 39 basis points annualized, reflecting the benefit of our diversified loan portfolio and continued underwriting discipline.

We returned $3.2 billion to our shareholders through common stock dividends and net share repurchases in the second quarter, the fourth consecutive quarter of returning more than $3 billion.

We continued to increase stockholder's equity, which now exceeded $200 billion for the first time, and we are pleased to have received a non-objection to our 2016 Capital Plan from the Federal Reserve.

Incidentally, when the former Norwest, which where I came from, and Wells Fargo merged 18 years ago, our total assets at the time were slightly less than $200 billion.

Now our stockholder's equity exceeds that, remarkable results over that period of time.

Turning to the economic environment, Brexit has added to global economic uncertainty, and could result in rates remaining lower for even longer than expected, putting pressure on reinvestment opportunities.

However, compared to our large bank peers, it should have a much lower direct impact on our long-term business drivers because as you know, we are largely a US-centric Company, and many indicators point to continued relative strength in the US economy.

After a couple of lackluster quarters, we estimate real GDP grew at 2.5% rate in the second quarter, up from 1.1% in the first quarter.

Most of the improvement came from consumers, where drivers were broad-based.

Spending on big-ticket items was especially robust, and sentiment surveys show that consumer confidence remains strong.

Home sales continued to rise, with the second quarter on pace to set the strongest quarterly sales volume since 2007.

Price and appreciation remained steady at the 5% to 6% rate nationally, and appreciation isn't just restricted to coastal states.

Every state, and 90% of all metro areas have experienced an increase during the past year.

And job gains remained solid, with 69 consecutive monthly increase increases, the longest on record, including the strong June report released just last week.

Before I conclude, I want to highlight the announcement we made earlier this week, Carrie Tolstedt, Head of Community Banking who has been with Wells Fargo for 27 years has decided to retire at year end.

She and her team have built an extraordinary franchise, one that meets the needs of millions of customers nationwide, and has served investors very well for decades.

Mary Mack, who currently serves as President and Head of Wells Fargo Advisors will succeed Carrie effective July 31.

Mary is a 32 year veteran of financial services industry, and has a diverse [breadth] of experiences, including retail banking which will serve her well as she takes the reins of this key business.

This transition highlights our commitment to stable, long-range succession planning, and our belief that our team members are our most valuable resource.

I will now turn the call over to John Shrewsberry, our Chief Financial Officer, who will provide more details on our quarterly results.

John?

Thank you, John, and good morning, everyone.

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

Our results in the second quarter were straightforward, and demonstrated momentum across a variety of key business drivers.

Compared with the first quarter, we had strong loan and deposit growth.

We increased net interest income by growing earning assets.

Many of our customer-facing businesses generated strong fee growth.

Our efficiency ratio improved.

Credit quality remains solid, and our capital position remains strong, while we returned more capital to shareholders through common stock dividends and share repurchase.

Our net payout ratio was 62% in the second quarter.

On page 3, you can see the strong year-over-year growth John highlighted, including increases in revenue, pre-tax pre-provision profit, loans and deposits.

While our earnings were down $161 million from the year ago, our results in the second quarter last year included a $350 million reserve release, while this quarter we had $150 million reserve build, primarily due to loan growth in commercial, auto, and the credit card portfolios.

Turning to page 4, let me highlight a few balance sheet trends.

With the expectation of rates remaining lower for longer, we grew our investment securities portfolio by $18.5 billion with $38 billion of gross purchases in the second quarter, significantly higher than the $5 billion of purchases last quarter, and higher than the $26 billion of average quarterly purchases last year.

We completed these purchases before the rate decline late in the quarter driven by the Brexit vote.

We also added to duration as we've done in the past with interest rates swaps that convert a portion of our variable rate commercial loans to fixed rate, a $13 billion increase in swap notional from first quarter.

Even with these actions, we remain asset sensitive.

Long-term debt increased $16 billion, with $24 billion of issuances, including a $10.7 billion issued by the holding company which we expect to be grandfathered as TLAC eligible.

As we highlighted at Investor Day, we expect that we will need to increase our portfolio of qualifying TLAC by approximately $[50 billion] in order to be compliant, including a 100 basis point buffer which we plan to complete through measured issuance over the phase-in period of approximately five years.

However, this year we have a high level of debt maturing, so some of our eligible TLAC issuance this year will be used to offset these maturities.

Turning to the income statement overview on page 5, revenue declined $33 million from the first quarter, as growth in net interest income was offset by lower non-interest income.

I will highlight the drivers of these trends throughout the call, but let me discuss how the businesses we've sold and acquired impacted our results this quarter.

As I mentioned at Investor Day, for several years now, we've been focused on reducing non-core businesses, simplifying our organization, and improving our risk profile.

In the first-quarter, we sold our crop insurance business, and our results include a $381 million gain from that sale.

While the impact to our ongoing earnings from selling this business is negligible, the sale did reduce insurance revenue and related insurance expense this quarter.

In the second quarter, we sold our health benefit services business for a $290 million gain.

The go-forward effects from the sale of this business is not material to our financial results.

Our results this quarter also reflected the acquisition of the GE Capital businesses that we completed in the first quarter, including the full quarter impact of the $26.7 billion of commercial and industrial loans and leases that closed on March 1. As we stated at Investor Day, the quarterly benefit to net interest income from the GE Capital acquisition was approximately $300 million.

Lease income also increased this quarter from the operating leases acquired, along with corresponding higher operating lease expense.

The acquisition of the Asia segment of GE Capital's Commercial Distribution Finance business was completed on July 1, and the remaining international assets of approximately $2 billion are expected to close later this year.

We're pleased with the overall integration of the GE Capital businesses, and we still expect the GE Capital acquisition to be modestly accretive to our results this year.

As shown on page 6, we had continued strong loan growth in the second quarter, up 8% from a year ago, and 1% from the first quarter.

Period end commercial loan balances grew $6.3 billion from first quarter.

Remember, the GE Capital acquisition only impacted average loan growth this quarter.

Consumer loans increased $3.6 billion linked-quarter, as growth in first mortgage loans, auto, credit card, and securities-based lending was partially offset by declines in junior lien mortgages, and seasonally lower student lending.

Our total average loan yield was stable at 4.16%, as the full quarter benefit from the GE Capital acquisition was offset by lower consumer yields.

On page 7, we highlight our broad-based year-over-year loan growth.

C&I loans were up $39 billion or 14%, driven by the GE Capital acquisitions and broad-based organic growth.

Commercial real estate loans grew $10.7 billion or 8%, primarily in our real estate mortgage portfolio.

Real estate 1-4 family first mortgage loans grew $9.3 billion or 3%, with strong growth in high-quality nonconforming mortgage loans.

As a reminder, we sell our conforming mortgage loan originations to the agencies.

This portfolio also reflected the continued run-off of the Pick-a-Pay portfolio.

Auto loans were up $4.1 billion or 7%, with origination volume up 2%, while we maintained our underwriting and pricing discipline.

Credit card balances were up $3 billion or 10%, reflecting new account openings and increases in active accounts.

Other revolving credit and installment loans were up $2.1 billion or 6%, with growth in securities-based lending, personal lines and loans, and student loans.

As highlighted on page 8, we had $1.2 trillion of average deposits in the second quarter, up $51.4 billion or 4% from a year ago.

Consumer and small business banking deposits increased 8% from a year ago, and primary consumer checking customers grew 4.7% from a year ago.

Our average deposit cost was 11 basis points, up 1 basis point from first quarter, and 3 basis points from a year ago, reflecting an increase in deposit pricing for certain wholesale banking customers.

Page 9 highlights our revenue diversification.

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

While the drivers of non-interest income have varied, fee income was also 47% of revenue a year ago, and last quarter.

Market sensitive revenue, which includes trading and gains on debt and equity securities, can vary based on market conditions during the quarter.

Our market sensitive results in the second quarter, which included strong gains from trading and debt security gains, was partially offset by lower equity gains.

The sum were only $85 million higher than the five quarter average.

We grew net interest income $66 million from first quarter, primarily driven by loan growth including the full quarter benefit of the assets acquired from GE Capital.

The benefit from loan growth was partially offset by reduced income in our investment securities portfolio, reflecting accelerated pre-payments primarily on our mortgage-backed securities.

We also had higher interest expense from the long-term debt issuances that I highlighted earlier on the call, and lower interest income from trading assets.

The net interest margin declined 4 basis points from the first quarter, primarily due to growth in long-term debt and deposits, and reduced income from investment securities.

All other balance sheet growth, mix changes and repricing was beneficial to the NIM.

We grew net interest income in the second quarter by 4% from a year ago, even with an 11 basis point reduction in NIM, and we continue to believe that we can grow net interest income on a full-year basis in 2016, compared with 2015 in the current rate environment.

While total non-interest income decreased $99 million from the first quarter, we had growth in many areas that reflect our focus on our key business drivers, including increases in service charges on deposit accounts, brokerage fees, trust and investment management, investment banking, card fees, gains on mortgage loan originations, trading gains on higher customer accommodation activity, and lease income reflecting the full quarter benefit from the GE Capital acquisition.

Total mortgage banking revenue which includes both the gain on sale from originations and servicing income declined $184 million from the first quarter.

Production revenue increased $306 million or 41% reflecting higher originations.

Origination volume was $63 billion, up 43% from the first quarter due to the seasonally stronger purchase market, and increased refinancing due to lower rates.

Applications were up 23% from the first quarter, and we ended the quarter with a $47 billion application pipeline, up 21% from first quarter, and up 24% from a year ago.

Since Brexit and the related decrease in mortgage rates, we've seen refinance activity increase with our retail application volumes up approximately 15% to 20% in recent weeks, and we currently expect origination volume to be somewhat higher in the third quarter compared with the second quarter.

Our production margin on residential held-for-sale mortgage originations was 166 basis points in the second quarter, down 2 basis points from the first quarter.

Releases of our mortgage loan repurchase liability increased $69 million from first quarter, which also contributed to higher production revenue.

Servicing income declined $490 million from first quarter, primarily driven by changes in MSR valuation adjustments which were positive last quarter, and slightly negative in the second quarter.

These MSR valuation adjustments are outside the scope of our hedging and vary over time, as MSR valuation assumptions are updated.

Overall, we're pleased with our hedge results in the second quarter, given the increased rate volatility late in the quarter.

Servicing income also declined from higher quarterly unreimbursed servicing costs, primarily related to FHA loans.

Other income declined $392 million from first quarter.

The reduction was driven by a decline in hedge ineffectiveness income, from $379 million in first quarter to $56 million in the second quarter.

The decline also reflected the gain from the sale of the crop insurance business recognized last quarter, and the gain on the sale of our health benefit services business in the second quarter, with the net impact from these sales of $91 million lower other income compared with the first quarter.

As shown on page 12, expenses declined $162 million from first quarter driven by lower personnel expenses which are typically higher in the first quarter due to higher payroll taxes and 401(k) matching, as well as annual equity awards to retirement eligible team members.

Expenses also declined from lower operating losses, down $120 million from the first quarter on lower litigation expense.

Insurance expenses declined $89 million, reflecting the sale of the crop insurance business in the first quarter.

Partially offsetting these declines was an increase in $186 million from outside professional services, after typically lower expenses in the first quarter.

Operating lease depreciation expense was up $117 million from first quarter, reflecting the full quarter impact of the leases acquired from GE Capital.

As a reminder, beginning in the third quarter, we estimate that our total FDIC assessment will increase by approximately $100 million per quarter, reflecting the temporary FDIC surcharge which became effective July 1.

Our efficiency ratio was 58.1% in the second quarter, and we currently expect to operate at the higher end of our targeted efficiency ratio range of 55% to 59% for the full year of 2016.

While we're already operating at one of the best efficiency ratios in the industry, we remain focused on managing expenses while actively reinvesting in the franchise for future growth.

While total expenses have increased, we've reduced expenses in many categories, even as we've grown the balance sheet by acquiring businesses and adding new customers.

The increase in expenses has primarily been related to risk, compliance, and technology spending, reflected in higher personnel expense, outside professional services, and contract services.

We've also continue to invest in innovation to better serve our customers.

Let me give you just a few examples.

During the second quarter, we launched the FastFlex small business loan, an online fast decision loan that is funded as soon as the next business day.

This was an innovation we built in-house.

In addition, we launched yourFirstMortgage, a new home loan program to help more qualified first-time homebuyers and low- to moderate-income consumers become homeowners.

Early reaction to this program has been positive, with over $1 billion of applications in the first 30 days.

In wholesale banking, we introduced biometric authentication by piloting eyeprint image capture technology in our commercial electronic office mobile channel.

This slide highlights just a few examples that we have recently announced.

We're working on additional products and services within our innovation group that are scheduled to be released over the coming quarters, that we believe will add tangible, long-term value for our customers and shareholders.

Turning to our business segments, starting on page 14, community banking earned $3.2 billion in the second quarter, down 1% from a year ago, and 4% from the first quarter.

We remained focused on providing outstanding customer service, and achieved record store customer loyalty scores during the second quarter, and the highest year-to-date retail banking household retention in four years.

We continually work to enhance customer satisfaction and transparency, and ensure customers are receiving the right products to meet their financial needs, because the key to our success is long-lasting customer relationships built on trust.

For example, an hour after opening a new deposit account, our customers are sent a customized welcome email, including a summary of accounts, and ways to get the full value from their accounts.

We're also focused on using innovation to enhance our customer experience.

Mobile banking is our most frequently used channel, and we have 18 million mobile active users.

Beginning August 1, our mobile customers will be able to make real-time person-to-person payments.

P2P payments are not new to Wells Fargo, as our customers conducted over $10 billion in P2P volume through our SurePay service in 2015.

We are the number one debit card issuer by transaction volume which increased 9% from a year ago, while dollar volume was $76.4 billion, up 8% from a year ago.

Credit card purchase volume was $19.4 billion, up 10% from a year ago, benefiting from 8% active account growth.

Credit card penetration of retail banking households increased to 45.6%, up from 44.6% a year ago.

Wholesale banking earned $2.1 billion in the second quarter, down 5% from a year ago, and up 8% from the first quarter.

The decline from a year ago was driven by higher provision expense related to the oil and gas portfolio.

However, charge-offs for wholesale banking are still historically low with only 27 basis points of net charge-offs annualized in the second quarter.

Revenue grew 10% from a year ago and 5% linked-quarter, as net interest income and non-interest income both increased on a year-over-year and linked-quarter basis.

Loan growth remained strong, driven by acquisitions and broad-based organic growth, with average loans up $65.2 billion or 17% from a year ago, the seventh consecutive quarter of double-digit year-over-year growth.

Spreads on new originations were slightly better than the existing portfolio.

Average deposit balances declined $6.6 billion from a year ago, driven by lower international deposits from market volatility, and our pricing discipline in the competitive rate environment.

Wealth and investment management earned $584 million in the second quarter, stable from a year ago, and up 14% from the first quarter.

Our diversified revenue streams provided stability during a period of market volatility.

Second-quarter revenue of $3.9 billion was up 2% linked-quarter, and down 1% year-over-year.

Our continued emphasis on meeting our client's financial needs through planned-based relationships resulted in record high WIM client assets of $1.7 trillion, up 2% from a year ago, with growth resulting from both existing client relationships as well as new client acquisition.

Net interest income was up 12% year-over-year, driven by continued strong balance sheet growth.

Average deposits were up 9% from a year ago, and loans were up 12%, the 12th consecutive quarter of double-digit year-over-year loan growth.

Loan growth was broad-based, with strong client demand across a number of product offerings.

We are very excited to welcome Kristi Mitchem, who became the Head of Wells Fargo asset management on June 1. She has a strong industry experience, and will lead this business into the next phase of strategic expansion and growth.

Turning to page 17, credit results continued to benefit from our diversified portfolio, with only 39 basis points of annualized net charge-offs.

Net charge-offs increased $38 million from the first quarter, including an increase of $59 million from our oil and gas portfolio, which was partially offset by $46 million of lower consumer real estate losses.

Nonperforming assets decreased to $433 million from the first quarter, as lower residential and commercial real estate nonaccruals and foreclosed assets were partially offset by higher oil and gas nonaccruals.

As I mentioned earlier, we had a $150 million reserve build during the quarter, primarily related to loan growth in the commercial, auto and credit card portfolios.

Slide 18 highlights our oil and gas portfolio.

While oil prices have risen from where they were a year ago, there continues to be pressure in the oil and gas sector.

We had $263 million of net charge-offs in this portfolio in the second quarter, up $59 million from the first quarter, with approximately 94% of losses from the E&P and services sectors.

Nonaccrual loans were $2.6 billion, up $651 million from the first quarter on weaker financial performance, the run-off of borrower hedges, and less sponsor support.

Approximately 90% of nonaccruals were current on interest and principal.

Most of the losses we've taken were from nonaccruals that were current, but we recorded losses based on our judgment of not being repaid in full.

Our oil and gas loans outstanding declined 4% from the first quarter, and were down 2% from a year ago.

Oil and gas loans of $17.1 billion are less than 2% total loans outstanding.

Our oil and gas loan exposure which includes unfunded commitments and loans outstanding was also down 4% from first quarter, and down 10% from a year ago, primarily driven by borrowing base reductions.

We had no defensive draws in the second quarter.

And as in every challenging cycle, we're also seeing opportunities, and we originated new loans during the second quarter to well-qualified borrowers.

Criticized loans which include nonaccrual loans were down $1.7 billion or 17% from first quarter, reflecting paydowns, borrowing base upgrades, and net charge-offs.

And for the first time in the past six quarters, we did not have a reserve build for our oil and gas portfolio, and reserve coverage was stable at 9.2% of total oil and gas loans outstanding.

Our reserves declined from $1.7 billion to $1.6 billion, reflecting the increase in energy prices, the slower pace of deterioration in credit quality, improved criticized asset levels, and the smaller loan portfolio.

Overall, the performance of our oil and gas portfolio in the second quarter was consistent with our expectations, and our experience of managing through many cycles will continue to benefit us, and our customers as we move through the remainder of the cycle.

Turning to page 19, our capital levels remained strong, with our estimated Common Equity Tier 1 ratio fully phased-in at 10.6% in the second quarter, well above the regulatory minimum in buffers and our internal buffer.

We reduced our common shares outstanding by 27.4 million shares through share repurchases of 44.8 million.

We also increased our common stock dividend in the second quarter to $0.38 per share.

Our net payout ratio was 62%, within our targeted range of 55% to 75%.

In summary, our second quarter results demonstrated the benefit of our diversified business model.

We had solid returns with a 1.2% ROA, 11.7% ROE, and our return on tangible common equity was 14.15%.

We've continue to benefit from executing on our vision, with success in growing customers, loans, and deposits.

The headwinds from a flatter yield curve and a lower for longer rate environment creates challenges for all financial institutions.

But we'll continue to focus on what we can control, earning lifelong relationships with our customers which drive our long-term growth opportunities.

John and I will now answer your questions.

(Operator Instructions)

Erika Najarian, Bank of America.

Hi, good morning.

Good morning.

Just taking a step back, John, I think you said in your prepared remarks that investors own this Company, given your ability to grow earnings, regardless of what's happening in the markets.

If this flatter yield curve persists, and we don't have -- we don't see rate hikes from the Fed, I'm wondering what you think are your stronger, strongest levers for supporting EPS growth from here?

Is it continued balance sheet growth?

Is it even more disciplined expense management?

Is it growth in fees, in businesses where you don't have scale yet?

Just trying to figure out, Wells Fargo always has a reputation for pulling on levers to support EPS growth, and I'm wondering as we look out within the next 12 months what you think the most impactful ones are?

Well, I think it's all of the above, Erika.

You mentioned in broad terms, the likeliest sources.

If rates are going to remain lower, we will work hard at earning asset growth, and the first call on our capital and liquidity is to serve customers.

So we will be looking for loan growth, and we've had great success in our organic loan growth in commercial categories, as well as in consumer categories.

So that would be job one.

I think we're seeing nice momentum across a variety of the fee streams that we have.

I mentioned some of them in my remarks.

But there are many, and we've -- some of them are businesses where we already have complete scale, and some of them are businesses that we're, where we're under indexed, and continuing to grow.

So maybe the long-term opportunity is even bigger.

I think we're working hard at expense discipline in this environment to accomplish all that we're trying to accomplish in compliance and risk management.

But innovate at the same time, and stay within our range, which we've managed to do.

And we're, as I also called out, we are comping over periods where we had been releasing excess allowance.

And now because our loan portfolio is growing, we're building some allowance.

So we're muscling through that headwind.

But we're accomplishing our goals.

Let me just drill down little bit on the expense side, Erika.

We operate within our 55% to 59% range on efficiency ratio, which is -- you know that's either at, or close to or at the top of our industry, surely for our large bank peers.

We've spent a lot of money in the last couple of years around things like compliance and risk management and so forth.

And as you build those, you spend more money.

Once you get into a rhythm, there's an opportunity to get more eloquent, start to take some of those front end costs out, and build it in as part of your process.

John also mentioned that we continue to look to simplify our business, to get more standard.

And frankly, a lot of the investments we're making on customer service and customer convenience has a front end cost component, but a back end benefit.

So those things are all on the table.

We continue to look at those.

And in a lower for longer environment, pennies and nickels and dimes matter.

Got it.

And as we think about balance sheet mix management near-term, I'm wondering if, what I guess, it would take to maybe extend, even more aggressively extend duration, and protect the margin near-term?

Or you're not going to manage your assets and liabilities based on how the market is thinking about the curve near-term?

Yes.

So it's a good question.

And the things that we're balancing are -- and readjusting constantly are our expectation for what rates are going to do next, and whether today is a better or worse entry point, than waiting a quarter or waiting longer.

We're balancing the capital sensitivity of what happens when you meaningfully add duration, at what might be a cyclically low point in rates.

Which we're saying, we think it's going to be lower for longer, but we have to sensitize ourselves to what happens if we get much more invested here and rates move up, and that destroys capital.

So that's a limiter in some sense.

And then, we've got our liquidity constraints of how we might deploy, what we might use, and what it means in terms of available liquidity.

So there's a delicate balance of going on, all the time.

But I would say that we are relatively convinced -- that we may not be this low forever.

But we're, like we said a year ago, our expectation is lower for longer out the curve.

And we're going to keep putting money to work.

Got it.

Thank you.

Mike Mayo, CLSA

Hi.

Hey, Mike.

This is going to be a very short-term specific question, but it will save us [work] later today.

So you had a $290 million gain on the sale of the health benefit services and that added, I guess, about $0.04.

So if we strip out that $0.04 from your $1.01, it would mean you fell short of consensus.

Are there any other items and expenses, or anywhere else that might have mitigated that gain?

In other words, when you look at the results, do you think they met consensus?

And if so, what offset that $0.04 gain?

Yes, I don't create a detailed reconciliation back to the consensus versus our numbers.

We're looking at the total outputs, every quarter.

We've got a laundry list of things that might be seasonal, that might be episodic.

There could be gains from securities portfolio.

We've been selling a handful of non-core businesses, and some of them have given rise to gains.

So there isn't that type of a reconciliation.

I would look at those categories of revenue that come through, and look at the multi-quarter, the five quarter average, and think about how far above or below, we are at any quarter, versus that longer-term average.

And model it or manage it that way.

Could you give us some of your laundry list?

Some of our laundry list?

Yes, like what would you -- (multiple speakers) --

But my laundry list is what you guys feed back, which are market sensitive items that you often call out as unreliably different from quarter-to-quarter.

Some of the mortgage activity, which can be a little bit more episodic, mortgage hedging activity, this is what some analysts refer to as things that they've had a hard time modeling.

I mentioned gains on the sale of debt or equity securities.

There's seasonal impacts on things like investment banking fees that happen at certain times.

All of those things ebb and flow.

And I would look at the longer-term, either calendar adjusted or multi-quarter averages, and think about it that way.

All right.

And then, just one more follow up then.

Just when you look at mortgage revenues this quarter, were they where you thought they'd be, and what do you expect going ahead?

You said the mortgage pipeline is up quite a bit.

I'd say on the origination side, they were where we expected them to be.

And as you heard, the pipeline is full.

I think margins are in a good place, and we anticipate having a good third quarter on the origination side.

Our mortgage hedging results in the second quarter, and the net economic impact of mortgage servicing was lower than, for example, the five quarter average.

It was higher in the quarter before, so the difference is even more stark.

But I think we're -- we think it is a great time to be the leader in the mortgage business right now, because homes are selling, and also because people are refinancing.

All right.

Thank you.

So we are expecting good things.

Bill Carcache, Normura.

Thank you.

Good morning.

We've seen loan growth outpacing deposit growth for several quarters, at both Wells Fargo and the industry in general.

And a post LCR world, where HQLA levels are a factor, how high do think we can expect loan to deposit ratios to rise?

And with loan growth continuing at a healthy clip, can you envision a scenario where competition for deposits begins to heat up among banks, and basically causes them to start raising rates, possibly even before the Fed, as competition for deposits intensifies?

Can you speak to that?

Well, I suppose we could.

I think we're probably in the higher end of the range of loan to deposit ratios ourselves, in the high [70%s] I guess, at this point.

And, of course, there are a lot of other sources of liquidity that are coming in as a result -- at least for G-SIBs as a result of TLAC, et cetera, and some reliable sources of non-deposit wholesale funding that are part of a healthy liability management mix.

So funding never really seems to be the problem.

We've imagined, frankly, since LCR was first proposed that people would be competing for deposits, especially smaller firms who have less of a value proposition for customers, and they really have to pay for deposits in order to attract them.

And it really hasn't seemed to come to pass.

I don't know whether aggregate credit creation is outstripping aggregate deposit generation by so much, that it's going to cause firms at the margin to raise prices, compete for deposits, and drive up the cost for the rest of us.

It could happen.

We haven't seen it.

What we're seeing among assets is a lot more things changing hands.

So a big part of our loan growth are loans coming out of GE, and coming onto our books, and loans coming off of other people's books and onto our books, as opposed to the aggregates being impacted in the way that you described so.

Bill, I credit, John, in fact -- I don't know this, but my guess is aggregate credit generation in the private sector -- forget public debt for a second here -- but I doubt that that's growing faster than deposits.

I look at the last seven, eight years here, since our merger with Wachovia.

The time of the merger, we had something less than $800 billion of deposits.

Now we're over $1.2 trillion.

So we've grow in deposits, even after the run-off of those high-priced CDs by $400 billion or $500 billion.

We're up maybe $100 billion on loans during that period of time, so deposits have far outstripped loans.

In fact, if you believer lower for longer, there's going to be a hunger for earning assets.

And while a quarter or two might look different, recently, if we look at in our last year, the growth of $51 billion order of deposits, versus $80 billion of loans -- if you strip out some of the loans that we purchased, if you look at an organic basis, we're still growing deposits faster.

So it's -- I would -- I doubt -- I don't see pressure from that perspective.

That's great color.

Thank you.

If I could ask a follow-up on the consumer credit side of your business.

How do you think about the appropriate level of reserve coverage in auto and card?

And do you think the current environment is supportive of a path where charge-offs and reserves in those businesses can grow in line with loans, such that the consumer credit provision is not a headwind to your earnings growth?

It's a good question, and it will be different for every bank depending on what type of consumer credit they have on their books.

As we mentioned, we added a little bit to our allowance this quarter.

And in part it was from consumer credit, but that's based on the growth in the portfolio, not because of any meaningful change in underlying behavior.

My sense is, that if those loans are priced properly for their risk, and given the way that we provide for them as those portfolios grow, that it shouldn't become too much of a headwind.

Now we said earlier that we are happy to provide more reserve, more allowance, when we're growing our loan portfolio.

That's because it was going to happen, as we came out of a period of releases, and are moving into a period of net provisioning and growth.

But it's going to feel different for everybody, based on the quality of the loans that they put on their books, based on the pricing related to the quality of the loans that they put on their books.

So it's hard to generalize, and I think we feel pretty good about it.

Understood.

That is very helpful.

Thank you for taken my questions.

John McDonald, Sanford Bernstein.

Yes, hi.

Good morning.

John, just a follow-up on the credit there.

The charge-off rate was pretty stable quarter-to-quarter.

Just wondering underneath that, are there any areas of credit portfolios where losses are still improving, and some that are starting to normalize?

And do you have any short-term outlook on credit staying stable, benign?

Well, if you set aside oil and gas for a moment from our aggregate results, I think our net charge-offs were something like 28 basis points on the portfolio overall.

Just for analytical purposes, that's an interesting number.

That would suggest that they've continued to improve, and obviously 39 basis points when considering oil and gas.

I think it's a reasonable expectation that consumer credit performance normalizes somewhat.

So that we've had the best of times, it probably gets a little bit more average, all things being equal.

As Bill asked, I don't know that that makes it a real headwind.

I think that means the expected case is probably a little bit lower ROA than the existing case for most people who've been benefiting from the best of times in credit.

But not so meaningfully, that it causes us to want to curtail growth, based on the way we approach the market.

Where as I mentioned, we are happy with our auto growth.

We've maintained our pricing and our risk discipline.

And John, the 28 basis points John just mentioned to you -- there's a lot of John's here.

But for this quarter, ex oil and gas, is equal to what it was a year ago.

So it's -- so there's some movement within those categories, but as you know housing is getting better everywhere, and that hugely benefits us.

So while there might be some more normalization in one part of the consumer, it might be offset by another part of the consumer.

Yes.

A couple of call outs are on the consumer real estate side of things.

In second mortgages, I think we are down below 50 basis points of charge-offs, which for home equity loans is -- you can't get much better than that.

(multiple speakers).

And on 1-4 family first mortgage loans, I think we are in the 2 basis point charge-off range right now, which is something to celebrate when it's happening, but it doesn't feel like a permanent state of affairs.

Okay.

And then, a quick follow-up on net interest income.

Assuming the rate environment doesn't change much, can you talk a little bit about the puts and takes for growing net interest income, maybe size up the degree of difficulty of growing that going forward?

And then, just on the liquidity, cash on the balance sheet.

When we look at that fed funds sold, like roughly $300 billion, is there any way for us to get a sense of how much of that might be re-deployable, versus how much is needed to meet the requirements of LCR and other regulatory needs to hold liquidity?

Yes.

So there's not much limitation on the redeployment of that into HQLA, while still satisfying the liquidity coverage ratio.

So it really gets back to the, when is the right time, and how much at that time?

If you're, just for example, buying treasuries because of the capital implications that it creates, by putting more AFS securities on the books.

You're that much more exposed to a back-up.

So there is a trade-off there.

For non-HQLA, the limitations are different, because you're losing the benefit of that liquidity, and we continued to mention the ability to move out of cash or HQLA and into risk assets.

All things being equal based on a snapshot as tens of billions of dollars of activity.

You saw what we did last year when we -- or earlier this year, as we were sizing up taking the GE assets out of the book -- our books.

We actually went out and did a little bit of incremental funding in the marketplace to have that liquidity set aside.

And now, we're allowing that to run off.

It was relatively short-term.

But it makes sense for us to have ready access to something, some -- call it $200 billion worth of instant liquidity at any point of time, that's given our size, given our risk profile and giving our stress cases.

Is that helpful?

Yes.

Thanks, John.

Just the broader comment about just kind of degree of difficulty growing NII overall in this environment?

Yes, thanks.

Well, it is harder to grow net interest income in a lower rate environment than otherwise, which is obvious.

The short end of the curve is one thing, but this move down in seven years and out, is just as hard and just as meaningful because of the redeployment.

So it's still our plan and our goal.

And what we're telling you is that we intend to grow net interest income, even if there are no rate moves.

And we're doing it by adding by redeploying cash into HQLA and other earning assets, by looking everywhere for customers, where we can make quality loans.

And those are the big items.

So it's our plan.

It's our effort.

It's what we are all working toward but it's harder.

And John, the biggest influence that Brexit had on our Company was not on, frankly, a direct impact on the way we do business or customers or anything like that, it really was the big move down in long-term rates.

One other thing to say is, it's a great time to be a borrower.

It's a great time to be one of our customers.

The mortgage business is one obvious place to look for the origination fee generation or gain generation, but across the board I would expect more, everything is more affordable on a financed basis.

So it helps.

Thanks.

Kevin Barker, Piper Jaffray.

Thank you.

In regards to your servicing results within the mortgage bank, were there any changes in the way you hedged that asset this quarter?

Or was there something specific around the rate curve, and the movement in the yield curve in the second quarter versus the first-quarter that would have caused the hedging gains to be less than expected?

Yes, it's a good question.

There wasn't really any change to the hedging approach, and our hedging results just strictly speaking, accomplished what they were intended to.

There were a handful of items that went, call it in our favor in the first quarter, that were negatives in the second-quarter.

And some of them of are input -- are just model inputs, in terms of how the MSR valuation calculation works.

Some of it obviously, was just lower servicing fees.

That's not a hedging outcome, but it contributed to the net servicing benefits, things have speeded up.

Of course, we're getting more servicing calls away from us.

Even as we originate at this pace, there's more servicing getting called away from us, as others are originate rapidly as well.

So I would expect that to normalize, and I would think about that also as something more along the lines of a multi-quarter average.

One other item I would point out is that the unreimbursed servicing costs was a net drag, an incremental net drag this quarter this as well.

And that's mostly around FHA activity.

In regards to that the FHA activity, what is the headwind that you're seeing from unreimbursed insurance claims this quarter, or how would you look at the run rate from that, in that line item?

Well, I think we're talking about a couple hundred million dollars of unreimbursed direct costs in the second quarter, and the run rate is probably half of that, looking back over the last several quarters.

Okay.

And then, in regards to the introduction of yourFirstMortgage, have you seen an incremental increase in your overall mortgage originations from the introduction of that product?

Or would you expect that to accelerate on a go forward basis?

Well, so there's an increase all things being equal on the agency side of things, but many of those borrowers might have been FHA eligible borrowers prior to the introduction of that program.

So in some sense, we're shifting origination from one program to another.

It's a -- we think it's a very high-quality program.

It's -- the way we've described it and constructed it, it's never worse for customer, it's often better for a customer because it's got a, it's different approach to MI.

It's more borrower-friendly.

So there should be more availability for it, and it should help grow our originations over time.

And as we've mentioned, it's particularly valuable to us because it gives access to mortgage credit to low and middle income borrowers, and first-time home buyers who are people that we're really trying to serve.

Thank you very much.

Paul Miller, FBR.

Yes, on the follow-up to Kevin's questions on yourFirstMortgage, is this very similar to an FHA product, but outside the FHA arena to a Fannie and Freddie product, i.e., is it low FICO, low down payment type loans?

Well, it's lower down payment.

Actually, the first part of your question is, this is an agency program.

This is a Wells Fargo and Fannie program.

It is geared to serve the first-time homebuyer, and the low and middle income homebuyer.

So there is some overlap with people that the FHA might be serving as I mentioned.

And it is built around a lower initial down payment to make it easier for those people to access credit.

I wouldn't describe it as a predominantly lower FICO, lower credit quality.

But more of a structure for people who have a lower down payment available.

Yes.

And Paul, it really looks at those first-time homebuyers especially.

So it really looks to serve that market, who many times have a lower down payment available.

And this product will be sold, I mean, either sold, is it sold or wrapped by a Fannie Mae guarantees?

It's agency mortgage productions.

So it doesn't look any different on our books.

It goes right into agency securities.

So there's no different risk profile on our books.

And frankly, one of the reasons that the program makes so much sense for us, is because we have such a commercial relationship with Fannie, in terms of knowing what our risks are, what their risks are, and when those risks pass, and it's very helpful.

Okay.

I don't know if you disclose this or not, but do you know what your recapture rate is on your refis right now on your book?

You have one of the biggest books out there on the MSR.

Are you able to recapture a lot of those refis?

So we do capture a lot of our refis.

I don't think we disclose the capture rate.

We probably do disclose our market share, both in originations and in servicing.

I don't have them at my fingertips, but we'll come back to you with the most recent specifics.

And that relationship will help you, I mean, there's obviously other things going on there because a lot of a mortgage origination is not refi activity.

But that might be helpful.

Hey, guys, thank you very much.

But Paul, just one quick thing.

We are recapturing less today as John mentioned, because some of products we're no longer in.

So some of that refinance, is refinancing away from us, where we would have captured more in the past.

Some of the higher risk categories.

Yes.

Okay.

Guys, thank you very much.

You're welcome.

Matt O'Connor, Deutsche Bank.

Good morning.

Hey, Matt.

To follow up on expenses, a lot of talk earlier about the investment spend, the risks, the compliance, obviously growth areas, and then, eventually getting the payback on that.

As we think about just the pace of investment spend, and that relationship of getting it back on the other side, what inning are we in, in terms of still ramping on the investment and still waiting on the payoff?

Well, I'd say we're in the middle innings of the investment.

We'll be doing it for a few years, and we've been doing it for a few more years I'm sure, and we'll always be innovating.

But in some cases, we're getting the payback.

You saw at Investor Day, the moves that we made toward more of a paperless store.

And we talked about the specifics in terms of what the benefit is of taking paper, labor, storage, transportation out of stores.

That's happened, that's in our run rate.

A lot of the digital and mobile migration that we have of customer activity, is taking personal interactions out of those types of transactions.

It's taking paper out for sure, and those benefits feed right into the run rate as they happen.

John was mentioning the initial investment and build to create some of these new programs, in compliance and risk management for example.

And the fact, that once they're highly effective and repeatable, then there's an opportunity to automate, streamline, to learn from how we got there, and to make them more efficient.

I'd say those opportunities are -- we're always learning, but they're probably a little bit more in the future.

And then, who knows where we'll be going with the increase in mobility, et cetera.

My sense is we're just going to keep benefiting.

Customers benefit on the one hand, but from an expense perspective, we'll be benefiting as well.

I'd point out the P2P activity as another place where we're taking checks out, taking cash handling out, increasing customer service, but doing it at a lower cost to serve.

So there's a lot of that.

Are you still at the point where you're increasing overall investment spend, or are you able to remix some of it, so that it's still at a high level, but not necessarily going up?

I think it's still going up a little bit.

We've been doing that, while taking expense out of our standard run rate, in order to accommodate it, while staying within our 55% to 59%.

So and as the nature of MobileFirst and technological solutions first occurs, we're always going to be spending at a high level.

We'll just keep, at least for innovative types of activities, and we'll keep doing what we're doing, and taking expense out of our business as usual.

And then, just separately, you mentioned in a press release about the higher amortization on the mortgage bond book, which makes sense given the sharp drop in the rate.

But do you have the figures, in terms of how much it was this quarter versus last?

And remind us how your strategy or approach there, is there like a mark to marketing, or is there a smoothing effect?

One of your peers has what feels like a mark-to-market impact, so they take their hit upfront.

Some other peers smooth out a little bit more.

Remind us how your approach is?

What I would point out is that we're amortizing premiums on mortgage securities in particular, that are highly prepayment sensitive.

And in this quarter, the net interest margin or net interest dollars, negative impact of getting premium book value bonds called away at par was -- I think the number is $100 million -- I'm confirming, its $100 million.

So that's one way of thinking about it.

So we put a mortgage security on at a premium.

We amortize that premium over an expected life and an expected CPR, things come in faster, and we have to write off the remaining premium when it happens.

This quarter, that impact was $100 million.

And do you have that for last quarter?

I don't think I do handy, but it wasn't $100 million.

So less.

Got it.

Okay.

Thank you very much.

Brian Foran, Autonomous.

Well, hi.

How are you?

Maybe just two quick ones on credit.

First, in auto lending, you mentioned the [Manheim] is up a little bit, but severities are up a little bit as well.

What's driving that.

I know it's not (inaudible), but what's driving that disconnect?

Manheim is up a little bit, and was up in each of the last few months.

And I think as we've said, we have an expectation that that can't go on forever.

And that's part of why we would say that we expect future losses to be a little bit more normal in that business, than what's been happening.

The - any change in severity is really just a change in the mix, the repo activity, the circumstances of what's been coming.

I don't think there's a systematic reason for it.

I would just add that, it's been a really strong new car sales the last couple years.

Some of those go out in lease programs, and they come off lease.

So our guess, is that there will be more late model, used cars on the market, put pressure on Manheim, on the other hand which could cause some normalization in losses.

On the other hand, that's really where we play, and where we have a lot of market expertise.

So it's a bit of an offset.

Thank you.

And then, on commercial real estate.

I mean, I guess, as I think about both your commentary and data, as well as like what the OCC is saying, et cetera.

There's just kind of general concern around underwriting standards, but at the same time, the current data around loan growth is pretty good.

And on charge-offs, kind of bouncing between zero and net recovery.

So it's about as good as it can get.

How are you thinking about the commercial real estate cycle now?

Is it just pockets of concern, or is there a concern that there's maybe a more broad-based turn on the horizon, or how you are thinking about the concerns around underwriting standards, versus the very good numbers today?

Yes.

So I would say that our underwriting approached commercial real estate tends to be at the conservative end of the spectrum, and we have reputation often for better, sometimes to the chagrin of customers for approaching it that way, which helps us well through cycles as you're alluding to.

This is a very cyclical business.

It is regional and local.

It is property type by property type.

There are some areas and some property types where values have been elevated, because people have been willing to accept really, really low returns on their invested capital, and that creates one sort of outcome.

And then, there are others, where there's just a lot of supply that's coming on, has come on, has to be absorbed.

That creates a different dynamic.

We're seeing that -- we have seen that in some multifamily or luxury single-family from market to market.

And in that market, those dynamics have to play out, where that gets absorb at some clearing price.

We're taking the same approach that we've always have.

We are sort of relatively low loan-to-value lender.

We look very hard at in-place cash flow.

We have a lot of incremental borrower guarantees and supplemental protections in our bigger commercial real estate types of financings, and that's -- it's always been true.

So I'm sure when the cycle turns, there will be either property types or geographies where -- that do better or worse.

But we're not taking a big change.

We're not seeing a big sea change.

Our originations have actually have been slower, certainly were slower before we bought the seasoned GE portfolio.

The organic activity, because of the competitive environment and because of the market circumstances cause us to slow down there somewhat.

Thank you very much.

Ken Usdin, Jefferies.

Thanks, good morning.

A question on the investment portfolio, John, you had mentioned that you added a lot of securities this quarter before the rate change, and it looks like you did it mostly in the agency MBS and the held-to-maturity.

And I'm just wondering, given that it looks like that average yield was 1.90 below, given that's where the average are.

How are you thinking about continuing to build the securities book, versus potentially keeping more of your originated production, where you can get a [3] handle [fill], versus a maybe [1.5] in the securities book?

So what's your trade-off on interest-rate risk versus credit risk, I guess?

And does your philosophy change, given where we are in the environmental?

Yes, it's a good question, and it's analysis that we conduct.

We, as I'd mentioned earlier, we have been still continuing to sell all of our conforming production.

There are limited, but some benefits, limited liquidity attribution, but some benefits to agency mortgage securities, but less so, or not so with loans.

So that's part of that determination, there's a different risk profile for carrying loans on the books, obviously versus guaranteed pass-throughs.

That's part of the analysis.

We have a reasonably large allocation to single-family [home] loan real estate, residential real estate today because of our jumbo portfolio, which we continue to want to make room for as we serve those customers going forward.

So all those things sort of fit together in our risk appetite and have -- setting the [ALCO] considerations aside -- but just from a, how much is enough and what type of risk do you need on your books?

We follow the path that we followed.

Which isn't to say that if circumstances changed or persisted, and the allocation opportunities look a little bit different, we wouldn't modify our conclusions.

But that's where we've gotten thus far.

Okay.

And then, just a second question on commercial real estate brokerage, just within the other fees category, it's been a good business for you historically.

It looked like it's gotten a little softer.

Is that purposeful change in how you're doing the business or is it just the environment?

Any color there would be great?

Its cyclical.

It's a great business for us.

We're the best, frankly, in that business.

And there's a lot of knock-on benefit in terms of the financing that we do, investment banking that we do for those customers.

But it is cyclical, and it will follow patterns, like the one that we just talked about in terms of what's going on in different markets.

That business is interesting, because it's got something for bullish times in commercial real estate, and it's got something for bearish times in commercial real estate, because the same team is involved in helping to define liquidity for properties, and financing for properties when things aren't going well in markets, and when investors are going the other way.

So we like it.

But it is a little bit harder to forecast, because it doesn't just trend up over time.

It moves around.

But it's been a great performer for the last couple years.

So there's no change, in terms of how you're approaching it?

It just a little bit of an air pocket?

It's just, the normal volatility, and what's happening in that business.

No change.

Okay.

Thanks a lot.

Yes.

Joe Morford, RBC Capital Markets.

Thanks, good morning, everyone.

Hi, Joe.

The C&I growth seemed a bit softer this quarter, particularly relative to the pace you saw through much of last year.

Is there anything to that, besides maybe some impact from energy?

And just how in general do you feel business owner confidence is these days, particularly given some of the uncertainties like Brexit and the upcoming election?

I'm not sure what would inspire marginal business owner confidence in this environment.

I mean, it's about the same as it has been recently, probably a little bit less certainty, given what's going on around the world.

But I don't think of that as having a meaningful impact on the quarter's organic C&I loan growth.

It's competitive, and we're out there competing.

There some amount of capital formation around CapEx and in expansion and other projects.

Not as much as there would be, if we're in a more vibrant overall economic environment.

There's actually little bit more happening in energy today, than there was over the last several quarters, more capital being raised.

More assets are changing hands, which is giving rise to some financing opportunities.

So I would think of it more as a season, or a short period of time to measure against.

Nothing, no story there.

Okay.

And then, you also talked earlier about being disciplined on expenses, and getting paper and transactions out of the stores.

But kind of more broadly speaking, how are you currently thinking about the overall retail distribution network, particularly given the growth in mobile banking?

Are you considering moving more aggressively, or transitioning to the smaller neighborhood stores?

Or perhaps maybe you don't need as much density in certain markets, and can reduce the overall footprint?

What's the update there?

Yes.

Joe, I think that's an interesting question.

We continue to look at that, and we're not oblivious to the changes going on.

As you suggest, the mobile offerings are our fastest-growing channel now,18 million of our 20 million-some households now have, use that.

And sometimes as their -- most times, as their dominant channel.

So we continue to think about that.

Our philosophy has been and will continue to be, we want to serve customers when, where and how they want to be served.

We don't want to drive them someplace to our benefit.

We want to provide for their benefit.

That being said, that's a big area of -- we continue to look at as we innovate, and we see customers change their behaviors.

(multiple speakers) We're going to make it easier for them to do business with us in other channels as well.

And if they change their behavior, then we'll react to that.

We'll react to it, and that, that could have some meaningful impacts on it.

Right.

Okay.

Thanks so much.

John Pancari, Evercore.

Good morning.

Hey, John.

I'll try to be quick given the length of the call here, but I am going to beat a dead horse on the expense topic.

But I know, and I appreciate the color you gave on the levers that you can pull, given what we're seeing on the top line side here.

Now what I'm trying to just understand is, like what do we need to see?

Maybe it's in terms of where rates go, or overall top line pressure, for you to start to really pull those levers more aggressively?

And again, maybe it's around expenses.

And also, longer-term, is the goal to keep the efficiency ratio -- are you okay with that high-end of that range even through 2017, if this top line pressure persists from the curve?

Or do you at some point, look to get to the middle of that range again?

Thanks.

Here's how we look at expenses.

We look at this Company -- in fact, on Wednesday, we had our 164th birthday, and we look at this Company from a long-term perspective.

We've always been thoughtful about how we spend our shareholder's money.

We're the stewardship of your capital and their capital.

And surely, a longer, lower for longer scenario puts pressure on everything that we do.

But we're going to continue to make those investments that we believe are good, long-term investments to help customers succeed financially.

That being said, I do think we're at a point in time where there are some opportunities, that because of changing customer behaviors.

So we will, but we're not going to do something that's going to be short-term bright and long-term dull if you will, just because of pressure on the revenue side or the earnings side.

Just assume, that we're going to continue to work really hard on making investments, and also maturing systems, taking out costs that don't add value.

In other words, think about of maximizing or monetizing our scale.

Got it.

Got it.

Thanks, John.

And then, just if rates, if we only see another 25 basis points next year, and that's it, is it fair to assume that you're in the upper range still, of the efficiency ratio?

I think we probably are, yes.

Okay.

Which still is a world-class range.

And don't take for granted how hard one has to work to operate at 58% efficiency ratio.

There's a lot that has to happen to stay there, while we're spending the money that we're spending to innovate and improve ourselves, from a compliance risk management and other perspectives.

Yes, completely understood.

All right.

Thank you.

Eric Wasserstrom, Guggenheim Securities.

Thanks.

One narrow question, and then perhaps one broader one.

On your servicing income, and I'm looking at the data on page 40 of the release, your servicing fees are down year-over-year by -- in order of magnitude something like 20%.

But your servicing portfolio is only down about 3%.

What's the dynamic there on the servicing income?

So there are older categories of loan product that are running off, that might have different per pound fees associated with them.

There's different categories of unreimbursed servicing expenses that get netted against those servicing fees.

And I mentioned, we're up $100 million I think in this quarter which contributes to the delta between last year end this year that, a quarter a year ago and this quarter.

But the servicing book has been getting smaller, as we've walked away from higher risk activities, et cetera, and focused more on core, today's core agency mortgage origination.

So that phenomena is something to grapple with, when thinking about how that performs over the coming couple of years.

As augmented by how successful we are on the origination side, and growing new servicing assets as well.

But does the pace of change -- I guess, does the pace of change change at all, because of the -- presumably many of the legacy assets are now being refied away, and newer assets may look more like legacy assets in terms of servicing rate?

Well, I think what changes is the cost of service.

Because we are working through -- we've had higher foreclosed and work-out expenses over time, there's labor.

There's extra compliance.

There's a lot going on.

The standards are still -- the new standards are as high as they've ever been, but the incidence will be going down over time.

So my sense is that that should improve.

There should be some scale there.

And perhaps it's true also, that the per pound revenue or per loan revenue scales into today's run rate.

And with each new $1 billion worth of servicing that we add to the book, it doesn't pay the same servicing revenue as a legacy $1 billion.

But you'll watch that move slowly over time.

And then, if I can just step back for a moment.

Your earnings power for the past several years now has been running just above $4.

And, of course, this current quarter, it has sort of affirmed that run rate.

And the consensus for next year is closer to $4.30.

I'm not asking you to specifically forecast, but could you help us understand like what bridges that increase in earnings power?

Presumably rates might be some of it, but is there -- and the balance sheet continues to grow, but in the absence of rates would that figure be achievable, or are we more in a trend line?

Well, there's a lot of unknowns in that question, and we're not giving guidance on next year.

As was mentioned earlier by Erika, in terms of what might happen, or what has to happen as we grow in the future, it will be earning asset growth, loans, and investments.

It will be what, how efficient we are on the expense side of things, and then, the whole spectrum of noninterest income generating possibilities.

There's a lot of strength in a number of those line items.

General Electric?

Yes, the GE portfolio added -- not just the $40 billion-odd worth of loans but over 200,000 commercial relationships, that for most of whom weren't meaningful relationships at Wells Fargo already.

So it's doing more with customers, and generating more lending opportunity, more noninterest income opportunity, and executing along those lines.

It's a lot of work.

But if you think about the way we do business and our operating model, it's a great model to have for this economic environment, really when you think about it.

We're in the real economy.

We do have many different businesses.

We serve customers broadly and deeply, and I don't think I'd want any other model for this environment.

Don't have to reach.

Yes.

Thanks, very much.

Marty Mosby, Vining Sparks.

Thanks for taking the question.

John, what I was, wanting to drill down to, if you think about mortgage refinance, the way you've got the accounting set up, where you recognize at close, and the way that the servicing valuations get hit almost instantaneously when rates fall, you typically have a pressure quarter when refinance kicks in, followed by more favorable outcomes as you move forward.

So I just wanted to focus on that, kind of contrast, and make sure that I'm still thinking about that right, as it's kind of built in the past?

I think you probably are.

And then, the only thing I was going to add and follow-up, is if you think about what you were just responding to, the one thing that I think you left out, was the fact that share repurchase will reduce the shares outstanding by about half of that growth that was just highlighted.

So capital announcements has a big part of, what would generate any incremental growth, if net income was absolutely flat from this point forward.

We have been benefiting, and we'll continue to benefit from taking share, net share repurchase as a result of our capital plan.

It is a driver for people who are measuring in earnings per share.

Thanks for pointing that out.

Yes, thanks.

Nancy Bush, NAB Research.

Good morning, guys.

Good morning, Nancy.

At least I think it's still morning anyway.

One larger question, and two small ones.

The commentary on the oil and gas portfolio and the trends there, seems to be a little bit different than what we've heard from JPMorgan Chase yesterday, and US Bank Corp early this morning, where they seem to be a little less equivocal in the trends.

And it looks like you had a big addition in nonaccruals, but you didn't add to the reserve for the portfolio.

Yesterday, Jamie Dimon talked about the companies in their portfolio having greater access to other financing.

That seemed to be -- your trends or commentary was little different from that.

Can you just -- I mean, are there differences in your oil and gas portfolio, or are you just being cautious here?

I'd say both.

There are probably differences.

We have a big, broad spectrum of upstream, midstream, and services companies that includes a lot of middle market companies, which are our entire wholesale portfolio does.

So the portfolios are probably different.

We are generally cautious, however.

I guess, I'd point out that our criticized assets in sum, in energy are down by $1.7 billion.

Within that, we moved more into nonperforming in the quarter, which we had expected to do in our outlook as we sat here a quarter ago, which is why our reserve didn't have to go up in connection with that.

I think we're just a little -- it's a little premature to declare victory, because prices are hovering in crude in the $40s, and who knows what the next couple of quarters brings?

And we don't want to get ahead of ourselves there.

We're performing great, with 39 basis points of loss all-in with these levels.

And so, there's no point in declaring victory.

I would agree, if I didn't mention it, it was an oversight.

There's a lot more access to capital among energy companies today, all forms, loans, high yield, high-grade and equity.

We're busier in the second quarter than it had been in a while.

There are more assets changing hands.

Things are freeing up a little bit, and that's going to help with resolutions.

We have recaptured the benefit of that in our analysis, for what our exposures are, but it's true.

And it was less true, a couple quarters ago.

And Nancy, the other thing I -- John mentioned, but I just want to remind or say it again -- even though we added to our nonaccruals, we tend to be conservative.

Over 90% of our nonaccrual oil and gas customers are still current on principle and interest payments.

Think about that.

I mean, that's --

Almost all the losses that we have taken are from loans that are still paying.

Okay.

So we're sort of harkening back to the performing/nonperforming era of a couple of decades ago?

Yes.

I remember that.

That's right.

Yes, I remember.

Secondly, mortgage banking gain on sale.

Have, can you give us the current margin, and how that stacks up, and if it's strengthening?

I mean, if refi activity goes up, I'm assuming that gain on sale margin will strengthen.

Can you just affirm that or not?

So it was [1.65%], [1.66%] in the quarter, and about the same from the first quarter.

I think you're right that, the industry is probably going to have some capacity constraints at this level of application activity.

And that's probably, it's at least supportive, for the levels that we are at today.

I don't know if it moves up from here, but it feels supportive, because people are working hard to accomplish the throughput that these applications create.

Okay.

And just one final question.

John Stumpf, you raised the dividend what, $0.02 I guess, what last quarter, and you're sort of at the 37% payout ratio, et cetera, et cetera.

When would be the next regular dividend meeting, where you would consider a more meaningful dividend increase?

And given that your stock is one of the highest yielding in the group, is that necessary at this point?

Well, we increased a $0.005 right, from $0.375 to $0.38.

And I would remind, as John did that, and you just suggested that, if you take $0.38, and divide that by $1.01, you get a number that is -- that we are proud about.

We just went through our CCAR process.

And I hope you would agree, and I know our investors appreciate the fact that we are shareholder-friendly.

We have, of the big banks, or of the G-SIPs, we are a leader in returning capital.

So dividends are important.

It speaks of the confidence of our, of how we run the Company, and the earnings momentum that we have.

On the other hand, buybacks are also important.

So they're both in there.

And we, and the question you asked, we think about that a lot.

So we will continue to put all of our emphasis on running a really great business, and returning as much capital as we can.

And people should think about the 55% to 75% range.

Thanks for the artful non-answer, John.

(laughter)

You bet, Nancy.

Thank you.

Our final question will come from the line of Brian Kleinhanzl with KBW.

Great, thanks.

Yes, just a quick question.

When you look at the balance sheet, when you look at, on the liability side of the balance sheet.

If you look at it year-on-year, you've seen deposits up $60 billion, where most of the funding is coming from short-term borrowings and long-term debt.

So is there something changing in the depositor base, or are depositors becoming more rate sensitive, and that's why you're not seeing the deposit growth that you once were?

Especially this quarter, where it's only been $4 billion on end of period for total deposits?

I was just wondering, if there's like a change in the depositors there?

Yes, if there's anything specific, I'd say it's among wholesale customers.

I think retail deposits grew by 8% year-over-year.

And the total grew by 4%, and the balance is coming from wholesale customers who are a little bit more price-sensitive.

And in the wake of the 25 basis point move in December, there are some deposits that we paid a little bit more for in wholesale, and some that we didn't, and some that have better liquidity value and some that have worse.

And this is how that's shaken out.

You pointed out that there has been some wholesale funding on the liability side.

We went out and put on some short-ish term.

I think it shows up as long-term because it's beyond a year, but short-ish terms financing to make sure we had funding in place for the GE assets as they came on.

Some of that will roll off.

Some of it we might hang on to for a while, but it's a mix.

And then, as you also pointed out, we are out there, marching along the TLAC implementation path, and we will be over the course of the next several years.

And that will add to that portion of the liability stack.

Brian, we love all of our deposits and depositors.

But if you look at, as John mentioned, if you look at the most core of our core deposits, that would be retail, and especially retail transaction deposits, savings accounts, checking accounts.

And if you look at our net primary, which is where people live on those accounts, you look at that growth, and you look at the growth on the retail side, it's been world-class for us so.

And so, that continues to march along.

Okay.

Great.

Thanks.

Thank you.

I know we ran over, but I want to thank all of you for joining us today, and your interest in Wells Fargo and your questions.

And I also want to thank all of our 265,000-plus team members for a great quarter.

Thank you much.

See you next quarter.

Bye-bye.

Ladies and gentlemen, this concludes today's conference.

Thank you all for joining.

You may now disconnect.