Earnings Call: Q1 2016

Apr 14, 2016

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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'd 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 U.S., and our loan and deposit balances are at an all-time high. We continue to grow our customer base both organically and through acquisitions, and February was the strongest month for retail bank household growth in 5 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 U.S. 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 U.S. 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 U.S. 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 a 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. 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 in fed funds sold increased $30.4 billion, reflecting growth in deposits, long-term debt, and our disciplined approach in managing liquidity and 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 in 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, which 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 Railcar Services acquisition on January 1st, 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 1st, we acquired the North American-based portion of GE Capital 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 one to four 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 betas 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 in 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 is 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 end 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 correspondent 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 the fourth quarter from higher net MSR servicing hedge results and lower unreimbursed servicing costs. As shown on page 14, expenses increased $429 million from the 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 a 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%-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 continued 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 and 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 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 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 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 borrower's 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. 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're tracking changes in outstandings, utilization, delinquency rates, FICO scores, and LTV migration across our consumer portfolios in these regions. 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've tightened our underwriting standards across our consumer portfolios in oil-dependent regions. We're also actively monitoring commercial real estate exposure and 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 workout 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're 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 and 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. We still reduced our common shares outstanding by 16.2 million shares through share repurchases of 51.7 million. Our net payout 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. At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Our first question will come from the line of Ken Usdin with Jefferies. Please go ahead. Thanks. Good morning, guys. How are you? Just 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 just get the understanding from here of the kind of pace of potential reserve additions? Underneath that, are we effectively at the point where any benefits from lingering consumer reserve have kind of moved past? Thanks. Well, on the second part of your question, it's 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 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 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 are doing a semi-annual borrowing base redetermination on E&P loans where we are in the middle of the spring redetermination period right now. Call it 20%-25% have been completed. We will have the rest of that information. That is name by name, capital structure by capital structure. That will continue to inform things. We have definitely taken steps or, for example, categorized loans as non-performing, even if we haven't completed their spring redetermination. My sense is there is more information there. This is going to go on for a while. We are in the $40 context today. We were in the 30s for a while. Some of these capital structures just need to be restructured. That will take some time. My assumption is that we are 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. 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 would just like to remind you that I mentioned that residential real estate losses were down 41% year-over-year. I think that sometimes goes a bit unnoticed. When we went into the downturn, we had over $100 billion of Pick-a-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. The performance is really good. 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. Just one follow-up on the redetermination and the structuring. John, how far ahead can you get a redetermination? I get your point that we're only 25% through the spring, but have you already been able to get ahead of that just 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 plus starting point? Or do you still end up being much more punitive in terms of how you discount and how you redetermine? Yeah, I think the price deck for this cycle is the front month is more in the mid-30s context. It's a curve that you're using, not just the spot price. But it's worth probably 20% lower across our price deck curve in the spring versus where we were six months ago. 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. But in terms of getting in front of it, as I said, we're categorizing loans as non-performing. We're recognizing these loss determinations, the $200 million that we've taken. That's our own credit folks determining that there's something to be done. It's not as a result of a final resolution or a workout or the completion of a bankruptcy plan. We can do that even before we've completed a redetermination. So from an impact to Wells Fargo point of view, we're always trying to stay out in front of it. Thanks for all that. Appreciate it. Yeah. You bet. Your next question comes from. That's probably the last oil and gas question we'll get. Yeah. Your next question comes from the line of John McDonald with Bernstein. Please go ahead. Hi. I'll 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's in the run rate at this point. Okay. Then a question for John Stumpf. What's the market like, John, for additional portfolio purchases? That's part one. Then part two is in terms of broader M&A because of your size and favored nation status, you're the kind of 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 just remind us your strategy around M&A, maybe how it's 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 who know us well, 97% of the revenue we produce is from U.S.-based customers, consumers, small business men and women, middle market, large customers. While we love our international business, it's mostly in support of our U.S.-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, we provide great products and services and great value. 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 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 advisors across the geography. We could still do a lot more business. There's a lot of our customers who call us their bank who have their wealth away. We're 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's 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've grown that significantly internally. About over 43% of our customers who have their primary account here have a credit card. That's an area that would be opportunistic. We've been doing a great job organically. If there'd 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 folks right now, our best opportunity to grow long-term shareholder values here, value creation, is doing more of what we're doing, just doing it better. Okay. Thank you. Your next question comes from the line of Paul Miller with FBR Capital Markets. Please go ahead. Yeah, thank you very much. A lot of clients, a lot of questions that I've been getting is that, yeah, energy, a lot of people might be reserved good for energy, but the second or third derivative energy was a lot of the growth of this economy over the last year or 2. Since energy is starting to struggle, the economy's going to 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 is hitting the hardest? Sure. Well, as I mentioned in the prepared remarks, in the consumer portfolios, all of them were going MSA by MSA and comparing the performance of our borrowers in the areas that are highly leveraged to energy. The greater than 3% employment is one measure that we use, 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's where all the growth has been coming from. They're starting to look more average. So whether it's measures of delinquency, in some cases, measures of LTV based on what's changing in asset values, they look a little bit more average. It doesn't feel like it's, at least at this point, that it's another shoe to drop in the short term. But as you'd expect, less employment, loans will perform differently. In commercial real estate, which is 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. Multifamily is a little bit weaker. We're 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 what people are going to have to look out for. More broadly speaking, I think we still feel we're in a 2% environment. There are obvious pockets of strength around the country, but when you move out of oil and gas, we're in the same low growth, better consumer, strong employment environment that we've been operating in for a 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're stalling either. Paul, if I could just give you an anecdotal. I lived in Texas for 6 years in the mid to late 90s, 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 was just in Houston last week, and I have been back a number of times in the last year. Things do feel different 20 years later. It is a much more diverse economy. If you take it with Texas generally, but Houston specifically, it feels different this time around. Downturns are always hard. Volatile markets always have an impact. This feels different this time because of what the state has done to diversify their economy. Okay. Hey, guys, thank you very much. Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead. Hi, good morning. Hey, Erika. My first question is actually a follow-up to John's question. My conversations with investors have often paired Wells, just to be frank, with either large credit card companies or there's 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 maybe the real stop here is Wells Fargo not moving up a SIFI surcharge? As we think about the opportunities 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 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's 250 acquisitions we've done with all different companies, as we've come to the modern Wells Fargo, I've probably been involved in half of those just because it happened during my career time. They're hard to do. There's 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 thing. We are 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 4 or 5 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 lower degree of shareholder reward on it. That's just not who we are. Thank you, John. That was very clear. My second question is just 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? Yeah. It's hard to comment on that during the middle of the CCAR cycle, but I admire you for asking. I tried. Thanks for taking my questions. Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Good morning. Good morning, Matt. I just want to delve into a couple of potential earnings levers going forward. I guess the first one would be as we think about the liquidity that you've built since you chose not to reinvest as much in those securities both. 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're obviously off the bottom. What's your approach to managing that liquidity from here? It'll 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 in cash forever. We're going to have to put some of it to work. We're very cautious about what it means entering at these levels in terms of capital impact in the future if a subsequent rate rise does occur. That's obviously a big issue for us, and we'd like to be smart about our entry points. But 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'll be some amount of redeployment. We'll 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. That is an earnings lever when and if we redeploy. Then just separately on the expenses, maybe just talk about, is there any kind of change or even tweak on the approach to expense management given maybe weaker revenues and some of the ongoing pressures in energy likely lingering? Yeah. There is a continuous drumbeat and a high level of vigilance around how we spend all of our business as usual types of dollars. We're 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're 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're still comfortable in our 55%-59% range, which is where we've guided that. I don't need to remind you, but that is a very attractive level for a firm of our size. We think we're 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. You're welcome. Your next question comes from the line of Bill Carcache with Nomura. Please go ahead. 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're 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. 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's how the process works. In the quarter, there were some of these, what you might characterize as defensive draws that we observed. Not that many of them. You can see the increase in the total outstandings in oil and gas rose by about $400 million. About half of that was from, frankly, leases that we picked up from GE that have a credit mark in them, incidentally. It really didn't amount to that much. It is a phenomena that we've seen, that we've read about. It isn't having that big of an impact today. But we do think that we're capturing that risk as we assess what the appropriate size is of our allowance for both funded and unfunded commitments in the space. When a previously unfunded energy loan commitment becomes funded, how does that transition from unfunded to funded impact your allowance? I guess 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 Sure from one bucket to the other. Yeah. So in the calculation of the allowance and the migration of credit that leads up to whether we consider a borrower relationship to be non-performing or what status we are marking 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 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 is some estimation of what today is currently unfunded will become funded in the future. Okay. Thank you. If I can just ask a final follow-up. Sure. 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 kind of 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 kind of speak specifically to the approach that Wells Fargo has taken. Well, it is a combination of both, and they are highly correlated for E&P companies in particular. But it is their sources of repayment both principal and interest in full and on time, and we are taking into account 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 that they might have to liquidate in order to pay us back. Understood. Thank you so much for taking my questions. Sure. Your next question comes from the line of Kevin Barker with Piper Jaffray. Please go ahead. Good morning. Thanks for taking my questions. I just want to switch gears here and look at your auto exposure. You are 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 have seen in the industry and some deterioration in the subprime portfolios, could you help us give 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. Well, I think we have 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 have 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, I think we are number two right now, and 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 do not. Some of the things that feel a little bit different right now, I mean, seasonally, obviously, we are in a better place in Q1 than Q4 just because those loans behave that way. Collections and losses are lower in the first quarter than they are in the fourth quarter. It is a little bit, 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. We have always had our eye on the elevated level of used car auction prices. The Manheim index in particular is evidence that we point 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. 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 have allowed our market leading position to slip a little bit. Let other people buy the loans that do not make sense for us. It is still a great business for us and 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 I guess we have observed is because the ABS market has been under pressure, some of the probably most aggressive players in the subprime 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. Just to follow up on that, are you seeing better risk-adjusted returns in subprime auto versus prime auto right now? Are you growing the subprime auto portfolio at a faster rate? No. We have sort of held the line. Using our own approach to what a subprime borrower and subprime deal is, we have limited ourselves to at about 10% of our originations, which has amounted to about 10% of our outstandings that we would consider to be subprime. There is often an opportunity to grow that if we wanted to. We have 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 is priced for the risk. Frankly, it does not compete directly with some of the specialty finance companies that are in that space. They tend to be a little bit deeper, and they are running a different business. Okay. Thank you for taking my question. You're welcome. Your next question comes from the line of Joe Morford with RBC Capital. Please go ahead. Thanks. Good morning, guys. Hey, Joe. I guess first, just 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'd 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. 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. I guess the other question was just wondering if you could talk a bit more about how the GE Capital business integrations are going and how you're feeling currently about the potential for cross-selling or revenue synergies. Also just 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, but we're- Okay. There's a big opportunity. This is early stages. This is an important and big integration. It'll 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're doing great with customers and team members. I think we imagine that there's a real opportunity with these customers. These are businesses where GE has been an absolute leader, and they've 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'll take a while to work with each relationship and find out what they're doing that might be done at Wells Fargo in addition to their credit. But my sense is that we'll get great adoption over time, and that's part of what makes it such a high-value opportunity for Wells Fargo. Okay. Thanks so much. Okay. Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead. Morning. Hey, John. Just 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? Yeah. Let's see. $113 million of the combined second lien in mezzanine today is categorized as non-accrual. Okay. All right. What is your energy criticized ratio as of March 31? I know last quarter it was approximately 38%. Yeah, it's 57% now. 57? 57. That reflects the environment that we're in. That reflects what's going on with the stress of the borrowers. That migration is what leads us to provide more reserve. Okay. Then through the 25% of the spring redeterminations that you completed, what has been the average reduction in borrowing base that you have seen? Well, I guess 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. But 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. Okay. Then lastly, on the expense side, could you just give us a little more color onto the why the incentive comp increased as much as it did this quarter, particularly on the backdrop of some of the revenue? Sure. Yeah. It is not really incentive comp so much. It is think about FICA resetting in the first quarter. Contributions to our 401(k) happened in the first quarter. And then for people who are retirement eligible, there are 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 is granted because it is immediately vested, and that is why the first quarter has that extra impact. Okay. Thank you. It is not so much about Commissions and incentive are a piece of it, but it reflects the actual business activity that is happening. Okay. Thank you. Yep. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead. Hi. Good morning. Hi. Good morning, Betsy. A couple questions. One, 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 today for the spring redetermination. The rest of them are underway. Oh, okay. It is a borrower analysis. So 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 will not 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, just in terms of our review of the company's overall performance, the value of their collateral, what their prospects are. So- It is not really a linear, but you cannot really draw a line between the redetermination and specifically and the change in reserves. Okay. It could have some impact, but not. 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 are not that many instances of that. It is just that as we go through the rest of the 75% of the redetermination for this spring, that could drive some more incremental 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. Just a question on rates and balance sheet. So you brought down Fed funds a bit, is that right? Actually, 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 25 bp increase in rates today, are you in a more asset sensitive position now because of that? Yeah, I think that's right. True. Okay. Any sizing or? No. We are more asset sensitive as a result. We also have more long-term debt that came on during the quarter. There's a handful of things going on at the same time. But at the margin, we're 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, "You know what, I wanted to, but it's been 1.7 for five, six, seven, eight months," whatever it is. I am going to start to redeploy some of my cash into longer duration paper. Can you just give us a sense as to how you think about that? Yeah. Well, 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 would 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. But it is the trade-off between foregone earnings, capital sensitivity, and a handful of other things that we are having to assess, and we are doing it with our best estimate of where we think rates are going, and what happens if they do not go there. The long and the short of it is, I do not think that we are going to continue to build cash balances like we did in the first quarter. But 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. Yep. Thank you. Your next question comes from the line of Mike Mayo with CLSA. Please go ahead. Hey, Mike. Hi. 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? So we're not breaking out what it added during the quarter. What we're saying is we think it'll be modestly accretive for the rest of the year. It's really about what it costs to transition people, technology, premises, et cetera, throughout the remainder of the year. We'll update that as we move along and we've got more information about how those costs are actually coming in and being spent. I'll 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. The expectation once they're 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, 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. Most of the loans only came on March 1. So there's a lot of stuff going on in the first quarter. But there's one month- Can you size? One month worth of really revenue, if you will. Three months of funding, one month of revenue. You will see the full benefit in the second quarter. I was just wondering if you could size that a little bit more. Well, we are talking about $30-ish billion 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 will 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? Well, as John said, we had one month of the revenue side of it. We had not quite three months worth of the funding cost because we weren't fully funded for those three months. Correct. But more than one month's worth of funding cost. How about that? Okay. Separately, John, did I hear you correctly? You said benefits of falling oil prices offset the cost. I think you said that at the start of the call. Yeah. Since we're still a net importer of energy. What's 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 the pump, what consumers have done, and not exclusively, but they're saving more of that, what's happening at a 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 stocks sell off, and you are saying that the market is wrong with that. What do you see in your business that you think maybe the market has wrong how they think about oil prices? I have long stopped trying to figure out the market and why bank stocks or stocks generally seem to move in concert with commodity prices, especially oil prices. 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. We are seeing savings rates go up. These are some of the strongest savings rates we have seen in some time. I do not know if that is a statement about confidence or whatever, but consumers are benefiting from 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, just give us a sneak preview of the investor conference. What do you hope to achieve at the investor conference? Do you think you will have a director show up again at it? Well, thank you, Mike, for reminding everybody of that. Steve Sanger, our Lead Director, showed up last time. Obviously, we invite our directors, and I am- Just give me a chance to invite all of you. It is on the 24th of next month. It is a Tuesday. We have an exciting day to share with you. We will get very 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. We are looking forward to it. We also will think about guardrails around our three big metrics that we talk about, ROA, ROE, and efficiency ratio. We might talk about that. It is a bunch of things. Everybody talks about Fintechs, 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 were not, we would have stagecoaches on the freeway right now. We will talk a little bit about that. All right, great. Thank you. Thank you, Mike. Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities. Please go ahead. 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. I'm wondering how you view that now in light 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 and investment in those areas? Not really. The pattern's been the same since the merger of Wells and Wachovia, to make sure that we've 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've 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 like that. 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're not thinking much differently about it. Our results, frankly, we think they 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'll be plenty more need for that as the industry repairs itself. 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's just one of them. But like others, it's a cyclical business, and while there's less capital raising going on there right now, there's 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 those business lines? Yeah, 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've got the right people in position to do the right thing, where we've 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're always adding good people. Okay, thanks very much. Yep. Thank you. Your next question comes from the line of Nancy Bush with NAB Research. Please go ahead. Good morning. Hey, Nancy. John, it kind of got lost in the hoopla yesterday about the living will, but there was a 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, and it reported the same thing it reported a year ago, which is that we're number 17 among G-SIBs in the lowest risk category among globally systemically important banks. There's no basis for that story. We are a big bank. We are globally systemically important. We're used to being measured. But we ended up toward the bottom of that list. That was a funny conclusion that was drawn. With respect to the feedback that we got in the living will, there are some actionable things that we're going to get right on, but there's 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're being criticized by our regulators for the types of things that work their way into the financial press. But surely we're disappointed in the result and all hands on deck here, and 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 just to share for a few minutes. Even though our company has grown significantly, principally organically over the last seven or eight years, we have continued to simplify our business, and we've shed businesses quietly that either didn't have scale for us or provided or had a risk-reward relationship that was not consistent. Just let me just check off a few. I was just thinking while John was talking. We're no longer in the wholesale mortgage business. We're not in the joint venture business. We're not in the reverse mortgage business. We're not in the mortgage consolidation business. We have FHA overlays, so we're 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're not in the government student lending business. We used to have a Wells Fargo financial business. It's very different today. So yes, we've grown in deposits. We've grown in our corporate loans and wealth management, and all those other kind of things that we're involved in, but a much simpler company today in many respects. If I may ask, you've sort of opened up the living will issue. If I may ask if there are any of this feedback that you got yesterday that you feel is related to residual issues that are left over from the Wachovia deal. I'll just say that 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 just speak to that business? You've 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. The product that we have today, where we do sell it, is an amortizing product right out of the gate. It's very different than it was in the old days, where it was more just 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'll see it make a difference in our reported consumer real estate assets. Really, on our balance sheet, it's more about prime jumbo, non-conforming by balance types of loans to prime borrowers. Okay. Thank you. You are welcome. Thank you, Matthew. Your final question will come from the line of Marty Mosby with Vining Sparks. Please go ahead. Thanks. John, I have 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 would 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? 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? So that is my real question is there any also leverage in the sense that the expenses were already kind of in place for this quarter going into next quarter? Right. The big expenses related are people expenses. The bulk of the people joined on March 1, so in the last month of the quarter. There were 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 they come over. 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. Then there is technology work to do. There is some loan file work to do, some paperwork to do. There is 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. So I would 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 the integration like you would do with any other kind of merger? When we look at the seasonal uptick that we have in those employee-related expenses, typically you do not see kind of a net benefit as it goes down because there is 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? So just two things on that side. Yeah. Well, I expect that we will 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 is a good point that not all of that seasonal comp expense disappears and that the whole net benefit does not 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 have not begun to yet because we are still developing those expenses. 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, just lastly, trying to climb into your head a little bit is, as you were looking at the first quarter and you had the gain from selling the crop insurance business and rates were going down, you had so much market disruption, were you kind of thinking in a sense of, "Well, I have this gain over here. I don't really feel comfortable putting my liquidity to work because of what's going on in the market." That gives me some kind of breathing room to kind of 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. So 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. The threshold issues on reinvestment are more around our capital sensitivity because we're 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. So thinking about the whole year impact maybe on interest income, but also our OCI sensitivity if rates ultimately back up. Thanks. Yep. Okay, 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. That is just a wonderful result on their behalf. One more shout-out to all of you. Please join us on the 24th, Tuesday, May 24th, 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.