Earnings Call: Q3 2015

Oct 14, 2015

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 third 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 third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third 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 the 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, and thank you. Good morning, and thanks for joining us today. We earned $5.8 billion in the third quarter as our diversified business model generated growth in revenue, loans, deposits, and net income compared with a year ago. We remain focused on meeting the financial needs of our customers and on investing in businesses so we may continue to meet the evolving needs of our customers in the future. The strength of our franchise also positioned us well for the acquisitions we have recently announced. We are excited that the transactions with GE Capital will enable us to deepen relationships and increase our presence in commercial businesses that serve the real economy. General Electric, like Wells Fargo, is one of America's great companies, and the businesses we are acquiring are industry leaders with proven business models and exceptionally talented and experienced people. We are excited to have them join the Wells Fargo team. John Shrewsberry will provide more details on the recent GE Capital announcements at the end of the call. Let me now highlight our results this quarter compared with a year ago. We earned $1.05 in earnings per share, up 3% from a year ago. We generated $21.9 billion of revenue, up 3%, with growth in both net interest income and non-interest income. We grew pre-tax, pre-provision profit by 6%. We continue to have broad-based loan growth, with total loans reaching a record $903.2 billion. This is a bit larger than the size of our loan portfolio at the time of the Wachovia merger at the end of 2008. However, the quality of our current portfolio is significantly better than at the time of the merger. Our core loan portfolio increased by $73.4 billion, or 9%, from a year ago, reflecting both strong organic growth and the benefit of the acquisitions we've completed over the past year. Our deposit franchise once again generated strong customer and balance growth, with total deposits reaching a record $1.2 trillion, up $71.6 billion, or 6%, from a year ago, and we grew the number of primary consumer checking customers by 5.8%. Our financial performance resulted in strong capital generation, and returning capital to our shareholders remains a priority. Our dividend payout ratio is 35%, and we repurchased 52 million shares of common stock in the third quarter. Turning to the economic environment, the global economy showed some signs of weakness in the third quarter, primarily in China and other emerging markets. This weakness impacted the financial markets, and the rising value of the U.S. dollar has caused the trade deficit to widen. As you know, Wells Fargo is a U.S.-centric company, and the U.S. economy, while not immune to these developments, has proven quite resilient. The low energy prices that are negatively impacting certain aspects of the economy have provided a welcome boost to consumers, with many now beginning to redirect their savings into purchasing goods and services. An example, new auto sales were at their highest levels in a decade. Housing continued to rebound, with home sales at their highest level since 2009, and a limited supply of new homes are driving new home construction. While the latest jobs report was disappointing relative to expectations, the labor market continued to show steady gains, with September posting the 60th consecutive month of rising employment, something never before accomplished. The unemployment rate is at a level that many consider to be the long-term norm. As the U.S. and the world economies evolve, Wells Fargo remains focused on the building blocks of our growth. Increasing the number of households we serve, adding commercial relationships, deepening consumer and commercial relationships and growing loans and deposits. This focus will benefit our long-term growth while we continue to meet our customers' financial needs and navigate the challenges of today's economy. John Shrewsberry, our CFO, will now provide more details on our third quarter results. John? Thank you, 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. Our third quarter results demonstrated consistent financial performance and momentum across a variety of key business drivers. We continued to have strong loan growth and deposit growth across our diversified commercial and consumer businesses. We grew revenue by generating growth in net interest income and non-interest income. We produced positive operating leverage as our expenses declined. Credit quality remained strong with net charge-offs of only 31 basis points of average loans. We operated within our targeted ranges for ROA, ROE, efficiency, and net payout ratio. Let me now highlight these key drivers in more detail. On page 3, we show the strong year-over-year growth John highlighted, including revenue, pre-tax, pre-provision profit, loans, deposits, net income, and EPS. We reduced our common shares outstanding by 106.5 million shares over the past year. Turning to page 4, we continued to benefit from the strength of our balance sheet, which has positioned us well to take advantage of growth opportunities, including our recently announced acquisitions. We grew total assets by 7% from a year ago and 2% from second quarter with growth in loans, short-term investments, and investment securities. Our funding sources increased with continued deposit growth and increased long-term debt and short-term borrowings. Turning to the income statement overview on page 5, revenue increased $557 million from second quarter with growth in net interest and non-interest income. We generated positive operating leverage as expenses declined. As shown on page 6, we had strong, broad-based loan growth in the third quarter, our 17th consecutive quarter of year-over-year growth. Our core loan portfolio grew by $73.4 billion, or 9% from a year ago, and was up $17.1 billion from second quarter. Commercial loans grew $9.4 billion, and consumer loans grew $7.7 billion from second quarter. Our total loan portfolio is balanced between commercial and consumer loans, with commercial loans now 50% of our portfolio. Our portfolio has become more balanced as we've experienced runoff in our liquidating consumer portfolios and have grown our commercial portfolios through organic growth and acquisition. On page 7, we highlight the diversity of our loan growth. C&I loans were up $38 billion or 15% from a year ago. The growth was diversified across our Wholesale Banking businesses with double-digit year-over-year growth in asset-backed finance, corporate banking, commercial real estate, structured real estate, and government and institutional banking. Commercial real estate loans grew $12.8 billion or 10% from a year ago and included the second quarter GE Capital transaction and organic growth. Core one to four family first mortgage loans grew $15.3 billion or 7% from a year ago and reflected continued growth in high-quality non-conforming mortgages. Credit card balances were up $4 billion or 14% from a year ago, benefiting from strong new account growth, more active accounts, and the Dillard's portfolio acquisition in the fourth quarter of 2014. Auto loans were up $3.9 billion or 7% from last year. We had record new originations in the third quarter, up 10% from a year ago, reflecting the strong auto market while we remain disciplined in our approach. As highlighted on page 8, we had $1.2 trillion of average deposits in the third quarter, up $71.8 billion from a year ago and up $13.6 billion from second quarter. This growth was broad-based across our commercial and consumer businesses. Our average deposit cost was 8 basis points, down 2 basis points from a year ago, and stable with the second quarter. We continued to successfully grow our primary consumer checking customers, which were up 5.8% from a year ago, and our primary small business and business banking checking customers increased 5%. Page 9 highlights our revenue diversification and the balance between spread and fee income. Our earning asset mix results in diversified sources of interest income, and the drivers of fee generation are diverse also. We had strong equity gains in the third quarter, comprising 9% of our fee income, up from 5% last quarter and 7% a year ago. Our total market-sensitive revenue, which includes trading and gains from debt and equity investments, increased $210 million from the second quarter but was down slightly from a year ago. We grew net interest income $516 million, or 5% from a year ago, reflecting strong growth in loans and securities and by adding duration to the balance sheet. The $187 million increase in net interest income from the second quarter reflected growth in investments and loans, including the benefit from the GE Capital loan purchase and financing transaction related to commercial real estate assets that settled late in the second quarter. Net interest income also reflected one additional day in the quarter, accounting for about one-third of the increase from the second quarter. These benefits were partially offset by reduced income from variable sources, including purchase credit-impaired loan recoveries, periodic dividends, and loan fees. The net interest margin declined one basis point from the second quarter. The decline was due to customer-driven deposit growth, which reduced the margin by 3 basis points but had minimal impact on net interest income. Lower income from variable sources also reduced the margin by 3 basis points. These decreases were partially offset by balance sheet growth and repricing driven by security purchases and higher loan balances, which benefited the margin by 5 basis points. As I've discussed previously, our view on interest rates has evolved over the past year to be more of a lower for longer expectation for both short-term and long-term rates. As a result, we've been adding duration to our balance sheet. However, our balance sheet remains asset sensitive and we're positioned to benefit from higher rates, and we expect to be able to grow net interest income over the long term, even if the rate environment continues challenging. Total non-interest income increased $370 million from second quarter, driven by higher equity gains, other income, deposit service charges, and card fees. Gains from equity investments were up $403 million from second quarter, reflecting strong results from venture capital, private equity, and other investments. We recognized gains on more than 10 different holdings, demonstrating the diversity of our equity portfolio and our long-term commitment to this business. Non-controlling interest reduced the impact of the equity gains to our net income and increased $120 million from second quarter. The other non-interest income category was up $406 million in the third quarter, driven by the impact of lower interest rates on our long-term debt hedges. As a reminder, we're required from an accounting perspective to measure the hedge effectiveness at the end of each quarter. While the net impact is generally expected to be zero over the life of an instrument, interest rate and currency volatility can cause this line item to vary from quarter to quarter. Other income also increased from higher income on our equity method investments, as well as the gain on our sale of Warranty Solutions, which happened in the third quarter. Mortgage banking revenue declined $116 million from second quarter. Origination volume of $55 billion was down 11% from second quarter, reflecting the expected seasonal slowdown in the purchase market, but was up 15% from a year ago, benefiting from a stronger housing market. 66% of originations were for purchases in the third quarter, up from 54% in the second quarter. We ended the quarter with a $34 billion application pipeline, down 11% from the second quarter, but up 36% from a year earlier. Based on the current rate environment, the level of our pipeline, and the seasonal slowdown in the purchase market, we currently expect originations in the fourth quarter to be lower than the third quarter. Our production margin on residential held for sale mortgage originations was 188 basis points in the third quarter. This ratio has been refined from how it was determined in prior quarters in an effort to provide investors with better information about our residential originate and sell business. Based on our updated approach, we currently expect our production margin in the fourth quarter to remain within the range of the past five quarters at 170-195 basis points. As shown on page 12, expenses were down $70 million from the second quarter. The decline was primarily due to lower employee benefits from reduced deferred compensation expense, which was largely offset in trading. Expenses also benefited from lower advertising expense and reduced insurance expense, reflecting seasonally lower premium-driven compensation costs in crop insurance. We also made a $126 million contribution to the Wells Fargo Foundation, which increased other non-interest expense. Operating losses were stable from the second quarter, but they remained higher than the five-quarter average as we continued to have elevated litigation accruals for various legal matters. We continued to invest in our businesses with particular focus on risk, cyber, and technology projects. These investments were partially reflected in higher outside professional service expense in the quarter. Our efficiency ratio improved to 56.7% in the third quarter. We are focused on managing expenses, partially reflected in the 27% reduction in travel and entertainment expense from a year ago, as we have reduced non-customer facing travel. However, we expect to operate at the higher end of our target efficiency ratio range of 55%-59% for the full year 2015. Until our revenue benefits from higher rates, we expect to remain at the upper end of that range. Turning to our business segment starting on page 13, Community Banking earned $3.7 billion in the third quarter, up 7% from a year ago and up 10% from second quarter. One of the drivers of our long-term growth is our ability to attract new households to Wells Fargo. Year to date through August, we have had the strongest new retail bank household growth in four years. During the third quarter, we announced an initiative that makes the experience of opening an account easier for the millions of consumers who choose to bank with us. Our new and existing customers are increasingly using our digital offerings, with active online customers up 8% and active mobile customers up 17% from a year ago. We are growing our credit and debit card businesses through new customer growth and increased usage among existing customers. Credit card purchase volume was $18 billion, up 15% from a year ago, and debit card purchase volume was $71 billion, up 8% from a year ago. Our wealth brokerage and retirement segment has been renamed Wealth and Investment Management, reflecting the realignment of our asset management business from Wholesale Banking into Wealth and Investment Management. We also moved our reinsurance business to Wealth and Investment Management and our strategic auto investments from Community Banking into Wholesale Banking. These changes are part of our regular course of business. We are always looking for ways to better align our businesses, deepen existing customer relationships, and create a best-in-class structure to benefit both our customers and our shareholders. For comparative purposes, prior period segment results have been revised to reflect these changes. Despite a challenging equity market environment, Wealth and Investment Management earned $606 million in the third quarter, up 10% from a year ago and up 3% from the second quarter. These results reflect the strong balance sheet growth and net interest income growing 18% from a year ago. Average core deposits grew 6% from a year ago, and loans grew 16%, the ninth consecutive quarter of double-digit year-over-year growth. Loan growth was driven by an increase in high quality non-conforming mortgage loans and security-based lending. Retail brokerage managed account assets were flat from a year ago and down 6% from second quarter. The linked quarter decline reflected the weak equity markets. As a reminder, managed account asset fees are priced at the beginning of the quarter. So fourth quarter fees will reflect the weaker September 30th market valuations. Wholesale Banking earned $1.8 billion in the third quarter, down 8% from a year ago and 13% from second quarter. The linked quarter decline was driven by lower non-interest income, primarily as a result of lower equity investment gains and reduced sales in trading and investment banking activity reflecting market volatility. Balance sheet growth remained strong, with average loan growth of 15% from a year ago. This growth benefited from the GE Capital loan purchase related to commercial real estate assets that closed last quarter and also reflected broad-based growth across most wholesale businesses. Average core deposits grew 12% from a year ago. Treasury management revenue continued to grow, up 9% from a year ago, driven by new sales of treasury management solutions. Turning to page 16, credit quality remained strong in the third quarter. Our net charge-off rate was 31 basis points of average loans, up slightly from second quarter, primarily from seasonally higher auto losses. Non-performing assets have declined for 12 consecutive quarters and were down $1.1 billion from second quarter. This improvement was broad-based, driven by improvements in our commercial and consumer real estate portfolios. We did not have a reserve release in the third quarter, the first quarter with no reserve release since the first quarter of 2010. While we continued to benefit from improvements in the performance of our residential real estate portfolio, we also increased commercial reserves reflecting deterioration in the energy sector. As a reminder, only 2% of our total loans outstanding are in the oil and gas sector, and we continue to work proactively with our customers as we manage through the current industry cycle. We've started the fall redeterminations, and reserve-based energy loans are performing as expected. We believe the energy services sector will incur greater challenges in the near term as it adjusts to lower commodity prices, and this view is reflected in our reserving process. We're also monitoring all loan types in MSAs where greater than 3% of employment is directly tied to oil production. To date, while we've not experienced measurable differences in the portfolio performance between oil and non-oil communities, over time, we would expect some correlated stress in communities that are dependent on oil and gas. Future allowance levels, whether they're higher or lower, will be driven by a variety of factors, including loan growth, portfolio performance, and general economic conditions. Turning to page 17, our capital levels remain strong with our estimated Common Equity Tier 1 ratio under Basel III fully phased in at 10.7% in the third quarter. We returned $3.2 billion to shareholders in the third quarter through dividends and net share repurchases, and our net payout ratio was 60%. In summary, our third quarter results demonstrated the benefit of our diversified business model with strong growth in loans and deposits, and revenue growth reflecting higher net interest and higher non-interest income. Our returns are among the best in the industry, with an ROA of 132 basis points and an ROE of 12.62%. Our strong liquidity and capital positions us well to serve our existing customers while growing our customer base organically and through acquisitions. Let me conclude by highlighting the transactions we've announced over the past couple of weeks. We summarize these announcements starting on slide 20. As John mentioned earlier, operating from a position of strength allows us to make quality acquisitions that help us serve more markets and meet more of our customers' financial needs. In connection with these transactions, we maintained our long-standing disciplined due diligence process, and our strong capital position provides us with the capacity to acquire these businesses and assets. I'll start by highlighting the largest transaction, which involves approximately $32 billion of assets. Yesterday, we announced an agreement to acquire GE Capital's commercial distribution finance and vendor finance businesses, as well as certain corporate finance loan and lease assets. Over 600 Wells Fargo team members were involved in the evaluation and due diligence, which occurred over the past few months. This agreement provides us with the unique opportunity to add relationships and earning assets in businesses where GE Capital was an unequivocal market leader and where we either have meaningful experience or, in the case of commercial distribution finance, is a strong complement to our existing capability. These businesses have established and deep relationships with their customers, and we're excited about the opportunity to enhance these relationships with the breadth of our product offerings. These businesses are run by experienced teams with average tenures of over 20 years. We will also benefit from the acquisition of GE Capital's state-of-the-art customer-facing systems that will create efficiencies. We expect this transaction to close in the first quarter of 2016 with minimal impact on our liquidity position. Over the medium to long term, we plan to fund the acquisition with anticipated growth in deposits, and in the short term, we will likely have to increase our borrowing to preserve our liquidity position. Similar to the GE Capital transaction related to commercial real estate assets that closed in the second quarter, the loans and leases, roughly 90% based in the U.S. and Canada, will be recorded at fair value, inclusive of a lifetime credit loss at close. Including transition costs related to integrating these businesses, we expect this acquisition to be neutral to modestly accretive to our 2016 results. At the end of September, we also announced an agreement to acquire GE Railcar Services, which is expected to close in the first quarter of 2016. This transaction involves 77,000 railcars and just over 1,000 locomotives, as well as associated operating and long-term leases that will be added to our existing First Union Rail business, making us the second-largest railcar and locomotive leasing company in North America. Similar to the GE Capital transaction that we completed earlier this year, we were able to find a partner, in this case, a Berkshire Hathaway company, to agree to acquire the assets that did not align well with our business strategy. This acquisition will add to the quality and diversification of our existing fleet and add to our capacity to meet the industry's growing demand for railcars. Just to summarize the timing related to our GE transactions, our results this quarter include the impact from the GE Capital transaction related to commercial real estate assets that closed in the second quarter, and we expect to close in the first quarter of 2016, the GE Railcar transaction and the GE Capital transactions we announced yesterday. John and I will now be happy to 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. We'll pause for just a moment to compile the Q&A roster. Our first question will come from the line of Joe Morford with RBC Capital Markets. Please go ahead. Thanks. Good afternoon, everyone or good morning, everyone. Still too early. Hi, Joe. Good morning. Hi. I guess following up first on the last comments about the GE Capital acquisition, just curious to learn a little bit more about, fit with the existing platform that you have, where some of the synergies are, and then any color you may be able to share in terms of the profitability of these businesses, the relative yields. I guess a little surprised that you are saying maybe only modest earnings accretions. Is that due to some of the expenses you are bringing on with their staff and/or the higher near-term borrowing? With respect to the first part of your question, Joe, the businesses line up well. Most of this GE Finance business is an asset-based lending business that operates between OEMs on the one hand and distributors on the other. It will fit in Wells Fargo alongside what we describe as Wells Fargo Capital Finance, our ABL business. The GE team has leadership and specialty in their version of ABL lending. But of course, we have got a team that has been together for 20-plus years in ABL, and this will complement them nicely. As we mentioned, the technology that they use to run their business is also something that we think we can benefit from in our broader business over time. The vendor finance business aligns well with our equipment finance business. Our equipment finance business tends to focus on users of equipment. Their equipment finance business has big relationships with OEMs who are selling equipment. We think that they're very complementary when put together. With respect to the question about 2016 accretion, we think there'll be plenty of expenses in order people expenses, technology integration expenses, premises expenses, perhaps, and other things. We're focused on doing that integration in the right way. It's going to take some time. We're going to be very thoughtful about it, and we're more focused on the medium to long-term impact than what this means in 2016. Yeah. Joe, I've been around the acquisition game for a long time, and what we typically have said in the past, and this is probably truer with the depository, that we look for accretion by year 3. It'll happen sooner in this case because it's not as complex. We've learned that to do these things well, you practice on yourself, not on your customers. You get everything done right. We really look at this, as John mentioned, as a long-term value add to the company. Things that close in the first quarter are bound to have expenses around integration to get this rate done right. Actually, Joe, you also asked about funding, and that is a part of the equation here. We will be term funding components of this, so it's not as easy as absorbing existing cash. I think some of the early analyst reports have reflected that belief. We'll be layering in some term funding in advance of the assets coming on. That'll have some incremental costs, et cetera. We're trying to maintain our liquidity buffers through and after the addition of these assets. That makes it a little bit more complicated than some of the math that I've seen so far. Okay. That's all really helpful. I appreciate that color. I guess the other question was just, I recognize the equity investment gains this quarter really came from a number of different investments, but any color on maybe what's a good run rate there or just maybe market sensitive revenues overall recognized if they were in a couple of hundred million support? Yeah. In both cases, I would look at something like a five-quarter average of equity gains on its own and then equity gains based on debt and trading activity. I think they are probably more representative of a run rate. Okay. Thanks so much. You are welcome. Thank you, Joe. Your next question comes from the line of Marty Mosby with Newcomb Securities. Please go ahead. Thanks for taking my questions. Tom, talk about the expenses being elevated with legal. Last quarter, there was about $225 million increase. Is that still the same number that is embedded in the overall operating expenses this quarter? Marty, there is going to be a run rate of what we had last quarter, where we are this quarter, probably for a period of time. Each individual legal matter is its own thing, and we certainly cannot comment on litigation. But I would think of them as part of the environment that we are in. And operating losses in total are probably going to remain about where they are. If they begin to come back down, that would be great, but I would not consider this to be outside at, call it, $500 million worth of total operating loss. The other thing is, you look at Wholesale Banking. That is where you see some of the pressures that we have seen in other banks with capital markets activities. You had the reduction in the fee income, but not much reduction in expenses. You talked about compensation expenses going lower, but were offset by losses. Can you kind of break those two things out so we get a feel for the two components in the expense line? Yeah. I would expect the expenses that are directly related to revenue to general, especially over the course of a year, to reflect the production of revenue. It might not be as linear from quarter to quarter as revenue moves up or down. That's been true for some time. Where we have operating losses, like a legal settlement, for example, that will temporarily elevate expenses in that business unit at the firm. While they may remain elevated, they don't necessarily remain elevated in Wholesale Banking or in any individual segment. I wouldn't expect, for example, compensation expense to cycle for the firm as a whole or for the division as a whole as a result of a one-time in an operating loss. But all told, I would say that we pay for performance in that group. Our total approach to performance-based comp seems to hold very well with the revenue sources that we have. The operating leverage and the results of the segment make sense through the cycle or frankly, for any full year. Thanks. Any further duration extension on the asset structure given the outlook that rates will stay lower for longer? I appreciate it. Not much. You could see that we added a few billion dollars of net securities to our investment portfolio. We like where we are from an asset sensitivity standpoint today. We're going to be adding these incremental assets that we talked about in connection with the GE portfolio. Some of which are leases, so you think of them as a little bit longer term and fixed rate which will have the same impact as adding securities. So we slowed down a little bit in adding duration in the third quarter compared to the second quarter, which I think you can see in the deck. We still have conviction that we're probably in a lower for longer rate environment. Thanks. Your next question comes from the line of Mike Mayo with CLSA. Please go ahead. I just wanted to follow up on that last comment. Do you believe you're in a lower for longer rate environment? Do you think the U.S. economy is getting better or worse? I guess I'm hearing on the one hand, John, you're mentioning some additional confidence in some areas. On the other hand, you're mentioning the global economy as being a headwind. So which is it? Is the U.S. economy getting better or worse? Yeah, Mike. It's a good question. We think it's getting better, but only incrementally better. None of us know, of course, but this year, the GDP in the U.S., let's call it 2.1, maybe 2.2. Maybe next year it's maybe 2.5, something like that. 2.4 to 2.5. So better, but not substantially better. You know us well. You know that most of our business is U.S.-centric. But clearly some of our businesses that we support and do business with have an international component to them, either sales or whatever the case is in the rest of the world. The biggest risk, I think, to the U.S. economy is what's happening in the rest of the world. I think that's unquestionable. Better, but not hugely better. And with respect to rates, the lower for longer applies. We think of it as at the short end and at the medium- Correct long end of the curve. If the Federal Reserve starts moving rates in December or in the first quarter, we will be sitting here a year from now, we think, with one, two or three 25 basis point moves under our belt at probably best case with respect to how far things might move. Unless there's meaningful inflation, which isn't on anybody's radar screen right now, then it doesn't feel like that's going to have an impact on long-term rates. It feels like more of a flatter curve environment and long rates in the vicinity where they are now, unless something really different begins to emerge. Of course, the good news is if we're wrong about our forecast, we perform better. Sure. We're constructing ourselves to do well in this environment. But if we end up in a higher short-term or a higher long-term rate environment than we're forecasting, that's net good for Wells Fargo. With that expectation, are you taking a second look at expenses? Your efficiency ratio this quarter moved in a better range. But do you have a plan B to say we expect these headwinds to last for longer, therefore we're going to do something extra? Yeah. I describe it as a full-time Plan B, which is that we're always looking at ways to be more efficient. We highlighted a couple of them over the last quarters. You could look as far as what? The beginning, a year ago, and we're down 25% year-over-year. We've talked about our real estate strategy where we shrunk by 20 million sq ft over the last few years. Still have more to go. Because there are a variety of programs like that. But most of that savings gets absorbed by areas where we're changing or improving the firm. We're spending money on compliance, on risk management, on technology, on innovation. I have got some conviction that we are not going to move below the higher end of our range while we are still in this lower rate environment because whatever savings we get by being thrifty, we end up reinvesting into the programs that I mentioned. Yeah. Just to put an emphasis on that, Mike. Expenses get a lot of discussion around here, and we are keenly focused on them because, as John mentioned, you save. And we think of it in the ways of what will the customer pay for, and what makes us a stronger long-term provider of services to our customers and to be a more relevant company to all our constituents. You save on one side, and you invest on the other side. Some of those investments have been fairly significant. But it is a constant drumbeat around here. All right. Thank you. Thank you, Mike. Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead. Yes, good morning. Just to follow up on Joe's question. John, could you give us a sense of what the average yield of the $32 billion in GE assets that you're putting on and what the fee income generation was for last year? No. Just because we haven't disclosed the yields on that portfolio. But I can tell you, Erika, it looks a lot like that portion of our own Wholesale Banking portfolio. And I would add, frankly, that their approach to the risk analysis of their loans looks like our risk analysis of their loans. And their pricing on those loans looks like our pricing of similar loans. You could think of it as a component piece of what our Wholesale Banking outcomes look like. And then fee generation, is the question what GE generated in fees with those loans or what- Yes. Or that business that you're acquiring generated in fees. The revenue streams for that business are more net interest income streams rather than fee streams. There are certainly loan fees, but they get amortized into yields. I can tell you that in our own analysis of this, and I am sure in yours also, as we look out over some period of time, we can imagine a lot of other products and services that we will be providing to these same customers that GE wasn't in a position to offer them directly. So it is part of the long-term value creation. But there isn't a run rate of that in there today because GE was primarily a lender rather than a full-service provider of banking capabilities. Got it. Just wanted to get some clarification on your comments earlier because adding these assets have the same impact of extending duration on the asset side. Should we expect cash balances to stay relatively stable from the average balances of the third quarter? It depends on what is happening with deposit growth over the timeframe that we are talking about. This is five or six months in the future. All things being equal, maybe you could say yes. By cash and HQLA or high-quality liquid assets are interchangeable in some ways. So I would look at the sum of those things, not just cash, depending on how our rate view evolves and what goes on in terms of the opportunity to get more invested, et cetera. These are risk assets. That is one sort of use of cash. Cash at the Fed or cash in treasuries are two other related uses of cash. So I do not want to overcomplicate it, but it is a little bit different than just cash balance. Got it. Just to sneak one last one in. Your results clearly demonstrate your strength on your relationships with the consumer and the corporate side. Given your balance sheet and capital strength and some difficult headlines that we are seeing from European banks, how are you thinking in terms of your medium-term strategy to increase your market share with institutional clients given potential market share dislocation and your strength in capital, particularly in leverage capital? Yeah. I wouldn't think of our medium-term strategy any differently than how you've seen us behave in the recent past in that area. We have great relationships with a large number of institutional clients and counterparties, and there are sometimes interesting things to do. We have high regard for our capital and our funding and real meaningful expectations for how we get paid for using it as we work on those relationships. We are already doing that. From time to time, something interesting will reveal itself, and we will consider it. There is no change in strategy that is going to result in us having a different risk profile or trying to fill a major vacuum that may be being left behind by a European bank or something else over the next few years. Yeah. What you have liked about us in the past, you will like about us in the future regarding that. Got it. Thank you so much. Thank you. Your next question comes from the line of Eric Wasserstrom with Newcomb Securities. Please go ahead. Thanks. Good morning. Hi, Eric. Hi, how are you? I just want to make sure that I'm fully understanding what the key points of leverage are in the income statement as we look out into next year. Obviously, it seems like the biggest contributor as a revenue driver is asset growth stemming in part from these acquisitions. But given the NIM commentary and the efficiency ratio commentary, should we expect positive operating leverage into next year or more basically zero? Well, we're always striving to generate positive operating leverage. That's a goal as we set out to plan for the coming period. In terms of what happens, it'll reflect what we're primarily emphasizing, which is the growth in relationships, which leads to a growth in loans and a growth in deposits, credit discipline, and further penetration in our product areas with the customers that we have. How the macro events sit on top of that with respect to where rates go, et cetera, it's tough to know. We're not as focused on that or can't be as focused on that because we can't control some of those outcomes. We're setting ourselves up to have expense discipline. We're setting ourselves up to add relationships. We're setting ourselves up to deliver into those relationships, which you see in loans, deposits, and many of our product areas. But how it lands in a given quarter is different, more difficult to forecast. Eric, we're enjoying some of the strongest growth years we have seen in what we describe as the core building blocks of long-term shareholder value creation. Relationships, loans, deposits, depth of relationship, new primary checking household growth. As John mentioned, depending on the macro environment, not all that shows up in net value creation the next quarter, but over the long period or even the interim period, that is the best way we think to successfully grow and add to the things that our customers and our shareholders value. Yeah. No, certainly. It sounds like then it's basically top-line led operating leverage stemming in part from a continued shift in mix of revenue sources. Is that fair? Well, we surely want the top line, but we're watching the expenses where nothing goes unexamined around here and we'll see how things turn out. If I can just do one quick follow-up on asset quality. It sounds like from your commentary, the go-forward expectation should be for provision to roughly equal NCOs. Is that right? It's tough to forecast. We've gone through five years of reserve releasing. We've been saying for a few quarters that what's going to happen subsequently is going to reflect loan growth, portfolio performance, and general economic outcomes. Does that mean that we remain at a no release, no provision level? That's too precise to forecast, but it's true that if we grow our portfolio and the new assets look like the assets that we already have, that we'll begin providing for those, which could become more of a net outcome. As we're already at a generational low in terms of charge-off, which means that credit performance can't really improve meaningfully from where we are today. It's already that good. Great. Thanks very much. Thank you. Your next question comes from the line of Scott Siefers with Sandler O'Neill. Please go ahead. Morning, guys. Hey, morning. John, I was hoping you could talk for a moment on some of the changes in the loan yields within the commercial bucket. At least a few of them like commercial mortgage, construction leasing. They came under a little more pressure than I would have thought. I imagine at least to a certain extent that due to both the financing and the GE deals, but was curious to get your color and thoughts on what might be going on there. Yeah. I wouldn't think of that as attributable to those assets coming on. It really has more to do with the variable sources, the loan fees that sometimes accelerate that run through their PCI recoveries or other things that are harder to forecast and more one time. You see them changing these two, the yields in these two dates side by side, but it's not a general change in the inherent yield or the customer yield of the portfolio. Okay. All right. That makes sense. Then just one sort of nitty-gritty question. Did you guys quantify anywhere the size of the gain from the Warranty Solutions business? I think when you announced you'd sold it for $150 million in cash, but I just wasn't sure where it had been recorded on the books. Yeah. It's less than a penny per share. I don't think that we did put that anywhere, but you're the first person to ask it, so there you go. All right. Okay. I think I'm all set. Thank you very much. Thank you very much. Your next question comes from the line of David Hilder with Drexel Hamilton. Please go ahead. Good morning. Thank you. I noticed what appeared to be a reversal of a prior deferred comp expense and wondered what the reason for that was. I don't think of it as a reversal. Every quarter our employee benefits expense on the one hand, and our trading results, on the other hand, reflect the outcomes from our deferred comp approach. Our employees voluntarily defer comp, and we neutralize the outcomes for them, and we provide that return, and we do it on a hedge basis so that our results reflect when equity markets go up, our trading line goes up, and our employee benefit expense goes up. When equity markets move down, that's just to generalize, the reverse is true. In this quarter, we had equity markets down, we had trading revenue down, and consequently we had an equal amount of employee benefit expense down. So it's really just the cyclical ebbs and flows of that program, no change in approach or reversal of anything. Great. Thanks very much. You're welcome. Thank you. Your next question comes from the line of Nancy Bush with NAB Research LLC. Please go ahead. Good morning, guys. How are you? Good morning. Nancy, good morning. Two questions for you. John, when you did the initial GE portfolio acquisition, I guess that was about a couple of quarters ago, you said that you were going to continue to look at assets at GE, and obviously you did. I guess my question, is GE going to continue to be the gift that keeps on giving? Is there more there that you're looking at, or is this sort of the end of the GE pot? You may have seen the list in the paper today of the 13 announcements that they've had since they declared that they were going to wind down GE Capital, and three of those line items are attributable to our activity, the commercial real estate, the railcar, and now the commercial businesses. Just incidentally, we looked very closely at many of the other things that looked like they might have a fit for Wells Fargo, and for one reason or another, they were a better fit for somebody else, either because of the asset type or the pricing scenario or something else. I think this pretty much concludes their U.S. business. I think they've got some things to sell around the world. Because of our U.S.-centric approach, it's probably true that we wouldn't be playing a role like the role that we played in these three on those future acquisitions. Now, having said that, we've been an advisor in some of these other transactions. We've been a lender to a winning bidder in some of these other transactions. There may be other things to do, but in the way that we've approached these three businesses or these three portfolios that we're acquiring, I don't think there's more of that coming from GE Capital. My second question would be whether the integration of this latest large business from GE is basically going to preclude you from looking at other possible asset portfolios, et cetera, at other companies due to the funding issues. Nancy, I'd answer it this way. Never is a really definitive word. But I'd say, on the other hand, the focus right here now is to do this and do it really well. This is a lot to say grace over. We have lots of experiences in acquisitions. We're going to treat this as a merger. Doing it well provides huge benefits to all those involved, and that's job one, job two, and job three right now, do this really well. If you guys could just clarify, are you going to be moving people? How is this physically going to work? These businesses are primarily headquartered in the Chicago area and the Dallas area, and nothing about that is intended to change. There may be some opportunity for their people in the field to team up with our people in the field, but the bulk of the people will remain doing what they are doing, right where they are doing, and we will figure out how to help, how to improve, how to optimize, but not a big migration. Yeah. Of course, we have real estate and locations and people on the Wells side in both those locations. Okay. All right, great. Thank you. Great. Thank you, Nancy. Again, for any questions, please press star followed by the number 1 on your telephone keypad. Your next question will come from the line of John Pancari with Evercore ISI. Please go ahead. Morning. Hey, John. Back to the loan yield topic. Just based on your answer there, are you implying that commercial yield decline of 15 basis points that we saw this quarter could actually snap back next quarter? It depends on what happens with resolutions, with prepayments that accelerate loan fees into yield, et cetera. So it could. I'd say as a general matter, based on where we are in the cycle, there are fewer resolutions, fewer PCI wind-ups today, and we're not making bad loans anymore, or buying them for that matter, quite that way. So I would expect that type of accounting to quiet down and more reflect the amortization of loan fees into yield, and then of course the acceleration of those when loans prepay. We are in a higher commercial loan prepayment environment probably because things just go liquid. But I wouldn't expect it to snap back, but it certainly could increase a little bit, move around, et cetera. Okay. One other thing on the margin, the swaps. I just want to get an idea of how much the swaps benefited the margin this quarter, and also the graphic that you're adding from Boston. Yeah. So we don't break out what the swap's benefit is to the margin. As we've described our approach to adding duration to the balance sheet for just for everyone's benefit, a portion of that's been done by swapping floating rate loans with fixed. Which has a very similar impact of adding fixed rate securities to the portfolio. We don't anticipate a lot more of that activity today. I mentioned in response to one of the earlier questions that we think we are about where we need to be from an asset sensitivity perspective. That could change as deposit flows ebb and flow, and we could end up with a lot more liquidity to deploy. But at the moment, I think we like where we are from an asset sensitivity point of view, and so we probably won't be moving rapidly down the path toward meaningfully growing the securities portfolio today, or swapping floating rate loans. Okay. Lastly, just on the credit side on energy, just want to see if you are in a position to quantify your energy reserve right at this point, and also your criticized ratio on an energy loan. We don't break out the components of the allowance. But I can tell you that our approach through the first and second redetermination dates since the price of crude moved down meaningfully, has been, from my observation, a conservative approach, where we're re-rating credits down before waiting for information from borrowers based on what we know about the relationship and trying to get ahead of this. So while frankly, as I mentioned in the services space, we could continue to see more negative migration or even meaningful negative migration in the industry. We feel great about where we are from an allowance perspective in the energy space where we stand today. But we don't break out the component pieces of the allowance. Okay, thanks. Then one more very quick one on that topic. The AFS portfolio with oil and gas bonds. I think you indicated a couple of quarters back it was around $1.5 billion. Is it still around that amount? I don't have the total in front of me, but I can tell you with part of your question, actually $1.4 billion is the number. We took some OTTI in the quarter in that space. Those are of the corporate names in that portfolio. Energy names were the ones that were the most underwater for the longest period of time, which is certainly part of our review for other than temporary impairment. And in the quarter in our results reflect taking those impairments through P&L. So we feel good about our basis in those assets. All right. Thank you. Thank you. Our final question will come from the line of Paul Miller with FBR. Please go ahead. Yeah, thank you very much. Most of my questions have been answered. But on the jumbo loan markets, it is one of the areas I think if you are not number 1, I think you are number 1. But we are seeing more and more market share go to the jumbo markets. Can you add more color around that? And then, the loans that you put on your portfolio, my guess is most of them are jumbos. And where do you feel that you will be filled up there? The loans that we put up, the single-family mortgage loans that we put on our balance sheet, virtually all of them are prime jumbo loans because as you know, there is no secondary market for those loans. But to serve those customers, we end up keeping them. Frankly, there is no magical number in terms of when we are full. Our total single-family real estate portfolio has not shrunk or grown in the aggregate over the last few years meaningfully. The level stayed about the same, but we have had home equity paying off and Pick-a-Pay paying off. We have had other lower quality loans winding down and prime jumbo loans winding up a little bit. And I guess I would anticipate that to continue as jobs are stronger and housing is stronger, there are more people looking at those types of homes requiring those types of loans. Only a balance sheet lender can provide that loan because there's no place in size for a mortgage company or any place else to go. There's no government program, and there's no private label market. I'd also add this, Paul, that as a percentage, even though the overall residential real estate totals have not changed, the quality's improved significantly. While the totals are the same, since we've grown our loans, the percentage of those loans as a percentage of our overall portfolio is down. Those jumbos also tend to turn over a bit faster. They have a little less duration because those folks tend to move more often and so forth. These are for our very best customers. We surely like that asset class. Okay. Hey, guys, thank you very much. Thank you very much. Thank you. This concludes the call. Thank you all for joining us. We always appreciate your interest and involvement. Again, for all the questioners, we will see you here three months from now. It will be 2016. We will be expecting our fourth quarter earnings. Thank you very much. Bye-bye. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, and you may now disconnect.