Earnings Call: Q2 2015

Jul 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 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 second quarter results and answer your questions. This call will be recorded. Before we get started, I would like to remind you that our second quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I would also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release, and in the quarterly supplement available on our website. I will now turn the call over to our Chairman and CEO, John Stumpf. Thank you, Jim. Good morning, and thank you for joining us today. We earned $5.7 billion in the second quarter as our diversified business model continued to generate strong loan and deposit growth. Our financial strength and competitive positioning have allowed us to capture opportunities for growth, both organically and through acquisitions. In addition, our commitment to managing risk and the benefit of an improving housing market continue to improve our credit results. Let me highlight our growth this quarter compared with one year ago. We earned $1.03 in EPS, up 2% from a year ago. We generated $21.3 billion of revenue, up 1% from a year ago, with 4% growth in net interest income. We had broad-based loan growth, with total loans reaching a record $888.5 billion, and our core loan portfolio increased by $68.5 billion, or 9%. Our growth benefited from the $11.5 billion GE Capital loan purchase and financing transaction in the second quarter. Our deposit franchise continued to generate strong customer and balance growth, with average deposits up $83.8 billion, or 8%, while we reduced deposit costs. We also grew the number of primary consumer checking customers by 5.6%. Our credit performance continued to improve, and our net charge-off rate declined to 30 basis points of average loans, the lowest level in 20 years. Our financial performance resulted in strong capital generation, and returning capital to our shareholders remains a priority. We increased our quarterly dividend rate by 7% to $0.375 per common share, and we repurchased 36 million shares of common stock. We've reduced our common shares outstanding for five consecutive quarters, with shares down 105 million from one year ago. While recent developments in Europe and Asia have implications for the U.S. economy, the ongoing U.S. economic expansion has remained on track and has entered its seventh year, a feat accomplished only four other times in U.S. history. The labor market continued to recover with a record 57 consecutive months of payroll gains, and housing activity has been especially encouraging, with second quarter positioned to be the best quarter for home sales since 2007. These factors, along with an increase in consumer confidence, makes me optimistic that the economic expansion will sustain momentum into the second half of the year, and Wells Fargo should benefit from the increase in economic activity as we remain focused on meeting our customers' financial needs. John Shrewsberry, our Chief Financial Officer, will now provide more details on our second 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 results this quarter are straightforward and demonstrate momentum across a variety of key business drivers. We continued to have strong loan and deposit growth across our diversified businesses. We grew net interest income with earning asset growth, and our net interest margin improved. Many of our customer-facing businesses generated strong fee growth. Credit quality improved, and we had lower net charge-offs and a higher reserve release. And we continued to operate within our targeted ranges for ROA, ROE, and efficiency. Let me now highlight these key drivers in more detail. On page 3, we highlight the year-over-year growth John emphasized in his remarks, including revenue, loans, deposits, and EPS, as well as improving credit. 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 and to prudently deploy liquidity. Short-term investments in Fed funds sold were down $59.1 billion from first quarter, reflecting loan growth, security purchases, and lower deposit balances driven by seasonality in our consumer businesses and repricing in certain wholesale businesses. Our securities portfolio grew $16 billion from first quarter. We purchased approximately $36 billion in securities, primarily agency MBS, US Treasuries, and municipal securities, which were partially offset by maturities, amortization, and sales. Turning to the income statement on page 5, it is important to note that the linked quarter decline in earnings was driven by the $359 million discrete tax benefit recognized in the first quarter. Our pre-tax earnings increased $386 million or 5% from first quarter, demonstrating the underlying momentum we had across our businesses. Revenue increased $40 million from first quarter, with strong growth in net interest income up $284 million, reflecting growth in earning assets. We had linked quarter growth in fee income in most of our customer-facing businesses, including deposit service charges, trust and investment fees, card fees, merchant processing, commercial real estate brokerage, mortgage, and insurance. However, non-interest income declined $244 million from first quarter due to lower market sensitive revenue and lower other income driven by the accounting impact related to our debt hedges. Expenses declined despite an increase in operating losses related to litigation accruals, and we generated positive operating leverage. As shown on page 6, we continued to have strong loan growth in the second quarter, our 16th consecutive quarter of year-over-year growth. Our core loan portfolio grew by $68.5 billion or 9% from a year ago and was up $29.5 billion from first quarter. Our growth was broad-based, which I will highlight on the next slide, and included $11.5 billion from the GE Capital loan purchase and financing transaction. This transaction is an excellent example of how the combination of our balance sheet strength, the expertise of our team members, and our relationship focus positions us to capture opportunities for growth. 67% of this portfolio is U.S.-based with the remainder of the portfolio predominantly in the United Kingdom and Canada, which are active lending markets for us. The loans we purchased were to over 145 different customers. While we had existing relationships with many of these customers, the transaction has provided us with a meaningful number of new relationships, which we believe will lead to additional opportunities for new business. It is also important to note that we did not acquire these loans until late in the quarter, so while it increased ending loan balances, most of the benefit to average loans and to net interest income will be reflected in the third quarter. On page 7, we highlight the diversity of our loan growth. C&I loans were up $36.6 billion or 15% from a year ago. The GE Capital transaction drove $4.2 billion of this growth, primarily from the financing to Blackstone Mortgage Trust. The rest of the growth was diversified across our wholesale businesses with double-digit year-over-year growth in asset-backed finance, equipment finance, corporate banking, and government and institutional banking. Commercial real estate loans grew $10.2 billion or 8% from a year ago and included $7.3 billion from the GE Capital transaction. Core one to four family first mortgage loans grew $15 billion or 7% from a year ago and reflected continued growth in high-quality non-conforming mortgages. Credit card balances were up $3.9 billion or 14% from a year ago, benefiting from strong new account growth and the Dillard's portfolio acquisition in the fourth quarter of last year. Auto loans were up $3.7 billion or 7% from last year. New originations reflected the strong auto market and were up 5% from a year ago and up 15% from first quarter benefiting from seasonality. As highlighted on page 8, we had $1.2 trillion of average deposits in the second quarter, up $83.8 billion from a year ago and up $10.5 billion from first quarter. Our average deposit cost declined to 8 basis points, down 2 basis points from a year ago. The decline in ending balances reflected the seasonal impact to consumer balances due to income tax payments and repricing in certain wholesale businesses, primarily global financial institutions. We continued to successfully grow our primary consumer checking customers, which were up 5.6% from a year ago, and our primary small business and business banking checking customers increased 5.3%. Our primary customers have more products with us and are more than twice as profitable as non-primary customers. Page 9 highlights our revenue diversification and the balance between spread and fee income, which has shifted slightly to more net interest income as we benefited from strong earning asset growth. Our earning asset mix results in diversified sources of interest income. The drivers of our fee generation are also diverse and vary based on interest rate and economic conditions. For example, market sensitive revenue, which includes trading and gains from our debt and equity investments declined 21% from first quarter. Market sensitive revenue was 8% of our fee income in the second quarter, down from 11% in the first quarter. However, many of our other customer-facing businesses generated higher fee income. We grew net interest income on a tax equivalent basis by $524 million or 5% from a year ago, reflecting strong growth in average earning assets up 11% from a year ago. The $312 million increase in net interest income from first quarter reflected growth in earning assets and one extra day in the quarter. Net interest income also benefited from increased income from variable sources, lower deposit costs, and higher income from interest rate swaps used to convert a portion of our floating rate commercial loans to fixed rate as we continue to add duration to our balance sheet. The net interest margin increased 2 basis points from the first quarter. This is the first linked quarter increase in the NIM since the first quarter of 2012. The increase this quarter was driven by balance sheet repricing and growth, including growth in investments in loans and lower deposit costs, which benefited the margin by 4 basis points. Higher variable income from increased loan fees, semiannual preferred dividends, and PCI recoveries contributed 1 basis point to the margin. Customer-driven deposit growth reduced the margin by 3 basis points but had minimal impact to net interest income. Our balance sheet remains asset sensitive, and we are positioned to benefit from higher rates. However, we believe we can grow net interest income in 2015 compared with 2014, even if rates remain low. Total non-interest income declined $244 million from first quarter, driven by lower market sensitive revenue and lower other non-interest income. The other non-interest income category was down $426 million in the second quarter, driven by the accounting impact of interest rate and currency hedges associated with our long-term debt. We are required to measure the hedge effectiveness quarterly, and while the net impact is expected to be zero over their term, quarterly interest rate and currency volatility can cause this line item to vary from quarter to quarter. It's important to note that while total non-interest income declined, if you exclude market sensitive revenue and other income, we had strong diversified fee growth across our other fee categories, demonstrating growth from doing more business with our customers. In fact, second quarter was the strongest quarter over the past five quarters for brokerage, trust and investment management, card, merchant processing, insurance, and mortgage origination. Mortgage banking revenue increased up $158 million from the first quarter on higher origination volume, up $13 billion or 27%. Second quarter had the highest level of mortgage production since the third quarter of 2013. 54% of originations were for purchases, up from 45% in the first quarter. We ended the quarter with a $38 billion application pipeline, up $8 billion from a year ago and down $6 billion from first quarter. 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 third quarter to be lower than second quarter. Our gain on sale ratio was 188 basis points in the second quarter, and we currently expect the third quarter ratio to remain within the range of the past five quarters, between 140 and 210 basis points. As shown on page 12, expenses were down $38 million from the first quarter. The decline was primarily due to lower employee benefits expense, which was seasonally elevated in the first quarter. Operating losses were $521 million in the second quarter, up $226 million from first quarter, reflecting higher litigation accruals for various legal matters. While we continue to invest in our businesses, reflected in higher professional services and advertising expenses in the second quarter, we remain focused on operating efficiently, as indicated by our efficiency ratio improving to 58.5%. We expect the efficiency ratio for the full year 2015 to remain within our targeted range of 55%-59%. Turning to our business segment, starting on page 13, community banking earned $3.4 billion in the second quarter, down 8% from first quarter, which included the discrete tax benefit. One of the drivers of our long-term growth is our ability to grow retail bank households. Year to date through May, we've had the strongest household growth in four years. This strong growth reflects our success in attracting new customers to Wells Fargo, as well as the benefit of better retention of our existing households as we remain focused on meeting their financial needs. This focus has also resulted in an increase in total products held by our customers. For example, we've been successfully growing the penetration rate of credit cards to our retail bank households, which has grown to 42.6% in the second quarter, up from 39% a year ago and 34.9% two years ago. Credit card purchase volume was up 15% from a year ago, reflecting an increase in new accounts. Debit card purchase volume was up 8% from a year ago, benefiting from the strong growth in primary checking account customers and increased usage among existing customers. Wholesale Banking earned $2 billion in the second quarter, up 3% from a year ago, and 12% from the first quarter. Wholesale Banking continued to have strong loan and deposit growth. Average loans grew 12% from a year ago, with broad-based growth across most wholesale businesses. This growth in average loans did not fully reflect the benefit of the GE Capital transaction recorded late in the quarter. Average core deposits grew 14% from a year ago and were flat linked quarter, reflecting pricing actions we took in the second quarter to reduce deposit costs. The strong loan and deposit growth helped grow revenue by 2% from a year ago. Treasury management revenue grew 10%, reflecting new product sales and repricing. Second quarter revenue also benefited from higher equity gains from the sale of certain equity fund investments driven by the Volcker Rule. Wealth, Brokerage and Retirement had another record quarter, earning $602 million in the second quarter, up 11% from a year ago and up 7% from first quarter. WBR's pre-tax margin was 26% in the second quarter, exceeding its long-term target of 25%. Revenue grew 5% from a year ago, driven by higher recurring sources of revenue. Net interest income increased 12%, and asset-based fees were up 7%. Brokerage advisory assets grew to $434 billion, up $25 billion or 6% from a year ago, primarily driven by net flows. WBR's strong loan growth continued with eight consecutive quarters of year-over-year growth. Loan growth accelerated this quarter, up 16% from a year ago, the strongest growth rate in over six years. Growth was broad-based with strong client demand across a number of product offerings. Turning to page 16, credit quality in the second quarter improved. Our net charge-off rate declined to 30 basis points of average loans. Non-performing assets have declined for 11 consecutive quarters and were down $438 million from first quarter. Non-accrual loans declined $67 million from first quarter, as higher energy non-accrual loans were offset by improvement in residential real estate, as well as other categories. The reserve release was $350 million in the second quarter. The increase from first quarter was driven by continued credit quality improvement, most notably significant improvement in residential real estate. Our credit losses in our residential real estate portfolios declined 22%, and non-accrual loans declined $388 million or 4% from first quarter. It's important to note that even small changes in the performance of our residential real estate portfolios tend to outweigh changes in other portfolios, given the size of our residential real estate portfolio, which is 36% of total loans. We had an increase in non-performing loans in our energy portfolio. Oil and gas loans are only 2% of our total loan portfolio, and balances in this portfolio declined by approximately $700 million from first quarter, reflecting paydowns. Our energy team completed their spring redetermination process during the second quarter, and as expected, the drop in energy prices did impact the cash flow and collateral values of a number of our borrowers, leading to downward portfolio migrations. The deterioration in this portfolio is reflected in our allowance for credit losses, and we will continue to monitor the energy portfolio. Finally, when considering our allowance, it is important to note that the loans we acquired from GE Capital were accounted for under purchase accounting under GAAP and reflected a lifetime credit loss adjustment and therefore did not require additional loan loss reserves typically associated with commercial loan growth. Turning to page 17, our capital levels remained strong with our estimated common equity Tier 1 ratio under Basel III fully phased in at 10.5% in the second quarter. We returned $2.9 billion to shareholders in the second quarter through dividends and net share repurchases. Our common shares outstanding declined by 17.7 million shares in the second quarter, reflecting 36.3 million shares repurchased and 18.6 million shares issued. We expect to reduce our common shares outstanding through share repurchases throughout the remainder of the year. Our dividend payout ratio increased to 36% in the second quarter as we increased the quarterly dividend rate on our common stock by 7%. Our net payout ratio in the second quarter was 54%. The decline in our net payout ratio reflected our strong asset and RWA growth as our first call for capital is for providing credit to our customers. However, we remain committed to returning capital to our shareholders, and we expect our net payout ratio to be within our targeted range of 55%-75% for the full year. In summary, our second quarter results demonstrated the benefit of our diversified business model with strong loan and deposit growth and momentum in non-interest income across many of our customer-facing businesses. Our strong liquidity position and capital levels position us well to serve our existing customers while growing our customer base organically and through acquisition. The improvement in credit quality demonstrated our continued focus on risk management. While the current interest rate environment remains uncertain, we are actively managing our expenses while focusing on meeting our customers' financial needs to generate growth. We 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 one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question will come from the line of Ken Usdin with Jefferies. Please go ahead. Thanks. Good morning. Good morning again. John, I was wondering if you could just give us a little bit more on your confidence about the economic environment versus the commentary about the tough competition out there. We know you guys are going to get a great benefit looking ahead from the averaging of the GE. On one, could you just kind of flesh out the pockets of loan growth that you continue to expect? Also, do you anticipate being able to at least be in the pole position to get some more of those GE assets? Thanks. There are a variety of loan categories that deserve to be mentioned individually, but you know we're aggressively growing the card business with our existing deposit customers, and percentage gains there will probably continue to be very strong. Autos, in spite of the heat in that market and our public posture of wanting to maintain our credit discipline, still are providing a big opportunity because so many cars are being sold. That's a continued opportunity. Still a lot going on in commercial real estate. As you mentioned, the GE Capital loans helped us late in the third quarter there. Jumbo loans on the residential side have been growing on the balance sheet at the same strong pace for a long time, and we expect to see that there. Across the C&I range, we mentioned several of the businesses that have slightly independent but all attractive growth prospects. The utilization of lines across the variety of corporate and commercial loan categories is still in the, call it mid to low 30s. There is room for that improvement, and we keep gathering new customers in those businesses as well. It is coming from everywhere at attractive paces. Yeah. Ken, there is a fair amount of capacity to carry more debt by medium-sized companies, small companies, and consumers. Rates are very favorable. Most Americans, businesses and consumers have de-risked and de-leveraged their balance sheets. There are opportunities, and we are very active on Main Street and on the back 40, working with customers. We love this opportunity to do the GE thing, but organic growth is still the main part of the way we grow. With respect to what there still might be to do with GE, there have been some portfolio sales that have been announced there since the one that we worked on. We are working as closely as we can with them. They are a great relationship of ours. There are businesses that they are trying to dispose of that fit neatly with our expertise. Some things we are going to be very competitive with, and some, because we are not expert in them, will be less so. But we are working hard. We hope that it turns up incremental opportunity to do more of what we have done on the commercial real estate side. We will be hearing about that in the coming months as their processes unfold. Okay. Great. Just follow up on the energy portfolio shrinkage. You spoke about the $700 million decline. I am sure there will be other questions about the NPA growth. Can you talk about just what you are seeing in the energy side? Is that active, like pushouts by you guys? Is it de-equitization coming in and taking out credits? Can you just talk about how that portfolio behavior is acting and how that influences your provisioning decisions? Sure. I would describe the reduction in the principal balance as borrowers taking their balances down just to conform with their borrowing base reductions. As I mentioned, that was about $700 million of reduction in the second quarter. There was a lot of capital being raised in the first quarter. Capital markets activity was very brisk in the first quarter. It is a little bit slower in the second quarter, and a lot of that was equity coming in to stabilize balance sheets. Feels like that has slowed down just a little bit as people process what happened in the first quarter. We do not anticipate loan balances or new loan activity to be terribly brisk in terms of leading to higher outstandings at Wells Fargo in the second half of the year. But the market is acting very rationally. The market is acting very quickly. The opportunists are arriving at the door and trying to work things out, create business combinations, and take advantage of the situation to resolve it. Things are happening, frankly, a little bit faster than we might have anticipated sitting here six or eight months ago. Thanks, John. Yes. Your next question comes from the line of Joe Morford with RBC Capital Markets. Please go ahead. Good morning, everyone. Hello, Joe. Hey, Joe. I guess just a follow-up on the credit trends within the energy portfolio. With the borrowing base redeterminations finalized, you touched on this, but how has the performance tracked relative to initial expectations, and how much of the increase in the related non-performing loans stemmed from that as opposed to the shared national credit exam? Well, it's a combination of both. It's tough to call out specifically what the regulators might have independently wanted that we wouldn't have agreed to or gotten to on our own. The outcome is what it is. I think we had about a $400 million increase in non-performing assets in energy for the quarter, which feels like it makes sense. To the extent that some of those were very conservative estimations of NPA status, then that'll get recaptured on the back end of the process when those loans get worked out, which is fine. We had nominal losses in the quarter. We'll go into a fall redetermination for E&P companies as well, and we'll measure the performance of the midstream and services companies at the same time. We feel great about where our allowance is right now. As you may recall, it had an impact on our first quarter number, even though that was pre-redetermination, and it has an impact again on the second quarter number. Who knows? As the third and fourth quarter roll through, I'm sure that there'll be more loans that are at issue. The whole portfolio amounts to 2% of our loan portfolio. We feel very well reserved for where we are. We've got the best team in energy banking, and our credit folks working through the portfolio. So the impact here is relatively immaterial to Wells Fargo. As we called out in our comments, especially in a quarter like Q2, minor changes in our residential real estate portfolio have a tendency to dwarf whatever's going on in energy because 36% of the loan portfolio is in single-family real estate and 2% is in energy. Joe, I would offer this. Since I've been around a long time, I think this is my third or fourth cycle. I remember doing workouts in this business in the early 80s. This one is different in that the energy participants, whether they be on the E&P side or upstream, whatever it is, are more conservative. They tend to be better capitalized. They reacted more quickly through reducing their CapEx budgets, some case reducing dividends. Some of the real stretchy stuff was done outside of our industry, if you will. So it doesn't mean that all situations are going to work out, but they went into this with and reacted much more quickly than I've seen in the past cycles. That's very helpful. Good color. I guess, have you quantified what you have in terms of dedicated reserves against the energy portfolio? As you point out, given that things like single family is such a bigger part of the overall loan portfolio, what's your broader outlook for the provision and the possibility of any future reserve releases? We're bumping along here at 30 basis points of annualized net losses on the total loan portfolio. As we've called out in the past, we shouldn't expect releases in any given quarter because the calculation each quarter of the allowance is going to include the observed performance of the portfolio. It's going to include general economic conditions. It's going to include where the growth is coming from in the mix in the portfolio. I would not model in releases of this magnitude going forward. Of course, as we've said, if we keep building our loan portfolio, you'd expect to see builds, all things being equal. Separately, we also called out in the case of GE, if we're growing our loan portfolio by acquiring loans and we invoke purchase accounting, then that's a complicating factor in whether the allowance is growing or not because the mark on the loans reflects the lifetime credit adjustment. That's a little complicated. For our own internal purposes, of course, there is an allocable component of the allowance that reflects what we think the inherent loss content is in the energy portfolio, and that will grow or shrink depending on how the portfolio performs. As I said, I would assume that the next couple quarters aren't much better than the last quarter in terms of we're still resolving these issues. Some of them are just coming to light for certain borrowers, but it's a very contained portion of our loan portfolio and the aggregate impact should not be material to Wells Fargo. Understand. Thanks so much. You bet. Thank you. Your next question will come from the line of Erika Najarian with Bank of America. Please go ahead. Hi. Good morning. Morning, Erika. Just wanted to take a step back. As we enter potentially a rising rate environment in the second half of the year, fingers crossed, one of your peers today mentioned anticipating a significantly more competitive environment for retail deposits, given the regulators have essentially said there are good deposits and bad deposits this time around. Secondarily, they also mentioned entering new markets for the first time and de novo-ing. I guess the first question is, how should we expect Wells Fargo's repricing to progress if rates actually rise on the short end? Secondarily, given the impressive footprint that you've built, how would you defend that market share and footprint against those that are aggressively trying to grow retail deposits, particularly for regulatory purposes? Erika, let me start with that. It's a great question, and not all retail deposits are created equal. Our focus here has been on relationships, and we think relationships on the consumer side start with a consumer checking account. In fact, I don't have the exact number, I think it's 86% of our retail customers have a checking account with us. It's their primary account. They live out of that. If you look at certificates of deposit, it's less than $35 billion here. So it's a couple percent of our. So that's a very different deposit makeup. Like other companies in our industry, we have a lot of experience in rates backing up. The speed of the backup matters, where it starts from. A move from 3% to 4% is different from a move from nothing to 1%. Also, where you employ those more expensive deposits, will you find offsetting earning assets to employ those? I recall the last time we went through this, we had very aggressive deposit competitors who were using those deposits to fund businesses, acquire to sell models, in the real estate business, for example. So we've been through a lot of different things. We've modeled this. If I were a betting person, I would bet that we'll probably be favorable to what our models suggest early in the backup. I think one of the great undervalued parts of our business today is the quality of our deposit franchise. You'll see that in the backup. To the point of entering new markets, while we adjust our store footprint meaningfully every year by opening and closing stores where we see fit, I think as Carrie Tolstedt has described in our last investor day, we believe that we need a certain amount of scale in any urban market before we can really make a difference. We're in most of the markets that we'd like to be in. Of course, we're not going to get there through acquisition. So it would seem unusual for us to commit to building, for example, hundreds and hundreds of stores in a new major urban center that we're not already a part of. So I wouldn't think about that as part of our next stage plan. Got it. Just to follow up on some of the comments. John, thank you for telling us how you accounted for the GE purchase. How should we think about your capital progress relative to further or incremental loan purchases? As I think about the past three quarters, your CET1 ratio has been fairly stable at about 10.5%. If you're using purchase accounting for larger loan purchases, of course, that would impact CET1. I guess I'm wondering what your thoughts on whether you may account for purchases differently going forward as you consider the CET1 progress, particularly in terms of some commentary we've heard from regulators recently about including CET1 surcharges in the CCAR test. Sure. The first call on our capital is for our customers, including prospective customers, if we were going to add either originate or acquire portfolios of loans. I don't think there's any accounting theory out there that would allow us to add loans without impacting common equity Tier 1. Risk-weighted assets are what it's for. So if we had a bigger opportunity to grow RWA faster in a way that we thought was very attractive for shareholders, then we would probably do that. If we needed to, for example, curtail distributions for some period of time in order to retain the capital to create that outcome, then we would probably do that. As we've told people in our capital planning process in describing it, we want to keep as much capital as is appropriate and necessary to grow the business, and that's primarily by growing RWA. We want to distribute everything beyond that, which is about where we've been operating. So if there were a bigger RWA opportunity, we would measure where we were starting from. We would understand what sort of organic capital generation was going on at that time. It's possible that we would end up retaining a little bit more in order to maintain satisfactory levels while growing assets. Got it. Just so I'm clear on the takeaway. Any portfolio purchases from here has to be life of loan accounting in terms of the losses? Yes. Okay. Just a quick follow-up to the GE portfolio that you did add this quarter. You mentioned that we need to consider the average balance impact. Are there any considerations on the average yield impact as we think about the third quarter? For average yield of the loan portfolio? I think- Yeah, in terms of- Yeah, the GE loans fit right into the averages that we already had, so it's really more a balance. Got it. Thank you so much. You bet. Your next question will come from the line of Bill Carcache with Nomura. Please go ahead. Thank you. Good morning. I wanted to ask a question on margins. Part of the NIM compression that we have been seeing for so long has obviously been in part due to all the excess liquidity that has been getting parked at the Fed as deposit growth has significantly outpaced loan growth really at a system-wide level. Today, we saw one of your competitors report a decrease in deposits, both sequentially and year-over-year, while still putting up pretty solid loan growth. You guys also saw your loan growth outpace your deposit growth this quarter. I guess the question is, do you think we are at an inflection point where we will no longer see deposit growth continue to exceed loan growth? If so, does that suggest that we should begin to see some continued improvement in NIMs going forward? Let me take the deposit side first, and then John can do the One quarter does not make a summer, or one sparrow, if you will. If you look at the last year, we grew average deposits by almost $84 billion, and our core loan portfolio grew 60 some billion. If you take our overall loan portfolio, it was in the 40s or 50s. So we actually outgrew deposits by some $20 billion or $30 billion on an annual basis. The first quarter is always kind of a funny quarter when you compare it to the second quarter or second quarter to the first quarter because of the tax impact because we have such a large retail deposit base. We've looked back, I think, to 1945. I think all but one year we grew deposits. Whether we can outgrow or not outgrow, we sure like our opportunities continuing on the deposit side because after all, we're growing net new consumer checking accounts primary by 5.6%. On small business, we're growing by 5.3% or 4%. These are the strongest numbers I've seen the last couple of years in my history with the company. These are very, very strong acquisition numbers. One thing I'd mentioned about the industry, and I'm sure you're thinking about this, but we're in a slightly different position, but there are some other larger banks that are discouraging deposits because of the adverse impact on leverage ratio, the adverse impact on the GSIB buffer calculations, et cetera. People have been vocal about getting out there and trying to move those deposits out of their banks to take their numbers down. Those are in the same deposit numbers that you're referring to. It's a little bit complicated, I think, bank by bank as you're looking at it. Ours is as John described. We're also not shrinking our store count. We have found that in our omni-channel distribution where you have stores or locations, ATMs, phones, online, and mobile, it's the magic of all those working together. That's a very strong, compelling value proposition for customers. Attracting, retaining deposits. Yes. Back to Erika's question about what happens in a backup. People who want to move away from Wells Fargo are moving away from that value proposition that's provided to them basically for free in exchange for having their relationship at Wells Fargo. Thank you. If I may, as a follow-up, the amount of liquidity that you're holding at the Fed, you mentioned fell this quarter from an all-time high of $291 billion, I believe, last quarter. Is it reasonable to expect that to continue to fall from here as you redeploy more of that into higher-yielding loans and securities? Taking LCR into consideration and the constraints there, can you give us a sense for where we could see those balances go? Well, it depends on what's happening on other fronts, including ongoing deposit growth. I wouldn't forecast it as coming down. As we've described before, there's probably tens of billions of dollars of room from where we are today even to where that balance might go before we started having any difficult discussions about LCR. There's plenty of room from where we are today. Okay. Thank you for taking my questions. Yeah. Your next question comes from the line of Paul Miller with FBR Capital Markets. Please go ahead. Yeah. Thank you very much. Talking a little bit about the mortgage side. We saw rates go up, but the volumes have held in very strong. Some of that I think is the refi pipeline coming out of the first quarter. Can you talk a little bit about what you're seeing in the purchase market world? Is it really starting to make a comeback? Yes, it was a strong quarter. The strongest in a while. It doesn't reflect the pre-crisis types of activity at this point. It's strong in a handful of individual markets. California, New York, Southern Florida, Denver, are particular markets where we've seen a lot of strength. First-time home buyers are a little bit stronger at about 30% of home purchases. You saw that our purchases as a percentage of originations were 54% this quarter versus 45% the prior quarter. As you mentioned, the second quarter had a lot of refis closing in it that were locked in the first quarter when rates were very low. When you think about new application volume in the second quarter, my guess is as that flows through in Q3, that number will be even higher all things being equal because rates did back up meaningfully in the quarter. The business is good. There's plenty of credit available. We're obviously as enthusiastic and committed to it as we've ever been. Margins have been holding in there nicely, and the pipeline looks quite good, actually. And then One last thing I'd add is that all of that is a reflection of continued affordability. While home prices have moved, they're still affordable. While rates have moved, they're still affordable. So that's helping a lot. And we've had an improving jobs market, which brings more people into eligibility for a purchase or refinancing. And then everybody saw the RESPA-TILA has been pushed back another 3 months. Do you see any impact on the mortgage market or on how you view the mortgage market with the new regulations with RESPA-TILA? No. Except one thing I'd say is we were ready to go at the original deadline. No impact. Okay. Thank you very much, gentlemen. Your next question will come from the line of John McDonald with Bernstein. Please go ahead. Hi. Thank you. Just a question, John, on the efficiency ratio. You're at the high end of your range the last couple of quarters. Do you see opportunities to drive down the efficiency ratio prior to rates going up, or is it more likely to stay still at the upper end of the range until we see interest rates move higher? I think it's going to stay in the upper part of the range until revenue moves higher, which will probably happen as a result of, or at least most meaningfully over a short period of time because of rates moving higher. We're spending the money that we think we need to spend to run a great business today and manage risk as well as invest in the future around things that customers want, things that we need to be a well-run, resilient, compliant, risk-managed, technologically savvy firm. That gets us to 58 plus or minus percent, which I would remind you is a very good number for a bank of our size. But there's no near-term path or project to try and drive ourselves down in the range. We're trying to operate where we have been, accomplish all the things that we need to accomplish and deal with the reality that we're in a below 3% GDP growth environment and a zero rate environment, neither of which is as hospitable as some other environments might be for revenue growth in banking. John, but we're always, as you know us well, we continue to look for opportunities to simplify the business, streamline the work we do so we can repurpose those dollars into things that are important to customers, important to risk management, other things here. So, the development that we're doing in image capture in our branches or our stores, the different things that we invest in, payments, cyber, and all those are the things that we do. We're self-funding through being very thoughtful about where we spend our money. Thank you. One other question, guys. Could you comment on the market and what it's like for additional portfolio purchases? I assume it's very competitive. Obviously, GE's got some other assets out for sale. Just in general, nothing specific, but more general, what are the pros and cons when you look at portfolios to purchase and how do you feel like the market's like for that? It is very competitive, and I think that this current set of assets that is being offered for sale is being viewed by some people as the biggest opportunity in a long time. Some of the assets or platforms are suitable for non-depository institutions, and I would say that non-banks interested in creating a lending platform would appear to be willing to pay a bigger premium than people who have an existing platform and are looking to add customers and assets to it. All of these do require financing in one form or another. That can be either a limiting factor or for the easier to finance assets, I guess that can be a benefit for people who do not have deposit bases in order to bid. But very competitive is how I would describe it. Okay. Thank you. Yep. Your next question will come from the line of Betsy Graseck with Morgan Stanley. Please go ahead. Questions one on other income and one on the wealth business. You called out on other income that you had a $426 million impact from the debt hedges. I just wanted to make sure I understood what that was driven by. I know you indicated rate moves. Just want to make sure I understand, is that the longer the curve? And does it have any relation to the fair value hedges that you put in the 10-Q, the $173 million? So wanted to make sure I understand how that works. Sure. So, for some of the debt that we issue, we swap it back to dollars and swap it back to LIBOR. We have got perfect cash flow hedges on where we choose to do that. The accounting for that requires the liability on the one hand and the hedge on the other to be discounted using different discount rates. So over the life of both instruments, there can be some noise in the P&L. We have had a benefit in the past, and this time we had a negative, and it was driven by a few things, but mostly by the major movements in longer-term swap rates in dollar, sterling, and LIBOR during the quarter. The net impact from the quarter is as it was described in the materials. So I would just point out, this is sort of a, call this a timing difference, an accounting difference. It nets back to zero over the life of the liabilities. So we do not think of it as a real economic issue, but it creates noise in the other non-interest income line item. Okay. So the net was $426, not the $426 plus the $173 from the fair value hedges in the 10-Q. Correct. Okay. Separately on wealth, I have been just reading some articles recently that talked about how, and you can tell me if this is correct or not, but how the focus is not really on increasing the number of FAs, and obviously we see flat FAs in the release you put out today, but more on the technology and the investment spend there. Is that accurate, number one? And number two, could you explain how you are looking to advance the technology platforms that you have got in this business? Sure. I wouldn't say that it's an express strategy to not increase the number of FAs. I don't think that that's necessarily the primary driver of value creation in the long term for David Carroll's business. You may see that differently, John. The point on technology is a good one. There are a number of initiatives underway in that business to modernize and to create service capability to attract new investors and to better serve the investors that we have. That turns up in the sort of the primary systems that our financial advisors use to interact with their customers. It will turn up in our mobile and online offerings that allow people to do more for themselves. At some point, it could even include a service or capability that competes with some of the robo-advisory people out there today who rely primarily on technology to construct portfolios and make offerings to customers. All of those things are opportunities for us to make the business even stronger and more relevant going forward on top of what we feel is very good performance over the last few years. Yeah, I should. We see this really as one of the most attractive growth opportunities in the company. If you think about how we're positioned as a broadly diversified company serving customers, one in three Americans, one way or another. Americans are living longer. They're probably convinced yet to be more reliant on their own resources for their retirement. We have 10% to 11% of the deposits in the country, yet only a fraction of that as far as where we manage wealth. So this is a big opportunity and investments in people and systems and capabilities. That should in no way, the growth. We've already done great work. David Carroll and his team have done incredible. Think how many companies out there would love to have the way we monetize and the way everybody else does, $602 million in after-tax earnings for a quarter, 26% margins. These are very, very good numbers. Got it. Thanks. Your next question will come from the line of Mike Mayo with CLSA. Please go ahead. Hi, a factual question. What was the amount of your debt hedge loss in the second quarter? You mentioned that other income is down $426 million. Was that the amount of the debt hedge loss, or is it different? We had a $127 million gain in the first quarter and a $193 million loss in the second quarter. Again, I just want to describe that as the accounting treatment for the hedging program that we have there. Think of the delta between Q1 and Q2 as what creates the more outsized number. Normal would just be zero? No, normal would be around zero. You would expect it to be zero over its life. Sometimes it is a little positive, sometimes it is a little negative, and it is driven by swap rates and currency movements in the currencies where we issue. All right. The more important question from me, you mentioned repricing in wholesale businesses. What are you doing there as it relates to your market-sensitive revenues? What we repriced in wholesale is deposits. For a variety of customers, the ones who seem to have acted the most strongly in the deposit area were FIs, which for all the reasons you can imagine, have relatively low-value liquidity deposits. We have been paying less for those deposits, or in some cases, and in some jurisdictions, have been charging a little bit for those deposits, and that is what we were referring to. What are you seeing in pricing in your market-sensitive businesses more generally? Is that one reason why you're this is the lowest trading quarter you've had since the third quarter of 2011, and we'll certainly take the other revenues in lieu of trading, but are you pricing some of those activities away? Is it simply the market's weaker? What's going on there, but especially as it relates to potential repricing or the competitive environment? Yeah. It's not as a result of Wells Fargo-specific pricing strategies. It's just the chips falling where they did in terms of flows, volumes, and other activity in the business. As you know, in our trading business, we have what you're thinking of, which is market making and customer accommodation activity, but we also have the impact of our own deferred comp program, et cetera, which makes that line a little bit noisy. But it's not as a result of any conscious business decision to price things differently, to do any more of this or less of that. It's just where the quarter fell. Lastly, is pricing getting better or worse? If so, what areas within the market-sensitive areas? I wouldn't say that pricing is getting any better. You would think that pricing might be getting better in areas where other banks are pulling back from providing financing or liquidity to customers, which is part of the discussion around how some of the bigger trading-oriented banks have been providing repo, providing securities finance, et cetera, and have limited their appetites. But prices haven't gone up that much. I think capacity has come out, and people have had to figure out how to deal with that. At the moment, it's as competitive as it ever was, and the pricing reflects that, but not because of conscious strategies. All right. Thank you. Thanks, Mike. Your next question will come from the line of Eric Wasserstrom with Guggenheim Securities. Please go ahead. Thanks very much. I just had one question to clarify the loan growth expectations. If I look at the core loan growth, excluding the GE transaction and runoff, it is growing at almost four times nominal GDP, which would be at the higher end of the historical norm. I just want to make sure I understand, John, your comments about expectations of maybe some incremental leverage across both commercial and consumer. I wonder to what extent that may already be occurring and the GDP number will move to reflect that rather than an acceleration in loan growth. That's a good question. We don't model loan growth necessarily as a reflection of prior quarter GDP, but it's an interesting relationship. I think our point is that the areas where we've been experiencing organic loan growth, all are still very active. We're still very competitive. We're getting more than our fair share in most of those categories. We've got further to run in card, I'd say, than other people because we're starting from a smaller base. Then in some of our material businesses, we've got customers who have been holding back on their borrowing capacity. So in the corporate, but in the commercial space in particular, where we are a very big player. Our customers are still very cash-heavy, which is reflected in our deposits, and have maintained very low leverage profiles so that if they got a little bit more enthusiasm around M&A, around organic growth, building a new plant, et cetera, expanding their businesses, they have lots of debt capacity to do that. We'd expect to see some of that in line utilization or demand for funded assets. But the real takeaway is that we're very well-positioned in all of our key lending markets and competing well today, and in those areas where there might be incremental drivers of demand, and we hope to benefit from it when it happens. Then of course, we're working on a few strategic or inorganic activities as well. Sure. Thank you for that. Then just one clarification question. Did you indicate how much your legal accrual was for the period? We didn't. We indicated the size of operating losses in total, the amount of the change, and the amount of the change reflects increased litigation accruals, but we don't split that out from our other operating losses. Are those legal accruals for issues related disclosing the 10-K or for new ones? It is for a variety of matters, most of which you would already be familiar with. Right. All right. Thanks very much. Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Good morning. Hey, Matt. Good morning. I know there's been some talk about working on becoming more efficient, just kind of continuous improvement, but do you have some formal initiative underway? I guess there was an article in a regional paper a couple of months ago, and it mentioned something called E&E or something along the lines of that. Yeah. As John was mentioning earlier, we're trying to repurpose our expense dollars to their highest value area. There's a collection of programs, of ways of doing business, of thinking about how we spend our resources that are designed to do just that. It's an internal, it's a relatively formal program, and it's around some operational improvements. It's around some of our staff functional alignments, some of our technology spend, et cetera. It really is designed to make sure that where we're spending money, and of course, we spend a lot of it, that we're putting it in the most impactful places. Is it the kind of program where if we don't get rates increasing and a stronger economy, then you can kind of redirect some of the savings more to the bottom line versus investing in other areas? Well, dollars are fungible, but the way we're thinking about it is we're directing those dollars toward places they're going to make a difference for customers, which would drive revenue, and we could see bottom-line improvement as a result of that. But as I mentioned in response to an earlier question, it's not really designed to drive us down in the efficiency ratio or to drive total dollars of expense down, all things being equal. It's designed to make sure that we're spending the money that we're spending in the most impactful place. Okay. Then just separately on the net interest margin, as we think about the trajectory from here, assuming rates don't increase, what should the path of the NIM be? Well, it's going to depend on what happens with deposits versus loan and other earning asset growth, primarily. So if we continue along the path that we're on right now, then you'd think that it would probably stay in or about this range. There's not much else. Deposit pricing is quite efficient here at 8 basis points. So as we get more invested, as we add more loans, and if we convert cash to higher yielding assets, then that should be an improvement. Over the course, if you fast-forward it a few years, we'll probably be layering in more senior unsecured in connection with TLAC. That'll probably have a negative impact, although relatively modest in the overall scheme of things. We still expect net interest income in 2015 to be higher than 2014, which is frankly the most important thing, all things being equal. That's what we're driving toward. Let me just go back to the expense thing just one more time so we are all on the same page. There was talk on this call, and of course, we listened to what the Chairwoman of the Fed has to say about rates. But when we plan internally here, we do not consider rate increases as part of the ongoing justification for an investment in anything. In other words, you would not hear language like, "I want to make this investment because when rates turn around and go back up, then this investment will be justified." We do not know what is going to happen to rates. If rates do increase, either long term or the short end or both, that is a benefit to us. But for the last five, six years, you could have said the same thing, and it did not happen. That is why there is a continual consideration here and pushing ourselves and our thinking to eliminate work that is no longer beneficial, taking out processes that do not add value, and investing in places, in things that do add value and make us more competitive, more nimble, more relative to the constituents that we serve. Great. Thank you. Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead. Good morning. Good morning. Just a couple quick areas I wanted to ask about. On the commercial loan yields, it looks like they were up pretty solidly, 7-8 basis points or so for the quarter. Just want to see if we can get a little bit of color on what drove that. Sure. There's a handful of things. It's the mix of the assets that we're adding to that portfolio from one period to the next, which reflects customer activity, customer demand, both in terms of what's rolling on and what's rolling off. Also, you're seeing in that calculation the impact of having swapped portions of that portfolio from floating to fixed because that impacts the yield. And we've done that partially as the recognition that we think we're going to be in a lower long-term rate environment for a longer period of time than we might have previously thought. So that impact runs through there as well. Still asset sensitive but not waiting forever for rates to begin to move in that portfolio. Okay. All right. That's helpful. On the credit front, back to the energy thing, just real quick, any clarity on how much of that increase in the energy-related non-accruals were E&P versus oil service? Separately, it sounds like some of this movement may have been related to the shared national credit exam. Was there anything non-energy and any takeaways out of the shared national credit exam that may have impacted your non-energy portfolio? So on the first question, remind me of the first question again. Yes, just of- E&P. It was predominantly all E&P. The services credits have, first of all, they don't go through the exact same. There's no borrowing base redetermination to occur in services companies. It's more like any other corporate in terms of how they're reviewed, but the impact has not been felt there in quite the same way as it has with E&P companies. Then back to the shared national credit review, in terms of the negative outcomes or the suggested downgrades, it really was primarily an energy set of conclusions this time around. Okay. All right. Lastly, the home equity portfolio. Just wanted to see if you can give us an update there as you are seeing some of the lines exit their draw periods. Wanted to see how those credits have been performing and if you're seeing any migration there. Well, we've been, as we've talked about, ahead of this end of draw expectation for some time now because it was pretty easy to schedule. We're going into a couple of years when those 10-year draw periods will be coming to a close from the heaviest periods of issuance right prior to the turn of the cycle. Frankly, I'd say we're experiencing a better outcome than we originally imagined, in part because of the focus that we've had, the team that we've had facing the proactive work that we're emphasizing, trying to get people refied into something that is suitable or more tolerable for them to repay. Things are going well. Losses in that portfolio this quarter are in the 56, 7 basis point range. Very tolerable. Very tolerable. Okay. On that front, do you know what percentage of your '05 originations may have been refied already or worked out? Right. I do not on this call. Our real estate group certainly knows because that has been managed, so they will know what they have left and what is gone already. What I am focusing on when I say that there is a plan underway that is being executed that is working, of course, are the ones that are still there and that have not refied out. Got it. All right. Thanks for taking my question. Sure. Your next question will come from the line of Marty Mosby with Vining Sparks. Please go ahead. Thanks. Had a question on, you talked about the duration of the balance sheet, and you're doing that through swaps and through investment portfolio purchases. Can you give us a feel for half a year, 6 months, is it 9 months? And how far do you want to go in the duration of the portfolio or the overall balance sheet? How far are we along that process? When we use the term duration, we're using it in that context, but not to define a duration of the balance sheet, but really to think about using those tools, the investment portfolio and loan portfolios to impact our overall asset or liability sensitivity. The net conclusion of that is that not terribly unlike where we were at our last Investor Day, we find ourselves still asset sensitive. We mentioned a year ago May, that we thought that we had probably 10 to 30 basis points worth of net sensitivity, net benefit from a 100 basis point instantaneous parallel movement in rates, very stylized example. And we're less asset sensitive. If we were at the mean then, we're at the lower end of that range today, we believe. That's probably a conservative estimate. That's how we generally calculate things. But by adding securities, by swapping floating rates to fixed and other actions that have occurred on the growth of the business, we've made ourselves a little bit less asset sensitive because of the belief that we could be in a lower rate environment for a longer period of time. And we're earning today rather than maintaining all of that sensitivity for the future. We still have plenty of it, and we'll develop more of it as time passes, but that's how I would answer that question. Would you see any more lengthening in the near term, given the steepness of the yield curve now gives you an opportunity to productively use that to your advantage? I would expect that we would continue to be adding securities to our securities portfolio, for sure. Then lastly, the mortgage banking pipeline was very strong going into the second quarter. It looks like the pull-through was about as low as we have seen in the last year. I was just curious if there was any operational issues or anything that happened during the quarter. Was it just refis that never got closed? What was the difference in the pull-through for this particular quarter? No, there is nothing that I would point to. The production occurred the way we would have expected it to. We ended with a relatively large pipeline as well. So nothing different there. Thanks. Your next question comes from the line of Kevin Barker with Compass Point. Please go ahead. Just a quick follow-up on some of the mortgage banking results. You saw margins remain pretty strong compared to what you've had over a historical basis, and they were strong in the first quarter despite the decline in the primary/secondary spread. The front half of the quarter looked a lot stronger than the second half of the quarter. Could you just give us some detail between the differences of what you saw in maybe April and early May versus what you saw on the back half of the quarter? Yeah. It's tough to be that precise about it, although I'm sure there are people in Wells Fargo Home Mortgage who are thinking about it as granularly as the question that you're asking. Certainly in the first quarter, as rates rallied hard and that pipeline really grew, applications came in at an increased pace. The capacity constraints to deal with that, both at Wells Fargo and in the industry, are supportive of higher margins as people use their scarce capacity as beneficially as they can. So you'd expect, if that's a high point, for things to slip a little bit from there. In terms of where they've gotten to and where they are now, we expect them to continue to be in that range. The full range, frankly, is a pretty attractive place to be operating. As long as we can stay higher in the range like we have, we'll be thrilled for that to happen. There's also, from one quarter to the next, the mix between what's happening retail versus what's happening through others is going to influence our gain on sale, and that might look different from one originator to another. I think that's an important consideration. But frankly, I would look at it quarter to quarter and then seasonally adjust it to think about what the steady state is. The last thing I'd say is that, again, we're pretty happy with where things have remained given how competitive that market is, given how much capacity there is, and we're happy to be operating here. Yeah. I think just to support John's comment, I remember when gain on sales years ago were 40, 50, 60 basis points. So the pricing discipline, even with the capacity and the size of the market, is I think a good thing for Americans, good thing for borrowers, good thing for the originators because we're getting paid for the work that we're doing, the value add. Okay. Just to follow up on some of the comments on the extension of the duration of the balance sheet this quarter with the use of interest rate swaps, could you provide some more details on why you're increasing your duration at this point in the cycle? Is it a change in your view on whether you want to be patient for higher rates, or is there some other reason why you would extend duration now? It's been happening for a while. We're talking about it a little bit more now, and maybe it was a little bit starker in this quarter because deposit growth slowed also, so you saw cash balances go down while both securities and loans went up. But as you suggest, regardless of what's happening with short-term rates and over what period of time that normalization of policy occurs, it's our expectation at the longer end of the curve that we're going to be lower for longer than we would have thought six months ago, a year ago, or a couple of years ago. And how we're managing the balance sheet is a reflection of that. Is there anything specific that you're seeing that would change your view, that has changed your view in the last six months? Well, in the last six to 12 months, I would say what's happened with rates around the world has been a big reminder that a 2.5% U.S. ten-year is a really attractive asset and could be for a really long time. That's why I say regardless of what's happening with Fed funds, we're preparing ourselves for a long march at the longer end of the curve. If we're wrong, and we have to be prepared for that in terms of what it means to capital, et cetera, and we certainly are, and we sensitize that drastically to make sure that we've protected our balance sheet. But in the meantime, we're getting our assets more productively deployed. I point out there's still $250 billion worth of cash in the bank. There's plenty of short-term liquidity and dry powder for what happens if we're wrong and there are more attractive entry points on the way back up if that were to occur. It's a good question. Thank you for taking my questions. Yes. Your last question will come from the line of Nancy Bush with NAB Research LLC. Please go ahead. Saving the best for last. Always. Hi, Nancy. Hi. A couple of questions on the mortgage front. JPMorgan Chase reported a very strong production quarter in jumbo mortgages this morning. How are you guys positioned in that market, and what percentage or rough percentage of your production are jumbos? About 25% of our production are jumbos. That includes, of course, many of our most valuable customers in terms of the breadth of the total relationship. We carry them on our balance sheet, as you know. Right. And I think the total category right now for jumbos on our books is about $120 billion-$125 billion of the, call it, $1.7 trillion overall. Okay. And just a question on the mortgage business as a whole. Do you consider at this point, given all the gyrations we've had in the mortgage business in the past 10 years, are we at what you consider to be, quote, "a normal mortgage market right now?" And are you staffed appropriately for that market? Or where does sort of the mechanics of the mortgage business stand for you right now? In terms of staffing, I am sure it is true that we are probably a little bit heavy in some areas around loss mitigation and working NPAs and foreclosed assets through the system, versus where we might be in a completely normalized point in the cycle, just because they are still elevated. So there is probably opportunity there over some period of time. From a policy normalcy point of view, there are still other things happening, whether it is agency reform, the relationship between the FHA and the industry is still not completely settled, and that has to happen for people to feel good about things. There is still no meaningful secondary market for non-conforming loans. And there was a good one for prime jumbo loans that existed pre-crisis. And so at some point that probably has to reemerge, and that has not happened yet. But we are just as committed to the business. It is a very important part of the relationship between us and our customers because buying and financing a home is one of the most significant things our customers will ever do. We enjoy our status as the largest mortgage servicer in the land, and our status as the largest mortgage originator as well. So we are working hard to try and shape good outcomes in those areas that are still unsettled, and we are making the most of it during the period that we are in. Nancy, it is an insightful question because I think part of the distinguishing features of big-scale players in this business, whether you are successful or not, is how quickly you can scale up when business opportunities present themselves and how quickly you can scale down. We think we are pretty good at that among other things. Some are surprised the mortgage market does not come back stronger. We went through a pretty deep downturn. This was the asset class that had the problem in 2008 and 2009. It is steadily improving and healing, but it is going to take time. Like John said, we really like this business for a whole host of reasons. I would just ask as an add-on question. Bank of America talks about their legacy asset servicing, et cetera, which is mostly mortgages that were still on the books that they are working out. Where are you guys in working out any problems you got through the Wachovia deal, et cetera? Are you pretty much through the workout period now with most of that stuff? Well, the Pick-a-Pay was probably the most problematic of that portfolio. That came over, let us say in the 120 range, $120 billion or so, and it is $54 billion, give or take now. The average loan to value on that is in the 60s. Right. If you look at the overall servicing portfolio we have, it is 94%-95% current. There are still issues going through this. There are some judicial foreclosure states that we are still having to work through. But for the most part, it has performed above our expectations, especially with respect to the Wachovia part. I think we are in the later innings of working on this. As John mentioned, there is some opportunity to take some costs out. The cost of servicing a current loan versus one that is delinquent is such a big difference. So when people look at these portfolios, you really have to look at the past dues and the ones in foreclosure because that really skews the costs on those. I know that this is clear in the materials, Nancy, but our non-strategic, our wind-down portfolio is ticking down at $2 billion-$3 billion per quarter, and there is 50-odd billion dollars of it left. The tail of it will be here for a while. Okay. All right. Thank you very much. Thank you. This concludes our call. Thank you again for spending time with us. It is always enjoyable for us to represent our 265,000 team members and the work that they do every quarter. John and I and Jim will see you next quarter. Thank you very much. Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.