Earnings Call: Q4 2014

Jan 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 fourth 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 fourth quarter results and answer your questions. Before we get started, I would like to remind you that our fourth 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 a happy New Year to everyone. Thank you for joining us today. We just completed another outstanding year at Wells Fargo. We generated record earnings, produced strong deposit and loan growth, grew the number of customers we serve, improved credit quality, enhanced our strong risk management practices, strengthened our capital and liquidity levels, and rewarded our shareholders by increasing our dividend and buying back more shares. Our achievements during 2014 demonstrated the benefit of our diversified business model and our continued focus on the real economy. Let me share just some of our accomplishments during the past year. We generated earnings of $23 billion and earnings per share of $4.10, both up 5% from the prior year. We grew both revenue and pre-tax, pre-provision profit. We had strong, broad-based loan growth. Our core loan portfolio increased by $60 billion, or 8%. Our deposit franchise continued to generate strong consumer and balance growth, with total deposits up $89 billion, or 8%, and we grew the number of primary consumer checking customers by 5.2%. Our credit performance continued to be very strong, with net charge-offs down $1.6 billion and our net charge-off ratio declining to just 35 basis points for the year. Our capital levels increased even as we returned more capital to shareholders. We returned $12.5 billion to our stockholders through dividends and net share repurchases, up 74% from a year ago. While we serve our customers throughout the world, 97% of our revenue comes from the U.S., and there have been many signs of strength in the U.S. economy. GDP growth accelerated during 2014 and may be even stronger in 2015. Last year was the strongest year of job growth in 15 years, and December was the 50th consecutive month of job creation, unprecedented in U.S. history. Consumer confidence is at its highest level since the peak of the last economic expansion. Home ownership remains an aspiration for most Americans, and recent developments such as the announced reduction in FHA premiums, GSE clarification on repurchase rules, and changes in GSE lending guidelines should provide some benefit to the housing market, where affordability remains attractive. While lower oil prices have created volatility in the financial markets, America as a whole is a net consumer of energy, and American households will benefit from the decline in energy prices, which is positive for the U.S. economy. I believe the improvement in the economy, the strength of our balance sheet, the diversity of our businesses, and the continued commitment of our team members to meet our customers' financial needs, will provide Wells Fargo with many opportunities in the year ahead. John Shrewsberry, our chief financial officer, will now provide more details on our fourth quarter results. John? Thanks, John, and good morning, everyone. My comments will follow the presentation included in the quarterly supplement starting on page 2. John and I will then answer your questions. Wells Fargo had another strong quarter, earning $5.7 billion and $1.2 in EPS in the fourth quarter. Our results included continued strong loan and deposit growth that was diversified across our businesses, and credit quality continued to reflect the benefit of our ongoing risk discipline. Our capital levels remain strong even as we returned $3.9 billion to shareholders in the fourth quarter through common stock dividends and net share repurchases. Slide 3 highlights our strong full-year results that John discussed at the beginning of the call, including increased revenue and pre-tax, pre-provision profit, strong loan and deposit growth, higher earnings and increasing our net payout ratio to 57%. Page 4 highlights our revenue diversification and the balance between spread and fee income in the fourth quarter. The benefit of our diversified business model is that we have over 90 businesses that perform differently based on interest rates and the economic environment. While the balance between spread and fee income has remained consistent over time, the drivers of fee income have varied. For example, over the past five years, mortgage banking as a share of total fee income has been as high as 28%, but because of the decline in mortgage refinancing activity, mortgage banking fees have declined as expected and represented 15% of fee income in the fourth quarter. However, other businesses have benefited from current market conditions. Our trust and investment fees have steadily increased over the past five years and were 36% of fee income in the fourth quarter. These examples demonstrate the benefit of our diversification and how our business mix enables us to focus on meeting our customers' financial needs while retaining our risk discipline. Let me highlight some key drivers of our fourth quarter results from a balance sheet and income statement perspective starting on page 5. I will discuss the drivers of our strong loan and deposit growth later in the call. Short-term investments in fed funds sold declined $3.5 billion from third quarter due to the deployment of liquidity into loans and investment securities. This was the first time since the fourth quarter of 2011 that we've had a linked quarter decline. Investment securities increased $24 billion from the third quarter due to $35 billion of purchases, partially offset by runoff and maturities. The majority of our purchases were U.S. Treasury and federal agency securities. Turning to the income statement on page 6, revenue grew $230 million during the quarter with growth in net interest income and stable non-interest income. Expenses increased in the quarter, reflecting higher personnel costs, continued investments in our businesses and risk-related initiatives, and some typically higher fourth quarter expenses. Our results in the quarter also reflected lower income tax expense, which was down $123 million. As shown on page 7, we continued to have strong, broad-based loan growth in the fourth quarter, our 14th consecutive quarter of year-over-year growth. The core loan portfolio grew by $60.4 billion, or 8% from a year ago, and was up $26 billion, or 13% annualized from the third quarter. Loan growth in the fourth quarter included $6.5 billion from financing related to the sale of our government-guaranteed student loans, as well as the Dillard's credit card portfolio acquisition. Our liquidating portfolio decreased $20.1 billion from a year ago and is now only 7% of our total loans, down from 22% at the end of 2008. Total average loan yields remain fairly stable, declining just two basis points from the third quarter. On page 8, we highlight our loan portfolios that had strong year-over-year growth. C&I loans were up $36.4 billion or 15% from a year ago, with broad-based growth that I will highlight on the next page. Core one to four family first mortgage loans grew $14.4 billion or 7% from a year ago, reflecting continued growth in high-quality non-conforming mortgages, primarily jumbo loans. The credit quality of our core mortgage portfolio was outstanding, with only six basis points of annualized credit loss in the fourth quarter. Auto loans were up $4.9 billion or 10% from last year. While we continued to benefit from the strong auto market, new originations were down from a year ago, reflecting our continued risk and pricing discipline in a competitive market. Credit card balances were up $4.2 billion or 16% from a year ago, benefiting from a combination of organic account and loan growth, as well as the benefit of the Dillard's portfolio acquisition. Slide 9 demonstrates the diversity of businesses that contributed to the growth in C&I loans. Let me highlight just a few. Asset-backed finance increased $16.7 billion, which included $6.5 billion from financing related to our government-guaranteed student loan sale. Corporate banking grew $5.8 billion, driven by new customer growth and higher utilization rates from existing customers. Capital finance grew $3.8 billion, reflecting new customer growth. As you can see on page 10, we had over $1.1 trillion of average deposits in the fourth quarter, up $22.7 billion or 8% annualized from the third quarter. Our average deposit cost declined one basis point to nine basis points in the fourth quarter. Our strong growth in checking customers continued in the fourth quarter, with primary consumer checking customers growing 5.2% from a year ago and primary small business and business banking customers increasing 5.4%. Our success reflected the advantages Wells Fargo offers, including broad-based and industry-leading distribution channels, enhanced product offerings that make it easier for customers to do more business with us, and improved customer retention. We continued to grow net interest income on a tax-equivalent basis, up $255 million from the third quarter, reflecting strong growth in average earning assets up $43.5 billion or 3%. The net interest margin declined two basis points from the third quarter due to strong deposit growth, which resulted in higher average balances of cash and short-term investments, and from actions we took in the third quarter, which resulted in higher average balances in liquidity-related funding. The impact of all other balance sheet growth and repricing benefited the margin by three basis points due to a larger investment portfolio and stronger loan originations. Increased interest income from variable sources benefited the margin by one basis point. Our balance sheet remains asset sensitive, so we're well positioned to benefit from higher rates. But as we've demonstrated by growing net interest income throughout the year, we're not relying on rates to increase to generate growth. Of course, the first quarter will be impacted by two fewer days in the quarter. Total non-interest income was stable from third quarter as higher trust and investment fees, card fees, commercial real estate brokerage commissions, and a $217 million gain on the sale of government-guaranteed student loans was offset by a $396 million decline in market sensitive revenue, driven by lower equity gains and lower mortgage banking revenue and deposit service charges. The decline in deposit service charges in the fourth quarter was primarily due to lower overdraft-related fees resulting from changes we implemented in early October designed to provide customers with more real-time information to manage their deposit accounts and avoid overdrafts. Mortgage banking revenue declined $118 million from the third quarter. As expected, mortgage origination income was down from last quarter, reflecting reduced volume from the seasonally lower purchase market. The decline in mortgage rates during the quarter resulted in refinancing volume increasing to 40% of originations, up from 30% last quarter. While it is still early, the continued decline in rates could benefit origination volumes in the first quarter, and we currently expect volumes to be relatively consistent with fourth quarter levels, despite the fact that the first quarter usually reflects a slower purchase market. Our gain on sale margin was consistent with last quarter and is expected to remain within the range we have seen over the past four quarters. Servicing income increased modestly from the third quarter, reflecting lower unreimbursed direct servicing costs, partially offset by lower net hedge results. Our total trust and investment fees were $3.7 billion in the fourth quarter, which was a record high and increased $151 million from third quarter, driven by higher investment banking activity. Our expenses continue to reflect our investments in our businesses, including risk-related initiatives. As shown on page 13, expenses were up $399 million from third quarter. There were a number of factors driving this increase. Personnel expenses increased $272 million, reflecting higher deferred comp expense, which is offset in revenue, higher revenue-based incentive compensation, and higher healthcare costs. A number of our expenses are typically higher in the fourth quarter. Equipment expense was up $124 million, primarily due to annual software license renewals. Outside professional services increased $116 million, which included higher project-related spending on business investments as well as risk-related initiatives. Advertising expenses were also elevated, up $42 million from third quarter. While these typically higher expenses should be lower next quarter, we will have seasonally higher personnel expenses in the first quarter, reflecting incentive compensation and employee benefits expense. Our expenses will also reflect our continued investment in our infrastructure, our risk infrastructure, including hiring new team members and ongoing project spending. Our efficiency ratio is 58.1% for full year 2014, and we expect the efficiency ratio for full year 2015 to remain within our target range of 55%-59%. Even at the upper end of our target range, we are operating more efficiently than many of our peers. Turning to our business segments starting on page 14, Community Banking earned $3.4 billion in the fourth quarter, up 7% from a year ago and down 1% from the third quarter. I have already highlighted the strong growth in primary checking customers. We have also been successfully adding retail bank households. Through November, our year-to-date household growth rate was the highest since 2010. Meeting the financial needs of these new households will help drive growth across our diversified product line. Our debit and credit card businesses are examples of where we have had success and yet still have opportunities for continued growth. Debit card purchase volume was up 8% from a year ago, driven by primary checking customer growth and increased usage from our existing customers. Our credit card penetration rate increased to 42%, up from 37% a year ago. Credit card purchase volume grew 17% from a year ago, reflecting account growth and increased usage among our existing customers. Wholesale Banking earned $2 billion in the fourth quarter, down 7% from a year ago and up 3% from the third quarter. Loan growth continued to be strong with average loans up $32.2 billion or 11% from a year ago, with growth across many businesses, as I highlighted earlier. Credit quality remained outstanding with eight consecutive quarters of net recoveries. Deposit growth was also strong, with average core deposits up $33.9 billion or 13% from a year ago. Results also benefited from strong investment banking fees, up 10% from a year ago, driven by higher loan syndication fees, high-yield debt origination fees, and equity underwriting. Treasury management revenue increased 11% from a year ago, benefiting from record product sales in 2014 and repricing. Wealth, brokerage and retirement earned $514 million in the fourth quarter, up 5% from a year ago and down 7% from the third quarter. Revenue grew 6% from a year ago, with growth in both net interest income and non-interest income. The growth in fee income was driven by a 12% increase in asset-based fees as we continued to execute on our strategic initiative of focusing on plan-based relationships resulting in higher recurring revenue. Our brokerage advisory assets grew to $423 billion, up $48 billion or 13% from a year ago, primarily due to positive net flows. Loan growth for WBR remains strong, up 13% from a year ago, the sixth consecutive quarter of double-digit year-over-year growth. This growth was primarily driven by an increase in high-quality non-conforming mortgage loans. Turning to page 17, credit quality in the fourth quarter remains strong with a net charge-off ratio of 34 basis points of average loans. The $67 million increase in net charge-offs from third quarter was primarily driven by lower recoveries, down $54 million, which we would expect at this stage of the credit cycle. Non-performing assets have declined for nine consecutive quarters and were down $739 million from third quarter. Non-accrual loans declined $517 million, and foreclosed assets declined $222 million. The reserve release was $250 million in the fourth quarter, down $50 million from third quarter and down $350 million from a year ago. Our capital levels remain strong with our estimated common equity Tier 1 ratio under Basel III using the advanced approach fully phased in at 10.44% in the fourth quarter. Our ratio declined slightly from the third quarter, reflecting an increase in risk-weighted assets, primarily from strong loan growth in the quarter. We've stated that our long-term target is 10%, which includes a buffer over required minimums. Since we've achieved our targeted level, our capital ratios may fluctuate from quarter to quarter, reflecting changes in asset levels or composition, or changes in OCI impacted by market volatility. These potential changes are why we maintain a buffer. As shown on slide 19, we returned $3.9 billion to shareholders in the fourth quarter. Our common shares outstanding declined by 45 million shares in the fourth quarter, reflecting 62 million shares purchased during the quarter. In addition, we entered into a $750 million forward repurchase contract that's expected to settle in the first quarter for approximately 14 million shares. As a reminder, our share issuance is usually higher in the first half of the year, given the timing of certain employee benefit plan issuances. In summary, our results in 2014 and for the fourth quarter reflected the benefit of our diversified business model with strong growth in loans and deposits. Our loan portfolio is well diversified and charge-offs were near historic lows. We increased the amount of our capital and liquidity and returned $12.5 billion to shareholders through dividends and share repurchase. Our net payout ratio was 57% for the year within our targeted range of 55%-75%. We believe we're well-positioned to benefit from an improving economy, an increased customer base, our diverse product line, and our continued risk discipline. Our diversified business model has performed well across a variety of economic and interest rate environments, and I'm optimistic that it will continue to produce opportunities for our customers, our team members, and our shareholders in the year ahead. We'll 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 will 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 morning, everyone. Good morning. I just wondered if you could speak to how we should think about weighing the positive and negative effects of the sharp drop in energy prices on the bank. While it should help out the consumer businesses, is this enough to offset any potential credit issues or possibly a slowdown in loan growth and investment banking activity? Well, as I mentioned in my comments, Joe, since the U.S. is a net consumer, net importer of oil, we think it's a positive for the U.S. economy. Clearly, that's on average because there's going to be some states that are impacted, some customers who are going to be impacted, and some businesses can be impacted. But we serve 70 million customers. Virtually all of them know how to fill a gas tank and go to a gas pump, and that's a real benefit. We think net-net, it's an opportunity. Surely, there are offsets, like we said. But even within the oil and gas business, and John mentioned we are a participant there. It's about 2% of our loans. There is still a lot of opportunity for consolidation there, and we'll participate in that with our customers. We're looking at our portfolio. We analyze that. We've been through that over the past. But net-net, we think it's a positive. Okay, great. I guess somewhat related to that with the it seems recently the expectations now that higher rates are getting pushed out, we could be lower for longer, which theoretically could weigh on margins. Do you expect to be able to offset that with better growth in the business amidst the stronger economies you talk about? Or do you see any need to take a harder look at expenses? And what other levers might you have to pull there? Well, we're always taking a hard look at expenses, so there's nothing incremental that we would plan on doing there, but continuing to be as vigilant as we have. We've been operating at a pretty strong level in a zero interest rate environment for a very long time. Because of the way our balance sheet's positioned, there's upside when short-term rates move, and if that happens later, then that upside might be realized later. We're continuing to position ourselves to compete and to perform in this interest rate environment. Loan growth, deposit growth, redeploying excess liquidity into earning assets, as I said, being vigilant on expenses. All of those things contribute to the performance that we've had and that we're anticipating continuing to have until that time that rates begin to move. Okay. Thanks so much for the thoughts. Thanks, Joe. Your next question will come from the line of John McDonald with Sanford Bernstein. Please go ahead. Hi, good morning. Hey, John. I was wondering, John, just a question on credit and provision. Asset quality clearly remains excellent, and I wasn't sure if you mentioned future reserve releases, John, but with such strong loan growth and credit metrics now looking stable, should we expect the reserve releases to taper off? Might you need to start adding to reserves at some point if loan growth continues at this kind of pace? I think the short answer is yes. If we have robust loan growth going forward, all things being equal even, that would contribute to the need for some amount of incremental provisioning. It's going to be a function of the amount of loan growth, the mix of loan growth, the quality of the portfolio overall, and general economic conditions. One thing I'd add to Joe's first question also is there's no specific provisioning action in the fourth quarter for what's going on in the energy world. There's nothing anticipated, nothing necessary at the moment, but there's nothing in that quarter either. Okay. Did you make a comment about reserve releases, John, in the future? In the past couple of quarters, you said reserve releases could continue. I was wondering if that changed a little bit now with credit bottoming. With the size of the portfolio, the size of the allowance, and the amount of the fourth quarter's release at $250 million, it's close to call. We've said in the recent past to expect them to taper. Now, for the reasons that you mentioned and I described, there could be future releases. There could be future net provisioning. So we're at that point in the cycle, I think. Okay. Got it. In terms of just the net interest income, the puts and takes, did you say how big the Dillard's portfolio was, or could you tell us? We can't because of the nature of the contract we have with our customer. Okay. You can see the amount of loan growth in the credit card portfolio from quarter to quarter, and that is a combination of the organic growth and the Dillard's portfolio. Okay. Any color you can offer on what opened up in terms of opportunity to deploy the liquidity this quarter? Anything driving that in particular? Well, some clarity around our liquidity framework, further clarity around LCR, further clarity on what kind of cash versus other HQLA we would need to have. I think that emboldened us a little bit in terms of finding an entry point. As we have said, these are difficult times for finding attractive entry points into fixed income markets when we are thinking about making that switch. John, also we had, as you know, continued very strong deposit growth. Got it. Okay, great. Just one last quick thing on TLAC, John. Rules are not finalized. We do have a proposal. How do you feel on that? Would you have to do some gradual preparing for that as we go forward? Sure. Depending on where the ultimate rule comes out versus the range that's been published, at the low end of the range, we've got less to do, and at the high end of the range, we'd have more to do. There's still a lot to know, and there's some wood to chop in the regulatory realm to get to the final rule. We're on the record as pointing out that the industry doesn't understand the need for the magnitude of the total buffer, or loss-absorbing capacity that's being talked about here. We certainly find that it lands a little bit harder on people who seem to have less risky business models, those of us who are deposit-funded with a little bit more straightforward deposit-taking and lending type of activity. We'd like some clarity on why that makes sense. However it lands within the range that's been published, the approach for Wells Fargo is going to be to add more term debt at the holding company level, and that will have a P&L consequence that we have to navigate through, and it'll be substantially more manageable at the lower end of the range and somewhat more expensive at the higher end of the range. Okay, thanks. Your next question will come from the line of Erika Najarian with Bank of America. Please go ahead. Yes, good morning. Thank you. Morning. I appreciate the color that you have given us so far on what you expect for mortgage originations in the first quarter. As we think about the full year and think about your comments earlier, high consumer confidence, accelerating GDP in the context of potentially lower long rates for longer, is it possible that from an industry level, the origination growth for this year could surpass the current MBA forecast of 6%? Yes. The last numbers I have seen from them is $1.1 trillion to $1.2 trillion. Yeah, it could be higher based on those things. As I mentioned in my comments with what was done recently on FHA and some of the things that the GSEs are doing, if rates stay low or are favorable, surely we could see more activity. You could see actually more activity on both the refinance side and the purchase money side. We will just have to see how that goes. I do not think there has been any reduction or any update on those numbers from the MBA, but it could be the higher end of that range. Got it. On the flip side to that, you mentioned that you did get more clarity on LCR and HQLA with regards to being more aggressive on liquidity deployment. John, you've mentioned several times that the absolute level of rates has dictated your cash deployment or liquidity deployment strategy. As we look out into 2015, was the clarity around the rules enough to make you a little bit more aggressive about deploying your liquidity into earning assets, or is it going to continue to be largely rate dependent? Well, it's a good question. It's substantially rate dependent at this point, and loan growth dependent as well because that's the first call on all of our available liquidity is making loans to customers. If we believe that we're in a lower for longer long-term rate scenario, separate that from policy rates for a moment, but just thinking about the 10-year and mortgage rates, et cetera, at the margin, that probably emboldens us a little bit additionally to convert what's cash today into duration over the course of the year. Got it. Because, Andrea, we still have a lot. We have tens of billions available. Right. There's just a lot of liquidity on the sheet. Understood. Just a quick follow-up. We appreciate the color that you gave in terms of the impact of energy. As there have been a lot of questions from investors in terms of what it would take for banks to adjust its qualitative reserve to reflect lower energy prices. I was just wondering if that's how Wells Fargo does it, or do you really look at the reserve, at least in terms of your energy commercial exposure, on a name-by-name, loan-by-loan basis? In the case of commercial and corporate loans, it's absolutely the sum of the parts of a name-by-name basis and the risk rating on each loan. We have hundreds of customers in the energy business. They are in the E&P or upstream part of the market. They're midstream companies. They're services companies. We have the largest team in this area, very long-tenured, been through several cycles, and we're going customer by customer and working through each situation to figure out what this drop means to them based on their leverage, based on their hedging profile, based on their assets, based on their management capability. That will lead to risk rating changes on a loan-by-loan basis or a name-by-name basis as time unfolds. It's that activity that would lead to changes in our reserving posture for the portfolio. We don't want to minimize this, but this is a nature of that business. If you go back just six years, we've had $30 a barrel oil, and we've had $140 a barrel oil. We've seen gas, for example, natural gas, go from $6, $7 MCF to $2 and some change today. That's just part of that business. On the E&P side of that portfolio, those tend to be reserve-based loans, asset-based loans with a very interactive approach between the bank and the borrower in terms of determining the value of the collateral and then remargining the loan down to reflect changes in the value of the collateral. Of course, that's at our discretion. We have our own engineers, and we're very engaged in that process. All of that ties into what the future reserving needs or requirements are for that portfolio. As I said, nothing obviously has revealed itself yet, and there's nothing in the fourth quarter specifically for that. Got it. Thank you for taking my questions. Sure. Your next question will come from the line of Ken Usdin with Jefferies. Please go ahead. Hi. Good morning, guys. Hey, Ken. A couple of questions on the fee side. John, you had mentioned some of the tweaks you made in October on the service charges side. I am wondering if you can help us understand what types of changes those were and then how you are looking at your product set with regards to either payday advance and whatever pending rules we could still get at some point next year on overdrafts, and if that would continue to have an impact on your deposit fees. What happened in October was not a change in the product or what we charge for it. Rather, we unrolled some incremental technology that allows our customers to have more real-time information to manage their own banking affairs. They have been using that information and successfully reducing the amount of overdrafting that they are doing, which has had an impact on our revenue. We think it is very customer friendly, and it is good for all of us. That is distinct from any pricing approach or product approach that we have. With respect to- Okay. Oh, go ahead. No, go ahead. You asked about short-term or payday-type lending. I think it's clear that during 2014, we discontinued a product that we used to offer that was a direct deposit advance product that allowed people to borrow on a short-term unsecured basis with their next direct deposit paycheck as security for a source of repayment for the loan, and there was some regulatory urging around that. I think most of the discussion around those types of products is now, frankly, outside the banking system because it's private finance companies who are providing that. That's how it seems to be dealt with from a regulatory perspective. I'd also tell you that the discontinued product is out of the run rate at this point, so the impact has been fully realized. Then overdrafts? Hard to say much more about it other than we're not in the process of repricing or rethinking the product capability. The results that you'll see in our numbers are a reflection of the activity and behavior of our customers as they manage their own banking affairs. Okay. Another question I had is just on the kind of market-related revenues. They've been trending a little bit lower if I combine trading activity, securities gains, equity investment gains, and that's even with the student loan gain in that $354 number. Should we generically expect that you'll still be able to generate this type of market-related revenue? Or is it more likely that you see that trend down over time? Well, there's a lot of moving parts there, and I would look at a multi-quarter average to think about how to model it. On the trading side, the customer accommodation, customer-facing trading revenue that we make, which is a pretty modest part of Wells Fargo revenue profile, will probably ebb and flow along the lines of what you're seeing in the industry, just at a more modest level. The trading line also includes the impact of our deferred comp hedging program, so it's a little noisy given the magnitude of that versus the magnitude of our trading businesses. But those will be what they are based on industry factors, and the deferred comp program will be more revenue and more expense in an up market and less revenue and less expense in a down market, generally speaking. On the other elements, we've got gains from equity securities, gains from debt securities. In the equity space, you've seen some of the businesses that we've been involved in that frankly continue to be our sources of revenue that we would anticipate seeing if market conditions stay the same as they are today. So I wouldn't model that down too heavily. On the debt side, given the levels of rates that we're at and in some markets, the levels of spreads that we're at, there are some debt securities which it makes sense for us to sell and monetize from time to time just because their market value substantially exceeds what we can imagine as their intrinsic or certainly their carrying value. So there'll be pops in there from time to time as well. It's the sum of those things that gets to that collection that you described. Okay. Last one, maybe you can just talk a little bit about the momentum in the trust business and what type of outlook you see just for asset gathering and after a really strong year in that part of the business. How's the pipeline for asset growth looking? We're very happy and pleased with the progress we've made in that area. One of the biggest opportunities we have is the relationship between David Carroll's Wealth, Brokerage and Retirement group and Carrie Tolstedt's Community Banking group. We have as many assets away from customers who call us their bank as we do under management right now. The relationship and the working data there to bring those assets home, if you will, has been a big opportunity for us. But I still view this, of all the opportunities we have in the company, of all of our businesses, probably that is our biggest opportunity to jump a curve or to even show some incremental growth above what you would see in other more mature businesses. A lot of opportunity there. Pleased with where we are. A lot more to do. Thanks, guys. Appreciate it. Thank you. Your next question will come from the line of Paul Miller with FBR. Please go ahead. Yeah, thank you very much. There's been a lot of news flow out today. If you mentioned this here in the remarks, I apologize, but your C&I loans jumped up. Is that where the Ginnie Mae financing came through on your balance sheet? No. No, that's not that, Paul. That's just pure- The biggest thing to call out is the student loan financing that we did. Yes. We sold this portfolio of student loans, and we provided some financing to the company who bought those loans. If one item stands out in the quarter as outsized, it would be that. But those are all commercial loans. Yeah. Is it any particular industry that are doing well, or is it just across the board and cross geographic that this line item picked up? Because this is one of the line items we're waiting to see pick up in general amongst the bigger banks. Very broad-based. Very broad. You are not seeing, because the questions that I get is that everybody is concerned about the energy credits, but you are just not seeing, and I know you made some opening comments about that, but you are just not seeing anything on the negative side on energy credits at this point? Well, this drop in crude is very recent, and the companies are taking the appropriate evasive actions to preserve cash, to delever, to reduce their expense base, et cetera, but it has not worked its way into loan quality. Now, loan demand will certainly be down in that area, I assume. But in the fourth quarter, you can see what the change in net outstandings was, which more than makes up for whatever reduced demand there is in the energy space. Okay. Hey, guys, thank you very much. Your next question will come from the line of Bill Carcache with Nomura Securities. Please go ahead. Thank you. Good morning. I had a question on your credit card growth strategy. I think most would agree that credit card asset yields have held up quite well in this low rate environment relative to other asset classes. Would you consider competing more aggressively on rates in an effort to grow your share of outstanding balances, particularly since it is a high return business where you arguably have room to give up a bit on pricing while still generating returns that are attractive relative to other lower return, lower yielding asset classes? Well, let me say it this way. First of all, we love the card business, especially for our community bank customers. We have grown from the low to mid-20s penetration to now to 42% of our customers carry our credit card. We like that business a whole lot, not only from the balances we get, but to be relevant to our customers as far as handling their payments, providing them services that are even around payments and so forth for them. We want to provide great value. Pricing sure is part of that. You have seen recently where we have partnered with American Express. We do a ton of business with Visa on the higher end, higher value cards. This is really a strategy about getting more cards, top of wallet with our customers and pricing rewards. The whole value proposition is part of that. I would not say it is just any one thing around price per se, but it is around value. Great. Thank you. A separate question, if I may, on municipal deposits. Can you talk about how significant municipal deposits are to Wells? Are you de-emphasizing them given their relatively unfriendly LCR treatment? To what extent do you see a future revenue opportunity for holding them? We have a very big municipal business, and deposits are certainly part of that. It is a service that we provide to the tax-exempt issuing community. By municipal, it is all forms of state and local and county government and other nonprofit types of customers. The unfriendly LCR treatment came from the fact that municipal deposits tend to be collateralized by us so that the municipal depositor is safer in the event of a problem with their bank. That was not being taken into account in the original approach to LCR. We think we have gotten a favorable outcome there so that they are now LCR friendly, still very competitive. We still like those deposits. We still very much enjoy those relationships because there is a lot of banking service that we provide to those types of clients. They don't have the LCR problem that they might have seemed to have in pre-clarification that came out in the third or fourth quarter. Okay. So it was my understanding that for the purposes of the LCR calculation in the numerator, the high quality liquid assets would not be able to include the collateral associated with the deposits and then had to outflow in the denominators on day 1. Is that not the case anymore? I don't think that you have it right. Okay. I think that it works fine. Incidentally, there were two issues that people were trying to address in tweaks to LCR relating to munis. The other one was whether high quality muni bonds would be considered HQLA on the asset side, and I don't think that there's been a resolution there. There are a number of our clients who issue high quality muni bonds who take exception to that, and we'll see where that goes. But on the deposit side, I think we've cracked the code. Thank you. Your next question comes from the line of Mike Mayo with CLSA. Please go ahead. Good morning. I had a question about the efficiency ratio. First, what were the drivers in higher revenue-driven compensation and deferred comp, especially with lower originations and softer trading results? Then the following question to that is, you are still at the upper end of your efficiency target. What can you do to get at least back toward the middle end? The drivers of the revenue-oriented portion of increased compensation included a handful of businesses. I would say investment banking was one of them where we were $150 million up in the quarter, and some portion of the elevated expense is attributable to that. But it comes from a few others as well. Again, it is those businesses that performed better in the fourth quarter. With 90 different businesses, it can be a little here, a little there. That was part of it. We find ourselves in the high 58s or now 59% and with a lot of emphasis on trying to be as efficient as we can in how we spend our money every day. There are no guarantees that we are moving toward the middle or the lower end of the range in this interest rate environment. As we go through a full year, while we are tackling the things that we need to tackle, we spend a lot of money on risk management, compliance-related initiatives, other things that have a regulatory origin. Some of that is semi-permanent, might be around for several quarters, and some of it is going to be around in the run rate for a while. If rates begin to move up, that probably moves us down in the range. But frankly, at 59%, which is the high end of our range, we can tolerate that. We think we are performing very well. Mike, you are hitting one of the important issues for us. As John mentioned, we take this seriously. We are looking for all those opportunities to eliminate expenses where customers do not find value. It is an ongoing, continuous process for us. Reducing square footage is one of those. Looking hard at the kind of money we spend that is not revenue producing, if you will. But also making sure that we take a look at the long term. So we continue to invest in things like, late last year, Apple Pay and other things that we do to provide convenience for customers. So it is always a don't waste, but also, we take a long-term view. But this continues to be a big focus for us. Well, correct me if I am wrong. You have a 55%-59% efficiency target range, and what I am hearing now is, with the rate environment, we might be at 59%, whereas I was not sure if I heard that same message before saying, well, unless rates go up, we will not get to the middle part of the range. You were a little bit lower before. So am I hearing the message wrong, or is it simply that you have done what you could for so long with the low rate environment, and you cannot do a whole lot more, or what is it that leads you to say, well, 59% is okay? Well, I think when we had the range, we knew that we would. Sure we would love to be at 55%, but we also recognize that that is why we gave a range. These were think of as guardrails. We are spending more on cyber today. We are spending more on all things risk. On the other hand, we have not yet pulled out all of our expenses around loss mitigation. We continue to make investments in distribution. So I guess a range is a range, and I cannot guarantee you we are at the low end. But if we are at the high end, that is also acceptable in our mind, if we are making the right investments in the right things and eliminating expenses where we think they can be eliminated. So that is how we feel about it. Last follow-up, the cyber expenses or the all things risk expenses, have these ticked up some, or is this kind of what you had expected? They've ticked up in the terms of we continue to make more investments there, and we're starting to get the annualization of expenses we made last year. We'll get more efficient in that over time. We're spending the money we think we need to spend, and sometimes that's hiring consultants. Then over time, you can convert whatever they're doing to team members, which tends to be more efficient. You're not as efficient on every process the minute you adopt it or employ it. More money is being spent there. All right. Thank you. Thank you, Mike. Your next question will come from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Good morning. Good morning. If I could just follow up on the net interest margin was down just 2 basis points, which I think is very good in this kind of environment. As I look at some of the underlying detail on the yields of the securities, and even some of the loan yields, I guess I don't totally understand how they've been so stable and wondering if there's anything you can add on maybe first the securities piece. You've been growing it, and the yields have been remarkably resilient. Well, it is just math. What we have been growing has not been that extraordinary in terms of its incremental contribution to the weighted average because the denominator is as big as it is. If we continue to deploy, as I know you know, if we continue deploying in this environment, ultimately it will start to skew down the weighted average returns. Also we have been tending to invest in Treasury and agency securities, and just from a credit quality point of view, that is going to bring down returns. Setting aside historical book yields versus current book yields and the shape of the curve when the investments were made. If we have got corporates and munis and some other things in the starting portfolio, if we are just adding U.S. Treasuries, it is going to bring things down. But it just has not revealed itself yet because the numbers have not been big enough yet. Okay. On the loan yields, I guess they have been surprisingly resilient as well. Do you feel like I know it is a blend of 8 or 10 categories the way you disclose it, but do you feel like generally speaking, loan yields have stabilized? I am looking at the C&I that was actually up a couple of bits. But really up and down the portfolio, it feels like there has been pretty good stability the last 3, 4 quarters. I think that is right. We are in fiercely competitive markets. Not every bit of competition is in the last basis point of spread on a loan. Sometimes it is in the structure of a loan. Of course, there are places we will back away from when that happens. It is competitive, but it has not all shown up in price. Okay. Just, I guess putting it all together as you think about the net interest margin percent going forward, probably largely dependent on loan growth, but how do you think it shakes out? Obviously, the rates where they are does not help, but is it just this modest pressure or More material pressure to come? It depends on the pace of continued deposit inflows and how that gets redeployed. If deposits remain steady where they are, then the loan growth and the redeployment from cash into investment securities is going to be very supportive of the NIM. If we keep getting high single digit or even low double-digit deposit growth, and loan growth isn't happening at the same pace, or redeployment into investment securities doesn't make sense at the same pace, then the math is going to put pressure on that calculation. As you know, that's not a calculation we're managing to, it's an outcome of the other things that we're doing. But the driver there is the growth in deposits and how you responsibly deploy that into either loans or securities in the same timeframe that the deposits are coming in. Yep. Okay. All right. Makes sense. Thank you. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead. Hi. Good morning. Hi, Betsy. Hi, Betsy. Hey. I had a question on investment spend and thoughts around mobile wallet with Apple Pay. Obviously, you did a lot of work there. Is there an opportunity to take those investments and potentially expand them into mobile wallet, real-time banking, other tokenization strategies? Well, we're doing a lot of work in all those things about the so-called paperless store and doing real-time cash letters, and helping customers with real-time information, notwithstanding which channel they're involved in. I would say all the above is important. What we found, which is interesting, is that our most loyal customers today are the ones who use the channels most often, and the most types of channels. Even for those customers who are very advanced in technology, in the use of technology, the ease of technology, who might be dominant in that channel, still visit stores on an infrequent but regular basis. They go to ATMs. There's lots of things. Some of the investments we're making is to set up an appointment with a banker using your technology. We're testing things about being able to authenticate customers, know when they are in the stores, working on things that would authenticate at an ATM machine, maybe using your mobile phone. There's a mobile device. There's just lots of things going on there. We're actually learning a lot of those things from retailers and other service providers outside of our industry. Pretty exciting stuff. Do you feel that this is table stakes and will just maintain share? Or do you think that you're doing things that could potentially drive share up, drive down that expense ratio? Well, I think about less of an expense ratio, but these are more than table. Well, they are table stakes in some cases. If you don't have a mobile offering, you're probably not going to serve most millennials today. But we think of it more than table stakes. We think it's a big reason why we're growing net new primary checking accounts by over 5% a year. Deposit growth we've had clearly is partially a result of our distribution model and the omni-channel view we have of these various channels. Not separate businesses, but combined into really centric around the customer needs and convenience. Our growth is I think reflective of our commitment to that. I guess I am just wondering, too, on the Dillard's because I would expect that retailers also want best-in-class mobile apps, et cetera. Is this part of what we should expect you will be delivering to Dillard's and other private label portfolios that you win? Well, I do not want to speak about a particular situation, but I will just give you this. 16 years ago, we did not have an online offering. Today, over 80% of our customers are actively online. Some 24 million customers actively online on the consumer side. 5 years ago, we did not have a mobile offering. Today, we have over 14 million customers on that. Mobile is the fastest growing, fastest adopted channel we have had in our history of our company. The things that customers can now do mobily, and the things that they will be able to do in the next year or 2 as we continue to introduce new capabilities is really exciting. So watch for this. It is really important. Okay. Thanks. Thank you. Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead. Good morning. Morning. I am going to kick the energy horse here again, so my apologies. First of all, can you just help quantify your total leverage loan book, what the size is, and then of that leverage loan book, how much of it is energy? Sure. We do not have a leverage loan book. We have loan portfolios in various lines of business. We have an energy loan portfolio, which would include both oil and gas. As I mentioned, it is about 2% of our loans overall, and it includes E&P companies, it includes midstream pipeline companies, and it includes services companies. It also includes some investment-grade integrated oil names. But the sum of that is about 2% of our total loan portfolio. Some of those companies will have higher leverage, some of those companies will have lower leverage. But we do not draw the portfolio line along the level of leverage. Okay. Then separately, related to that, do you have the amount of bond exposure that you may have held in your trading portfolios for any deals that you've done in the energy sector? Do you have that quantified? Yeah, it's a good question. So I'll quantify for you our total securities exposure, including what's in trading and also what's in AFS, because we have some corporate investments in energy names as well. And the sum total of both of those is less than $1.5 billion at Wells Fargo. And it's a much smaller portion in trading, which of course gets marked to market through the P&L every day, and a somewhat larger percentage of that sitting in AFS, which we mark every day, but the value change goes through OCI. Okay. All right, and then separately on the loan growth, I agree, good pickup that we saw in C&I for the quarter. As we look out into 2015, is it fair to assume that you should see some acceleration in the loan growth that you're looking at for 2015 versus what you achieved in 2014? I think you're in the 4%-5% range for 2014. Is it fair to assume that that accelerates from there next year or for the full year of 2015? I think knowing what we know about the economy today, we'd feel better about the next four quarters than a couple of the last four quarters. If the most recent quarter is the continuation of a two-quarter trend, then yeah, we'll probably have higher loan growth or higher amounts originated. Now, the denominator keeps growing as we grow the size of the portfolio, and at some point the rate gets impacted by that. But yes, it feels like a good year for loan growth. John, we think if you are going to grow revenues over the long run, you have to be growing households, cross-sell deposits, and loans. We sure plan for all of those. Okay. All right, and my last question, I know there were some questions around the excess liquidity reinvestment and what you have been buying. I know you indicated you are buying treasuries and agencies. Do you have what durations and what yields that you purchased in the quarter, just to get an idea of what the ultimate impact could be on the margin? Yeah, we do not lay it out quite that way. You will see in our tables what we are talking about. If it is treasuries and agencies, you know the timeframe, and I can tell you we are in the intermediate part of the curve, so that will probably get you there. Okay. All right. Thank you. Yeah. Your next question comes from the line of Eric Wasserstrom with Guggenheim Securities. Please go ahead. Good morning. Morning, Eric. Eric? Wow. Regina? Did he drop? Eric, your line is open. Hi, can you hear me? Yeah. Hi, Eric. Oh, hi. That was odd because I was not on mute. I have used a telephone at least once before. Just to follow up on the OpEx for a moment. I understand the discussion of the ratio, but just in terms of absolute level, based on what I'm hearing in terms of your loan growth expectation, it sounds like we should be anticipating an absolute level of expense that is higher than what we saw in 2014. Is that correct? It's really tough to say, which is why we talk in percentages and think about things in terms of a range. You can see the items that we're calling out as feeling seasonal in Q4, and there's a handful of them, and they amount to a few hundred million dollars. Then, of course, in Q1, we typically have escalated personnel and benefits expense as well. In terms of the OpEx or the investments that we're making in risk management, et cetera, they will be elevated for some period of time, but because of all of the other drivers to the total expense number, it's possible and there's a reasonable expectation that we operate at a lower level than we have in the last couple of quarters because we're always pushing down on things where we can. That's why we give you the range. We think we're going to be in the range in 2015, like we have been in 2014. One other item I'd mention for those that are newer to it, that we do have this deferred comp element that shows up in expense even though it's a P&L neutral item. That creates 100 or in some cases, a couple of hundred million dollars worth of noise in any given quarter, which is material given the differences that we're talking about here. But Eric, even though we're at the high end of the range now, one should not assume that it's not top of mind around here. It is. It remains top of mind. It's always looking for opportunities to be more efficient, but also continue to invest in the future because we do have a long-term view. Right. Of course. The financing that you provided on the student loan sale, what is the expected duration of that? That financing probably comes down over the course of next couple of years on a relatively steep curve as the portfolio gets permanently financed into student loan ABS. My expectation, I think the reasonable expectation is that its average life would be maybe a little bit more than a year as it comes down. Got it. Just quickly, one last thing. The tax benefit that you mentioned in the period from the change in federal tax law, is that a permanent benefit? What should we expect for your go-forward GAAP tax rate? Yeah. What happened in the fourth quarter is both the impact of the extender legislation that came in at the end of the year, as well as the resolution of some discrete matters that we've been working on with the various taxing authorities for some period of time. I would look at recent prior years for what a good expectation is for our tax rate going forward. Okay. Largely unchanged, it sounds like. Yeah, I think that's right. Okay. All right. Thanks very much. Thank you. Your next question comes from the line of Chris Mutascio with KBW. Please go ahead. Good morning, guys. Happy New Year to you. Hey, happy New Year to you, Chris. I have a quick question for John Shrewsberry. You noted that the investment securities portfolio has increased quite materially over the last year. I think it is up about $50 billion. Can you tell me what portion of that is Ginnie Mae MBS? How much is that Ginnie Mae portfolio, if you have exposure? Has that grown in 2014? It's negligible. Okay. Because I'm concerned being the refinance activity there with the 50 basis point cut, plus rates being down. I didn't know what the impact would be, perhaps on the margin, but your Ginnie Mae exposure is negligible? Negligible. All right. Thank you very much. Thank you. Your next question will come from the line of Nancy Bush with NAB Research. Please go ahead. Good morning, guys. Happy New Year, Nancy. Happy New Year. Two questions for you. John, you mentioned the changes in the GSEs and at the FHA with regard to allowable mortgages, et cetera. There seems to have been a remarkable turnaround in Washington since the days of the financial crisis, when everybody was cracking down on mortgages, and we are in a reverse posture now. As a result of this, do you see any changes that you might make at the mortgage company in terms of businesses that you exited, the wholesale business, et cetera, that you might want to go back and revisit? No. First of all, I think those are positive changes that have been made, and I think they've been largely made because it got too restrictive, and customers who deserved a loan, who wanted to buy a home, could afford it, could not get credit. I don't want to overstate the amount of those folks, but there was that element, and I think we've come to a much better place with regulators, with the industry, and with customers. But no, we don't have an intention of going back into joint ventures or the wholesale business. We like the business mix we have now. Okay. Second question is this. There was, I believe I heard on "The Street Column" a few days ago in The Wall Street Journal about the impact of the energy price drop on various banks. John, I think they mentioned that the figure 17% of revenues comes to mind with regard to your capital markets businesses related to energy. Could you just clarify that, where you stand in capital markets with relation to the energy business? Is there going to be a big impact in revenues there? In that article, they referred to, I think, Dealogic information for 2014 that suggested that we had about $280 million worth of underwriting revenue from energy-related activity. That would be debt and equity underwriting and probably loan syndication fees as well. That's the order of magnitude. The 17% would refer to that as a percentage of the U.S. investment banking revenue for full year 2014. In terms of at-risk or where it goes from here, that's a starting point for last year. It's bounced around between, I don't know, $150 million and maybe $300 million over the course of the last several years. Yeah. Okay. Just one more question, John Stumpf, for you. You've been very positive on the direction of the American economy for the last couple of quarters, and I think you remain that way. I don't know if you saw your predecessor, Mr. Kovacevich, on CNBC a couple of mornings ago, and he was not so positive on the strength of the American economy. I'm sure you still talk to Dick from time to time. What is behind the differing views? What was his name again? You know, that K guy. Oh, the K guy. Well, I obviously respect Dick's view, and there are different views on the economy. That being said, and there's volatility, clearly. I mean, today you look at retail sales and you sort of feel differently. You can feel differently on a day-to-day basis. But when I look at the businesses that we're in, and as I'm out talking with customers, which I am every day, and talking with our business leaders, and frankly, looking at the numbers. I mean, 50 consecutive months of employment growth. Unemployment in the 5, 6 range. GDP 5%, and we'll probably have a few quarters this year start with threes. I'm optimistic. Again, I don't think this is a breakout, but I think we're on our front foot. Consumers. Confidence is at an all-time high since the downturn. The way I read the tea leaves, I'm optimistic. I think Dick also suggests that we could have gotten here sooner. We could be at higher levels. Sure. That is fair. I would agree with that. Okay, thanks very much. Thank you. Our final question will come from the line of Marty Mosby with Vining Sparks. Please go ahead. Hello, and we are going to wrap it up for you. Thank you, Marty. If you look at the capital deployment ratios, if you look at your total payout this quarter at 72%, which is, I think, close to your stated target, you talked about around 75%. To increase capital deployment from here, are you going to need to see some earnings momentum, or do you think you could push past that 75% payout ratio? Our target is 55%-75%, and you saw that it bounced around during the course of the four quarters of 2014 for a few reasons. One of them is that we do more share issuance in connection with our benefit plans in the first half of the year, and so it drives down the net payout ratio. But the first call on our capital is to be available to support more loan growth on behalf of our customers. The capital deployment horse is out in front of the net payout cart, and that's important to remember because we're not hoping that we have enough to support the business growth after we think about distribution. We're making sure we have enough to support the business growth, and then we're factoring in distribution behind that. We anticipate continuing to operate in the range quarter by quarter, 55%-75%, and the fourth quarter was a high tick on that in the 70s. I was really kind of looking back towards the E part of that, which is, as earnings grow, that gives you more chance. What kind of catalyst do you see while we're waiting on interest rates to create some incremental earnings momentum, kind of reigniting that we've seen kind of slow down over the last couple of quarters? Sure. Well, it's loan growth for sure. It's redeployment of excess liquidity into higher yielding earning assets. It'll be what the impact is on expenses that we've been talking about a little bit if we do as expected there. And then it's the various sources of fee revenue, which were flat quarter-to-quarter, up year-over-year, but there's a lot of momentum in places like card, places like investment banking, trust and investment fees overall. We just talked about the slightly more bullish case for mortgage this year. All of those are catalysts for growth. Thank you. Yep. Thank you. Thank you, and thanks to everybody who joined us today. Again, happy new year to everybody, and thanks for your interest in Wells Fargo. See you next quarter. Ladies and gentlemen, this does conclude today's conference. Thank you all for joining. You may now disconnect.