Wells Fargo & Company (WFC)

Investor Day 2014

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May 20, 2014

Good morning, everyone. Welcome to Wells Fargo's 2014 Investor Day. Thank you for spending the day with us here in San Francisco and via the webcast. As always, thank you very much for your interest in and investment in our company. Before we start, I will remind you that some of our presentations contain forward-looking statements. Please refer to the page entitled Forward-looking Statements and Additional Information in your materials, and the forward-looking statements section of our SEC reports for information and factors that could cause actual results to differ materially from the forward-looking statements. Additionally, some of our presentations contain non-GAAP financial measures. Information about those non-GAAP financial measures, including reconciliation to GAAP, can be found in your materials and in our SEC reports. With that, I would like to start the day and introduce our Chairman and CEO, John Stumpf. Thank you. Good morning. What a great crowd. So nice to see so many familiar faces and long-term holders of our company and those of you interested in us. At Wells Fargo, we do lots of things to advance the business. We have been doing that for 162 years. I would like to categorize those very quickly for you in six general buckets. First of all, it is all about customer here at Wells Fargo. We like to say the reason we get up in the morning and go to work is to serve customers, and the result is we make money. We do not put the stagecoach in front of the horses. The reason is service. The result is we make money. We have the privilege here of serving over one in three American households. We have the broadest coast-to-coast banking franchise. In serving these customers, we want to help them succeed financially. That is what we are all about. Secondly, we measure lots of different things. In fact, we are really driven a lot by the science of the business. The rudiments and the elements of the business. If I had to pick just one number, one area I focus most on, if I could only pick one, it would be revenue. Because when you are growing revenue, you are growing the business. Some of you would say, and rightfully say, well, revenue has been challenged for the industry and for Wells Fargo, and that is absolutely right. But when I look at revenue, I look at the long-term side of revenue. What is revenue? It is deposits and loans and more credit cards, deeper cross-sell, longer relationships, more assets under management. Those are the organic compounds that make up revenue growth. Because we have seen cycles, we have seen times in our history where interest rates were low and some of the things you do get underappreciated. I think our great deposit franchise, say, is hugely undervalued. That does not mean that we are not out looking for every core deposit we can find that is part of a full relationship. The third area that we spend time on are expenses. At the last investor conference, we shared with you that we would run the company between 55% and 59% efficiency ratio. At a 55%, 59% efficiency ratio. In other words, for every dollar of revenue, it would cost us between $0.55 and $0.59 to bring that dollar of revenue in, and we have done that. But we are also making investments for the long term. We are spending lots of money today, for example, in areas of risk and risk management. Mike Moffin will tell you more about that a little bit later today. The fourth area is our vision and values, our culture. I know culture is a hard thing to put into a profit model. I get that. But if there's anything that's more important than culture, I don't know what it is. The culture at Wells Fargo is uniquely us, uniquely ours. I like to say we specialize in this company on plural pronouns. We're the company of the us, we, and ours. Not that I, me, and mine are not important. They really are. Our 265,000 team members have their own careers. They have their own life, their mortgages. They want to do well. We want them to do well. We want to recognize them, but never at the expense of the us. The fifth area that we spend time on is connecting with our constituents. I started in the industry in 1975, and for much of the first couple decades, your outreach was about limited to this. Do a really good job, keep your head down, and the market will reward you for your work. Today, it's more complicated than that. It takes more investment than that, especially since 2008. Some of the things that I'm most proud of, in 2012, among all companies in the country, we were the number one philanthropic organization. We invested in over 20,000 nonprofits that year. Last year, we were in the top two or three. We're the 12th largest employer in the country, and those team members have given more to United Way than any other company five years running. We connect a lot with community leaders, elected leaders, activists, and others to help them understand our culture, our reputation, and to hear from them so we can continue to get better. Another area we're spending a lot of time on is risk management. Again, going back to when I started my career in 1975, risk started with credit and ended with credit. I didn't even know what a chief risk officer was. I had met a lot of chief credit officers. I was one at one time, and that was the risks you managed, was credit. Now, credit is still an important risk to manage, and our company has been known as being very good at managing credit for a very long time. We now want that same reputation for all things risk, whether it be cyber or operations, interest rate, reputation, all the other things that make up the risk profile. Our board's agreed to that. Our management team and our whole team want to be known as best in class in that area. So those are the six things that most of our work is embodied in. As I sit here now, as we start very soon, our 163rd year of history, I'm optimistic. 97% of our revenues are here in the U.S. 97% of our people are here in the U.S. Wells Fargo is all in on America, and we love it that way. In fact, you're going to hear from our leaders today representing our over 90 businesses, and I think they all have opportunity. We're a real economy company. We do business with farmers and ranchers and folks in the energy business and individuals who are buying transportation to go back and forth to work, home mortgages, and you name it. We are a real economy company. Even for our businesses that you might think or some might think have an oversized position in a market, in a business, there is still oceans of opportunity. Consider this. Five years ago, when we merged with Wachovia, since that time, we have grown the fifth largest bank in the country in terms of deposits. It would be next biggest right behind Wells Fargo. That is just the growth. Oh, and by the way, at 11 basis points. In fact, I think today the company's brand, its people, its market reach, its relevance to customers has never been better, never stronger. You are going to hear some of that excitement today and the enthusiasm and the opportunities from our team. 17 of my colleagues will make presentations today. Seven of them are new to Investor Day, but not new to the company. They have been here two and three decades. Of those 17, six will be direct reports of mine, and five of my direct reports will not be presenting, but they are in the audience today. Incidentally, my 11 direct reports have been with this company over 27 years. I know them, I know their children. In some case, I know their grandchildren. One of the parts of the secret sauce of this company is we have learned how to disagree without being disagreeable. We have learned how to argue without being argumentative. Everything is on the table. The people who are not my direct reports who are not presenting today, I would like to have them just stand for a second so you can know who they are. If you have a question for them, please seek them out. Pat Callahan, my Chief Administrative Officer. David Julian, who is the Head of Audit. Where is Jim Strother, who is our General Counsel, and Kevin Rhein, who is the Head of our Operations and Technology Group, and Hope Hardison, the Head of HR. We also have another special guest here today. Our lead director came today. His name is Steve Sanger. He is the former CEO, Chairman, and President of another iconic American company, General Mills. Steve is from Minneapolis. Steve, you want to stand where we can see you? Steve claims this is the only reason today. I think the Chamber of Commerce sent him to go find the sun because they have had a hell of a winter in Minnesota. But, Steve, thank you for joining us. Before I introduce our first speaker, I want to take just a minute and recognize a giant in our industry who recently announced his retirement. That is Dave Hoyt. If you are going to start a bank any place on the planet, and you could use draft choices, you draft Dave Hoyt. If you are smart, you draft him number one. If you are not so smart, you take him in the top five, but you would surely take him in the top five. His contribution to our company over 32 years, building our culture, building, I think, the best wholesale commercial banking business on the planet, and his legacy are the leaders that he is leaving behind and that he developed who will take this company to the next level. Dave, thank you for your contribution. Now our first presenter, our CFO. Deeply knowledgeable of our company. It's his sixth day as CFO. Seriously, John is somebody who I've known for 15. He's been with the company 16 years. Came out of our wholesale group. Is a terrific leader for us, and he will share his perspective of the company from a CFO perspective. Thank you much. John? Welcome, John. Good morning. Welcome to San Francisco. We're very happy to have you all here. Thank you, John. I'm going to start on day six with a little bit of a scorecard of some key metrics that tell the story of what's been going on at Wells since the last Investor Day of 2 years ago, many of which you'll be familiar with. Starting with net income at the top of the slide, which is a popular metric, we've had a great run, very consistent, growing the whole time. You'll learn more about the elements of what's driven growth from the speakers throughout the course of the day, but uninterrupted by any excitement on the downside, a very consistent story for 2 years. There's a little bit more in a moment that I will use to describe that. In terms of loan growth, one of the most important metrics of what we're doing with customers, how we're winning new customers, loan growth has increased by almost $60 billion or 8% over the last 2 years. There's two elements to that. One is core loan growth, which is the going concern businesses that the activities that we have with customers are ongoing, $90 billion or 14% growth there, and that's reduced by what's happening to our liquidating portfolios that you're familiar with, which have shrunk by about $30 billion over the same timeframe, or 28%. Now that liquidating portfolio amounts to about 10% of total loans, where it was 16% a couple of years ago. In terms of deposit growth, which John describes as part of the key fabric of our relationship with customers and a big part of our customer acquisition strategy, average deposits are up $162 billion or 18% in the last 2 years. They now amount to 130% of average loans versus a little under 120% 2 years ago. Deposit costs of 11 basis points are now down 9 basis points, and that's industry-leading deposit costs on the low side. In terms of credit costs, Mike Loughlin will speak at some length about credit when he speaks this afternoon. Net charge-offs declined 66% over the 2 years. Since the first quarter of 2012, reserve releases have amounted to about $4 billion during that period of time. We're very proud of that. That's a combination of both the environment that we're in and improving fundamentals, as well as our adherence to our disciplined underwriting strategy. With respect to capital return, you're probably all very, A, familiar with, and B, enthusiastic about, $22.6 billion in gross capital returns to shareholders over the last two years. We've increased our quarterly dividend by 36% and repurchased 277 million shares during that period of time. We think all very strong performance versus our targets. When we met two years ago, we actually laid out some specific operating ranges, some targets that we were going to try to achieve. I'm happy to report, I'll walk you through our performance against those metrics over the last two years. John mentioned efficiency ratio, on the top left, you can see that we got within our band and remained within our band for the last two years. On the top right, you can see our ROA band of 130 to 160 was aspirational when we set that level, and we've operated within that band and moved actually toward the high end of the band recently. In terms of ROE, it's a similar story. We were at the low end of our range and have moved to the high end of the range while building equity at the same time. Then again, with respect to payout ratio, it's shown here gross versus net. Gross meaning the sum of dividends and repurchase, and net after subtracting out issuance that we do on behalf of our benefit plans. Here we've increased it every year and gotten above the 50% gross line. We were operating last year at 34% net, and we'll roll forward in a moment and talk about what our plans are for that. So very proud of these targets, and operated where we said that we thought we would. Importantly, we've been achieving those targets in what we consider to be a pretty challenging environment. We're in an extended low-rate environment. Rates have transitioned a little bit higher in some cases, but still historically low, particularly at the short end. While we've got an improving credit environment, as I mentioned, as a result of real estate markets, of corporate markets, et cetera, that's been helpful, but has created some competition to work against. We had a very strong housing market at the beginning of this two-year period that we're talking about, and I think something on a lot of your minds that you'll learn more about today is how exposed we were to the high level of activity and the great returns we had on the mortgage production side of our business, how we would do after that went away. We'll talk about that in a moment. I can tell you that volumes are down 72% over that two-year period. Refis in particular, that used to be about 70% of production, are down to about a third. We've been working through an evolving capital liquidity and the CCAR framework for the last couple of years, which for the whole industry have taken a lot to get used to. That adds a little bit more complexity to how these two years have unfolded. We've done it with 2%-ish economic growth, a little bit more or a little bit less from quarter to quarter, and real political and regulatory uncertainty. Our clients, both on the consumer and corporate side of things, have had to watch and plan amid the debt ceiling crisis, the fiscal cliff discussion, the sequester, the implementation of the ACA, and a variety of other things that stood in the way of them and their best business planning, which has an impact on our industry. Of course, we as an industry have been implementing Dodd-Frank in bits and pieces and getting used to both the capital and liquidity framework of Basel over these two years. That is how the environment felt for us from the inside of a bank for the last two years. Nonetheless, in spite of that, in fact, we've had a very good run in terms of generating earnings for shareholders. Very consistent, no sudden moves to the downside. The character of each quarter is always a little bit different, and there's always a story to tell. But in spite of those environmental considerations that I mentioned, we're very proud of where we've ended up and how we've performed. In fact, if you roll the tape back a little bit further, this goes back to 2001 on the left. It's a combination of the unemployment rate, real GDP growth, and the slope of the yield curve between the short end and the 10-year. You can see over that 10-year period, there's all sorts of combinations that present different challenges to banks. On the right, you can see a familiar graph of how we've performed over that time. Obviously, the 2008 number's impacted by the merger between Wells and Wachovia. But other than that, a very consistent set of annual returns. In the period since the merger, so 2009 forward, that amounts to a 16% compounded annual growth rate. We're very proud of that. What you'll hear today from all of my colleagues is the many things that we have going on to support customers that contributed to that and will contribute to our business results going forward. You may say, why is it that Wells Fargo can perform that way? We would tell you, we think it's our business model that creates long-term durable advantages, such as the very strong distribution that we have. You'll hear more about the combination of stores, ATMs, online, and mobile that give us a best-in-class relationship with consumer customers. You'll hear about our leading market share in a variety of financial products, both commercial and consumer, including autos, mortgages, small business, middle markets, commercial real estate, et cetera. All of which contribute to our results. We're proud of our diversified and balanced sources of revenue, both in terms of the combination of spread income and fee income, and then with respect to fee income, the many drivers. I'll talk about that more in a moment, in terms of what's contributing in any environment at any point in time. Our relationship focus and cross-sell capability is hopefully legendary at this point. It's been our vision for decades. We've stuck to it. You'll hear about it all day today, woven through the presentations by my colleagues about each of their businesses. It's a difference-maker. John described the comprehensive nature of our risk discipline. We've always had it with respect to credit. Many of you are in this room because of the good work that we've done over decades in credit, and that same approach has been taken across the whole spectrum of different types of risks that we face. I think the most important thing that you'll observe today is our deep culture and the dedication and experience of the management team. You'll be listening to 17 people, 16 after me. I hope that you walk out of here at the end of the day with the feeling that that's the right team that you want to deal with the circumstances that we're all facing to produce the type of results that we have for a very long time. The next few pages, I've got a couple of comparisons of Wells Fargo versus a peer group. This peer group includes both traditional regional banks who share characteristics with Wells Fargo of being traditional in deposit-taking and lending activity, as well as some of the larger national banks or larger cap peers. We think it's the right peer group. It's a little of each. We occupy a sweet spot that's in the middle of that. Again, looking a little bit more traditional, but having scale and breadth that compares better to the larger cap firms. These are firms that you're very familiar with. You invest in their shares. You write about their prospects. Hopefully, you'll agree it's the right group. On the left, we're describing what's happened to loan growth. Each of these is 2012 versus 2013. The way we're showing loan growth is a stacked bar. The full height of it representing the core loan growth and the net height of it describing what happens after you subtract the diminution in our runoff portfolios. About 3% on a net basis, about 5% on a growth basis, comparing against the regional firms on the left and the larger cap firms on the right. In terms of average deposit growth, for all the reasons you're going to hear about today, we were at the front of the pack between 2012 and 2013 with 8.5% growth. As you'll also hear, with the lowest cost of deposits of anybody in our peer group. Attracting deposits while retaining discipline in deposit pricing. This next slide describes revenue to average assets. It's a measure of asset productivity. We like it a lot because it describes how much of our customers' business we're winning. For the dollars of balance sheet that we deploy, our customers are doing more with us than apparently they're doing with the people in our competitive peer group. You've heard about efficiency ratio. This is our comparison versus the peer group for 2013 at 58.3%. It's in the bands that we've discussed. You know how it's calculated. Some of the big drivers that are involved in our point-in-time measurement are exactly what we're paying to generate an incremental dollar of revenue. It accounts for all the product development that we have going on, all of our work in the risk management space, where we're adding more resources, et cetera. Every dollar that we're spending, you can see here. In spite of all of that incremental investment, we are operating at just about best in class, certainly among the large cap banks, for efficiency. This next slide is a measure of charge-offs versus average loans. This shows last year, 2013, at 56 basis points. You know that that has improved to the low 40s in Q1. It is a very good time in credit. Mike will be talking about what trends we are seeing, where we think that is going, both from a commercial and consumer perspective. But in the meantime, we are best in class on that measure. Then I described for you what has been happening with our ROA and ROE, but here you have us measured against the competitive group. Our return on assets in 2013 at 151, toward the high end of the range that we have set for ourselves, and return on equity of just under 14% against that same peer group, also performing very well. Near and dear to many investors is this discussion about capital return. This describes 2013, and this is measured in billions of dollars. So Wells Fargo on the left with $11.44 billion of capital return. That is dividends plus repurchases. We understand the importance of this metric to shareholders, and you are going to hear a lot more about this in Paul Ackerman's discussion later this afternoon. Then lastly, with respect to the competitive group, this is shareholder return. So this is the change in market price of our shares plus dividends. The year-to-date metric is measured through May 7th, so it is a little bit dated, but the stock price has actually held pretty strong since then. You can see us at the top of the class in the one-year category and also year-to-date. We are very happy about that, and we are both thankful to you for that and happy for you for that. The market is rewarding our shareholders. While a lot has changed over the last few years, much has remained the same. The topics that you are telling us that you are interested in are very similar. I am going to spend a moment going through each of the ones that are listed here and that you have told us you care a lot about. So specifically with respect to loan growth, you can see here, first quarter 2012, 2013, and 2014. Green is core portfolio and blue is non-strategic or liquidating loans. You can see core loans building, you can see non-strategic shrinking, and the net has been growing, as I mentioned, 8%, $60 billion since the first quarter of 2012. It is coming from both commercial and consumer loans. The key takeaway from this is that we expect loan growth to continue. We expect it to come both from the commercial and the consumer side of the house. With respect to net interest income and NIM in particular, you will hear more about this this afternoon when Paul Ackerman speaks to the group. On the right, you can see what has changed about our balance sheet in the last two years. The immediate takeaway is the percentage of the asset side of the balance sheet that is made up of loans and the percentage that is made up of liquid assets. As a result of that increase in the percentage that is liquid assets, it's causing the NIM to come down. But as you can see on the left in the green bars, it really hasn't adversely impacted net interest income in dollar terms that much. We have lots of deposits coming in. We have to deploy a certain amount of that in highly liquid assets. They happen to be high grade and low yielding, so the NIM calculation changes. But in terms of dollars that we're generating for shareholders, and frankly, the capital efficiency, which Paul Ackerman will talk about, it's a trade-off that's worth making. This snapshot describes how to think about what's happened over the last two years. The key takeaway here is we continue to target growth in net interest income in dollars, and we're also very well-positioned for rising rates, which you'll hear about throughout the course of the day. This next slide, you're familiar with the data on the right, I'm sure, from our quarterly calls. On the left, you have a distribution of non-interest income for each of the last three first quarters. Two years ago, people would have rightly asked, what happens when the extraordinary amount of mortgage refinancing slows down? What's going to happen to non-interest income? The green slice of that leftmost bar at $2.618 billion amounted to 24% of non-interest income at that time. If you roll forward to the first quarter of this year, that contribution to total non-interest income is now at about 6%. What's happened is that the largest category of non-interest income, which is trust and investment fees, has grown by 20% from $2.8 billion to $3.4 billion. The category of all other, which is the gray part of the bars at the top, has grown by 28%. You can see on the right what those other things are. But there's been contribution from a variety of sources that have virtually closed the gap on what at one time seemed like a big exposure to ongoing mortgage production revenue. As I recall, like we assumed that it would, based on the diversification of our business model. You can see on the right, as I said, the color coding for what else is included in each of these categories. So we expect, and you'll hear from Mike Heid today, that we expect mortgage production revenue to stabilize at this point, and we remain well-positioned for non-mortgage fee growth. We're very excited about all of the businesses that contribute to the line items on the right side of that page, in addition to mortgage. Back to efficiency just for a moment. You can see what it means in dollars as we've gone through the first quarter of 2012, 2013, and 2014. This is non-interest expense. We've got a very disciplined approach to expenses. We still make lots of investments. We still have things to pay for, but we try and be as disciplined as we can, where we can, so that we can afford to make the investments that we're required to make. We're going to continue to target the range of 55%-59%. You will be hearing about many of those investments throughout the course of today. Back to credit costs. There is a little bit more detail here, although not as much detail as Mike will take you through later. Credit quality has improved significantly. New originations are of improved quality. The improving economy has helped. It is true in residential, it is true in commercial real estate, it is true in corporate risk. We have healthier borrowers. We are benefiting from that in a meaningful way. You can see provision expense and net charge-offs, as well as the net charge-off rate on the top graph here. You can also see what is going on with non-performing assets, including non-accrual loans and foreclosed assets on the bottom, both trending in the right direction. We expect continued strong credit results in this environment. Reserve releases are expected to continue, absent some significant deterioration in the economy. Things, in some cases, are better, but before we update you on our financial targets, I thought it would be helpful to review where we are today and our expectations regarding the overall environment in the period ahead. We expect the economy to continue to improve, including continued improvement in housing and employment, which both represent a meaningful opportunity for Wells Fargo. I mentioned that we are well-positioned for increasing rates, and you will hear more about that today, but our business model should allow us to adapt to whatever the rate environment is, as it has for a long time, including the period that we are coming through right now and that we are in right now. We have a lot more insight into the regulatory environment than we had at our last Investor Day, which leaves us better positioned today, but it requires continued due diligence. We remain focused on regular and meaningful dialogue with our regulators so that we are prepared for whatever comes. As the competitive environment becomes more intense, I also mentioned, as it will during an economic recovery, we are going to stick to our long-term risk discipline, which has been integral to our long-term success, and we will see how that weighs on our results going forward as well. We consider that to be an important environmental consideration. With that, I will show you what our updated financial targets are. It lost some of the drama because you have had the slides for a while. If I could have asked you to close the books for a bit, this would have been more exciting to do. Listen, these first three metrics are at the top of the competitive pack, where we have been operating there. We are going to continue to operate there. They are as good as or better than the people with whom we compete. We are very proud to be operating in that environment. Certainly, there could be factors that caused it to slip, but we are going to stick with them, and we are happy about that. The big news, and now, as I mentioned, you have already seen this, so my dramatic pause that I would otherwise make is not worth as much as it otherwise would be, is that our net payout ratio is going to increase to 55%-75%. As I mentioned, and it was on one of the slides, it was calculated at 34% for 2013. So 55%-75% is a meaningful move. And of course, the reason that we can move is that we generate lots of organic capital through the earnings process. We've grown into and think that we're operating at approximately our long-term capital requirements so that there is more available to return to shareholders in terms of both dividends and share repurchase. We're very excited about that. Of course, I must mention that it's subject to continued board of director approval and the ongoing CCAR process. That is what it is. But these are the targets that we have for ourselves and that we're happy to communicate to you. In summary, we feel really good about our performance since the first quarter of 2012 versus our own targets and versus our peer group, the two relevant benchmarks, we think. We've successfully managed through transitional periods in rates, housing, and the economy. We've continued to enhance product capability and our competitive positioning. We've grown relationships and cross-sell across the franchise. You're going to hear a lot about that today. We've maintained our risk discipline, and we've returned more capital to shareholders than anyone else and are targeting meaningful further increases, which we're very happy about. As Jim mentioned earlier, we're going to skip Q&A now and pick it up at the end of the day because theoretically, many of the things that you'd like to ask me will be answered throughout the course of the day by the other speakers. So hold on to your hats. It's my pleasure next to introduce Carrie Tolstedt, who's the head of community banking at Wells Fargo. Thank you very much. Welcome to San Francisco. Good morning. I'm Carrie Tolstedt, and I lead the community bank. I'm pleased to be here today to share some updates about our business. We've organized our presentation today in four different topics, beginning with a brief business overview, followed by updates on our economics of retail distribution. Next, we'll describe some advanced modeling we're thinking about relative to how we're thinking about multi-channel distribution and innovation and the deposits business. Finally, we'll provide a summary of opportunities for continued growth. When we met here two years ago, we had just completed the integration of these channels is powerful and positions Wells Fargo to meet our customer experience and our growth goals. Customers expect our channels to work together as they search for information, access accounts, transact, make payments, and buy new products. Our goal is to exceed our customers' expectations by ensuring great experiences in all of our channels when, where, and how our customers choose to use them. As we adapt to changing circumstances, our competitive advantage remains the same. We think differentiated performance is possible because of our unique combination of national distribution and expertise, and local experience and execution, coupled with our strong vision and values culture. This includes the following. Our unparalleled industry-leading multi-channel distribution, benefiting from the diversification of both geographies and products. Our proven cross-sell capability with a track record of building lifelong customer relationships. Our excellent customer service with a record customer experience and loyalty scores over the last year. A talented and highly engaged team. As important as ever, a strong risk management focus infused in everything that we do. Wells Fargo is uniquely positioned to outperform because our leadership is uniquely equipped to out-execute. Our local leadership includes over 60 regional presidents who have over 25 years of experience with our company. This team responds to customers and community needs quickly. They take pride in where they live and work. The tenure and community knowledge of these leaders are key to our out local to national and out national to local strategy. Our footprint, our product, our channel, and our shared services teams, well, they have over 20 years of experience with Wells Fargo. These leaders are deeply ingrained in our culture, built over decades. They know how to work together and to get things done on behalf of our team, our customers, and our shareholders. We believe that our people are the most important competitive advantage. I am more convinced than ever that a team of experienced professionals, steeped in our culture, who care deeply about what they do and are focused on achieving our long-term goals, is essential for the success in banking. Our team is the best of the best, in my opinion. Consider the graph on the right, which illustrates the engagement of the community bank's 105,000 team members. They are six times more engaged than the average U.S. working population. This means better service for our customers, more creativity and innovation from our team, and more enthusiasm to move Wells Fargo forward faster. Our advantages and capabilities don't stand alone. Rather, they build on one another, creating a system that drives value. This system is built around the economics of retail distribution, and it has stood the test of time. This slide illustrates our economics of retail distribution, which we shared two years ago. Our business is a distributor of financial service products through largely fixed cost channels. The key is to successfully leverage this infrastructure through highly productive sales and service team and channels while working to satisfy all the needs of our customers' business. Retail banking, when executed well, benefits from the economies of scale. We believe this scale allows us to serve each customer and deliver value efficiently. We translate these economics into a series of operating models. First, the density model, ensuring the right physical distribution density, format mix, and site quality so that we can grow households faster than the market, complemented by our very strong virtual distribution. Second, the cross-sell model. This ties directly to our vision of helping our customers succeed financially and meeting all of their needs. Together, the density and cross-sell model derive revenue. The efficiency model is the cost of sales, the cost of transactions, and our goal is to reduce the cost without reducing our sales, service quality, or ability to grow in the future. Finally, to keep this engine primed, the investment model. Improving the quality of our distribution system, making it easier for customers to do business with us. Balancing among these models is critical. As we move through different economic cycles and business cycles, we must adapt and pull different levers to different changing circumstances. We always consider the need to solve for the short-term realities while making decisions for the long-term health and vitality of our business. Let's take a look at how we've done since our last Investor Day. First, store density. Most customers demand convenience and choose their bank based on its location. On the left, we show the store distribution S-curve, where we plot store share and household coverage against retail household share in the market. On the flattened ends of the curve, you're either over-penetrated or under-invested in stores. On the steep slope of the curve, or what we call the sweet spot, it's cost-effective to add distribution as it usually leads to greater household and deposit growth than the associated increase in expenses. Our distribution density provides at least two key advantages. One, deep household penetration in the markets that we do business on, which are shown on the bottom left. We bank 20% or more of the households in 16 of the 21 major markets where we have banking presence, and over 30% in 10 of them. Two, greater leverage of our fixed store costs. On the right, we show the comparison of what we call our store impact ratio, or deposit share relative to store share. Our ratio of 1.5 means our retail deposit share is 50% higher than our store share, which is better than the aggregate of all other banks. We continue to expect our store network to work effectively at capturing households, deposits, and meeting the full financial needs of our customers over time. We expect an efficient store network. Our store strategy provides flexibility in the way we manage physical distribution. This allows us to evolve over time and in different economic cycles without making large-scale shifts from one year to the next. We manage this distribution in three broad categories. First, opening new stores. Our de novo program is supported by good fundamentals and discipline. We add new stores to improve our comparative position to compete better in the markets we serve. De novos are opened mainly in infill markets with high-quality A locations and approximately a three- to four-year cumulative break even. We've also been experimenting with small footprint concepts, including our neighborhood bank, as well as flexible technology, which will lower our operating expenses. Next, relocations and repositioning our stores. As the communities evolve, so do we. We actively relocate stores as leases come due to locations that enhance our health of our network, improve our customer convenience, and accommodate for higher growth. We also consolidate stores as local conditions support, which allows us to reinvest our run rate savings to fund new distribution. Finally, rebranding and refreshing stores to improve the visibility, increase our banker capacity, and to enhance the customer experience. We refresh over 20% of our retail stores annually. When it comes to the store network, we understand no one can predict the future. We believe in preserving options, and we've studied various scenarios to build a clear understanding of what actions we would take if customer preferences would change dramatically. This helps us to make sure that the decisions we're making today will not limit our future ability in the future. What has happened with our store density strategy over the last couple of years? Location quality has improved. The network consists of 20% more A locations and 25% fewer C locations today as compared to the composition at the time of the merger. We have added over 1,000 desks, which has supported the addition of approximately 1,700 store-based bankers. We have also improved our signage in 22% of the stores in the last two years. This has been mostly in the West, given that the Eastern stores were updated at the time of the integration. Our store relocations have significantly reduced square footage, averaging about half the size of the previous store. Since 2012, we have added roughly 300 off-site ATMs while consistently refreshing the existing machines. In 2012 and 2013, 95 stores were consolidated and 68 new stores were opened. We expect the number of stores in the near term to remain relatively stable. It is important to note that all these physical distribution improvements made were at the same time made when our occupancy expenses remained flat since 2010. Next, our cross-sell model. The beneficial cycle of cross-sell continues. The more products the customers have with us, the better deal and greater value we can provide. The more business they do with us, the longer they stay with us, giving us more opportunities to provide products they might need over a lifetime. Our retail bank household cross-sell is now at 6.17 products, up from two years ago, 5.98, and at the time of the merger, we were at 5.2. Our long-term goal continues to be an average cross-sell of eight, and achieving this goal will come with higher household purchase rates and growth and profitability. Now, for an update on our efficiency and investment models. Two years ago, we laid out strategies to drive costs out of our system while continuing to grow and invest. Our balanced focus has worked. Since 2011, total interactions have come up 11%, while the cost of transactions improved 14%. Total annual expenses reduced by almost or over $900 million, which drove a 1.6 percentage point improvement in our efficiency ratio, all while customer experience measures reached all-time highs. Our experience over the last two years has reaffirmed our confidence in the economics of retail distribution. As we continue to advance the model, we remain focused on growing primary customer relationships and earning more of our customers' business, delivering great experiences at the lowest possible cost. At the same time, we believe high-performance companies are also learning organizations. We are learning more about our multi-channel capability and its important driver to growth. We closely study customer transactions and channel activity. As our channels offer more convenience and more services, our customers use them more intensively. The more channels and transaction types our customers use, the better our density, cross-sell, and efficiency models perform, and the more frequently our brand is in front of our customers. Much like you might hear from a technology company focused on customer engagement through measures like active users, we want active customers using our channels and transacting with us in multiple ways. We call this customer intensity, a measure that tells us how customers engage with our channels and transact with us, and what combinations drive business outcomes. Our cross-sell measure measures the number of products per household and the profit of those households. Both measures tell us a more complete story and help us develop actions and strategies to support growth and the efficient use of our fixed cost infrastructure. We continue to monitor the changing preferences to inform our decisions with the goal to better serve our customers and build positive outcomes. Let's take a look at customer intensity. Most customers use multiple channels to do their banking, with two-thirds using two or more channels over a 3-month period. At the same time, customers use 6.5 different transaction types, a combination of automatic and manual deposits, withdrawals, payments, and transfers across different channels. While most of these are self-service, over 75% of our deposit customers come into a store at least once every month. This trend holds fairly steady across different demographics. We're happy with this mix. Customers choosing basic banking transactions through self-service, but still coming into our stores so we can better meet their complex financial needs. Our intensity measure is shown on the rightmost graph. We currently define high customer intensity as a combination of three or more channels used, and nine or more transactions type used over a 3-month period. Intensity correlates with better business outcomes. It correlates with higher value for our customers. When comparing customers with high and low intensity, we see those with high intensity being twice as likely to purchase products from us each year, having higher retention rate by 20 percentage points. They're more likely to refer a friend or associate to Wells Fargo. They own over six additional Wells Fargo products and are 70% more profitable. Around 25% of our customers meet this high-intensity definition. We have opportunity to engage the rest of our customer base. When customers intensely interact with us very often on a daily and even multiple times basis, we're enhancing the relevancy of the Wells Fargo brand while building trust and engagement. This, over time, contributes to developing primary customers, increasing purchase rates, and building lifelong relationships, which eventually earns advocacy for Wells Fargo. This creates a cycle of goodwill and referrals of new customers, thereby contributing to our customer growth. What are we doing to drive customer intensity and translate our economics of retail distribution into shareholder and customer value? We're continuing to innovate to exceed expectations with our distribution and our products to meet customer needs. I'd like to introduce a couple of our leaders to provide a closer look on how we're working to drive customer intensity, improve our models, and to encourage customer engagement. First, Jim Smith and Jonathan Velline. Jim is the head of our digital channels group with responsibility for Wells Fargo's digital strategies and capabilities. He's a 20-year veteran with Wells Fargo and has led this group since 2007. Jonathan manages our ATM business as well as our retail store technology, and he's worked with us since 1991. I'll let you two go. Great. Thanks, Carrie. Thank you. Good morning. I'm Jim Smith, head of the digital channels group, and Jonathan and I are here today to talk about distribution and our distribution network and how we design the customer experience across that network and across the channels into one omni-channel experience, creating customer engagement and unlocking shareholder value. Before we begin, let me first start by talking about how our economic models that you heard Carrie refer to translate from a customer perspective. When you hear us talk about density, we're really talking from a customer perspective about having convenient ways to access your accounts, whether that be in the physical channels, having stores and ATMs where you live, work, and shop, or in the digital space, having convenient access through online, mobile, or the phone. Our cross-sell model really refers to our ability to meet our customers' financial needs, understanding those needs, and providing the products that are valuable to them as individuals. Customer intensity refers to our ability to engineer the experience such that customers feel that there's a consistent way of interacting with Wells Fargo as they navigate through all of our distribution channels. Finally, efficiency and investment really refers from a customer perspective to innovation. Help me find ways to save time or to do more in the channels that you offer me. Jonathan's going to talk a little bit about our distribution network and how that plays. Thanks, Jim. As we design our experience, we do so knowing that our customers use all of our channels. We go where our customers go, where they move from the virtual to the physical, the self-service to the full service. We make it easy to move through those different modes of service. Think about the customer who is researching a new product online. Then they make an appointment to visit with a Wells Fargo banker. We help them move from the top left to the bottom right. The fact of the matter is 85% of our interactions are on that self-service side. But knowing that 85% of our sales come from within the Wells Fargo store makes it critical that we build those bridges between the everyday self-service interactions and the less frequent, but very valuable visits with a Wells Fargo store. The good news is 75% of our customers visit us every 6 months. Clarify what Carrie said. It is every 6 months, 75% of our customers will visit a Wells Fargo store. So how we design helps us capture that opportunity with that Wells Fargo visit. Let me show you what it looks like inside of a store. We have these three modes of service, self-service, full service, and now assisted service. Self-service takes place on a Wells Fargo ATM or a new counter height store transaction machines or STMs. Customer begins and finishes their transaction using the same interface across all 12,500 ATMs and STMs around the country. Then comes full service. Two things you should know. First, we have modernized the workflow. Our customers do not like to fill out a lot of paperwork, and so we have replaced those paper slips with touchscreens at every teller window. Customer initiates their transaction just like they would at a Wells Fargo ATM. Second, our tellers add value, especially with the larger or more complex transactions. They make sure it is done right, they control the risk, and we really cannot leave everything up to self-service. Next comes assisted service, and this is where we have combined our teller system and our ATM system. Most of the interactions are conducted self-service, but if a customer runs into issues, they need some help, they need an approval, a team member is alerted on their tablet, and they come to the customer, they have all the same information that they would on their teller system. They are able to review the transaction, approve the transaction, face-to-face standing next to the customer. This really delivers the best of self-service and full service, and it makes it easier for our customers to choose, because in a sense, they do not have to choose. It is not about getting in the full-service queue or the self-service queue. It is just about delivering great service. It provides us a lot of flexibility as we design new stores. That is really what drove our new neighborhood bank format. Here we took our self-service queue, our full-service queue, and our sales area, and we combined it into what you see here. We opened this store last year in Washington, D.C. Most of the service is conducted through those three store transaction machines. If a customer needs additional service, the team member is alerted on their tablet. They can come over, they can review the transaction, they can help the customer out. There's also the three areas behind the store transaction machines, as well as a private office. And there, a team member can help a customer with the deeper financial conversations, and help them with financial solutions. After hours, those walls close, and this turns into a 24-hour ATM vestibule. Innovative workflow, technology, and design have allowed us to fit a full-service staffed Wells Fargo store into only 1,100 square feet. That's a third of the size of a traditional new store, and roughly 40% less operating cost. This is now another format that we can employ alongside a traditional store or an in-store, allows us to fit into markets which are constrained with real estate, either through space or through prices. Let me show you how this plays out in Washington, D.C. Here we have 27 stores, three of which are neighborhood banks, number 1, 2, and 3 on the map here. Number 1 is NoMa. That's the one I just showed you. We opened it last year. It's 1,100 square feet. We just opened number 2, U Street. This is 1,900 square feet. Because it's a little bit larger, we're able to add three private offices compared to the one at NoMa. There's a big merchant population near U Street, so we've added a merchant services station so we can provide cash services to those customers. So we really have all the same components from a design perspective. We're just able to put them together differently to meet the unique needs of the customer and the unique characteristics of the space. Number 3 is Mount Vernon. This is an in-store inside of one of the busiest Safeways in Washington, D.C. It's only 450 square feet, but we're able to have the same basic components as the other neighborhood banks. It has three store transaction machines, two sales and service areas behind it, and a separate private office. The way I think about this is that we've been able to add two more sales desks than we would in our traditional in-store format, really expanding our ability to sell in this space. Now take a look at the triangle that those three neighborhood banks form, NoMa to U Street to Mount Vernon. Combined, they represent 3,600 square feet. That's the size of one new traditional store. But we wouldn't have been able to find space in that dense urban market for one traditional store. Instead, we were able to add three unique points of convenience to serve that one square mile area. Around there, we have roughly 50,000 census households. They're growing faster than D.C. as a whole. They're growing at 14% versus D.C. at 4%. This format has allowed us to enter that market to serve that population. We're also experimenting with store retrofits. This is where we take an existing teller line and we add the assisted service. In Desoto, number 4 on the map, we're using an STM combined with a teller line. In Fort Lincoln, number 5 on the map, we're taking a traditional ATM combined with a teller line. These are very busy stores, and the assisted service is allowing us to serve more customers within that square footage. We're really trying to expand the capacity of our existing store network, serve more customers within the same fixed cost. In all of these situations, team members are part of the overall service experience. They're standing there ready to help the customers, and they're ready to turn that into an opportunity to deepen the relationship when it makes sense. By digitizing the workflow in the store, we're creating more connections between the customers' everyday interactions with Wells Fargo, their interactions with the digital channel and the mobile channel. Great. Thanks, Jonathan. Digital continues to increase in importance for our customers. We have 23.8 million active users of our digital channels today, and for many customers, mobile is becoming the channel of choice. We have 12.5 million active mobile users. That's up 55% in the last two years, and they're accessing our site on all of the major platforms, which offers them integrated access to all of the accounts that they might have through Wells Fargo, from a checking account all the way to a health savings account in one convenient integrated package. Our site is number one ranked by Keynote in terms of ease of use, functionality, and performance, as you heard from Carrie. Our customers' engagement with the product is growing tremendously. Customers are actively signing in 15 times every month on average, and the use of our mobile payment and transfer functionalities and deposit functionality is up 163% in the last two years alone. But mobile isn't just about a self-service channel. The key to mobile is that it integrates with the other channels and unlocks new opportunities. Let's take a look at how that plays from the cross-sell model that we talked about. If you look on the chart on the left, it's showing the annual purchase rate of customers based upon the channels that they use. Customers that are using digital-only channels actually have the lowest annual purchase rate. You can see that store-only customers have a 50% higher annual purchase rate, but the real magic happens when you integrate the channels together. Store plus digital customers have a 70% improvement in purchase rate over digital only, and if you add the phone, you're seeing a 90% improvement in the annual purchase rate of products. The key is to integrate the experiences together and invest in capabilities that drive that customer engagement. We're investing in capabilities to connect self-service customers with the bankers and advisors, things like make an appointment functionality, video, and chat to turn those self-service customers into prospects for us. Integrating mobile into the physical channel so that we can introduce those store-only customers to the convenience of accessing their accounts through their mobile devices. Finally, leveraging mobile and the unique capabilities to turn that into an authentication device for all of the channels. Let's take a look at how that plays out from a customer perspective. Take our customer, Cindy. She's a typical customer, needs a new roof for her house, and is looking at options to finance that. Like many customers, she starts online, researches her products there, but she really finds that she wants to talk to someone. She's able to use our make an appointment functionality to choose a location and time of her choice, and she's really happy to learn that when she shows up, the banker is there to greet her, is prepared with all the information about Cindy as a customer, and understands what Cindy's trying to accomplish. They can go through a customer needs assessment and find the right product to match Cindy's needs. Then after she applies for our home equity line, she can actually track that home equity line through her mobile device and track the fulfillment process. Even if she needs to submit a document, say a tax record or something of that nature, she can snap a picture with her mobile phone to complete the interaction and upload it securely right there. The key is really integrating the channels into a holistic experience to help the customer accomplish their goals. The same thing holds true in our everyday interactions. Take another customer, Raj, who's about to go on a trip. He stops by one of our ATMs, uses one of his favorite features, the ability to text the receipt right to his phone. While he's sitting in the cab riding to the airport, he gets that receipt, but he also notices that he's got a reminder to pay his Wells Fargo credit card. He signs in and does that and sees that he can also let us know that he's going abroad. He can set up a travel notification telling us the dates and locations of his trip to make sure that his card is working there. Finally, as he gets out, he can even use our Wells Fargo SurePay person-to-person payment product to pay his cab mate back for the ride to the airport. Jonathan's going to talk a little bit about the team member experience to support that. Our team members are customers too. They have the same expectations about new technology. They have the same expectations around ease of use. If we build them those sorts of tools, they're going to provide better service, it's going to be faster for them to learn, and it's going to increase their team member engagement. Take a look at some of the things we're building. Later this year, we're going to have Click-to-Call, and that creates a fast connection between a customer's mobile session with a Wells Fargo phone banker, pre-authenticated. If Maria has a question about that SurePay transfer she just got from Raj, she can hit Click-to-Call, quickly connected to a Wells Fargo banker who can see where she's in the transaction, can jump in to help. Customer event history is a tool that our phone bankers and store bankers have where they can track the recent history of a customer, understand their situation so that the customer doesn't have to repeat themselves when they call in if they have a question. Jim talked about the customer needs assessment. This is a great tool for our bankers to be able to connect the needs that the customer is saying with the solutions that they're providing, making sure that we're needs-based selling as we're deepening that relationship with the customer. Finally, our new teller system is faster to learn and faster to use. It scans checks twice as fast as our older teller system and essentially sets us up to be able to have full image capture, where we'll capture and image all of the checks inside of a Wells Fargo store. This is a better tool for our team members. They're going to provide better service to our customers, who will enjoy the faster transaction times and the later posting times. It has a great business case because it's lower operating costs, lower transportation costs. Removing all of that paper in our system is a big part of our enterprise digitization strategy and another way that we're innovating for our Wells Fargo bankers. Great. We live in a really exciting time where technology continues to change the expectations of customers and change the way we can interact with them. At Wells Fargo, we have a long track record of innovating and developing new products and services for customers, and we continue to do so. Just a few blocks away from here, we have built out a Wells Fargo digital lab, which allows us to test and pilot new concepts. We reach out across the globe to understand what's going on in the world, what technology is looking like, not just today, but three, five, and 10 years from now. So that as new capabilities emerge, like wearable computing or biometrics, we understand how customers are likely to adopt them, and we understand what it means to deploy them in our business model. That way, when we do actually deploy them, we can do so with confidence, understanding how it's going to interact, not just the customer, but the team member, the back-end operations, and we can be confident in the solutions that we're offering. We're excited about the future and all of the technology that's emerging in the space today, and really excited to see how that develops for our customers. Now I'd like to introduce one of my key business partners and friends at work, Ken Zimmerman, who's going to talk a little bit more about how this plays out from a deposit perspective. Thanks, Jim. Good morning. Our retail deposit business is a good demonstration of how our operating models work together to ensure customers get even more value from the products and services that we provide and to create greater value for our shareholders. There are really three reasons why we are in the deposit business, and they are the same as when we spoke to you two years ago. First is to acquire and retain primary customers. Second is to ensure a mutual value exchange with our customers. Third is to provide a stable, low-cost source of funding for Wells Fargo. We drive primary customer relationships by offering best-in-class products, outstanding customer experiences, and robust multi-channel options. We also ensure a mutual value exchange, which creates and encourages customer intensity, enables cross-sell, and drives profitability. Finally, we are a source of stable, low-cost funding for the franchise through a variety of economic cycles by having a favorable mix of checking and savings accounts, which translates into sticky deposits. Deposit products continue to be a primary driver of consumer household growth for Wells Fargo, representing 66% of new consumer households in 2013 and consistently more than half of new consumer households to Wells Fargo. While growing households is key, making sure the customers within those households are highly engaged is just as important. Last Investor Day, we introduced the concept of a primary customer. What do we mean by a primary customer? By that, we mean the customer considers us their primary bank. It is the account they deposit their paycheck into, that they use to pay their bills, that they use to buy their groceries. Primary customer is important because it means customers get more value from us and create more value for us. Our product designs reward customers for maintaining primary relationships with us. For example, by doing more transactions, using their debit card more, and having direct deposits, the majority of our customers can avoid paying a monthly service fee. Primary customers are significantly more engaged. As you see here, they have 30% higher cross-sell. They are over three times higher in terms of their transaction type utilization, which is a component of customer intensity that we mentioned earlier. That high engagement and intensity results in significantly greater profitability. They are more than twice as profitable as the non-primary customers. How are we doing? Our focus on primary customers is driving great results. We are generating year-over-year primary customer growth of over 5%. We have improved our already strong portfolio mix to 78% primary, up from 74% in 2012. We have continually reduced primary customer attrition, which is down to just 7% annualized as of Q1 of this year. Debit card usage is another important characteristic of primary checking relationships, a good example of mutual value exchange, and a significant source of revenue. We have grown debit card purchase volume 8% annually since 2008 and have increased our share of industry debit card volume. We are the second largest issuer of debit cards in the U.S. and have closed the gap to number one and widened our lead over number three each of the last five years. Importantly, primary customers who use their debit cards have three times higher activation rates, eight times higher per account usage. That intensity engagement drives 25 times higher debit card point of sale revenue. As we discussed at our last Investor Day, it is critical that individual customers, at a minimum, cover their variable cost to serve. We call that variable contribution. Any additional income beyond that helps offset fixed costs and increase operating leverage. With innovation, increased efficiency, and more ability of customers to self-serve, we can ensure virtually all customers add to our profitability. We started with solid variable contribution in 2012, and our focus on primary customers has helped us improve variable contribution by 20% since that time. Balance revenue per customer is up 18%, fee revenue per customer is up 4%, and we reduced variable cost per customer by 11%, which actually adds to the variable contribution improvement. Another way to think about it, balance has contributed 60%, fees 15%, and lower cost 25% to our variable contribution improvement. The value, convenience, and breadth of services we provide helps us grow primary customer relationships and perform better than our peers throughout economic cycles, translating into a competitive advantage for Wells Fargo. We have demonstrated higher deposit growth than our peers across a range of rate environments, growing deposits per store two percentage points higher than peers in each time period shown here. We enjoy a consistently lower cost of deposits, 19 basis points better even in today's incredibly low rate environment, and 40-50 basis points better when rates are more favorable. In short, we are confident we are well-situated to be successful in any rate environment. Our deposit business and our focus on primary checking customer relationships show how our economic and operating models work together effectively. Now Carrie will summarize how all these aspects fit together in a community bank. With our experience, our capabilities, and our customer focus, we believe we can execute against our proven and adaptable model to have differentiated results over time and to support our company's growth and efficiency targets. We estimate to achieve our long-term goal of an average of eight products per household would mean around 100 million additional products owned and used by new and existing customers, satisfying all of their needs. The chart on the left shows the opportunities we have with existing customers, bringing the products and services they own across other financial services providers home to Wells Fargo. For example, if our customers, after seeing the value of doing so, give to Wells Fargo a third of the products they hold with other financial institutions, that would mean approximately 50 million in product growth. As more customers own more Wells Fargo products, profit per household will grow faster than cross-sell, with increased penetration of more complex and incrementally more valuable products on our path to eight. For example, the average annual household profit from the seventh and eighth products combined is twice that of the first four products combined. Given the value we believe we provide customers who bring more of their business to Wells Fargo, we still believe achieving eight products per household is possible. Our goal is to continue and to evolve and improve our model over time by growing households, by collaborating closely with the Wells Fargo businesses to meet more of our customers' needs, particularly in the complex products. By continually improving our multi-channel experiences. By enhancing our virtual sales capabilities, making it easier for customers to research, choose, and purchase products over the phone, online, or through their mobile device, always ensuring effective linkages with our store bankers. By adding more bankers, especially those who serve affluent and small business customers, and by innovating around our products and services. As we move forward, our efficiency and investment philosophies continue, both of which I believe have become core competencies of the community bank. The goals of our efficiency models remain to reduce the variable cost of transactions without reducing the quality of service, reduce the variable cost of sales without reducing our sales volume, and to reduce the expense of our fixed cost infrastructure without reducing our scalability. Our investing with a purpose approach includes supporting going where our customer goes philosophy, meaning building experiences and embracing the channels our customers most value, while continuing to meet our expectations for investment break evens and economic returns, all while reducing our risks through data, models, and our test and learn approaches. We're uniquely positioned to capitalize on our strengths for growth by focusing on growing primary customer relationships and deposits faster than the market over time. By deepening our customer relationships with both consumer and small businesses. By increasing our customer intensity with more multi-channel capability. By continuing to improve on our disciplined risk management practices. By leveraging our engaged and experienced leaders who know how to adapt in changing circumstances. And by supporting our company's ROA and efficiency ratio targets while investing in our future growth. In summary, we believe our business model of retail distribution is working today and positions us very well for the future. Thank you. Now I'd like to join my colleagues up on stage, and we'll be happy to take some questions. Hi, everybody. For Q&A, we have three mic runners. I would just ask that you raise your hand high. We'll get a mic to you. We'll select someone to start, and then please state your name and firm, if you wouldn't mind. Thank you. We have one in the back. Amy? Good morning. Chris Kotowski from Oppenheimer. Recognizing that this may just be one of those fads that we will all deeply regret five years from now, the peer-to-peer lenders seem to be gaining traction. In theory, it is both a deposit and a lending product without a layer of capital in between. So just on paper, it has a real efficiency advantage. I wonder to what extent have you studied that and looked at it, and to what extent does this worry you as a business model that could cherry-pick good customers from Wells Fargo? It is a great question. What I would say is we have studied it. There is not much in the financial industry that we do not study and consider. What I will say is that we are confident we can compete in an efficient way. I know from a peer-to-peer perspective, our small business team has taken a look at that. I know that Avid Modjtabai and our consumer group will be able to talk about that with more detail. We really believe that we have the ability to build a full relationship with the customer, and because of that full relationship with the customer, we are more efficient from a household perspective. Yes, Mike. I had three questions. Jonathan, what is the break-even period for the neighborhood bank? I know Carrie said it is three to four years on a regular store. The second question relates to Ken. Have you tweaked anything in your deposit models to reflect a lower interest rate environment, even if it is above where we are today? The last question for you, Carrie, it looks like the pace of cross-sell from 2012 to 2013, from 6.1 products to 6.2 products, that is the slowest percentage increase on a core basis in a couple of decades, if you x out the acquisition. Maybe it is easier to go from four to six products than it is to go from six to great in growing them. I will take the question in order, Mike. Sure. First, on the neighborhood bank, it is combined with our overall store model, where on a store-by-store basis, we are going to run the return, the ROA. The neighborhood bank is going to have the same rough 3- to 4-year cumulative break even. Obviously, it is a smaller investment. It is running 40% lower than an investment in a traditional store. So it is going to match the size. Now, if we were to install it in a place where real estate costs are lower or less constrained, you might see it break even a little bit faster. But we really have it targeted right now to those areas where real estate costs are high. Real estate itself is hard to get, and so it is roughly the same as you would see a traditional store. On the rate front, I would say our product line is entirely different than it was 5 years ago, and that is a reflection not only of the fact that we have been living in this rate environment for many years now, we cannot take rates much lower, but also the rest of the economics have really changed for the checking account as a result of things like Reg E and Durbin. So we have made many changes that put us on a better footing, I think, for a rising rate environment than we even were in the past. And we will reinforce the fact that the customer has their operating relationship with us, and should allow us to fare well, even if the low rate environment continues for some time. Relative to cross-sell, I have been around for a couple decades, 20 years, and we have been dedicated to helping our customers succeed financially and earning all their business. And one of the measures we do that is certainly cross-sell. When you think about cross-sell, there are many things that influence our cross-sell rate over time. And over different cycles, we have seen the pace of growth change, and that is really to be expected. Let me give you a couple of examples that can impact our cross-sell. CDs. In times where our customers choose that they would rather have their money in a savings account at Wells Fargo, they will close the CD. That will impact our cross-sell rate. Home equity loans. There are times at which they will refinance their first, fold in their home equity loan, and that will impact our cross-sell. All really good for Wells Fargo and will change over time. Another impact to cross-sell over time can easily be if our household growth is faster, we will bring in a new household at three or four products, where our existing base is at six. None of this is unexpected. None of this is bad news. In fact, we are very excited about our cross-sell. When you think about the seventh and eighth product being twice as more profitable than the first four, and the fact that our cross-sell rate will grow a little bit slower than certainly our profit per household will be. We are bullish on cross-sell. We are confident on cross-sell, and we still believe that we can get to an eight cross-sell. Thank you, Mike. We have time for one more quick question. Betsy? Okay, just scooch in two. One is on operating expenses. You mentioned all you have done with keeping the plant and equipment expenses flat. Maybe you could speak to what your outlook is on a go-forward basis. You sliced the data by showing that branches are important. Maybe you can give a little bit of a sense of the direction of either the use of non-branch and importantly, age bracket. Because the underlying question I think people have is, are you going to see more use of non-branch over the next five years? I just had one quick question on deposit settlements. The Fed put out a paper last September saying that they wanted the industry to go to point in time settlement. Maybe it is a way of keeping things like Bitcoin out of being a real competitor here. We batch process today. Are you doing anything to migrate towards point in time settlement as per the Fed request? Okay. I will take the first two, and Ken, maybe you can take the last one. Relative to how we think about operating costs, first of all, what we focus on first is growing revenue, then what expenses do we need to support that revenue with the goal of having positive operating leverage and contributing to our company's efficiency and growth targets. When we think about the store distribution, couple of things. Our customers still enjoy using stores. Our transactional volumes in our stores over the teller line in the last year have been flat, and in some regions, they would be up. Many people would think transactional volumes are going down. For us, they are not. Secondly, as I said, 75% of our deposit customers come into the store at least once every 6 months, not one month. Once every 6 months, demonstrating our customers still find great value coming in to have a needs-based conversation with our bankers. Finally, 85% of our sales and referrals in the community bank, which are revenue generating, are done in the four walls of the store. As a result, stores are important. Having said that, we are constantly looking at how we can become more efficient, shaving costs out of our processes. Let me give you three examples. First, when a lease comes up, it is an opportunity to say to ourselves, "Can we shrink the square footage to save expenses?" An example would be a 3,500 sq ft store is 85% of the operating cost of a 5,000 sq ft store. So when it makes sense, when we can find the right site, we will relocate our stores. Second of all, we look at our operating costs inside of the stores, even if we do not relocate. Jonathan talked about full image capture or digitizing our processes within our stores. His goal is to get the teller experience as fast as an ATM. That speed over hundreds of millions of transactions really get our costs out of our system and drive some of the variable expense out. Then, of course, we are also looking at our really busy big stores and how we can retrofit some of our store ATM-type machines into those stores, along with our tellers and tablets, to provide more service for our customers at a lower cost. There is not anything that we do not look at inside our four walls of our store that we do not think, "How can we serve our customers better, faster, at a lower cost?" We are continuing to do that. That drives our overall costs down. And then quickly regarding real-time. While many of our core operating systems are in fact batched, the vast majority of the customer's experience actually is reflected in real time. You can experience this today if you go use an ATM or you use your debit card, it's immediately reflected on your account, and you can see it in mobile. So we're doing a great deal to move more transactions to the point where they're reflected in real time for customers so that they have real-time information. Including things like receiving a real-time balance alert that you just did that transaction. So we're doing a great deal there. We're also doing a lot of work around funds availability so that customers have access to funds on a quicker basis. So we're totally aligned with the intent of where the Fed is going. I think one of the challenges that we face as an industry is moving money faster also entails increased fraud risk. So we've got to make sure that the right fraud controls are in place, to ensure that the shareholders' interests are safeguarded as well as our customers' interests. Great. Carrie and team, thank you very much. Yeah. Thank you all. We have a break until 10:00 sharp, so a lengthy break just outside the door. Enjoy the conversations, and we will be back at 10:00, and we will start up. We have two presentations after break, before lunch. Thank you. We are going to resume our session. If you would please take your seats. Ladies and gentlemen, please welcome the head of the Consumer Lending Group, Avid Modjtabai. Good morning. I am really delighted to be with all of you this morning. Since we were last together in New York at our last Investor Day, much has happened in consumer lending, and it is my pleasure to share with you how we have grown and how we have strengthened our businesses, and also speak to some of the opportunities that we have ahead of us. I am going to first start by giving a very quick overview of the consumer lending business. We are 60,000 team members. We serve 22 million households, and we manage over half of Wells Fargo's loan portfolio. These are loans that really matter to our customers. These are loans that help our customers turn houses into homes, go to college, or help them with a dream of education and having the transportation to go to and from their work. We have leading positions in all of these businesses. The group is organized into two big businesses. One is home lending, that is led by Mike Heid, and the other one is Consumer Credit Solutions, which includes our auto business, credit card- Personal loans and lines, as well as student lending, and that is led by Tom Wolfe. Mike and Tom are with us this morning, and you are going to be hearing from them this morning as well. One of the great things about our team is that it is very experienced and stable leadership team. In fact, in the fourth top four levels of our team, we have an average tenure of 15 years. Consumer lending group reflects the diversified business model of Wells Fargo. In 2013, half of our net income after tax came from home lending, and the other half came from the consumer credit solutions team. Within consumer credit solutions, we also are diversified amongst a number of different business groups. Two years ago, when we were together, as I shared with you, we had just brought together eight different businesses to form consumer lending, and every single one of these businesses had very strong momentum. Our goal was to integrate these businesses in a way that we could create better experiences for our customers, where we could leverage capabilities across all of them so that we could accelerate our growth. What we wanted to do was eliminate redundancies so that we would become a lot more efficient. Very importantly, by being as one team, our goal was to become even more disciplined across risk management and more effective in dealing with some of the regulatory challenges that we've been going through. At the time, we set some very ambitious goals. Since then, we have accomplished a lot. We strengthened our position in mortgage, in cars, and in auto. We grew cross-sell, and we did grow assets with that, and we also simplified our businesses. I will be speaking to some of these in a little bit more detail. Specifically in mortgage, as you all well know, it was a fairly challenging cycle and environment, and I believe that our team did phenomenally well in this environment. I think you've heard some of our competitors speak to mortgage as being one of the most painful businesses ever, and I have to assure you that at Wells Fargo, we fully disagree with that comment. We believe that mortgage is one of the most impactful and meaningful ways that we can help our customers succeed. It is a business that we are absolutely committed to through every single cycle, including the one that we just went through. As you very well know and you could see on this chart, rates reached a low of 3.35% for a 30-year fixed mortgage by the fourth quarter of 2012. We responded very flexibly and with agility. We added over 8,700 team members so that we can build capacity to help more of our customers either reduce their payments or purchase a new home. By the second half of last year, when rates increased, again, we responded very quickly. We reduced capacity as the refi volumes declined. Since 2012, we originated nearly $900 billion in mortgages, and we helped nearly 4 million customers. Through this entire cycle, we maintained our number one position in retail, in correspondent, in portfolio lending, as well as in servicing. In the auto business, when we last met, we were at the time the number one lender in used cars and number two overall auto lender. At that time, I spoke to our very unique auto lending business model, where we integrate the indirect part of the business with the commercial banking part of the business so that we could deliver a fully integrated sets of financial services to our dealer customers. We are in our local communities, focused on building relationships, and we have a very disciplined risk management process. In the last two years, we executed on that business model, and we continued to deepen existing relationships with our dealers, increase our coverage and bring in new dealers to our customer set, and to also grow our subvention business. We grew to the number one overall auto lender. In fact, that momentum continued into the first quarter of this year. Our auto originations were up 16% this past quarter, and we still continue to have very strong momentum. In the credit card business, we started from a very different position. We have been under-penetrated both in terms of account usage as well as account penetration and ownership. Last 2 years, we've been very focused on transforming the credit card business and repositioning. We brought new leadership. We developed new strategies. We strengthened our value proposition. We have built new capabilities. We have invested in some of the core disciplines, including marketing, originations, acquisition strategies, and we drove double-digit account growth as well as point-of-sale transaction growth. We recently launched our new products in partnership with American Express, the Propel cards, that we are extremely excited about, and I hope that you would all look at those products and hopefully have them in your wallets as well. We have been growing our balances faster than the industry. In the private label part of the card business, we've also been growing our relationships and our balances. Just a couple of weeks ago, we announced our new partnership with Dillard's, where we are going to be financing, issuing, as well as servicing Dillard's private label and co-brand cards. So we are extremely well-positioned in credit card as we move forward as well. 2 years ago, we said that we are going to increase cross-sell, and we did. We increased cross-sell both in the retail household base as well as in the consumer lending customer base. At the time, we showed you very strong account growth, and we continued with that. That's been in very strong partnership and collaboration with my partners and friends, Carrie Tolstedt's community banking team, and David Carroll's wealth brokerage and retirement teams. As a result, our portfolios grew. As you could see, these are very strong numbers in their own right. But when you compare these to the fact that there was still slow demand from consumers, I think these are really remarkable growth in our portfolios. It's important to note that we did not get this growth by compromising the quality of our portfolio. In fact, as you could see in the top part of this chart, our net charge-offs have been declining, and they are now at or below pre-crisis levels for the majority, actually, for all of our portfolios. New originations have been very strong. As you could see from the lower part of this chart that shows our FICO distribution by year, FICO distribution has been stable and actually improving in some of our portfolios. We've been making investments in the business, specifically in the digital space. We have been working with Jim Smith's team and Carrie Tolstedt's team so that we could build capabilities that could attract the next generation of customers and where we could serve them when, where, and how they want to be served. We've been transforming the customer experience, regardless of where our customers are coming through, whether it's through the physical or the virtual channels. We've also been working on retooling our business so our team members would also be more effective at doing what they are doing. Just a couple of examples. We have been integrating online and offline behavioral insights so that we could have truly multi-channel marketing capabilities. We have been working on building an e-lending platform, and we are right now doing some pilots with virtual close for mortgages. We are participating in a number of e-payments and digital payment initiatives. As we have been growing the business, we have also been working on simplifying and strengthening the business. We have integrated functions, policies, and procedures. We exited the joint venture and wholesale channels in mortgage. We have settled some very high-profile litigation matters. We have implemented a large volume of regulatory changes, and very importantly, in a way that makes sense for our customers and for our team members. As we look forward, we are very optimistic about our future. The macroeconomic trends are encouraging. Household net worth has now recovered, and it is actually at the highest level that it has been. We are bullish on the housing market, even though there has been some softness in the last couple of months. Rates are higher, but when you look at the context of the last 30 years, they are still extremely low, and affordability is still very high. Consumer confidence is improving, and there is still pent-up demand for durable goods. As we look to the future, we are expecting continued increase in consumer purchases. I believe that Wells Fargo and Consumer Lending Group, we are uniquely positioned to capture this opportunity. We have some very powerful structural advantages. Carrie talked about our distribution channel that is truly second to none. Embedded in that distribution is our network of 15,000 dealers and 16,000 retailers who are in the local communities and who are building relationships. We have the largest mortgage retail sales force. In fact, we have close to 9,000 home mortgage consultants who are in our local communities sitting face-to-face with our customers, building relationships with our realtors. This is really important because our relationship model is not easily replicated by our competitors. We know our customers, our customers know us, and we use these insights to build relationships that last a lifetime. Very importantly, as you are also going to be seeing, we have a very seasoned team with proven track record and execution ability through every part of the cycle. Of all of our advantages, there is no advantage that is greater than our 17 million existing customers. Cross-sell will remain our number one growth strategy. As you know, we have had significant growth in this area, but there is still tremendous opportunity. When you look at our cross-sell over the last couple of years, we still have about 50% of our customers who do not have a consumer lending product. Of the ones who do, two out of three only have one product. Within the consumer lending customer group, three out of four of our customers only have one product. With our integrated business model, we have a tremendous set of opportunities to cross-sell to these customers and deepen relationships. Very importantly, within our affluent segment, we have tremendous opportunities. Our partnership with David Carroll and his team, and especially with the brokerage customers, is a significant growth opportunity for us. I also want to mention that our portfolios are repositioned for growth. Two years ago, when we came together, about 50% of our portfolio was either designated as liquidating or it was a downsizing home equity portfolio. Today, almost 70% of our portfolio is in a net growth mode. The liquidating portfolios and the associated revenue drag is significantly lower as we move forward. Now together, all of these advantages, where we are as a business group, gives us big leverage as we move forward from a growth perspective. In home lending, we have the market position to capture opportunities in the purchase area as well as in portfolio lending. We also are expecting increasing returns from our servicing business, as well as lower environmental expenses in this part of the cycle. In auto lending, we expect sales of vehicles to continue to be strong, and we will continue to execute on our proven business model in auto lending so that we would win our dealers' and our end customers' business again and again. As you just heard, in credit card, now we have the benefit of the transformative investments that we have made. We have great products. We have a very strong value proposition. We have a best-in-class rewards program, and we are going to be working towards our goal of putting a Wells Fargo credit card, top of wallet, in every one of our creditworthy customers' wallets. We, of course, have still tremendous opportunity in the private label and co-brand space. As you listen to the detailed strategies for consumer lending from Mike and Tom, I hope that you would be as excited as we are about our future. Please welcome Mike to the stage now. Nice job. Thank you, Mike. Thank you. Well, good morning, everyone, and thank you for investing your time to be with us this busy day today. As you have already heard, and as you all know, the mortgage markets in America are clearly in a transition state. Along with that, individual companies are coming out, making individual statements about how they particularly see the business line. We thought it was very important to kind of go on record very early in this presentation with how we see the home lending business. From our perspective, home lending continues to be a great business. Not easy by any stretch of the imagination, but a great business. The reason I say that is the home and home ownership is as critical today for our customers as it has ever been, and the mortgage business is the means of making that happen. When you are effective and when you serve customers well in that space, they reward you with more business, and it shows through the numbers. Think about it from a cross-sell perspective. Non-homeowners in the retail banking customer profile have a little under five products per household with us. Non-homeowners. If you change the dynamic to add the mortgage relationship and the deposit relationship together, close to eight products. Actually, close to nine products if you throw the mortgage product in. So under five to close to nine. That demonstrates the power of the collective relationship. That is actually just icing on the cake. The mortgage business should also be very profitable in its own right. It has been a strong business for us, continues to be a strong business for us, and it has been profitable every single year since 1990. You think of all the cycles we have experienced since then, profitable for every single year since that point in time. For all those reasons, we continue to keep a very solid commitment to this space, and we also take a very long-term position, a long-term posture to this business. The keys to success. This slide will look very familiar to many of you. It has been probably the exact same slide we have shared the last several investor days we have had together. We believe these keys to success are as relevant and credible today as they have ever been. Just to highlight a couple for you. I have already mentioned the long-term focus on the business. We have built up a leading retail origination franchise over the years. Key in a purchase market. Strong operational credit, interest rate risk management skills. These are the tickets to play, if you will, in this particular space. A very experienced leadership team. I have been in this business now going on 30 years, been with Wells Fargo for close to 27 of those, and I am blessed to have a very experienced leadership team in the mortgage company as well. We have seen a lot of cycles together, is the moral of the story. The way we look at the mortgage business continues to philosophically be the way we have always organized ourself. We try to keep all the interconnected parts together in the same management reporting structure. From a business line standpoint, we approach the market through originations, both correspond and retail. We are in the servicing business as well as the portfolio lending business. What is also very unique to us is we have kept the capital markets activities inside the same line of business structure. I mean, the secondary marketing activity, as well as the hedging of our mortgage servicing rights, all are resident in the same reporting chain with very good, solid governance at the corporate level. That is how we philosophically continue to approach the business. Let us go a little deeper. Let us talk about the origination business itself. Clearly, the most cyclical of all the various activities. Because it is cyclical, it means that the skills to revenue manage in a very disciplined way are critical, as are the expense management skills to both ramp up and ramp down your expense base as customer demand changes. You have seen us do that over the last several years in particular. We ramped up significantly, as Avid said, and starting middle of last year, we began ramping down our capacity very significantly to keep our expense and customer demand in balance in the origination business. Scale still matters here. It matters immensely. It allows us to have the Wells Fargo brand, have the Wells Fargo customer base, customers that are already familiar with us coming into our doors, along with the strength and stability of the Wells Fargo brand. Provides the ability to invest in every cycle. We have been busy the last several years with refi activity and the like. Did not mean we stopped investing. In fact, we have continued to invest heavily in our origination systems for a number of years. We have a new origination platform already in production. As we have invested in the last couple of years, we expect to now be in a position where second half of this year, we can roll the new platform out more fully. Gives us a wonderful set of capabilities we have not had at scale before. Regulatory costs continue to mount in the mortgage business as well as financial institutions in general. Broader loan volume allows you to spread those costs over a broader base. The other thing scale does for you is it allows you to command vendor attention, which is critical in this particular business line. As far as the origination business itself, you have to expect distinct cycles. Very predictable, very understandable. This is not a time horizon, but what we are saying is three distinct segments of cycles, if you will. We have been living on the right-hand side of this for the last several years. Steep yield curve, high volume environments, very strong profitability, outsized profitability coming out of the origination units. We expect 2014 to be more like the middle zone, more like a balanced environment. Still a steep yield curve, but a smaller market overall. Very predictable and expected results in different cycles. I mentioned earlier, we continue to focus on retail. The reason for that is the local presence continues to be where the majority of purchase mortgage market activity continues to reside. Think of it this way. We've got close to 9,000 HMCs scattered across all 50 states. What that means is in a targeted way, in any given month, we're able to do close to 70,000 open houses with local realtors at the local level, which is where the transactions occur. That's the key to the purchase business. You can see on the chart, comparing our retail volume against the competitors. You can see the total bar, which is a combination of purchase and refi activity. More importantly, look at the blue piece of it. That's just the purchase market component of our retail versus the rest of the market. We've, in 2013, had more purchase volume in our retail channel than the next seven companies combined. That's important. Now what gets really exciting, and I should forewarn you, this is what an excited TCB looks like. So forewarned. There's about 42 million households in the Wells Fargo companies somewhere across the organization. We've got about 9 million of those in the mortgage company. They have their mortgage relationship with us. So 9 out of 42, not bad, but think of it in reverse. That means there's 15 million non-homeowner families already getting familiar with the Wells Fargo brand through some other part of the organization. Homeowners in waiting. At some point in the future, some portion of those customers will venture out into the mortgage space. We can be there for them. 18 million households have a mortgage relationship but with somebody else. As they move, as times go on and they refinance, we have an opportunity to capture their business in the Wells Fargo family itself. This I find to be an exciting opportunity. That's the production story. Think about portfolio lending. We never were big in portfolio activity. By portfolio lending for us, what that means is home equity business as well as the larger loan sizes. The first lien mortgages that don't qualify for sale into Ginnie Mae, Fannie Mae, or Freddie Mac securities. Jumbo loans, if you will. That's our version of portfolio lending. We never were very big in this space up until 2007 and 2008, when the secondary markets for non-conforming assets, as they're called, kind of basically dried up overnight. We became a very intentional investor in this space. We've grown our portfolio significantly. We still see that today because we just don't expect a return of a secondary market for jumbo loans at any kind of scale anytime soon. So we've structured our business in such a fashion that we've got dedicated underwriters, dedicated sites, dedicated sales process around serving customers that need the portfolio lending kinds of assets for us. We also expect home equity to continue to be a bigger portion in the future because people probably won't turn over as frequently and give up their low interest rates, which means they'll need time to remodel their homes, that kind of thing. We expect home equity growth as time goes on. Also, think about the cross-sell opportunity here. This is where we're just really scratching the surface with David Carroll's organization. The customer profile coming to us in this portfolio lending space allows us to have a wonderful opportunity for mutual cross-selling activity between us and the wealth brokerage retirement segments of the Wells Fargo family. We're just scratching the surface on that, and Dave will talk more about that later today. With all that focus on portfolio lending, it may be easy to lose context as to what we're seeing happen here. This chart is kind of a twofold story. You all know that from 2008 to now, the Wells Fargo balance sheet has grown in size. The one story on this slide is the total bar shows you the total size of consumer real estate assets on the Wells Fargo balance sheet. It's been pretty constant. Stayed fairly flat from 2008 until 2013. But inside, there's two different segments going on here. The blue represents the older assets. Those are the pre-2009 mortgage assets that we have, home equity as well as first liens. You can see the credit characteristics on the right, bottom right. Now, the growing segment, the green piece, look at the credit profile that comes with that. 760 on the average FICO, a 62% loan-to-value ratio. About 94% of that green bar represents first lien assets as opposed to home equity. Huge and wonderful credit opportunity for us to have a high credit quality portfolio to throw off earnings into the future. Which now brings us to the final piece of the business, the servicing business. This piece of the business has probably seen some of the most dramatic change over the last few years. There's no question the cost structure has arisen, but what's also important to note is that we're now moving into the cycle where lower prepayments, lower delinquency cost as rates come down, generate more favorable or positive financial results coming out of the servicing business. The other couple important thing to note is the servicing, mortgage servicing rights asset, the servicing asset, gets repriced every time you make a new loan. So the loan we make today, you have the opportunity to price into that mortgage servicing rights, whatever the current cost structure is for that particular asset as time goes on. The other part that's important to remember is the older books, the existing servicing rights as costs change. The accounting requirements are such that you make a lifetime estimate of that cost factored into your mortgage servicing rights valuation every quarter. So over the last four years, we've written down the mortgage servicing rights asset to the tune of about $2.6 billion in that four-year period of time. That write-down's already been absorbed in all the financial results that you've seen us publish over the last four years. The beauty of that is much of the current cost structure and the return off of that asset has already been adjusted to take into account the higher cost going forward. Again, like in origination, in this space as well, scale allows you the opportunity to command vendor attention, which is very important as time goes on. On the quality side, our portfolio performed quite well actually throughout the crisis. Even back in 2009, 91% of our customers were current in their payments. 9% were either delinquent or in foreclosure. Look at what has happened since then. We are currently down to about 6%, a lower level of delinquency and foreclosure activity than what we saw pre-crisis. If you put a wrap around all of that, and we think about 2013 versus 2014 in the total mortgage business as we think of it, here is some of the moving parts. 2013 was a very strong year of financial results. As we have thought about 2014's plan, we actually expected one more very strong year in 2014, pretty neutral bottom line year-over-year, but with a host of changes going inside the various pieces of the organization. Let me take you through a few of these. The production market. There is no question the production business will have less profitable returns this year than last. We still expect the production businesses to be profitable in 2014, but at a reduced level. To bring this closer to home, there is a lot of talk about softness in real estate across the country. We are seeing some of that happen. In fact, we still expect second quarter funding volumes will be up from first quarter. We still expect that the market will be larger in second quarter than first quarter, but it is probably going to be a bit softer than what we thought even a month and a half ago as we were having some discussions about first quarter results. The other thing to note is, what happens for 2014 as 12 full months? The Mortgage Bankers Association just came out with a market size for 2014, stating roughly a $1.1 trillion market. Now, we are in May. Who knows what happens between now and December? With what we are seeing right now, with the application activity we are seeing, the volumes we are seeing, it looks to us like a $1.1 trillion market for all of 2014 is probably as good an estimate as now as any. That is the negative. That is the '13 to '14 drop-off. Now look at all the positives. Servicing will be up in terms of lower prepayments, lower cost. Servicing results will be up. The mortgage servicing write-downs I mentioned earlier, significant drain on earnings in the past. That will be a positive as we think about '14. Portfolio lending asset growth over the last several years continues to throw off more bottom-line profitability as time goes on. Credit-related costs on the new and the old books coming down. Charge-offs are coming down, costs of foreclosed assets coming down, all positives. We have spent a lot of time in the last couple of years working through a host of legacy issues, repurchase issues, legal exposures, and the like. Those have impacted prior year earnings. Do not expect them to have a significant impact on 2014. When you look at the all-in mortgage picture, you can see why we believe that 2013 and '14 should be pretty balanced. I hope you can also see that between the opportunity, the capabilities we have got, and the way our team executes, I hope you can see why we believe this is a great business for Wells Fargo. Thank you for your time. Let me turn the stage over to Tom Wolfe, our consumer credit solutions. Tom. Thank you, Mike. In our time together this morning, what I thought I would do is do a quick overview of our Consumer Credit Solutions business and then do a deeper dive into what's driving success in our auto loan business. As Adeed said, we're starting to capture the opportunity in our credit card business, so I'm going to do a deeper dive into both of those businesses. Consumer Credit Solutions is made up of six different businesses designed to help our customers succeed financially. We have products and services that help our customers with everyday spend, short-term purchases, and longer-term plan purchases, like a student loan or an auto loan. For our existing Wells Fargo customers, we're fully integrated into the bank. In fact, Carrie Tolstedt's business model is our sales force for our consumer credit products for our existing customers, and they do a great job in selling and cross-selling our products. When Carrie refers to a 30% growth in credit card penetration, it's because her sales team accomplished that goal. We also, though, bring new customers into the bank, so we have relationships with merchants, automobile dealerships, and universities for our other products. What I'd like to do now is do a deeper dive into our auto business first. To understand our auto business, you have to understand the marketplace that lending occurs. We offer both direct and indirect auto lending across our network, so through our bank distribution channel and through our 15,000 dealers. The reality is the marketplace preference is the dealer. 95% of our business comes from our dealers. I'm going to focus on that dealer community. Oh, there we go. The dealer is actually legally the lender. If you think about in terms of what they're trying to accomplish, then they're looking for, how do I sell that contract into the marketplace? All you know is a very competitive marketplace. There's two key factors, though, that we've been able to leverage over a long period of time in this industry. One is reliability, and the second is consistency. Wells Fargo has been lending to the automobile dealers for 60 years now. We actually grow our market share faster in the bad times than we do in the good times. If you think about what happened in the most recent recession, we actually grew our auto loan business faster with more market share because we didn't withdraw from the market. We know that auto loans perform better after customers in a recession than the ones prior to going into a recession. So we doubled down in our reliability with our dealers. We're also very consistent in our strategy. We've had the same strategy for 16 years running now. We want to finance the customers that the dealers have that are looking for transportation vehicles to get back and forth to work. We typically define that as used cars that customers are buying in your dealership, where we can finance down six different tiers of credit. It's important that we have this consistency because they're looking for a lender that they can place that paper with over time in a variety of different ways. It's also more valuable to us because the used car market is three times the size of the new car market, and you know that the new car market is heavily subsidized by the captive finance companies. In fact, over 50% of all new cars are either subvented leases or loans coming from the captive finance companies. Now, we're lucky to have one relationship with a captive finance company, General Motors, given that they decided to diversify their model and have allowed us to be one of those lenders. The great thing about that relationship is that for every one new car subvented business that we do with the new GM relationships, we're doing three used cars in the same dealerships. Again, it meets our goal of providing transportation vehicles to our customers. Our focus on used cars and making the right decisions and building relationships has given us the opportunity to lead the market in both new car or overall market, and clearly a gigantic lead from our competitors in the used car market. It's been our focus for 16 years. As I said, we really want that business. If we go to a franchise dealer, we typically say, "Look, I want you to use your financing sources at your captive. You need to use your 0% financing, your subvented financing for 0% loans. We want at Wellcovia dealer, or Wells Fargo Dealer Services." That was a slip. Wow. Lots of Ws in my life over time. My last name is Wolfe, and I worked for three Ws before that. We want the lending from the customer associated with everything after that subvented financing. So we want six different tiers of credit, all their used car business, but we want to get out before it turns into a finance company subprime lending transaction. So we're really focused on what we think is the sweet spot in the marketplace. And we know when you finance customers that are using their vehicle to go back and forth to work, it is the best-performing asset in the entire indirect auto class. Our competitive advantages then are being that consistent provider of indirect auto solutions. We build deep relationships with our dealers. As Avid said, we integrate and have within my businesses both all the commercial lending businesses and the indirect auto businesses. We look at the dealership as one relationship, total profitability, not as separate business units going forward. We have local presence. We have 54 regional business centers that are in the local markets. They're full P&L-driven. They build the relationships. I was just with several hundred of our dealers, and what I like most about what our dealers say about our business is that it's their office. So they would refer to us not as Wells Fargo Dealer Services, they would refer to us as my Portland office or my Milwaukee office does this for me. The relationships are built at a local level. We make our credit decisions there. Our sales force, our commercial teams are there. We underwrite, we fund, and we collect in those offices. They're full P&L. They drive our success. And obviously, we have a huge benefit as Wells Fargo being able to fund our businesses off the balance sheet of the company. What's also important is we've done this, and we've improved our credit quality. After the recession, we have moved upstream slightly in how we think about credit, but we've been very steady since the recession. We take a long-term approach to this business, and we've been able to improve our credit quality and some of our key metrics around loan-to-value, FICO scores, and payment to income and grow the business. As Avid said, we grew quarter-over-quarter 16% just in the most recent quarter. One way to continue to grow our business is deepening that relationship with our existing customers. As I said, we have six different tiers of credit. We work hard to get all six tiers, and we're trying to move that relationship so that we can penetrate that dealer at a much greater level than we have historically. The team has done an awesome job of this last year. But only 38% of our volume today comes from dealers that give us more than 20 contracts a month. We still have a lot of opportunity to deepen that relationship with our dealers going forward. As I said, we have this key relationship between our retail business and our commercial business. When we win the commercial business from a dealer, we tend to get their real estate, their floor plan, and a much greater penetration of their retail paper. We also, though, end up with 11 different cross-sell products across all of Wells Fargo. We bring the entire bank to that relationship. As we look at how we want to continue to grow this business is that we've got additional opportunity with our GM relationship. We've just been expanding that over the last couple of years. We have flexible financing options that come to us as part of what John refers to as team play in the company. Not too long ago, the corporate bank came to us and said, "We have a green initiative. We'd like you to figure out a solution to finance Teslas." And we built a special program for Tesla. We also have a special program for CarMax. We are able to look at how do we be a team player and build special solutions for different types of lending as well. We're going to leverage our commercial relationship. We're going to deepen that penetration of all of our credit tiers with our customers. This has been a great business for us for many years. We have great leadership in the business, and I think you'll find that we'll continue to grow our market share, mostly because we're winning that relationship dealer by dealer over a very long and consistent approach. I want to switch to our credit card business, which I said is we're trying to capture the opportunity here. It's similar to our dealer business in the way that we're trying to capture the relationships of our customers within Wells Fargo to use us in the credit card world. A couple of years ago, when we started this endeavor, we only had 28% penetration of our customer base. And I would honestly tell you that most of our customers didn't think of us as a top-of-wallet credit card. We took a step back and asked our customers, what could we do to win their businesses? So from their eyes, how would we approach this business? The valuable thing that I heard, two things, was one was, "We want to use Wells Fargo for all of our products and services. We have four, five, six products with Wells Fargo. We'd like to be able to use you, but your value proposition isn't strong enough. You're not competitive, in my eyes as a customer, to do that. You don't have the right rewards. You don't have the right cash back. It's not as convenient as the card I have currently in my wallet." We had to invest in all aspects of our credit card businesses to be competitive. We want to be top of wallet in all of our customers. Over the last two years, we've been focused on improving all aspects of our businesses, and it's starting to pay off. Wells Fargo, as Avid said, has some unique capabilities. We know a lot about our customers. We have the ability to know them, to make it easy for us to do business with them. We have great insights into how and where they are in their life cycle. We can approve more customers by knowing all the data that we have within the bank. We're starting to leverage this capability more and more to expand our credit card business. The second thing that we have that's a huge advantage for us that most of our competitors would love to have is that we have most of our, or industry-leading bank selling credit cards for us. 85% or 83% come from the store channel today as a cross-sell through Carrie Tolstedt's world. That creates for us an industry-leading cost of acquisition that's 55% of the industry average, fully loaded with the cost of our bank distribution network. That gives us great flexibility in building more value propositions for our credit card products and services by segment, and then investing in both mobile and digital as we move forward as well. As I said, we had to rebuild this entire business. We made a complete commitment to redesigning this business. We recruited a diverse set of leaders from inside and outside of Wells Fargo with strong expertise in credit card industry. We're working to make it easier and better for our customers to use our products and work with us. We've launched new products and expanded our co-brand. We now have a continuing relationship with Visa that helps us today with most of our credit card products. We're, as Avid said, just launching one of our first larger co-brand deals with Dillard's, and then we've just recently launched our new two cards with our Amex relationship. We're giving customers choice, we're providing new solutions, and we've invested heavily in a new rewards platform. One of the keys to success in credit cards is not only how you earn rewards, but how customers feel rewarded. When we talk to our customers, we wanted to build an enterprise solution for our rewards platforms. When I say enterprise solution, our customers wanted to be rewarded for doing business with Wells Fargo, not for just doing business with a credit card company. We have the advantage with our cross-sell and our number of products with customers to look at customers and reward them for service with us. We can provide them great travel, great benefits. The way this program's designed going forward is that I can build my rewards community with my family, apply the rewards I get for paying off our mortgages, our auto loans, our student loans, making the deposit, interacting anywhere within Wells Fargo. You can customize rewards. You can automatically pay down certain types of loans. In the past, you would've had to have signed up for our Wells Fargo mortgage rebate card and used that to pay down your mortgage. In the future, any one of our products that you get and create rewards, you could use to pay down your Wells Fargo mortgage going forward. We've made it very flexible, very easy for us to innovate going forward. We talked about the cross-sell penetration within the different regions. 30% overall. Most impressive for us, or for me, is that it happened in all the regions, and we had a 59% increase in the East. Congratulations to the leadership for that. As Avid said, today, we're increasing their balances and the spend. We're receiving positive feedback from our customers. We feel good about where we are relative to our peers. We still have an awful lot of opportunity within our credit card business, so this is just the beginning for us. One of the key areas for us to focus on, and the reason we've launched some of the new products is that our affluent customers at Wells Fargo spend a lot more off of us than they do with us. We know exactly which products they have and how much they're spending. We see that there's a huge gap here, and we needed to develop targeted products for this product set. There's opportunity to increase engagement with our customers, but our goal here is to win this segment in top of wallet as well. When you look at our entire product set is that we have a pretty good set of products when we look at how to start a customer in credit. Secured card, college card, our Visa products there are outstanding. What we were missing was that rich rewards program for both travel and everyday spend, where our customer truly felt rewarded, that we could stand up and say, "We have one of the most competitive products in the marketplace." We launched these products just two weeks ago. We launched our Propel product about six months ago in a pilot, and I'd like to give you just a little bit of a sense of how this is working for us. We got exactly what we'd hoped to get in the pilot program on the Amex 365 Propel. We designed it to attract a much greater deposit customer than we were getting before. We're seeing greater engagement, greater usage of the card and spend across all the different discretionary areas. So far in the pilot, we're doing great. I'm sure in two years from now when we do an update on Investor Day, you'll want to know how the Propel World and 365 work, and we'll launch other new products with value propositions moving forward as well. To conclude, which feels really good at this point. You're almost to lunch. We're well-positioned to grow our credit card business. I've launched some new products to attract the different segments. We're ensuring that our customers have better experience across all of our different channels. We're very experienced at cross-sell, and quite frankly, I feel good about giving the bank better products and services to sell because I know that they can sell them. I hope this gives you a good overview of two of our most compelling businesses and what some of the businesses that are driving our growth moving forward. Let me bring Avid back up for a summary. Thank you, Tom. Thank you. Well, thank you, Tom and Mike. As you could see, our outlook is very positive for the consumer lending businesses. We're seeing demand increasing from the consumers. We have identified the opportunities. We have developed the strategies, and we have made investments to capture that demand. We clearly have the scale and the structural advantages that would allow us to differentiate ourselves in the market. Very importantly, we do have the proven leadership, and we have the relationships that we could continue to build upon to capture this opportunity. Now, I would like to invite Mike and Tom back up to the stage so that we could answer any questions you may have. We'll follow the same pattern, please. We have three runners. Please raise your hand if you have a question, and I'll call out here. Jason Goldberg here. I guess maybe for Mike. In the last, I guess last week, we saw a bunch of significant announcements, first from the GSEs in terms of relaxing rep and warranty put backs. You had the FHFA and Mel Watt make some comments. You had the FHA put out a paper in terms of, I guess, trying to get banks to expand The credit box for the mortgage. Can you talk to the implications of those announcements and what you are doing and do you see going further down the FICO spectrum and loosening up what you are doing? Sure. I think the announcements were very positive. Very strong announcements, very positive. We have been working on this with them for the last couple of years, actually. Just this year I have been with Director Watt, three different occasions. The driving force here is to try to make credit access available in a way that is both responsible. Keep in mind the products are fully amortizing products, predominantly 30 year fixed rate. This talk about returning to subprime is just nonsense. In the lending space, the clearer the rules, in a very practical way, with the GSEs, with FHA, the easier it is for lenders to know with confidence that they can make a loan and have the credit risk transferred to the GSEs or to the FHA, and you are not going to be second guessed years from now. There is still work to be done to translate the kind of principles into contractual guides. That work is underway. I think all told for the industry, I think it was a really strong set of announcements, both by FHA as well as the GSEs, to help families get access to credit that deserve it. Thanks. Moshe Orenbuch from Credit Suisse. Question for both Mike and for Tom. Could you talk a little bit about the- Where's Moshe? Are we on? From the mortgage business, could you just talk maybe about what you would see kind of on a longer term basis in terms of the returns and the growth rate from that business, once we get through this current cycle? Then for Tom, you've done an outstanding job kind of on your proprietary card and now have started with the Dillard's announcement to make some kind of push into the retail side. Can you talk a little bit about your ambitions there? There are other portfolios that are up. Could you just talk about that a little bit? Thanks. Oh, go ahead. I'll start with the mortgage side. The way I'd maybe answer that question in mortgage is keep in mind, we run in two business lines. About 60% is retail, about 40% is correspondent. What I expect for the next several years is predominantly a purchase-dominated market for several years to come. So I think we'll see markets like we have right now, some growth, but probably the growth tied more towards growth in the economy itself. So for us, there's still significant growth opportunity in the retail production channel itself. Where we've seen the greatest share drop-off of late has been in the correspondent space. GSEs are buying loans directly. We'll see where that goes. Then there's some other competitors who are coming into the correspondent space, either profit margins or compliance criteria and such that we just don't think makes sense. Just like we've done in the past, we've given up market share at times to be able to run the business the way we think it should be run. For us, long term, I think there's still growth opportunity in the retail production side. The rest of the pluses that I demonstrated earlier, including portfolio lending, continues to have upside growth as well. On the dealers question, the company has a merchant services businesses that does private label financing for the last 50 years. We have almost 16,000 relationships there. The dealers relationship's slightly different because it includes private label and co-brand. That really is because we have new capabilities within the organization. Quite frankly, dealers is part of the community relationship that we have in the bank. We bank dealers as a positive relationship for us. It gave us a great opportunity to look at that deal and make a competitive bid, and we won that transaction. We would be interested in others as well. As you know, those things come up on a cycle basis and we want to absorb the dealers deal, prove that we can do this correctly, and then I think we'll be looking at other opportunities as well. Yeah, and just to expand on what Tom was saying, in our private label business, we now have a relationship with about 16,000 retailers. But then they tend to be on the smaller size, and this was one of the larger relationships that we are now working with. Yes, Vivek Juneja. A couple of questions. Tom, what percentage of your auto business is non-prime, and what would you say is the difference in yields or spreads between used and new? I am not sure I heard the second part of that. The difference in spreads or yields between used and new car financing. Oh, so it is a difficult question to answer because everybody defines prime, non-prime, and subprime differently, to be honest with you. We use, in our auto lending business, customized scorecards for almost all of our lending. What I would tell you is that our lending in the different segments has gone upstream over the last several years, so we do a lot more prime financing than we do non-prime or subprime financing. I cannot really give you, or we do not really disclose the mix relative to that. Obviously, the spreads across prime, non-prime, and subprime are very different, but so are the operating costs and your expectation for losses. When you think about it in terms of what John Shrewsberry shared this morning, we target our auto loan business to be at the highest end of the ROA targets that we have as a company, and we run a very efficient business. We run efficiencies below the company targets as well. Mike, question for you. These new announcements by Matt Ward and people like that, what are the outs in the three-year put back? Or put another way, what is it that you need so that you don't have the same kind of situation that you are fighting right now, where you thought you had an agreement on servicing related liabilities and so that you don't run into that same situation years down the line when a new administration comes in. What is it that you need tied down so that this Three years of no put back if the customer's current is actually more ironclad. Sure. There were two parts of Director Watt's speech. There was actually a couple of bulletins that came out from Fannie and Freddie that spelled out the three-year program, some of the MI conditions and such, which was a good start. There was also some reference then to need for more clarity on life of loan exclusions. There was actually a productive meeting that happened earlier this week to start nailing that down. This will be a work in progress over the next several months. What we are driving for is just common sense clarity, so that if you transfer risk, you know that you've transferred the risk. We think that that's possible to achieve with just some common sense guidelines. I have been very encouraged to see the first bulletin that turns this down to a contractual matter was a positive step in the right direction, but more importantly, Director Mel Watt referencing the other two or three or four streams of activity that still need work. There is an industry group underway, we are a part of it, to nail that down over the next several months. I am hopeful that we will see where this all leads and gets to a point of what I would call more common sense contractual clarity so that we do not return to the repurchase saga we have all lived through. Mike Mayo will be next, then we will have one more question, Tanya, in the aisle here, and we will wrap up. Yeah, for Mike. Slide 29 shows that your FICO score for consumer real estate went from 678 before 2009 to 769. That is a big jump in the FICO score. How do you evaluate the trade-off of, on the one hand, it is better credit quality, on the other hand, it might be a little bit less growth. I think I saw a news release recently, you might have lowered FICO scores for new loans. You can clarify where you are headed with that FICO score. Are you getting any pressure from regulators to lower the FICO score to extend more credit. Talk about that trade-off, if you could. Sure. Let me break it apart. Most of the news accounts around reducing FICO are all in the GSE FHA space. Most of the recent commentary has been in that zone, all a result of the clarity of FHA and GSE guidelines. In the portfolio itself, it is an art form, not a science, in terms of how you evaluate trade-offs between credit criteria and market access. We very intentionally, as an intentional investor in the space, the chart you are referencing showed that we started to want to be competitive in the market with what other competitors were offering, but we also wanted to be very, I guess, intelligent about how we chose to extend credit in a more challenging real estate market. That is the reason we were fairly tight on credit over the last several years, and that green bar you are referencing is the result of that. We're in a different time. Real estate has come back. The economy is stronger. As we look at credit now versus credit then, there's a host of new factors to take into account. We don't see credit as a static thing. We look at credit extension as kind of an outcome of all the various factors in the market, including volume trade-off, what you price into the product for credit experience and such. The sum total of all those moving parts gets it to the credit policy that we have right now. Two years from now, that FICO of 769 will be higher, lower, or about the same. What's your best guess? I think that this we'll see. Yeah. Time for one last question. The other thing to also keep in mind is the blue part of that board, the legacy, also includes, for example, Wells Fargo Financial originations or the Pick-A-Pay portfolio from Legacy Wachovia. So in that legacy portfolio, there is also some businesses that we are no longer involved in. Mike. Over here. When you are looking at the servicing values, one of the things that I think this cycle created was it embedded a lot of innate value in the servicing portfolio. Prepayment speeds never got to the level that the model would have assumed, so you wrote down the value while not really ever experiencing the prepayments. Also, you talked about the $2.6 billion related to the additional cost. How do you recapture some of that value as you move forward and the environment starts to change? Well, one easy way to recapture is to outperform what you have assumed. Take the $2.6 billion write-down. That was all predicated upon a certain estimate of what costs would be, not just in one year, but over life. The better we are at managing our cost structure, the better our performance and our credit book is, the better we can be at extending modification to help the customers that need it. To the extent you can outperform the assumption, then you get some positive lift from that. The way we look at the MSR asset is we do not speculate on interest rates, so we are very intentional in our risk management around the hedging of it. But then, like any other asset, to the extent you can outperform it is to just be good at executing against the assumptions that you have baked in the model to begin with. As those assumptions improve, as they have been doing, there's some value you can recognize through incremental earnings in the future. Well, parts of it you already saw happen over time. In our disclosures, you can see where in, a couple of years ago, when prepays were running slower than modeled, we brought some positive value into the MSR. Then when cost came out negative for the regulatory changes, that was a negative deduct. If you look through the disclosures that are already there, you'll see a pretty real-time view of what our current estimate of the future is on all those different aspects to it. Then lastly, you've done a real good job of hedging the portfolio. You mentioned earlier the benefits of keeping that within the mortgage business as a whole, so the capital markets part. You've been able to take advantage with the steeper yield curve and using swaps and things to be able to generate some other value. Can you explain some of the other benefits you get from hedging inside the mortgage company? One thing we think is an advantage of, we see the mortgage servicing rights as its mortgages. The bulk of our hedge position is in mortgage-related instruments, where we just think there's a natural connection between the two. In current times, with a yield curve that steep, that also just gives you some extra carrier earnings that come with it. That's just a function of what instrument you choose and the risk profile that you get with it. I think the other benefit you get from it is, by having it closer to the business, you have a little bit more of a working sense as to what's going on on the pipeline side of the business. As you think about how should your instruments change or what coupons should you be in for your hedge, you've got more of a working sense of what's actually happening in the market itself. We just think all that conversation that tends to occur more effectively when things are closer to where the business gets done has an advantage for us. We do need to wrap Q&A, so thank you, Avid and team. Great. Thank you. Thank you. Ladies and gentlemen, please welcome the Head of Wealth, Brokerage and Retirement, David Carroll. Morning. Let me add my welcome and thanks for all of you for joining us today and for your interest in Wells Fargo. It is good to see so many familiar faces and long-term investors. By way of an agenda today, I am going to spend just a little bit of time refamiliarizing some of you and familiarizing the newer of you with who we are, what we do, and what our recent performance has been. I would really like to spend the bulk of the time I have with you today talking about what we are hearing from clients, what we see as the market opportunity, and how we intend to continue to take advantage of that opportunity. You have heard this time and time again today, and you will hear it again until we leave. We are all here for the same reason at Wells Fargo, and that is to help our customers succeed financially. I know as professional investors, you may see or hear similarly lofty missions from a lot of other companies, but I hope to give evidence in our presentation today, it really is what drives this company, it is what sets priorities for us, and it is what defines how we work together as a team. It is different here. More specifically, in Wealth, Brokerage and Retirement, in our part of the company, it is not first all about generating commissions or fee income or growing client assets. It is about helping our customers build, manage, preserve, and transition their wealth over a course of a lifetime. If you were with us in 2010, and 2012, you will recall I said exactly the same thing, and I suspect if we are here two years from now, I will say the same thing again. Wealth, Brokerage and Retirement consists of four business groups, offering a full complement of brokerage, advisory, fiduciary planning, and banking services. As Carrie pointed out so well, we do that across multiple channels of businesses serving mass affluent, high net worth, and ultra-high net worth households. This view just speaks to the scale and the market coverage of our four business groups. In total, we manage or advise on over $1.6 trillion in client assets. Over $640 billion in retirement assets custody. 3.8 million households directly, and another 3.3 million institutional retirement households do business with Wells Fargo. In addition to that, we have $165 billion of very low cost, less than five basis points on average, stable core deposits, and a $50 billion growing high-quality loan portfolio. As was also pointed out earlier, among our peers in the brokerage wealth management retirement space, we are unique in terms of the diversity of channels that our customers have access to, covering all of the client segments I just mentioned. Our service model ranges from self-service to full service to a boutique financial concierge level in our ultra-high net worth business, with the service level calibrated to the complexity the client need and the cost to serve. I also know as investors that it is not uncommon for you to see the obligatory geographic footprint map. But I would ask you to think about ours a little bit differently, in the sense that this will never be repeated again, not through acquisition, not through organic growth. This almost 7,500 geographic physical touch points is unique. But more than that, place and physical relation, physical contact with our customers is very important to developing relationships. Behind each one of these dots are literally millions of relationships, less than fully cross-sold relationships that afford us enormous opportunity. When you combine that reality with the culture of this company of getting the customer to the right place, to the right product, it gives me huge optimism. I cannot think of anyone in our industry that converts relationships to cross-sell to top-line revenue growth better than Wells Fargo. As testament to that, this is what our division has been able to accomplish over the last five years. Leveraging that footprint and the key internal partnerships with the community bank, with our mortgage partners, with the consumer lending group, and with wholesale. We have grown earnings after tax at a compound annual growth rate of 34% a year for each of the last five years. We have grown top line at over 5% a year. Non-interest expenses have grown at less than 3% a year, and we have been able to produce consistently high double-digit earnings growth and positive operating leverage over a fairly long period of time. Following the 2011 merger integration activity that we completed, we launched a series of strategic initiatives to shape our business and to drive growth into the future. One of those initiatives was to really focus on plan-based investment advisory relationships. One of the outcomes of that was to change the revenue mix much more towards recurring revenue and away from the traditional transaction orientation that is so familiar to all of us in our brokerage business. You can see the progress that we have made here over the last five years with recurring revenue now between 75% and 80%, up from about the mid-60s just a few years ago. At the same time, we have operated with a very disciplined approach to expenses. Non-interest expenses have averaged less than 3% a year over the last five years. In fact, when you take commissions or variable compensation out, total non-interest expenses are flat for the last five years. You may be asking with that kind of expense discipline in mind, are we investing sufficiently in the business to stay current, to be competitive? The answer to that is yes. We have found other opportunities to generate expense efficiencies to create the headroom to fund these investments within the business. Last year, to the tune of about $143 million, this year, another $170 million that we are investing in technology, operations, product development, and channel enhancements. These are a couple of other key metrics that give evidence to our consistent operating improvement. In spite of the prolonged low interest rate environment, through that strong expense control and shift in revenue mix and an emphasis on higher margin, higher value-added client solutions, such as advisory, fiduciary, and planning, we have been able to markedly improve our pre-tax margins. While the company has been growing capital, as John mentioned, we have been able to make consistent improvement in our return on equity in our business, and I am optimistic about further improvement there as well. Since close to 80% of our revenues are in some way or another linked to client assets, it is instructive to take a look at what that client mix of assets would be today. Probably no surprise to you, client asset allocation and mix has changed a bit over the last couple of years. You can see here where, since 2011, there has been a slow but steady move back into equities, going from about 45% of total assets to 52%, and fixed income has dropped slightly from 34% to 28%. Cash continues to be extraordinarily high, between 13% and 14% of total client portfolios. In brokerage alone, traditionally pre-crisis for the longest time, cash would have been 4%-6% of a client's portfolio. It is at 9% today. On the right hand of this chart, again, I want to remind you of that enormous opportunity we have, Mike touched on it, Carrie touched on it, for cross-sale. That is $2.1 trillion worth of existing investment assets that our Wells Fargo customers have held away from us, that we see as an enormous opportunity for us, regardless of whether the S&P 500 is up 5%, 15%, or whether we have 0.1% GDP growth or 4%. We are very focused on bringing those assets home to Wells Fargo. I mentioned earlier, the strategic initiatives, the one in particular focusing on moving away from transaction-oriented activity and more into managed portfolios. You can see the progress that we have made. Advisory assets are up more than 50% over the last five years, growing at almost an 18% CAGR. Advisory assets now account for more than half of total financial advisor revenue, and that is a new high water mark for us. The last time we met in New York, we rolled out a number of financial targets that I wanted to give you a brief update on. You can see we have made nice progress, as I said earlier, on our pre-tax margin, and I do think we have got room to run there, if you will. Like everyone else in the industry, we have struggled with the NIM. At some point, you would think that 13%-14% of cash would move into longer-dated assets. We are optimistic about being able to keep that within Wells Fargo. Hitting our longer-term target on net interest margin of 275, and we have been there before, is worth an incremental $1.1 billion in pre-tax earnings for our division alone. We also have made nice progress again on recurring revenues. In terms of operating leverage, we have had positive year-over-year quarterly operating leverage for 15 of the last 17 quarters. A lot of companies that I know you research and invest in claim people as a competitive advantage, but very few of them could evidence the kind of financial track record that we just talked about. Something I am more proud of than that, very few of them would have the quality of the team that we have got, the tenure, the stability, and the loyalty of this team. I have been in this business for a long time. This is the best group of people I have ever worked with. They work as a team selflessly to get the customer to the right place, regardless of which division it falls in. They also do an outstanding job of helping us manage risk in an environment that confronts us daily with something a little bit different than what most of us grew up with. I hope the value of that stability would be obvious to you. I have been here 33 years. My direct reports average 20 years with Wells Fargo. The rank and file, 35,000 people in our division have averaged 14 years of tenure with Wells Fargo. Very valuable to us. When we talk about relationships, think about that kind of tenure, that kind of familiarity, and the advantage we would have in the marketplace with that kind of stability. Those are the things that have been driving our growth over the last couple of years. Let us turn to what we are seeing and hearing from our clients. In spite of a five-year bull market, our investors remain very cautious, very skittish. Anxiety is very high. We see that every quarter with the Wells Fargo Gallup Investor Optimism Survey. Think about where cash levels are. That says something about what people's appetite for risk would be. Market volatility here and abroad. Inflation concerns. Our customers do not feel like they are in a low inflation environment when taxes, energy, and educational expenses are running at an all-time high. Concern over government entitlements, over high taxes, concern over the longevity of their retirement assets, concern over rising healthcare cost. BlackRock, a key partner of ours, recently released a survey that suggested that upwards of 45% of mass affluent investors, number one concern with respect to investing was the cost and access to affordable healthcare. All of those factors conspire to make our customers much more interested in and responsive to our fundamental belief that we need to have plan-based individualized strategies driving those relationships. No surprise, technology and demographics are also driving client behavior. Clients want immediate access to their accounts, to research, to advice, to their advisors. We are investing heavily in online and mobile to up our game there. We are also mining for customer sentiment and new business opportunities with social media. Another one of our initiatives that we launched a couple of years ago, particularly in brokerage, is to address the next generation of advisor, and I would say bankers. We have an initiative entitled Next Generation Talent that is focused on changing the face of Wells Fargo financial advisors, wealth advisors, and private bankers to more reflect the market opportunity out there. It is focused on recruiting, on retention, on training, and how we compensate them, and it will look differently 2 years, 3 years, and 5 years out. Let us talk for just a moment about our approach in competitive positioning. Our fundamental business model is really pretty simple. It starts with understanding the customer and finding out what it is important to them in life, not what they are trying to do in financial markets. Whether it is retire as of a certain date, educate their children, pay off the mortgage, establish a foundation, care for aging parents. Those are the life events that drive our customers. From there, once we understand those things, helping them build and put into place a saving and investing program that is calibrated to their level of financial literacy, their risk tolerance, and their time horizon. It is not a complicated strategy, but I would say it is not all that easy to execute well. For those of you that have had the misfortune of having to hear from me before, will know I am very passionate about investment plans and financial plans. We want every one of our client relationships, in some form or another, to be investing, planning, and saving relative to those life goals. I am happy to tell you today that in our brokerage business, over 70% of our key households, those would be households with at least $250,000 with us, would have an official plan of record. In our wealth management business, approaching 35% of our households would have some form of a more complex plan in place. The benefits to our clients, you can see here enumerated on the left-hand side, but if you go back to the very first chart or the very first slide, we added an additional dimension to our mission here, which was to help customers generate financial peace of mind. We think that is really important in these uncertain times, and we are gratified for our customers to tell us, in fact, following that regimen, that discipline around planning really does help them retire on their own terms and feel in control. The benefits to Wells Fargo are also obvious. They are on the right-hand side in terms of loyalty, in terms of cross-sell, the impact on revenue, and client retention. Those are also the things that have been driving our performance over the last 5 years. Competitive differentiation, those are terms I know you also hear frequently and may be a little bit cynical about. I go back to what I just said, our fundamental business model is very simple, but John talked about the culture at Wells Fargo. I am unaware of anyone that I compete against, be it large firm, national, global, or small boutique, that gets the kind of helping hand support and assist in the marketplace that we do. On the order of the $1 billion a month now in closed investment sales leads that we get from Carrie and her team. Or the fact that we got almost $1 billion in closed investment opportunities, closed investment opportunities from our mortgage partners last year. We really are scratching the surface, as Mike said, on both of those initiatives. I believe those initiatives will continue to pay dividends for us. At year-end 2013, U.S. households held about $31 trillion worth of investment assets. The biggest opportunity there is with the affluent and the high net worth. 17%, there's a subset of those households that control 87% of those assets, and it's the affluent and above. I can't think of any firm in the marketplace that's better positioned, given our footprint, given our product menu, and given the chemistry and culture of this business to get the customer to the right place at the right time. No one is better positioned to take advantage of that than Wells Fargo. Of those nine strategic initiatives that we launched in 2011, we believe we are today getting a return on those investments, and we want to give you a brief overview on just four of them today. One would be on advisor best practices to more institutionalize what we know leads to best-in-class client investment results and the service experience. A partnership between brokerage and the private bank, not something historically has been a very natural thing for any of the market participants. That's paying off for us in a nice way. Our community bank partnership, a very well-developed, very productive partnership between our group and Carrie's team, and then a partnership with our home lending partners. To join me on stage to give you a brief update on that would be Mary Mack. Mary is head of Wells Fargo Advisors, and she'll go over the first three of those. Thank you. Mary? Thanks. Thanks, David. I'm delighted to be back, this time to talk about three of the four growth initiatives in which we're seeing consistent execution and terrific results. As David mentioned, the first one of those is advisor best practices. As you all know, our industry has evolved from a time when access to information and trading was key. That's evolved to a time where relationships with our customers matter. Our financial advisors are part of their communities, and they understand their clients, as David said, their hopes, their dreams, their goals, their fears, their objectives in life. They work with a team of specialists to analyze those needs, then develop specific, customized, actionable advice that evolves as our clients' needs change. We had to figure out what those best practices are. We looked at our best advisors, studied them, and realized that our best advisors do 32 things consistently. We knew there was no way to get anybody to do 32 things consistently. We looked then more deeply at that and realized there were four of those 32 that really mattered. Our very best advisors have a service matrix that is achievable and actionable for their client segments. Number two, they're not trying to be everything to everybody. The days of large numbers of clients and large books had gone by the wayside. Our FAs, financial advisors, and bankers needed to really hone in on the clients they could serve well and serve those clients in a reasonable number. Third, the relationship starts with advice. That's where our advisors spend their time, and then they leverage money managers and other partners to deliver solutions. And then fourth, and really important, is that our advisors have a standardized process to review with a client, am I okay, and do I have enough? The good news is, and for those of you all who know this space, we have moved from aspiration to adoption. Since we started focusing on it, we have three times the number of best practice adopters than we had just four years ago. Our client loyalty responded in kind. We know that our clients of our best practice adopters are more loyal by 30% than non-adopters. As John said, and we repeat, what is good for our clients is good for our shareholders. Our productivity growth for our best practice adopters grows 2.5 times faster than for our non-best practice adopters. Those best practices translate into our partnerships. Our second key strategy is our high-net-worth partnership. As David mentioned, historically across our industry, financial advisors and private bankers competed. They did not partner. What we knew we had to do was rather than just come up with a list of things to go execute on, we needed to really address the cultural aspects of team. The we, us, and ours. We went to work on those cultural aspects to develop a partnership model that really focuses on a fairly small segment, niche opportunity, of those clients who already have $5 million or more with Wells Fargo. The results and the opportunity for us are tremendous. It also extends into our ultra-high-net-worth space and Ava Downing increasing opportunities to partner there, which allows us not to have to build additional capabilities, but achieve the efficiencies of leveraging those capabilities that already exist and the power of the partnerships. That, again, makes our clients more loyal, and quite frankly, has become one of the most powerful recruiting tools for financial advisors for our brokers business. We started with lending, because that seemed to have the least amount of potential drama and potential overlap. That went so well that we have introduced trust and fiduciary, and now are in the process of rolling out our fee-based, more complex financial planning. Again, here, the results are really nice. We have penetrated about 10% of the opportunity with a lot of upside. It is about $1.3 billion in additional credit balances. To the delight of our advisors, which drives adoption, we have uncovered with those same clients who we were already managing a lot of assets for, we have uncovered another $2.8 billion of assets split between brokerage and trust. As we see over and over and over again, the more we partner, the more our clients benefit. In 2012, David and Carrie introduced the Affluent Partnership, and Shelley Freeman and I had a chance to talk to you about what the opportunity was. Since 2012, that opportunity, as David mentioned a minute ago, has grown. It has grown because of the kind of growth that Carrie and her team talked about in our community bank clients, but also in the market to about $2.1 trillion. That is not the total wallet. That is not the total wallet these clients held elsewhere. If you look at our affluent clients today, we have about 1,400,000 affluent clients who are community bank customers of ours. Those 1,400,000 have more than $100,000 in deposits and investments with Wells Fargo. We have another 6.2, that is about $522 billion. We have another 6.2 million clients who have not yet brought their investment and retirement and some of their savings wallet home to Wells Fargo. If we just get the same amount of wallet with those 6.2 as we have with the 1.4, that is another $2.1 trillion. If you think about that wheel that David talked about, think about the 1.4 million that already have their wallet here with us. The more we serve the client and their needs, the happier they are and the longer they stay. So our retention for clients in that affluent most value space is about 98.5% retention. They have two times the cross-sell, they are five times more profitable, and they have 10 times the deposit and investment balances with Wells Fargo as the average retail household. So how are we doing it? We are doing it with very specific, actionable, repeatable strategies in our stores. Of the 6,200 retail bank stores, we know that there are 1,100 of them that we call affluent high opportunity stores. They have three times the number of affluent clients. Then if you look at affluent clients at $500,000 or more, they have three and a half times the number of households with Wells Fargo that have $500,000 or more than in our average bank store. We have got a really specific staffing strategy for those stores that we are executing on, and you can see the results in the staffing execution. Our staffing model has at least one licensed banker. That is a Series 6 licensed banker, typically also with an insurance license. It has at least one store-based private banker who has a Series 7, who is managing a portfolio of clients and typically also has an insurance license. Then we have a financial advisor also dedicated to that store and to that team. They get special training. We have a customer management strategy that helps us identify those clients. We know who they are. We have protocols around contact and sales for those clients, and we deliver results. So those results, not on this screen, but Carrie talked about them, David talked about them. They are so good, I am going to talk about them again, which is the referred investments. Closed referred investments to Wells brokerage and retirement from the community bank are up 31% on average. That is a billion dollars a month run rate, over a billion dollars a month run rate in closed referred investment assets. Also, though, because this strategy has two parts, it is investment assets for our banking clients, and it is banking relationships for our brokerage clients. So our deposit acquisition in this space is up 19%, and our loan origination for store-based private bankers, excluding mortgages, is up 49% on an annual basis. I would just tell you that this is driving the growth of our brokerage business. Our total brokerage client assets are up about 21%, but our shared clients that have bank and brokerage relationships are up 29%. And of our asset pie, the number or percentage of those clients who are shared is up to 35% and growing, which is a strong testament to the fact that almost half of our organic acquisition in brokerage already had a community bank relationship, already got a statement from Wells Fargo, either in the mail or online, and knew us and liked us. So I would just tell you that in a nutshell, it works. We tackled the cultural barriers first. That was the hardest. And now we are seeing increased levels of consistency, increased levels of results, and growing satisfaction across both clients and team members. So David, the last one, back to you. Oh, excuse me. Thanks, Mary. The fourth initiative that we launched a couple years ago relates to our partnership with Wells Fargo Home Lending, and Mike Heid briefly touched on the opportunity there. Just like the community bank, it is all about what does the customer want, what does the customer need, and finding the right product and the right channel to get them to. Our partnership with Wells Fargo Home Lending is already bearing great fruit for us. Our customers are very active in real estate, and we are good at this, and so it is a natural place for us to partner with Mike and his team. Last year, we generated just slightly in excess of $35 billion worth of agency and portfolio mortgage assets. About a third of that, $13 billion, went on our balance sheet. We were thrilled with our ability to deepen relationships with those households to the tune of that. But as I said earlier, Mike's team identified and referred to us $975 million worth of closed investment sales. I am unaware of anybody we compete with that gets that kind of support, cooperation, and inbound sales opportunity from their partner in the mortgage business. Mike touched on this, but Wells Fargo Home Lending last year served about 3.7 million affluent households, but only 11% of them have an investment planning, brokerage, or fiduciary services with Wells Fargo. So we see a lot of potential in Mike's run rate business. Our wealth brokerage and retirement customers, 2 million of them are mortgage customers of ours. Excuse me, 2 million of our clients have mortgages, but less than a third of them have mortgages with Wells Fargo. So we are really excited about the prospect for this relationship maturing over time, and I think as it does, not only will we generate high-quality assets for resale in the marketplace and for our balance sheet, but it will be the source of incremental new affluent households and new investment advisory assets as well. The last thing I want to touch on very quickly is to update our financial targets. You can see here again, the same four that I made mention of earlier. Three of them, our targets will remain the same, but we are upping our pre-tax margin target from 22% to 25%. We have a line of sight on that level of performance, given the change in our business mix and given the inertia of these partnerships that we have talked so much about. We feel good about our business, and John talked again about the oceans of opportunity. We have scale about any way you want to measure it across the four business groups in WBR. Again, almost without regard to the economic backdrop or what broader financial markets are doing, I am very optimistic about our ability to continue to provide growth, in earnings and relationships here. With that, I will ask Mary to join me back up on stage for a few questions. Questions. Can always count on Mike. Mike Mayo. Your results speak for themselves, but in context, I am just wondering if they are as strong versus peer as they should be. For example, the margin, 21%, you have a competitor there at 25% already, and I appreciate that you have increased that target. The growth rate in brokerage assets, if you compare that versus peer, including, say, the online brokers, not quite as strong. My question, what is your sweet spot? You talk about the affluent, and then you have the mass affluent, you have a lot of areas. What is your sweet spot, and do you agree there is, I guess, in your term, a lot of opportunity relative to peers? I do think there is a lot of opportunity relative to peers, and thank you for the question. Of course, our business mix is a little different than some of those competitors that you have mentioned, with the online firms being more monoline, if you will, in terms of pure brokerage. We have a $170 billion balance sheet that goes along with this that is weighted down right now with low net interest margin. Huge upside there. I mentioned $1.1 billion in pre-tax earnings available just with a normalized NIM for us. We have got a big fee-based retirement business that is in here that has different yield characteristics or earnings characteristics. So our business mix is a little different. I do see where we could get to a predictable mid-20s, maybe even a little higher pre-tax margin over time. For all of those competitors you have mentioned, I am unaware of any of them that have grown absolute bottom-line earnings at the rate that we have. So when you do the math on it, the fact that S&P was up 30-odd percent last year, remember less than half at the time of our assets were in equities, still 14% sitting on the sidelines earning essentially zero for clients, and not much more than that for us. So our sweet spot, we have multiple sweet spots, but the sweet spot for us would be where the intersection of our wealth management brokerage capability intersects with the community bank mortgage card and auto, where we can bring all three of those together. I think, and maybe we should endeavor to do this, to isolate the profitability of that household, and I think you would be really pleased with what. That is where we are going for. We are trying to bring the best of all of Wells Fargo to those relationships. Yes, sir. Hi, Ken Usdin from Jefferies. Davey, can you talk about that fee-based model? Set a nice chart up to 27%. Just how high do you think that can go? What would prohibit it from having meaningful incremental movement from there? The second question is just can you just talk a little bit about just the competitive environment for bringing new people in? There is a lot of talk in the papers about the models changing. Just a little bit on the near term of what that means, and also just any perspectives on just how the long-term thought process around that. Sure. I'll take the first part, then I'll ask Mary to do the second part. The first part of it is, we're in the advice business. In spite of our best efforts and the quality of our advice on any given day, there's a limit to the extent to which clients actually follow our advice. I mentioned earlier that investors continue to be cautious and very skittish, so lethargy, the unwillingness to do anything, is probably the thing weighing most heavily on the continued growth in advisory assets. One of the reasons I'm so committed to plan-based relationships is it puts everything in the context for the customer. I always remind our team members that most of our clients aren't like us. They're not interested in banking, finance, and alpha, and the Greeks, and the like. They're interested in real-life stuff. When we get a client to engage on what's important to them, then we build an asset allocation around those life events, we get adoption in a big way. We create much better investment results for the clients, never have any suitability claims or issues, and it's about 40% more profitable for us, whether that's in brokerage or in wealth management, or in our ultra-high net worth space. So the inertia of not doing anything, the concern about whatever the next negative headline is, I see weighing on people's adoption. But over time, we really do want the vast majority of our relationships to be plan-based with a formal asset allocation. So Mary, I'm going to ask you to address the advisor movement. When you look at advisor movement, and you go back even 5 or 6 years, we're delighted that we have been consistently a net recruiter of financial advisors at a deal that's not the highest on the street by any means, because of the value of Wells Fargo, the value of the partnerships, the value of the brand, and the value of the multi-channel model that we deliver. So it's been really great, despite the fact that advisor movement changes from year to year, but we've continued to benefit in that environment. David also mentioned the Next Generation Talent. We have kicked off a number of new training pilots that partner both with Carrie's team, and the ability to take some of those licensed team members that I've talked about who have shown an interest in and a propensity for the investment side with incredibly high success rates in our advisor training program, and then supplement that with some targeted hiring and training in the industry. So we're very optimistic about both our ability to have been able and continue to be able to attract experienced advisors, and increasingly bring on the new diverse talent that we feel like we need in the industry. The only thing I would add to that is we think over time, the business model does change. We have three channels in brokerage, the traditional private client group. We have the wealth brokerage channel, which works in partnership with Community Bank, and then we have an independent channel. But over time, we see it more coalescing around teams as opposed to just standalone relationships, more institutional equity associated with those relationships than necessarily following advisors around, and we are doing a lot to encourage that. Yes, sir. How leveraged are you to the equity market? If you had a 20% reduction, let's say, in an equity index, what would that do to your profitability and margins? We definitely benefit when markets are up, and we are going to, on margin, probably be dinged a little bit when they are down. But I think the diversity of our business model would kick in, and it depends on the circumstances that led to that. If it were higher rates, which typically would push markets down, we have got a lot of margin upside in the net interest margin. We are now growing our loan portfolio. We were up 7% last year. We think our deposits are incredibly sticky. Those have a lot of upside for us. To be sure, we are impacted by the broader financial markets, but it depends on the circumstances. Yes. Please remember to say your name. Hi, David. It's Jimmy Hanna with Peak6. I appreciate slide 10, where you show the expense growth over the last four years has been about 3%. But if I look at 2013, it looks like expense growth was closer to 6%, 7%, 8%. Yeah. Can you just talk about where those investments were? Yeah, happy to do that. We are making, relative to our total business, big investments in the platform. We have a large initiative underway to modernize and upgrade the fundamental broker desktop and our trading platform that we have a partnership with Thomson Reuters on. That's a multi-year initiative. In our wealth management business, we've got a multi-year effort underway to change out the fiduciary and agency investment accounting engine there. We've got investments that we're making in mobile and online. I mentioned earlier, we really want to and will up our game for those investors that are inclined to self-direct. We know that upwards of 40% of our traditional full-service brokerage clients have a self-directed account somewhere else. We want to give them every reason to bring that back to Wells Fargo. We're investing in that, and I'd like to think a year from now, you'll be able to see evidence of that in the marketplace. Betsy Graseck. Oh, hey. Hey. David, just a clarification. On your financial targets, you indicated the pre-tax margin line of sight to 25%, and then you also have the NIM at 2.75, which is obviously up a lot from last year's 165. I just want to understand, does the line of sight to 25% pre-tax margin assume? No, I think we can get there without hitting 275. If we hit 275, I'll have some accusations of sandbagging from. Okay. So those are all coming from the expense side? I think it's from continued revenue mix change towards advisory assets, which are a higher margin business. Continued growth in the balance sheet, without regard to the spreads alone, could get us there. Your 25% is based on last year's NIM. Yeah. Okay, thanks. No other questions, so David, Mary, thank you. Thank you. Thanks everyone. Before we break for lunch, first of all, thank you for the engagement and the dialogue this morning. We covered a lot of great territory, and we really appreciated your attention and questions. Just to orient you for the rest of the day, we have lunch. We're a little bit early, so we will start lunch a bit early. We'll be back here at 5 minutes past 1:00. For our guests, investors, and analysts, there is not assigned seating. There will be two Wells Fargo hosts at each of the tables out on the patio, so you'll have a chance to chat with both the presenters and other members of the executive team at lunch. Then we'll chime you back in to start in the afternoon. We will kick off the afternoon with Tim Sloan in wholesale. We will take a break after the wholesale presentation, then we'll wrap with Mike Loughlin, Paul Ackerman, and then group Q&A. We've got a great afternoon coming. Lunch is right outside the door, and enjoy lunch, and we'll see you back here just after 1:00. Ladies and gentlemen, we are ready to resume. If you would please take your seats. Ladies and gentlemen, please welcome the head of the Wholesale Bank. You know what? It's always good when your mother comes to one of these things and starts the clapping when they introduce you. For those of you who I haven't had the pleasure of meeting, my name is Tim Sloan, and I'm the new head of Wholesale Banking. I replaced Dave Hoyt, who we heard about earlier today, and I may make some Dave Hoyt references later. Thank you for attending today. I hope you enjoyed lunch and a little bit of a break. As you know, relationships really matter at Wells Fargo. I hope you appreciate that. I think you've only heard that about 100 times already this morning, and you're going to hear it more this afternoon. Our relationship with all of you, whether you're a long-term investor, a shorter-term investor, you're thinking about being an investor, or you cover us as an analyst, really, really matter. We appreciate the fact that you invested time with us today to come to San Francisco in this terrible weather and to listen to our presentations. You heard a lot of familiar themes this morning from my colleagues. You heard about a long-term, focused business model that works through cycles. Every one of the businesses described how well they've done through some pretty interesting cycles that have been somewhat business-specific. Excuse me. You've heard about the fact that we continue to very much focus on our customers and we want our customers to succeed. You also have heard about the diversification in our model, not only from John Shrewsberry, but from each of the business heads. I'm going to talk about that more when we go through the wholesale presentation today. From our CEO, John Stumpf, he talked about the six main drivers for the company and very much focused on our culture and the fact that we put our customers first, and they're the heart of our business. That's the vision of the company. John Shrewsberry walked through an update of our financial and operating performance. It was a pretty good report card for certain. He also made, hopefully, a really important point that you're taking away that Paul Ackerman is going to talk about a little bit later, and that is that we appreciate that you, as our shareholders, want more capital return, and it's our desire to provide you with more capital return. So we increased our targets in terms of dividend and share repurchase for all of you. You heard from my colleagues who run very important businesses within the company. Carrie and Jonathan, Jim, and Ken talked about the retail banking business. I thought really reset the bar in terms of how you should be thinking about the retail business. Sure, it is about cost. Sure, it is about the number of stores. Carrie talked about how we have reduced our annual run rate from a cost standpoint by $900 million. You know what? To be successful in that business, you have to have an appropriate deposit strategy that Ken talked about, and you have got to integrate all the ways that we work with our customers because we are not going to tell our customers how to do business with us. They are going to tell us how they want to do it, and our team has done that through all the investments that we have been making in our retail platform. On the consumer lending side, Avid and Mike and Tom talked about the great opportunities that we have in that business. We had a once-in-a-lifetime opportunity within the mortgage business to satisfy the needs of our customers in terms of providing them with new mortgages to refinance their homes. Mike described how he has diversified that business, so it is not just a for sale business, it is also on balance sheet, and reinforced our commitment to the servicing business because we have the best servicing platform in the industry. Tom talked about how we have quietly built the largest auto platform in the country, and the opportunities that we have in our credit card business, which are really, really exciting. Before lunch, you heard David and Mary talk about the wealth brokerage and retirement business. David set out some very clear expectations for his group two years ago, and they have met or exceeded most of those. David and Mary talked about the fact that the biggest opportunity that we have in that business, whether it is referrals from our retail bank, whether it is in credit card, whether it is in mortgage, is with customers that already say, "Wells Fargo, you are my bank." That is pretty exciting. We are going to switch gears a little bit now as we go through the afternoon, and we are going to move away from our consumer customers and we are going to be focused on our commercial, our wholesale customers. To do that, in a few minutes, I am going to ask my colleagues to come up, and we are going to provide you with an overview of our wholesale business. We are going to talk about different relationship management businesses. That is how we think about our customer base. We are going to talk about one of our key core products, treasury management. After that, we are going to take a short break if you are still awake. We are going to move to focusing on risk. Mike Loughlin is going to talk about risk within Wells Fargo. Just as we did two years ago at Investor Day of 2012, Paul Ackerman is going to provide a conclusion and a summary of thinking about how all the discussions we have had today about our businesses fit together in terms of our balance sheet, in terms of our liquidity, in terms of our capital, and it will be a real good story. With that, let me give you an overview of wholesale banking. I am going to go through a few slides. We're going to focus this year on three relationship management businesses that I mentioned. We're going to focus on commercial banking, corporate banking, and commercial real estate. Each of those businesses services a different type of customer, but the business model in each of those businesses is very similar. I hope you're going to appreciate how complicated it is to execute, but how simple a business model we really have, and how critical it is that our relationship management businesses work together with their product partners. Danny's going to come up and talk about our treasury management business. Let me give you a quick overview of wholesale. We have over 50 different business lines. We service commercial customers, we service corporate customers, we service commercial real estate customers, we service investment and asset managers, we service financial institutions, and then multinationals, both here in the U.S. and around the world. We serve those customers through 35,000 dedicated team members, and I'm going to talk a little bit more about our team in a few slides, but 35,000 team members that serve those customers through a little over 400 locations here in the U.S. and around the world. Just to level set you in terms of how we fit into overall Wells Fargo, we make up about a third of the assets, about 25% of the deposits, and last year, we earned almost 40% of the net income of the company. Sometimes when you say 50 businesses, it sounds like what it is. It's a number. The slide here, hopefully, it's a little bit of an eye chart, I appreciate, but it gives you a sense of the breadth and the depth of our businesses. We think we have the broadest and most comprehensive set of businesses in the industry because our focus is to help our customers succeed financially. We can meet almost any of the financial needs our wholesale customers have through this set of businesses. The other reason I show you this list is just to remind you that two years ago at Investor Day, we talked about two specific businesses. One was international and the other one was Wells Fargo Securities. We did that for a reason, because you asked us to. We listen to our customers, we listen to our stakeholders. You were very interested because there was some concern about those being new businesses within the company. You wanted to know how we thought about growing those businesses. I think there was also a little bit of a concern that because they were new, that maybe we would start to take different types of risks, that there would be mission creep, that there would be this view that somehow the basics of wholesale banking would change, and we'd go a different direction. I'm happy to report that hasn't happened. Both of those businesses have grown customers, they've grown revenue, they've grown pre-tax, pre-provision profit, and they've reduced the amount of risk. What you're going to hear in this presentation, particularly from Perry and Mike and Mark, you're going to hear about how those businesses are very integrated in terms of the relationship that we have with our customer base. Well, if you have over 50 different businesses, we must have a lot of products, and we have a lot of products at Wells Fargo. When we think about our products, we think about our products the following way. First, this wheel depicts the nine product families that we have. In red and blue, you see the two core product families that we have, credit and treasury management, which we are going to talk about a fair amount today. The other seven product families make up the overall product set at Wells Fargo. Behind these product families are not tens but hundreds of different products that we have to be able to help our customers succeed in whatever business they have. Like many of my colleagues today, we have all shown the map. We are pretty proud of it. We show this not because it is great to see a map and lots of dots on the map. The fact of the matter is that we fundamentally believe that if we have our 35,000 team members within wholesale banking, in 768 offices in the U.S. and around the world, in over 400 locations, if we have those team members close to our customers, we will grow revenue because we will help those customers succeed. We will know those customers better. We will take the right risks. Perry, in particular, is going to talk a fair amount about that in commercial banking this afternoon. This combination of 35,000 team members, over 50 different businesses, and hundreds of different products has allowed us to become an industry leader in many of the business and products that we provide. As Mike and Avid and Tom talked about today, we did not set out to become number one in any of these businesses. My experience, particularly in banking, but in particular in wholesale banking, is that whenever you set a goal of trying to be number one, you start to take risks that you are uncomfortable with, and you change the focus of the business. We got to be number one in so many of these businesses, and I will not go through every one of them, but we are going to talk about more of them in a few minutes. We got to be number one because we focused on our customers and again, we helped them succeed. Again, you have heard me say relationships. You have heard my colleagues talk about relationships, but we fundamentally believe that relationships drive growth within wholesale banking. You have got to focus on those relationships over the long term, and we are going to provide you with some specific examples of that throughout the day. You need to evolve and respond to the needs of the customer because just like we are changing, our customers are changing every day. You have got to provide a broad product offering to that customer set. That means that you have got to listen to them in terms of what they need. You need to start some new products. You need to invest in old ones and improve them over time. Then again, you have got to make sure you are working with those customers appropriately through cycles. Let me give you one example of one that I have been involved in. Sometimes I get to be the relationship manager. This relationship, it is a company called Public Storage. Some of you may be familiar with Public Storage. We started our relationship with Public Storage 31 years ago at Wells Fargo. We made them a relatively small loan. We've slowly but surely grown with them over time. When they needed to make a game-changing acquisition a few years ago of Shurgard Storage, they came to Wells Fargo. They wanted to know that we could be there for them, and we were absolutely there for them. Then as they've continued to evolve and we've continued to evolve, our product set got broader. Now we can provide them with capital markets products that a few years ago we couldn't. When they go to raise preferred equity or debt in the market, they come to Wells Fargo. Today, after 31 years, Public Storage has over 24 different products with Wells Fargo. It would be interesting and a good story if that was the only one example like that within the company. We have hundreds, if not thousands, of examples like that, which we're very proud of. You've seen and you've heard us talk about revenue diversification, so I won't spend too much time on this slide, but just point out that think about wholesale banking as a bit of a reflection of Wells Fargo. We generate about half of our earnings through net interest income, spread in terms of investments and loans, and the other half through non-interest income or fee income, and you can see the sources of that fee income are very diversified. This has allowed us to grow over a long period of time. This 16-year chart of double-digit earnings growth reflects a couple of periods within Wells Fargo history. It reflects pre-crisis, when wholesale banking was one of the many middle-market and middle-sized banks, regional banks in the country. Our model, our relationship focus model worked then. As we've gotten to be a larger financial services firm with a broader set of products and service, the model continues to work. The other reason I show this slide is this is the tenure that Dave Hoyt managed wholesale banking, so it's his fault that we have to live up to these lofty goals, but we're going to do our best. I think what's very important, and I'll talk a little bit more about risk later and then Mike, as I mentioned, is going to talk about it, is we were able to grow our earnings in that period, taking a reasonable and appropriate level of risk. We measure risk here on this slide by credit losses. You're going to go through cycles. Your credit losses are going to go up. You're going to go down. We've actually been in a net recovery mode the last couple of years, but this is a reflection that we've been able to deliver those earnings, taking the appropriate level of risk. More recently, in the last three years, we've talked about the environment a fair amount today that we've been in, where the economy in the U.S. has grown relatively slowly. We've had a tremendous amount of volatility in terms of the international economy, and interest rates have been all over everywhere, and we've had a lot of regulatory change. We've been able to grow our earnings. We've been able to grow revenues. We've been able to deliver those revenues in wholesale banking at an appropriate level, so we've improved our efficiency. Behind those expenses, we've invested over the last three years, $500 million a year in terms of new products, platform, and capabilities within the company. Kerry, Avid, and David all talked about a lot of the basics in the business, and wholesale is no different. Our business is fundamentally about creating relationships, and generally those relationships start in terms of providing credit or taking deposits from our customers. We've been very pleased with our loan growth in wholesale over the last five quarters. It's been at a multiple of underlying GDP growth. It's also been much higher than our competitive set. What's exciting to me is how diversified that growth has been. It's been in commercial banking. It's been in corporate banking. It's been in real estate. It's been in international. Our ABF business, our capital finance business, they've all grown. Same story goes for deposits. We've been fortunate enough over the last year that our deposits are up 17%. That means we have more customers that want to do business with wholesale banking. It means we have more large customers that appreciate the safety they have of having their deposits at Wells Fargo because of our capital levels, because of our liquidity levels, and they also appreciate the treasury management products that Danny's going to talk about in just a minute. Let me talk about three specific advantages that I think we have within wholesale banking relative to our peers. The first one is one that you've heard from my colleagues, and that's we fundamentally believe that people are a competitive advantage in wholesale banking. The tenure of the folks that report directly to me at Wells Fargo is 23 years. The total tenure of the five people from wholesale banking that are talking to you today, including me, is 139 years. I know based on our youthful appearances, that's hard to believe, but it's true. It's been audited and reviewed by our second line of defense. What does that mean? It's just a number. It's not just a number. We've worked together through cycles. John has a great quote, and that is, "We know how to disagree without being disagreeable." That's very important because we've got to get people fundamentally going in the right directions to work together to deliver Wells Fargo in an appropriate way to our customer base. But the information that I'm most excited about on this slide is the one at the bottom, and that is we have 35,000 team members who have an average tenure at Wells Fargo of 10 years. Why is that important? Again, just a number. It's important because that's what drives cross-sell. John talked about the secret sauce of Wells Fargo earlier today. To me, tenure at a company is the secret sauce of cross-sell. Sure, you need to have great products. Sure, you've got to have great distribution. But if you don't fundamentally have people that believe in the company that you work for, that believe in our culture, that work together, you will not be successful in cross-sell. We haven't reached the lofty heights that David Carroll and team have reached because they're at 10.42 products per relationship. But we've done a nice job over the last few years of continuing to grow cross-sell, and someday, hopefully, we'll get to 10. One of the ways that we'll be able to grow cross-sell is the opportunity that we have within wholesale banking. I talked about the two core products that we have, credit and treasury management. Three quarters of our customer base today in wholesale banking has a credit relationship with Wells Fargo. There is 25% that do not, and we are going after them. We want to help them succeed by borrowing from Wells Fargo. 85% of our customers, and this may surprise you a bit, 85% of our customers have a treasury relationship with us. There is 15% opportunity right there. Danny does not get off that easy. Look at the seven other product families below. The most penetrated product family we have within wholesale banking is international, and that is just about 36%. You can go down the list. I will not read them. That is opportunity that we are going to take advantage of. This slide is very similar to one that Kerry and David showed, and that is just the basics of how you translate cross-sell into revenue. That is the longer tenured a relationship is, that is why we focus on long-term relationships, the more we cross-sell, because the better we know that customer, the more opportunities there are. The more that we cross-sell, the more revenue grows, and as you can see on this chart, it grows exponentially. Let me now switch gears as I get toward the end of my presentation and focus on risk. I am not going to spend a lot of time on risk here. It will bore you. That is Mike's job in a few minutes. Mike Loughlin, our Chief Risk Officer, is going to bore you to tears about risk. That is the way you should think about risk. It is not sexy, it is not exciting. It is something you do every day to make sure that you can be in position to serve your customers well. When you think about wholesale banking, we take a lot of risks every day. We lend tens of millions of dollars some days. Sometimes it is billions of dollars. We trade billions of dollars of securities on behalf of our customers. Danny is going to talk about the fact that we process trillions of dollars of payments. We face off against very complicated counterparties. There is risk in all of that, and whether it is credit risk or market risk or operational risk, it is surely risk, but it is opportunity. If you fundamentally have a team that can look at a risk and only takes the risk that they are comfortable with, that they can understand, and if we do not understand it, we do not try to structure around it, we do not try to price around it, we just do not do it. Once we do it, we want to make sure that it is priced appropriately and we are making the right decisions for our customer. That is how we think about risk in wholesale banking, and that is why we have been so successful, one of the reasons why we have been so successful over the long term. Let me sum up and just highlight a few key growth opportunities. We focus on building long-term relationships. We partner across the wholesale platform to deliver our products and services to our customers. We're going to continue to increase the number of relationships that we bring to wholesale banking, and as we bring those relationships to wholesale banking, we're going to continue to up-tier and grow those relationships. We're going to continue to invest in expanding our global platform and the sector expertise. Mike and Mark are going to talk about some of the verticals that they have within their businesses. We're also going to continue to invest in the platform. I mentioned over the last few years, we've invested hundreds of billions of dollars in our platform in terms of new products and capabilities, and we're going to continue to do that because that's what our customers want us to do. We're also going to continue to look for interesting acquisitions that are out there. Both Mark and Mike are going to talk about one that we've done in the energy business and some that we've done in the real estate business. Fundamentally, we're going to continue to do this by focusing on our core values. We're going to do the right thing for our customers, we're going to work with them over time, and we're going to make sure that we price and manage risk appropriately. Now I'd like to introduce one of my colleagues, Perry Pelos. I've had the privilege of working with Perry for the last 16 years. In particular, I watched as he's led and grown the commercial banking business for the last five. You will not meet a better banker than Perry Pelos. Perry. Thanks, Tim. It's great to have the coveted after-lunch spot, which we all appreciate. I really appreciate it because in California, after lunch means the stock market's closed, so my boss can't blame me for the decline in the stock price today. It's great to be here. I head the commercial banking group at Wells Fargo, and I'm thrilled to talk to you about our business. I'll talk a bit about some of our strategies, and how we go to market, and hopefully you'll walk away with some concrete knowledge of commercial banking, how we think about it at Wells Fargo, and how we talk to our customers and execute in the marketplace. First off, how do we define commercial banking? We define it at Wells Fargo as companies with sales of $20 million to approximately $500 million. D&B tells us there's about 65,000 companies in the U.S. that are in that segment, and we do business with about a quarter of those companies at Wells Fargo. Our go-to-market strategy is local, with dedicated relationship teams in the local market close to the customers. These teams allow us to cover a large array of industries over a broad geography. As you can see from the pie chart, we cover every major industry group, and we're well-diversified among all industries in commercial banking. We have 135 commercial banking offices around the country. As Tim mentioned, we do business, and we think about our business locally. Our relationship managers are focused on their local needs of their markets. We ask our relationship teams to think about the business life of their communities, but also the social life and the philanthropic life of their communities. We see our customers in their place of business, but also in their places of worship. We see them on the ball field. We see them at the Kiwanis Club. Our relationship managers sit on the local boards of organizations that our customers care about. Because of that, we are able to establish deep relationships and really understand what the needs of the customers are and serve those needs over a long period of time. Because of our broad distribution network, we are also able to serve customers in many other ways. Most of our customers access us through multiple channels. Carrie talked about her business in terms of the retail customer and how they want to access Wells Fargo in multiple ways. The commercial customer is no different than that. They want to access Wells Fargo in a variety of different ways. Hopefully, that person is okay. One of those ways that they try to access the bank is through the store channel. Because of our close partnership with our community banking partners, we are able to give a one Wells Fargo experience to those customers, whether it is for their personal needs or for their commercial needs. Many of you may look at this map and think that scope for additional growth is somewhat limited here. I would tell you that that is a wrong way of thinking about it, because we do not think about this map in two dimensions. We think about this map in three dimensions. We think about it in terms of the depth, the depth of the relationships that we have with customers and the depth at which we are penetrated in these markets. There is a couple of additional ways to think about the growth here. One is through cross-sell. Many of you have heard us talk about cross-sell for years. We think we can do a lot more things with customers in commercial banking and go much deeper into the relationships that we already have. Because of the great platform that we have, we are able to attract and retain very good people, and they, in turn, attract and retain great customers. Year after year, we are able to bring in more businesses into the Wells Fargo family, and that is yet another way to grow. We have got years ahead of us before we run out of growth opportunities in the U.S., let alone what we can do in other parts of the world. Commercial banking business has grown pretty consistently over time. Here, I am showing you three years of growth, loans, deposits, revenues. Quarter after quarter, year after year, the commercial banking business shows steady growth. This growth is the result of how we go to market. It is the result of how we think about relationships, putting the customer at the center of what we do, and we start with listening to the customer. We listen intently for what the needs of a customer are, and then try to serve them through introducing them to our partners throughout the organization, regardless of where that takes us. The commercial banking business is very closely aligned with the rest of the company. You have seen a chart like this before from Tim and John in the quarterly updates that they have given you. But as you can see, the distribution of our revenues mirrors the distribution of revenues at Wells Fargo. Half of it is from net interest income, half of it is from everything else. Everything else is mostly annuity type revenues, like treasury management. They are repeatable events that happen day in and day out. As you can see from the bar charts, this has been fairly consistent for the past 3 years. If you go on even beyond that, it has been consistent for years before that. I talked to a few of you at the breaks, and you asked me about how pricing is competitive in today's market and whether I have a concern about that. This is why I do not have a concern. Because if the only way we made money was on the loan side, I would be concerned. But we have so many other things to do with customers. We look at it from a relationship standpoint. Actually, our customers do it that way when we frame it up for them. It is not just a loan negotiation, it is a relationship negotiation. Because we have a loan with a customer, and we do all these other things with them, the customer thinks about pricing in that context. They may be able to compare what we are offering them on a loan with what a competitor is offering them on a loan. But when you talk about the context of the overall relationship, that changes the dynamic. That is why I am not concerned about our ability to continue to compete in all markets, regardless of how the credit market is and regardless of how competitive the credit market is. Now, speaking of credit, over three-quarters of our customers are borrowers. More importantly, over 90% of our customers in commercial banking are treasury management users. Danny is going to talk more about that in a little bit, but that is a core product for our customer base in the commercial bank. Of our borrowers, 80% of them, we are the only bank. Think about the power of that in terms of a relationship. Think about the importance that we occupy in the mind of the customer to be their sole source of credit. We are very important to our customers. In most of those cases where we are the lender, the loan size is under $25 million. So we are an important provider of growth capital to middle-market companies throughout the country, and they look to us for advice on other things. We occupy a very important space, and through the relationship approach that we use, we are able to be there as these companies grow, providing them products and services over long periods of time, and making sure we can help them succeed financially. So beyond the core products that we have in credit and treasury management, there is a whole host of other things that we do. You saw a slide from Tim that is a lot like this one. This is the set of other products that we sell to commercial customers and the distribution of those products within our commercial customer base. As you can see, we have scope for additional penetration across many different products. But the important thing here is not that our customers use 10 products on average, because they do. The reason they do is because of our go-to-market strategy. The reason that they choose us for products and services is because of our relationship approach, our focus on the customer, our listening skills, and our ability to serve them over a long period of time. The great thing about this is that when you serve commercial customers well, they honor you with their business for a long period of time. The average customer has been with our commercial bank for 16 years. That is true in other parts of the market as well. That is what makes market share in commercial banking the key to success. Because it is so hard to get, and it is so hard to lose. Middle-market companies do not change banks very often. If you can move share, you can really win in this business. It is very valuable. When we talk about market share, this is the latest TNS data from middle-market market share. They measure this every year. Wells Fargo is number one in middle-market share across the U.S. Number one in terms of the lead bank choice, number one in terms of the total market. More importantly, we grew market share from 22.1% to 24.5% in the last year alone. That is a huge jump in market share. We did that without changing any of our credit standards. As Tim mentioned, that is a golden rule at Wells Fargo. How did we gain such share? We gained it by having a great distribution network, having great people, attracting more good people to our distribution network who in turn brought customers. I cannot tell you that we are going to be able to replicate this every year, but this is a good indicator of the power of our model. This is in addition to cross-sell. These are new customers that we will be able to cross-sell. You guys can do math really well. If you apply cross-sell ratios across market share, it is a very powerful combination of things. Beyond our relationship-focused teams, we have some industry-specific teams that are embedded within the commercial bank. I wanted to highlight a couple of those teams. The way that these teams operate is helping the local teams in industry-specific sectors to make sure we can deliver a customized local solution to that customer. Let me tell you how that works. Let us take the food and agribusiness unit as an example. This team is the largest lender to the food and ag space in the United States outside of the government-sponsored entities. Yet we are still less than 10% of the market in terms of share. There is huge scope for growth. We are larger in the West, where we traditionally have managed this business. We have got great upside in the East in this particular business. There is a customer out there called Aurora Cooperative. Aurora Cooperative is a grain cooperative, a 106-year-old company, and they came to us with two things they needed to work on. One was to simplify their capital structure. It was too complex. The second thing was they have thousands of members in this co-op. They needed to manage their hedging strategy for the grain they took in for their members more effectively. Their business has gone from regional over the past 106 years, to national, to international in nature. They really needed a bank that could help them grow and manage these increasingly complex set of risks. We put together a $300 million credit facility, syndicated credit facility, a $90 million trading facility to help them manage the ins and outs of the grain business more effectively. We added treasury management services, international treasury services, equipment finance services. We also introduced the members to our business banking group in the community bank to allow them to have access to multiple sources of financing beyond their traditional sources of financing. A true one Wells Fargo solution, and an example of what we can do at Wells Fargo that many of our competitors either don't have the capability or the coordination to do. Let's talk about another business within the industry specific teams, the technology banking group. We started this business in the 90s to focus on this sector. We've added the life science focus. We also added the clean tech focus. We've added a few more people in the geography. Let me give you a couple of examples of the things that this business segment is doing. An example of a customer is Tesla. Tom mentioned that they do some work with Tesla. We bank them on the commercial side as well. We're the main operating bank. We do their treasury management. We do their international treasury management business. We also do foreign exchange for them. We're talking to them about security solutions for their business as they continue to grow. Another example is a company called OpenTable. Some of you may be using them to make your dinner reservation for tonight. We're their sole credit provider, treasury management, trust and escrow business, and we're also talking to them about securities opportunities. As these businesses grow over time, the nature of the relationship changes. These technology companies grow much, much faster than the other businesses that we bank within the Wells Fargo Commercial Bank and provide great examples of opportunities that we have. We think those two companies and many, many more are examples of things we can do over time in this segment, close to the customer with a local team, paired with a technology banker to make sure we deliver a competitive solution close to the customer in these marketplaces. In the couple of minutes that I have left, I want to talk about two segments that I think a number of you had an interest in a couple of years ago, and just tell you how we're doing with those segments within the commercial banking group. The first is international. As you can see, we've had pretty good growth in the international segment, within the commercial banking group. Many of our customers that were regionally focused in the past and were thinking about going nationally, those same companies 20 years later are thinking about going global. The world is a much smaller place today, companies have access to new markets and new opportunities. They want to do it with a financial partner that they know and they trust, and that's where we come in. An example of that would be a company called Menasha. When you sent your mother flowers for Mother's Day, and all of you did, right? When your mother got the flowers, they were stuck into this green foam at the bottom. Menasha makes that foam. Always wondered what that stuff was, right? This is a company that started out as a regional company, grew internationally as they started sourcing internationally, and now sell more than 50% of their revenues are now international. So as this company grew, they were with a regional bank. Their needs got larger and more complex because they were sourcing overseas. They needed to do business overseas. They needed international expertise. They came to Wells Fargo because what they wanted to keep was a local relationship. But what they needed to have was the ability to access global markets. We could give them both. We gave them a local relationship manager and the expertise of a global bank. They moved all of their business to Wells Fargo. We did a multicurrency revolving credit facility, international treasury management, full treasury management domestically, and equipment finance, and also added foreign exchange. Complete relationship, gave the customer exactly what they wanted, helping them grow over time. Finally, our investment banking partners. This is a company, Premier Healthcare Solutions, headquartered in San Diego. We began a relationship with this company in the mid-1990s. A traditional commercial relationship. They were a small company. This company provides information and consulting services to hospitals and healthcare companies. As they grew, and this company was growing very, very quickly, our relationship grew. Providing credit, treasury services, all the other things we typically do within commercial banking. But again, the growth trajectory of this company was really taking off, and so it was growing far too fast to rely simply on debt alone. They started talking about other solutions. We introduced our capital markets partners three years ago. In September of 2013, we were named joint book runner on this company's IPO, which was 13 times oversubscribed. It was the largest non-sponsor healthcare IPO in the past five years. An example of what we can do working together with our securities partners. It used to be that the end of the rainbow on relationships for us stopped at the securities business, but since the merger with Wachovia, we were able to add a lot of very good people in that business. Now working together on a relationship basis, the rainbow's been extended, and the rainbow has become a circle, because it doesn't end with this. We just created a whole bunch of wealth management prospects for David Carroll's group here. So it's a circle. That money comes back in, and we can help them invest it and help them be more successful in terms of what they want to do personally as well. I gave you some things to think about relative to our go-to-market strategy and some examples of how we do it in commercial banking. Some of those things are here. But you still may be struggling with what makes us different, what makes Wells Fargo different in commercial banking versus all the other competitors. I give you these things. First off, our product set. We have the broadest product set geared towards the middle market and integrated than any other bank in the country. No regional bank can meet what we have. No global bank knits it together for the middle market the way that we do. We have the broadest distribution network. No other bank has offices in New York, Chicago, L.A., and also Green Bay, Des Moines, and Birmingham. We've got the broadest distribution network. Because of those two things, we're able to attract and retain excellent people. By attracting really good people, you attract more customers because we're in a relationship business. Middle-market companies want to do business with people they know and trust, and they've known and trusted for a long time. If you're a commercial banker, you want to be on this platform. This is the best platform in the U.S. You want to work for Wells Fargo, and you want to bring your customers here. If you're here, you want to stay here because this is the best platform to be on. You've got huge opportunities to grow your career. The people we have in our business, our senior management team, our 28 top senior managers have been here at least 20 years, mirrors that of other wholesale businesses. We've got great people. It's not only the people in the business, it's the people around the business that matter. This is what makes Wells Fargo truly unique. Tim Sloan has sat across the table from customers at closings before. Mike Loughlin, our Chief Risk Officer, has run a commercial business before. Carrie Tolstedt, who runs our consumer banking group, started out as a commercial banker. John Stumpf was running the workout group when I joined the bank 27 years ago, so he knows how to collect loans as well as make them. If I screw this up, they're going to know. That's really important, and that's really different than all of our other competitors. Finally, our culture. Our culture makes us truly different. We put the customer at the center of everything that we do at Wells Fargo, and commercial banking is no different. If our customers succeed financially, and we help them succeed financially, we will succeed financially. Hopefully, I've given you a few things to think about relative to the commercial bank. It's a great business, and it's one that we think has a lot of upside for growth at Wells Fargo. Let me just introduce Mike Johnson, who heads up the Corporate Banking group. Thank you. Well, good afternoon. For those that I haven't met, I'm Mike Johnson. I run corporate banking at Wells Fargo. I'm delighted to have the opportunity to tell you a little bit about our business. What I plan to do is a very broad overview of corporate banking and then do a little deeper dive on the energy business, which is one of the industry businesses that's part of corporate banking. First, a quick overview. Corporate banking consists of a group of different businesses. Most of those are industry-focused. We serve both public and private companies, both investment-grade and non-investment-grade profiles. We operate principally in the U.S., but we have a growing presence in Canada. We're pursuing that opportunity jointly with the international group. We've just opened our first office in the U.K. as part of our energy business. We have over 2,000 relationships, an average relationship tenure with us of 18 years, and that's allowed us to develop very deep relationships with our customers, as evidenced by the 10 products per relationship you can see on this slide. Something we're very proud of. Many of our clients are large corporates. They have significant scale. As a result of that, they have very complex financial service needs, and many of them have very significant capital markets opportunities. We've learned that the best way to serve those clients is around industry-focused businesses. You can see those groups across this slide. These are the individual businesses that comprise corporate banking. Each one of those has its own management team that's dedicated to running those business. Having an in-depth industry and sector focus helps us understand our customers better, and when we understand our customers better, we can serve them better. Having that same in-depth understanding is also absolutely fundamental to how we manage risk. Not only the risk of bringing on new relationships onto the platform, but the ongoing credit exposure and operating risk with our existing clients. You've heard from others about the importance of our relationship teams being close to the customers. Our 700 team members also operate through a regional office network, again, principally in the U.S. The office in Calgary, the office in Aberdeen, Scotland, are both part of our growing energy platform. Tim and Perry have both talked about our client-focused relationship model, so I'm not going to go back through this. What I would add to what has been said is that one of the reasons we're very successful at this is because we've been doing it for a very long period of time. Our people know how to do this. Perry and Tim both talked about the importance of the people doing it, having experience and longevity with the company. That's true in corporate banking as well. The average tenure of our senior relationship managers in corporate banking is 12 years. Again, they know how to do this. I mentioned that many of our clients have significant capital markets activities. To serve those clients, we work very closely with our colleagues in investment banking and capital markets. In fact, we have a dual coverage model where industry-focused coverage teams and investment banking work closely with the relationship teams in corporate banking to jointly cover these clients. But whether it's a syndicated credit facility, a complex treasury solution, or accessing capital markets, these teams work closely together with the goal of having an integrated, seamless solution for the client. We work very hard at this, and I think you'll see in the next few slides that we're executing pretty well around doing that on behalf of our customers. This slide shows some important metrics of how corporate banking has done over the last three years. You can see double-digit growth in all of these metrics. That's resulted in compound annual net income growth of over 15.5% for the last three years. Again, this is something we're very proud of. Both John Shrewsberry and Tim talked about the environment we've been operating in. Especially in the context of sluggish economic activity, low interest rates, these are very good numbers that we feel good about. This slide shows the composition of revenues in corporate banking. It's a little different than some in that you see that about two-thirds of our revenue comes from non-interest income. That's also very broad-based. I think that speaks to the fact that we're, again, back to the longevity of the relationships we have with our customers, as well as the success we're having with cross-sell. I would also highlight the importance of investment banking and capital markets to our business. It's about 25% of the revenue in corporate banking. The capital markets revenue is not only an important contributor to our results, but has also resulted in us establishing ourselves as a market leader in many of the businesses in which we operate. You can see that shown on this slide. This speaks to several things. It speaks to, I think, our industry expertise. It certainly speaks to the execution capability of our team. I think the most important part is what this demonstrates that our clients are viewing us as a trusted advisor, and that only comes about through deep relationships. Those deep relationships result in cross-sell opportunity. I've talked about the success we're having with that. 85% of our clients have a credit product, 73% use at least one treasury management product. You can see on the slide the penetration rates in some other important product areas. These are good penetration rates, yet we feel like there's a lot of opportunity to continue to grow this. We would grow it by adding more penetration to clients not using these products. But an even bigger opportunity is the opportunity to take the clients already using these products and expand it within those product families. I think one of the best examples of that is treasury management. Again, 73% of our clients have a treasury management product, or said differently, we touch 73% of our clients with that product, but we don't have 73% of their business. There's a lot of opportunity to grow that relationship just in treasury management alone. You'll hear more about that from Danny Peltz in a few minutes. Deepening cross-sell is part of our growth opportunity. There's several others listed here. The one I would highlight is the first one. That's just growing the share of the relationships where we're viewed as the lead bank. Today, 22% of the relationships in corporate banking, we're the lead bank for 22% of the relationships. This is a number that we've had great momentum with, that we've been focused on, and it's continuing to grow. That's something we work, again, very closely with our investment banking and capital markets partners on. As you would expect, being that lead bank not only positions you for more advisory and capital markets opportunities, but positions you further for additional cross-sell. It's a very key focus for us. As I mentioned, I want to spend a few minutes on the energy business. This is a business we've been in for more than 40 years with an industry-dedicated team. Obviously, it's a period that spans numerous market cycles. We bank companies of all sizes in this business. We also bank companies across several sectors, the upstream sector, midstream, services, and equipment. We have a very deep and broad platform. You heard Perry talk a bit about that. In commercial banking, we have over 400 team members in wholesale banking dedicated to the energy business. This includes not only the people in the energy business within corporate banking, but the industry-focused teams we have in investment banking, capital markets. Many of our product groups have energy-focused teams. We have got energy specialists in our risk management group, including the largest staff of petroleum engineers in the banking industry. A very broad, very deep platform. We are a market leader with over 500 relationships and an average of 8 products per relationship. You can see in this pie chart the composition of our business. It is a little over half in the upstream sector. That is primarily reserve-based lending, with the balance split between midstream business and energy services and equipment. We think one of the reasons we are successful in this business is because we bank the entire value chain in the sector. By banking each one of these segments, it allows us to understand the industry better, the segments better, and therefore, we can understand the challenges, the opportunities that our clients have, and we can serve them better by being active and being a leader in all of these sectors. Another way to demonstrate our leadership is the success we are having helping our clients access the capital markets. You can see here very impressive results. We are number 1 in many important categories. One in particular I would highlight is the platform we have for serving master limited partnership or people using master limited partnerships. We have got very deep product knowledge, structuring, finance expertise within our investment banking and corporate banking teams. Very broad distribution, both institutional and retail, industry-leading research in Wells Fargo Securities. Part of that broad distribution includes a terrific partnership between Wells Fargo Securities and our retail platform that you heard David Carroll talk about this morning in Wells Fargo Advisors. These leadership roles come about not just because we are active in the business, not just because we have got expertise in the industry, but also because of our execution capability. It really gets back, again, to the relationship and the fact that the customers are trusting us with these strategically important activities. We have become a leader in the business, but it has not happened overnight. It has come about, we have been working at this for a very long period of time. We have been building it throughout the cycles. It has come about because of our people. We have got a very experienced group of people doing this, both in corporate banking and investment banking. They are well-known in the industry. They have got great reputations in the industry. They have got great reputations with our clients. We have had a very consistent and reliable presence in the business, again, through many cycles. As you would imagine, it is when the times are a little tougher that the clients appreciate that you are being there for them. That is where we really can grow market share because others retreat, and we are there to support our clients. Last, we have got a very broad and very deep platform. You have heard an awful lot about that today, but it is certainly key to all of our businesses in corporate banking, too. That broad platform allows us to help our companies grow, but in particular, helps them grow regardless of what stage they are in in their business. We bank a lot of startups in the energy business that have needs unique to that stage. Then we can follow them through their growth. For larger companies, there is not a product or service they need that we cannot provide. Again, we can span the full range of activities to support a client's growth. You heard Perry talk about it. Example for us I will use is a company called BreitBurn Energy. This is a client we started banking in the mid-1990s. They were focused in a single basin, in terms of where their production was. We were their sole lender. We had a revolving credit facility with them. We did basic treasury management for them. They grew significantly over time through acquisitions. We assisted them in every one of those acquisitions with both capital and financial advice. We were an arranger of the capital they needed. We were also a principal in providing that capital, both as a senior lender, but also we assisted them with growth capital. We were able to provide them with second lien financing, and even direct equity that we did along with some other private equity firms that we helped them arrange. They grew. They ended up taking two of their entities public. We assisted both of those companies with their IPOs as a book runner. Fast-forward to today, and we are not only the lead bank still for this company, providing all their treasury management, we are a major counterparty for them on the hedging side. But we have assisted them over the years with a series of follow-on equity offerings for their two public companies and numerous public debt offerings for their entities. A great example of taking a small company and helping them grow through the years, and it all comes about because of the capabilities we have, but more importantly because the client viewed us as their trusted advisor and kept turning to us to help them. This slide shows the financial results in our energy business, and as you can see, again, very strong growth in all the metrics. The last three years, we have grown our net income by 24% a year. Same slide again on composition of the business. Similar to the broader corporate banking business, very strong contribution from non-interest income, a little over half of the business for the energy group. Before I wrap up, I wanted to spend a minute on the BNP acquisition. Recall, this is an acquisition we made about two years ago. It was a $3.5 billion purchase. It consisted of a North American energy platform for BNP Paribas. What was attractive to us about it was not only the portfolio acquisition opportunity, but it was a terrific franchise. We knew the people well from having been in the industry. We knew they had the same intense client focus that our team had, so it was a great cultural fit to get those people. We added a number of new relationships, and a big part of our rationale was, again, not only growing and adding to our asset base, but having new relationships we can plug into our broad and deep platform, to have additional cross-sell opportunities. You can see we have had, in the chart on the right of this slide, success with that. In the first year, we were able to increase the average number of products those relationships were using from four to five. There's still a lot of opportunity left to get that up to the overall average of 8 in the business. In conclusion, I would just wrap up by saying we've got a great business, and we're a market leader. Even so, we've got great opportunity to continue to grow it. Part of that's because we're in a very dynamic industry, an industry that's capital-intensive, and it's got very good long-term growth prospects. We're well-positioned to take advantage of that by being where we are today, yet we're not standing still. We're continuing to invest in our platform. We're expanding our product and service capability. We're also expanding our footprint. I mentioned the office in Calgary, which was opened about a year and a half ago, and we've just recently opened up the office in the U.K. We're continuing to invest in the business, and as we look forward, we continue to see this as a major growth opportunity still, not only for corporate banking but for Wells Fargo. With that, I'm happy to bring up my colleague, Mark Myers. Mark and I have worked together for the last 30 years, and he's going to tell you about our industry-leading commercial real estate platform. Thank you. Mike, thank you, and congratulations on all the success you're having with the corporate banking. Hello, my name is Mark Myers, and I'm honored to talk to you about commercial real estate, a business that I've been associated with during the vast majority of my 30 years with Wells Fargo. My message today is to share with you the breadth and depth of our commercial real estate platform, our competitive advantages, and the opportunities we have to continue to grow this business. Our commercial real estate platform and business benefits from the enviable position of being the industry leader. We consistently rank number 1 for commercial real estate loan originations. We're the largest commercial mortgage servicer. We have a leading position in the debt and equity public and private capital markets, and we are also fortunate to have the preeminent real estate investment banking firm, Eastdil Secured, with 40 years of deep knowledge and experience providing property sales, debt placement, and highly specialized advisory services. In commercial real estate, serving our clients is at the heart of everything we do. Each day, we come to work to generate ideas, deliver solutions, and provide capital to help our clients grow and succeed. Our unique industry leadership position is a function of our deep and comprehensive commercial real estate platform, a time and cycle-tested culture, high-quality team members, deep and long-term client relationships, and Wells Fargo's longstanding commitment and continuity to this industry. We have close to 2,000 client relationships. Our CRE clients include experienced and well-regarded regional and national developers, investors, and operators, public and private REITs, real estate investment management and private equity firms, public and private home builders, and strong nonprofits that focus on community development in support of Wells Fargo's commitment to economic development, job creation, and affordable housing. We built our high-quality customer base through a rigorous client selection process focused on management's track record, being cycle-tested, and customers who share our risk philosophy. Our platform has a robust credit product offering, providing a client solution through the capital stack with a combination of balance sheet and capital markets execution. We are product agnostic. We focus on providing our clients with the best available and highly customized solutions. Finally, our platform is enhanced by a wide range of product expertise. We have specialty units built around REITs, senior housing, hospitality, home builders, and affordable housing and capital markets. Our corporate culture of collaboration and teamwork allows us to tie this very impressive platform together and allows us to cover our clients more comprehensively. Executing on our core strategies of leveraging our comprehensive platform, emphasizing a customer-centric relationship model, and expanding and deepening client relationships has allowed commercial real estate to post double-digit loan, revenue, and deposit growth. In turn, our pre-tax, pre-provision, and net income growth rates have exceeded 23% and 37% respectively over the past three years on a compounded basis. With our commitment to this business through cycles, we are able to grow organically as well as take advantage of foreign banks exiting the commercial real estate business, allowing us to make a number of opportunistic acquisitions in the U.S. and the U.K. Importantly, we achieved these results while adhering to our very strict credit standards. We are able to maintain an 80/20 level of revenue diversification between interest and non-interest income. This revenue mix reinforces the significant opportunity to further cross-sell and grow our non-interest income. Let me highlight our partnership with Wells Fargo Securities and Eastdil Secured. We were extremely active last year as a leader in the public and private debt and equity capital markets, allowing us to generate in excess of $200 million of revenue for our commercial real estate business. Commercial real estate's dominant market position, Wells Fargo's financial strength and experience, provides stability during all market cycles and gives us an enviable competitive position. Our competitive position is enhanced by team members who bring deep local market expertise, cycle-tested credit judgment, long-standing industry relationships, and the talent, teamwork, and platform to creatively structure and execute complex transactions. Our long-tenured credit culture and strong risk discipline have been critical to the success and stability of our franchise. Wells Fargo's size, stability, and commitment to the industry is a significant advantage, and our dominant market position, as you see on this slide, is a validation of our time-tested relationship model, client-centric approach, and a strong adherence to risk and portfolio management. You should know that our portfolio is geographically diversified, with our largest concentration in California at 25%, New York, Texas, and Florida all at 8%. Additional diversity comes from our asset product mix, with 22% of our portfolio secured by office collateral, 16% secured by multifamily assets, and 11% secured by retail assets. We were very active, yet very prudent lender through the financial crisis. Wells Fargo's financial strength, our industry commitment, our track record provides reliability and stability during all market cycles. This level of commitment is critical to our clients who value relationship with lenders who will support them during a challenging time in the cycle. The broad CRE platform and Wells Fargo's product capabilities are delivered through a national platform with 35 offices located throughout the U.S. and an office in Toronto, Canada, and London, England. Consistent with Perry and Mike's businesses, our relationship managers are located close to our clients, helping us to develop and maintain strong relationships, and they as well provide local property market knowledge and insights. Our people, again, like so many of my colleagues have pointed out, remain our key competitive advantage. As this slide depicts, we are extremely fortunate to have long-tenured team members with depth and experience originating, underwriting, and managing commercial real estate loans through many cycles. Having in-depth industry, market, and customer knowledge is key to managing risk associated with new customer acquisition. Like you've heard from a number of my colleagues today, we put our customer first. Our relationship manager oversees all aspects of the customer relationship, and they help us leverage our comprehensive, fully integrated platform. Our corporate culture of collaboration and teamwork allows us to deliver unparalleled advice and execution. Although CRE is predominantly a credit business with 93% credit product penetration rate, we have a robust cross-sell effort, and our clients count on us for a full range of banking services, including rate risk management, capital market services, insurance, and permanent debt placement. A highlight of our cross-sell success and depth of our customer relationships is the fact that the top 50 commercial real estate credit relationships utilize 40 different bank products and have an average tenure with Wells Fargo of 17 years. We certainly know our clients, and our clients know us well, which we believe lowers credit, reputational, and operational risk. Notwithstanding our leading market position, we continue to look for opportunities to serve our existing clients and add new ones. We've expanded our geographical footprint by opening offices in Toronto and London. We recently launched two divisions focused on home building and senior housing following the success we've had with our hospitality unit. We continue to source, acquire, and/or finance opportunistic loan purchases from de-leveraging U.S. and European banks. Let me touch on our August 2013 acquisition of Eurohypo U.K. commercial real estate business, which included a $4 billion loan book and 45 new team members. Our acquisition rationale was a function of obtaining high-quality loan assets, high-quality client relationships, a very experienced and well-regarded relationship team with 20 years of operating history in London. Good news, we're off to a great start. In the 10 months since the close of the acquisition, we have originated and closed $2 billion of loan commitments. We're excited by the prospects for loan growth in the United Kingdom, as well as opportunities to cross-sell this new client base. This slide highlights our relationship model and ability to leverage our platform to generate significant cross-sell activity from public commercial real estate companies. In each of these four cases, our relationships began on the credit side with the pre-public entity. Capitalizing on our strong customer relationships, coupled with our Wells Fargo Securities capabilities, we obtained a leadership role in the public offering and subsequently grew our cross-sell activity as we fulfilled the growing needs of these public companies. I should point out that our dedicated REIT practice is well-regarded as we bank 75 of the roughly 100 REITs in the universe, and this positions us well to continue to grow our cross-sell and fee income. This slide highlights our relationship model and our ability to provide private clients with a full range of financing solutions, including a balance sheet product, a CMBS loan, potentially a syndicated transaction, or in fact, we might provide advice relative to a property sale or a debt placement. The key is to understand our clients' needs, take a long-term view, and offer a range of options. In summary, our CRE business is deep and best-in-class, supported by team members, our scale, product completeness, terrific customer relationships, and a strong track record of execution. We're expanding our international capability to serve our U.S. customers, and we expand as well to selectively bank local commercial real estate companies that fit our model in both Canada and the United Kingdom. We're excited about the growth opportunities in front of us, and we're proud of our franchise. We're proud of our abilities to continue to help our clients succeed financially. Now let me introduce Danny Peltz, a longtime friend and colleague who runs our best-in-class treasury management business. Danny. Thanks, Mark. Thank you. Hi. I'm Danny Peltz, and I'm going to talk to you about treasury management, a business that we've been at Wells Fargo in for the last four decades, and I've been involved with for the majority of my 24-year career. First, a primer on treasury management. Treasury management is a series of products and services that our customers use to manage their cash position. They include collection products, payment products, information products, the ability to be able to invest their cash and get visibility. You can see on the left-hand side of the slide, a listing of some of the products and services that we offer to our clients. We have over 2,000 different products and services or SKUs that we offer to our clients that we combine in a way to make their lives that much easier. We offer these products to our customers across all of our relationship groups here at Wells Fargo Bank. So clients can range in size from $3 million-$5 million, all the way up to the Fortune 50, and we provide that geographically as well as to particular industry verticals. At Wells Fargo Bank, the treasury management business is a multibillion-dollar fee-based annuity business that has strong risk-adjusted returns and has the added benefit of attracting low-cost balances and deposits. As Tim mentioned a little bit earlier, 85% of our customers in Wholesale Bank use treasury management, and so we understand how important that is to our clients because we touch them every single day. If we're able to be able to offer a great product with great service, it gives Wells Fargo the opportunity to be able to cross-sell them more and more products across our entire platform. The great news is that every customer all across America has some form, business customer all across America has some form of cash management need. If they meet our criteria in order to be able to bank them, we could provide it, and they're a prospect for us. We have a lot of competitive advantages in the marketplace, but first and foremost are our people and our culture. The 21 people who comprise my operating committee have over 20 years of experience here at Wells Fargo Bank. That's particularly important because we're uniquely organized within the industry. We're vertically oriented, so we have the entire sales, service, and delivery model, including the management and creation of our products and our channels, as well as the management of our payment processing platforms. Since we are servicing all the relationship groups, whether or not that's a wholesale banking client in corporate or commercial, that's a business banking client that's within our community bank, or whether or not that could be a family wealth client in wealth brokerage and retirement. We need to be able to wrap our business model around our relationship groups way that they deliver their services. The teamwork that we're able to create through 20 years of working together makes that a lot very easy. We also have a culture of continuous improvement. We are really good listeners. In fact, we pioneered the use of ethnography in commercial banking. That's where we go into our clients' locations, we watch what they do, we listen to what they say that they do, we talk to their management to find out what they think that they do, and everybody hopes that's all the same thing. Typically, that's not the case. But what that enables us to do is to really understand our customers' workflow and how they interact with one another, and of course, how that extends into the bank. We also have 8 advisory councils, geographically dispersed, where we ask customers to commit to 2 years, and we meet with them twice a year. That provides us feedback in terms of products and services that they're looking for, as well as for us to be able to provide them with demonstrations of some products that we're looking to be able to build and deliver in the marketplace. Lastly, we have size and scale. Payments are inherently a technology-based business, which means high fixed costs with low marginal costs. Our size and scale enables us to be able to invest in those platforms and add to those platforms on a continual basis, outstripping our regional competitors' ability to be able to do so. As you've seen from the other relationship groups, we put our people where our customers are. We also put our physical products, our physical collection products, close to where our customers are as well. That includes our cash vaults as well as our lock boxes. When you have clients in almost 99% of the 3-digit zip codes here in America, you need to be everywhere, and that's exactly where we are. One way that we're able to deliver that is through our Commercial Electronic Office, or CEO for short. That's one of our flagship products that we offer to our clients. Let me orient you to this slide. What this slide is illustrating is that over time, we've added more and more feature functionality and products and services to our portal. In fact, for the last 55 quarters in a row since we launched in June of 2000, and when we launched, we were the first commercial bank to offer a single sign-on financial services portal in the marketplace, we've been adding feature functionality, and the vast majority of that feature functionality has been customer-directed. As you can see also on the slide, last year, we moved $11.5 trillion. So our customers are using that platform a lot. If you look at the last 4 years, since 2010, we've moved over $40 trillion and only incurred less than $1 million in fraud losses. That's because we are focused on authentication, information security, and client education. The CEO has been a phenomenal platform for us. One of our strategic goals has always been to increase the amount of users within the companies that we support. Because the deeper we can embed ourselves into our customers' locations, the better off and the stickier our business is going to be. You can see over time, that's really been able to grow quite a bit. The CEO is not just for treasury management, though, even though it's an anchor client. Only 40% of the products and services that we offer are treasury management-oriented. The remaining 60% are products and services offer over all of our wholesale platform, including things like insurance, trust, international, et cetera. While the CEO does a lot of things really well, there are three things it does exceptionally well, and that's cross-sell, cross-sell, and cross-sell. The client feedback on our platform and our products has been phenomenal. This slide shows the results of a survey that Phoenix-Hecht performed recently. Phoenix-Hecht does independent third-party research where they go out to our clients and our competitors' clients and gather feedback about how we do in customer service, how we do in relationship management, and how our products and services are received in the community. These results are clearly the envy of the industry. Our business model is really centered on our customers. We put the voice of the customer at the center of every single thing that we do. You've heard that consistently throughout the day. All of our business units do that. It's the only way that we know to be able to succeed, is by letting them guide our development efforts and where we put our investments in general, as well as where we place our people. A few things I want to point out on this slide. First thing we hear from clients is, we want it to be easier to do business with. Since the merger with Wachovia, we spent the last 2 or 3 years really focusing on that, investing in people, products, and tools to make it quicker for them to be able to add an account, to add a location, to add a store. Basically, to do anything that they need to do with us on a daily basis. Another thing I would want to point out is our build versus buy philosophy. We tend to be builders. We listen to what our customers are saying, and we want to be able to provide an integrated solution that cuts across all of our wholesale products and services, so we can provide a consistent experience and be able to quickly react to our clients in terms of what features and functions that they're looking for. We're not standing still. We're continuing to build for the future. We were the first bank in the market to offer mobile solutions to our commercial clients back in 2007, and that's given us some unique insights into the behavior that they have on those mobile devices. In fact, did you know that people reach for their smartphone over 150 times a day, and that it's typically within 6 feet of where they are? You're more likely to know that your phone is missing than your wallet. That's provided us insight into recognizing that we can't just build for the PC anymore. We have to build for the tablet, the phablet, the smartphone. When we think about building, we think about three things. We think about people, we think about screen size, and we think about situations. We're building our next generation CEO platform to be able to deliver across all those different form factors in a consistent experience. When you have over 80 different products and services, you don't want to build that multiple times. You want to be able to build once and deliver to many. We believe that we're positioned to grow share, and we've been growing share consistently. In fact, last year, we grew at twice the rate of the industry. It's not just bringing in new customers. I think you saw from Tim's slide earlier, I mentioned 85% of our wholesale clients currently use treasury management. We still have a lot of opportunity just with them, notwithstanding all the business we can bring in from the outside. We hear from our clients that they want to hear from us more. They are looking to us for advice in order to be able to make their businesses more efficient. We all know products don't sell themselves. We have significantly increased our sales force over the last three years. We are adding these folks into three specific areas. First is within our relationship groups, aligned with how they are organized geographically. We have put people in the commercial bank sales, corporate bank sales, business banking sales, and to support our wealth and brokerage and retirement business. We have also heard that our customers want deeper knowledge about their particular industries. I have a listing here. A couple of examples specifically would be healthcare, energy, retailers. It is by understanding how they do business, we can better apply the products and services that we have to be able to grow our collective business and make them more efficient. Lastly, we have been adding to our specialized product groups. Our commercial card, it has been an incredible growth platform for us, and it has some specificity around it that requires expertise. We have added folks there within our merchant card group. As we start doing deeper and tighter integration with our clients, from their ERP systems into our mainframes, into our client service technology, it requires a deeper level of expertise. We hire more technical people to be able to support that sale. Of course, you have heard mentioned a few times our international opportunities. We have been adding international treasury management folks as well. The only way that I know how to grow our business in a business-to-business environment is to add salespeople and people in markets. We think we have some opportunity with our products as well. Commercial card, I mentioned it is one of our fastest-growing products, and we see that continuing going forward. In the last five years, we have grown that 26% on a CAGR basis, and we are going to continue to invest in that platform. We have a proprietary solution that we deliver to our clients with an expense reporting system. We also are providing deeper integration into their accounts payable so that they can give us direct transmissions to be able to leverage that card platform. We recently launched the ability to be able to support our European customer base with euro and pound sterling capabilities. In terms of paper to electronic, our customers are looking to us to eliminate inefficiencies in their workflow. We have a great track record in moving from paper to electronic. In fact, in 2004, we launched the first thin client Check 21 solution in the marketplace, effectively giving our customers the ability to be able to make deposits right from their desktop. Since inception, customers have deposited over $2.5 trillion with us and 850 million items. You have heard a lot of talk about rising rates and its effect on our net interest margin, but rising rates actually affect our customers as well. In a rising rate environment, our customers are more willing to pay a premium for good products and services that enable them to be more efficient with their operations. In summary, I think you have heard this from a lot of the speakers, treasury management is fundamental to how we deliver products and services to our customers. It is fundamental to how they operate. We have been consistently investing in our products and our platforms to make sure that we have industry-leading solutions. We recognize when our customers are successful, we will be successful, and we are very focused on that. I believe that our best days are ahead of us. At this point, I would like to invite my wholesale partners up to answer questions. Chris Kotowski. Thank you. A question for Mike Johnson. You referenced the equity co-investment in BreitBurn Energy Partners, then you had a slide that showed 6% of the revenues are equity gains. I am curious, how does that work in a post-Volcker world? Going back to Norwest, you had a big equity business. Can you continue to operate that business in the same way post-Volcker, or do you have to do everything through fund vehicles from here on out? Well, prior to Volcker, we had been a relatively active investor in funds. Volcker effectively has limited our ability to continue to invest in funds. What we are doing very selectively is making direct investments in operating companies. That BreitBurn investment was an example of that, where we've invested in a specific company, which we can still do. That's ongoing? That is ongoing. Yes. We have a team within our energy business called Wells Fargo Energy Capital, and they focus on direct equity. They focus on second lien and growth capital. We've got a team of specialists that do that. One from Mike Mayo. Well, I think the good news, Tim, is that you are number three in syndicated lending in Americas, number four in global syndicated loans. You have really moved up in your investment banking league tables. I think the bad news is you are number three in syndicated loans, number four in global syndicated loans. I guess Why is that bad news? Well, I think the issue is how much does the expansion of Wells Fargo Securities increase complexity? Are you not concerned, being in your new role, that one day we will see a headline, "Wells Fargo has a $200 million trading loss"? It is going to be all over the press and the reputational risk. I know you know where this is going, but to what degree is the additional complexity of the expansion of the investment bank not worth it just for all the regulatory and reputational issues? Yeah, Mike, look, it's a very fair question, all kidding aside. I hope that we never have a headline of $200 million, let alone $20 million, right? Even before we brought Wells Fargo Securities onto the platform, we were a very diverse and complex business, right? Does having that broader set of products and services add to the complexity? Well, sure it does, right? It has to. It's the way you manage that complexity, which we're very comfortable with. The first is you need to have the right people in place. We've got a great team in Wells Fargo Securities. We've got a great team in risk that oversees that business. Then we have a great team in risk in Mike Loughlin's world that oversees that business. But I think that what's been really important in terms of broadening the relationship is how much more important we are to that customer base. Because one of the things that having that investment banking platform has had is it's upgraded our relationship with many of the large corporate customers that Mike talked about, so that we're talking to the CEOs and the boards more often than just the treasurer and the CFO. Not that those jobs aren't important, obviously. So it's broadened the relationship. So it's allowed us to get to know our customers. The better we know our customers, the less risk we have. So am I concerned about risk in that business? I'm concerned about risk in every one of the businesses that we have. But if we have the right people and the right process, we'll be fine. So in five years from now, where do you think the investment bank will be? What do you think it will look like? At JPMorgan's Investor Day, Jamie Dimon said, "Five years from now, Wells Fargo's investment bank will be a major force, a big competitor." It was a compliment to you guys, but also put you on the map saying, "Hey, you're one of the big guys now, or you will be one of the big guys." What do you think it'll look like five years from now? You know what, Mike? I'd love to tell you that I know, and I have no idea. I'm glad Jamie knows that and he's told us. That's terrific. But I think if you went back five years ago and we were all sitting here today, we would've said that the landscape in financial service would've never looked like it is today. So I have no idea what and how big our investment banking platform is. But I do know that we're not going to change our model. It's about customers, it's about clients, it's about people, and it's about doing the right thing. And I think that will allow us to grow. Where we end up from a league table standpoint, who knows? Thanks. Ken Usdin from Jefferies. To that point, Tim, just about your business has changed, but it's generically the same customer-focused business that it's always been. The landscape away from you has changed meaningfully. Right. I was just wondering if everybody maybe would be able to talk about the competitive landscape and how it's changed, and whether that you think that's had permanent damage to either your pricing and on the price side, but also credit and terms, as we're already starting to hear in some of these businesses this early in a CRE recovery, for example, just how the non-bank competition has really come in. So what's changing externally, and how is that impacting your ability to continue to have the same type of profit margins and growth expectations? Sure. Why don't I start, and you guys jump in. As I mentioned, I've been with Wells Fargo for 27 years. I've been through a lot of cycles. No matter how we want cycles to be different, they're always pretty much the same, right? That is that when you come out of a cycle and things start to get a little bit better from an economic and a credit standpoint, it gets a little bit more competitive. We expect that. I would have been shocked if it didn't happen. I would tell you today that it's nowhere near what it was like in 2004, 2005, 2006, and 2007, where literally we were telling people around here just to put your pencils down because this is nuts. It's not crazy today. I think one of the reasons why it's not crazy today is because there are different rules in place. The competition is a lot more rational, notwithstanding that there's a lot of unregulated competition. But the level of unregulated competition today is much different than it was in the last cycle. Guys, go ahead. Yeah. Just to add on to what Tim said, look, there's no doubt that it is more competitive today than it was a couple of years ago in the lending business. But in the relationship business, it is really not, because nobody does it like we do it. That is the game we play. They are playing checkers, we are playing chess. That makes it easier for us to compete because we are doing it differently than they are. When we talk to the customer about making a decision, we do not walk in there with a proposal on a loan and say, "Okay, they are at 2.5%, we are at 2.25%." We talk about, "Hey, we can give you a credit facility. We can give you a full treasury relationship. We can talk about foreign exchange. We can talk about what we can do for you internationally. Let us talk about what we can do for your business to help you succeed." That is how you win business in any kind of environment. The other thing I would say is there has been a lot of focus on how competitive the environment is, and there is more regulatory scrutiny and oversight. We love that. The harder the environment is, the easier it is to differentiate yourself. When things are easy, differentiating yourself is more difficult. So I think this is the kind of environment that Wells Fargo will do very well in. Go ahead. Yes, Vivek Juneja. Thanks. A couple of questions. Tim, the direct investments, equity investments in companies that you talked about, can you give us a sense of how much are you doing, what dollar amounts, and what your plans are? Because that is obviously something that is a little different, for one. For second, in the investment banking overall, from a product of a capability standpoint, where would you say you need more capabilities, more investment in terms of product to get yourself to the next tier, since you are normally one who is a top tier in everything you do? For corporate banking, you talked about international, what exactly are you planning to do in terms of expansion internationally? Mike, do you want to take the direct investment question in energy and then international? Go ahead. Okay. Go ahead. Yeah, go ahead. Size? Yeah. No, go ahead. Okay. I mentioned that we started off more in the fund investing. That portfolio in energy today is a few hundred million dollars, and we've probably done an equal amount now in direct equity investments. These are investment commitments, so total equity portfolio, probably in the $500 million-$600 million range in the energy business. We've done some direct equity in some other segments as well. Mark's done a little bit of it in his business. This is separate from what Norwest Equity Capital does and what Norwest Venture Capital does. Then, I'm sorry, then your international question was- Yeah. You said you're planning to expand. Can you talk a little bit about what exactly you're planning to do in the international area in your business? In corporate banking, we have now done what we plan to do for the foreseeable future, which is we've expanded our energy business. Again, it was primarily a U.S. business. We followed some of our clients to Canada. We saw an opportunity in Canada because it's very similar to the business in the U.S., so we established a pretty significant presence in Calgary. I think we now have 12 or 15 team members up there. We just opened an office in the U.K. for the same reason. We had a number of U.S. customers active in the U.K., principally service companies and then serving North Sea clients. So we're serving some of those same U.S. customers in that market. As we get to know the market, we will bank local companies that are active in the U.K., as well as U.K. companies that are active in the U.S. It tends to be a primarily U.S.-centric business, even though we have now expanded into both Canada and the U.K. We have no plans for the foreseeable future to go any further than that. Vivek, in terms of your question about Wells Fargo Securities, we have a pretty broad product set right now, and we don't have any significant plans to make acquisitions or to fundamentally change the product set in the business. Given the expansion you've seen from the whole securities side, and following on Mike's question, what's the capital you're allocating to the corporate bank? Is it your TCE 8.5% or are you doing higher than that? Or when you do the analysis internally, what level of capital do you allocate to it? Yeah, it's a fair question. It's really a moving target because we tend to update it on an annual basis, and we're updating it based upon the changes in the underlying capital rules. No surprise for any of our businesses, whether it's corporate banking or anything else within wholesale or the rest of the company, the riskier it is, the more RWA it takes, the more capital is allocated so that we're getting the appropriate risk return. I'd say it's slightly higher than average. A quick question here on deposits. The company over the last several years experienced very strong deposit inflows. If interest rates ever move higher, do you fear deposit outflows from corporate and commercial clients? To what degree? How would you defend against that? I don't think it's if rates will ever go higher, it's when, right? Because they will at some point. I think that's a risk that we think about a fair amount. We think about that first at the corporate level, and that's something that we talk a lot about in our asset and liability committee, and it's something that from a risk standpoint, Mike and his team in corporate risk, and then Paul and his team in treasury think a lot about. Then we also have asset and liability committees within each of the business that look at it. I actually hope that that occurs, because it means that we'll probably have more loan growth. If our deposits decline at the margin because we have more loan growth, that would be a great problem to have. But as Danny pointed out, the fact of the matter is we're a much more important treasury management relationship for our customers. As we continue to grow that business, we think we can continue to grow deposits even if we see an increase in rates and some sort of outflow just related to the increase of deposits itself. Before we wrap, Mark, we did get a question on the webcast for you similar to the one that Mike just answered. How you think about international opportunities outside of Canada and the U.K.? Yeah. Happy to take that, Jim. I would say my comments would mirror image Mike. We focused initially on Canada and the U.K., largely because that is where our client base was headed. Then in the U.K., we saw a unique opportunity that we decided to take advantage of on the acquisition front. It is a very similar approach to Mike, and I do not see us in the foreseeable future going beyond those two markets. Seeing no more hands. Oh, yes, one more up here. Question for Mike Johnson. Mike, your pursuit or expansion into Calgary specifically and following the customers who are moving into that area, presumably they are moving into the oil sands or tar sands production. Is that true? Well, some of the service companies are that are serving the oil sands producers. Then there are some Canadian companies active up there that we are now banking as well. But these are also what I think of as more conventional oil-producing companies that are up there because there are shale plays in Canada that are starting to emerge, and we are banking some of those companies. But initially, part of our focus was the service companies in the U.S. that were moving into Canada to serve the whole market, including the sands, but not just the sands. How are you managing the reputational risk to Wells Fargo overall as it relates to the environmental risks associated with oil sands productions? The same way we always do. We are looking at make sure that the clients are doing everything in compliance with the regulations, and that we are looking very closely at that and being responsible with who we support. Again, we are not currently lending directly to any of the producers in that sector, but we are banking companies who provide services to them. Thank you. Okay. Tim and team, thank you very much. Great. Thank you very much. It's a pleasure. Okay. It's home stretch. We've got another break coming up now. Let's come back at 3:25. Again, we'll chime you back in, and then we'll wrap up the day with Mike Loughlin, Paul Ackerman, and the group Q&A. Thank you. I will also ask, if folks have questions on cards, if you'd like to pass it to me. Ladies and gentlemen, please welcome the Head of Risk Management, Mike Loughlin. Good afternoon. It's nice to see so many familiar faces, and I've enjoyed talking with a good number of you earlier today in the breaks at lunch. I'd like to sincerely thank you for your interest in Wells Fargo. There are three things I'd like to accomplish in this presentation. I'd like to review the risk management principles of Wells Fargo, which have not changed since our first Investor Day four years ago. I'd like to give you some sense of what we're working on to demonstrate that we remain diligent on evolving our risk practice. Then finally, I'd like to give you some information on how we view our credit loss rates going into the future. Our principles remain the same. This list of principles comes right out of our risk appetite statement. As you have heard throughout the day, Wells Fargo has a customer-centric vision as we focus on building lifelong relationships with our customers. As John noted at the beginning of the day, risk is one of our six priorities. It is critical that we only take as much risk as is necessary, and that we get paid appropriately for that risk. We know that our other stakeholders, including you, our shareholders, expect that from us. For this slide, I would like you to focus on operational excellence. It is one of the things we are working hard on. We must be a reliable provider of financial services. That is what you and our customers expect. We also have a renewed focus on improving our processes so that we can reduce future operational losses. This focus is best evidenced by the fact that we have expanded our senior risk teams in both operational risk and compliance. The industry has moved towards this model, but I wanted to emphasize that this has always been our model. Key to any risk management success you might give us is the ability of our business owners to manage their risk. They own the risk. They are superior risk managers. If they were not, they would not have the privilege and responsibility of running the businesses that they do. Corporate risk, second line of defense, is bigger and better than two years ago when we last met, but we cannot manage risk alone. We have an integrated and shared approach to managing risk with clear roles and responsibilities. The third line of defense is corporate audit. They evaluate and improve the effectiveness of all of our risk management, controls, and governance process, and are integral to our continued efforts to improve our risk management. We believe there are four elements required for effective risk management, and while they are all critical to success, for today's presentation, I would like to focus on just two, culture and process. Establishing the right risk culture is one of our most important responsibilities and is probably the most difficult of the four elements previously mentioned. While maintaining a strong risk culture is not easy, we believe this is a definite strength of Wells Fargo and the heart of our risk management practice. Even with 265,000 team members and operations in 50 states and 36 countries, we are absolutely committed to maintaining our culture and insisting that everyone at Wells Fargo is a risk manager. There are two other bullet points for today's conversation, monitoring for risk and escalating problems promptly. We have always focused on effective monitoring, particularly in the loan portfolio, but we remain focused on continuing to improve this process, and again, with a particular emphasis on compliance and operational risk. One way to illustrate our commitment is the fact that we have 41% more team members in internal audit than we had 17 months ago. Their leadership team has been expanded by 20%. A second is the establishment of an enterprise risk team that does early impact analysis on emerging issues. One example of their work was an analysis of the impact of a potential federal shutdown on both our customers and Wells Fargo. Escalating problems has always been a core strength at Wells Fargo. The fastest way to lose your job at Wells Fargo is failure to escalate a problem. Where we have improved on this core strength is our ability to identify problems early in one business and then canvas the other businesses to see if they have the same issue. That way, we can control the problem while it is small and manageable. We wanted you to know that we continue to invest in all things risk. In the upper half of the slide, you can see some selected areas where we have focused. In the lower half, you can begin to quantify some of the investment we have made. We have 1,200 more team members in risk management, both in the businesses and in corporate risk and in audit and other control functions than we did two years ago. My group, Corporate Risk, has added 600 new people over the last 24 months, which means we are adding 25 people per month. Our primary job is oversight. We independently opine on the strategy and performance of all risk-taking activities. I have listed for you our other primary responsibilities, but I wanted to focus on the last two. Of course, we have to comply with all laws and regulations. That is our job as a good corporate citizen, and it is what you expect from us. But given heightened legislative and regulatory expectations, we are much better coordinated as a team on this effort. The businesses, enterprise compliance, our first-rate law department, and our communications teams are coordinated in making sure we achieve this goal and are prepared to comply and execute the new rules and regulations that are frequently coming our way. The last bullet point refers to taking action. Seems obvious, but it is one of the keys to success. Remember that businesses manage their own risk. But if they fail to manage risk properly or exceed their risk appetite, we have processes to identify this early and to take action. Our action, if you will, would be to flag the problem and work with the business to correct the situation. If the business does not respond adequately or without sufficient urgency, we are expected to and obligated to escalate the problem to the group heads that you heard from earlier today, John, and the board. In addition to our oversight responsibilities, Corporate Risk is engaged early on in new initiatives, acquisitions, CCAR, and the annual planning process. A good example would be our card expansion, which you heard about earlier today. Our risk people have worked hand in hand with Avid's card team on every aspect of this rollout for the last two years. Another example would be credit policy, where Corporate Risk team members engage at the earliest stages of any conversation about changing underwriting standards. I will remind you that underwriting standards cannot be changed at Wells Fargo without an approval from Corporate Risk. Finally, we are heavily engaged in talent planning, people evaluation, and compensation. Like the other speakers, I wanted you to see our organization, our team, and their tenure. My direct reports are in blue, while the group risk officers who report to the group heads but have a dotted line to me are listed below. I hope you will note the tenure of the team. While my direct reports have an average tenure of 16 years, you will see that we have also made some hires over the last 10 years to strengthen and deepen the team. We are very lucky to have these very talented people. As we reported in April when we released Q1 earnings, credit performance is strong and continues to improve. While we expect credit performance to continue to improve, we expect the rate of improvement to slow. Our view that credit quality will continue to improve in the near term is demonstrated by some of the facts on this slide. The commercial portfolio has never been in better shape. Our borrowers continue to pay down debt and have improved their liquidity. While we have $3 billion in commercial non-performing loans, 67% of them are current on their interest. The liquidating portfolios have been significantly reduced, with Pick-A-Pay continuing to perform much better than originally modeled. Junior lien balances, which have produced a disproportionate level of losses, are down $19 billion or 23% since the 2012 Investor Day. Finally, 40% of the consumer real estate portfolio has been originated since January of 2009, which is what I'd like to talk about on the next slide. You may recall that we began to tighten credit in the second half of 2007. We then spent the full year 2008 rewriting all of our consumer lending policies. These new policies went into effect in January of 2009. You can clearly see the impact of these changes in the chart on the left. Recent vintages have performed very well, with negligible losses to date in 2009 through 2012 vintages. To give you a sense of how high quality the new residential real estate loans are, of the 143,000 mortgage loans originated and held on balance sheet since January of 2009, 134 of those have gone 60 days past due. You heard me correctly, 134. They didn't go non-performing. They didn't go to loss. They're just 60 days past due. So you can see why Mike Heid highlighted the growth and additional opportunities we have in portfolio mortgage lending earlier today. Finally, as you can see in the chart, I noted before, 40% of the residential loan portfolio is made up of these newer loans, and of course, this percentage will go up every quarter. You may be wondering what this means for loss expectations over the longer term. Two years ago, we told you that our through-the-cycle loss rate would be 100 basis points. We honestly don't think of losses through the cycle, in part because our loan portfolio mix continues to change. You've heard today that we have strategies to grow auto and card, which is absolutely the right thing to do. But both of these asset classes have higher loss rates than the rest of our non-consumer real estate secured book. On the other hand, as I have just demonstrated, the vintage composition of the portfolio has changed in our favor. But we know that many of you use this number for modeling purposes. Given the generally favorable environment which we have been operating within, we believe that an updated normalized figure would be lower than 100 basis points and would likely be in the 75 to 80 basis point range. I'll finish where I started. Our risk principles have served us well for many years. We continue to invest and focus on emerging risks. Our loan portfolio continues to perform well, and we believe our through-the-cycle loss rate will be lower than what we told you two years ago. We view ourselves as stewards of the capital you provide us. We take that responsibility very seriously, and I look forward to answering any of your questions. Thank you. Questions for Mike. From Mike. I just want to make sure I got that right. So of the 143,000 mortgage loans since 2009, 134 are 60 days past due? Correct. Are you doing your job too much? In other words, have you reined in- Well, you have to get a balance between- Right safety and growth. Right. Did you overdo it? No. We have to balance the borrowing needs of our customers with being a responsible lender. I will say that we tightened pretty dramatically. We review it on a normal course, and 143, we are proud of. I think there probably is an argument that perhaps we may have gone to one side a little bit too much. Then just more generally, the size of Wells Fargo is larger than it was before the merger, going back 15, 20 years. We have seen some of your peers. You have seen Bank of America with the $4 billion restatement. You saw JPMorgan with the $5 billion London Whale. You have seen Citigroup in many different ways. So why is Wells Fargo going to be different when you are such a large size and increasing complexity that you are going to escape some of these mishaps others have had? Well, we're humble enough to know that we've made our fair share of mistakes. Large organizations do that. But I think the reason why you as shareholders and you as people who review us should take some comfort in the fact of the people that you saw up here on this stage today. They are first-rate risk managers. We take it very seriously, and I've been here 33 years, and we've never had a better team. I would put your faith in them. Question here in the front. Mike, how do you square the through-the-cycle loss rates of, whatever it's 75 to 80 basis points, with the regulatory loss rates embedded in the CCAR? How do you think about the differences between those two, and can they be reflected in loan pricing? Well, as you know, the Fed doesn't give us a lot of feedback on how their credit loss models work. I really can't answer the first part of the question. In terms of pricing, we have two advantages over most of our competitors on pricing. One, we have a lower cost of funds, and we have a loan portfolio that performs better than anybody else's. We relationship price, and if the quality of the borrower is sufficiently high, they will get a break on pricing, and we can compete on that. Hey, Mike. Andrew Morphew, Evercore. Can you talk about how much you spend annually, or some sort of frame it for us in terms of compliance costs on an absolute basis or relative to revenue or something to kind of frame it. We've had data points from JPMorgan, doubling their compliance costs, year-over-year, 8%-9% of revenue is global IT spend. How should we think about it for you guys to help us feel comfortable that you're on top of these things? I can tell you that in my group, corporate risk, our spend has doubled in the last 24 months. Can you frame it in terms of bigger than a breadbox? My spend is just over half a billion dollars a year. That doesn't count all the risk people that are in the businesses that there are far more of them than the people I have in risk. Got it. Then maybe related, also related to maybe the CCAR question from John. In terms of how do you get comfortable, I guess, in terms of the whole process on CCAR, and the ability to have confidence to start bumping up the payout ratio, for example, the fact that now the outputs seem like they are so different on pre-pre, for example. Maybe, is there really risk to actually pushing it to use them all again? Maybe not next year, but the year after to get to 100%. How do you get comfortable that there is not? Well, we have tied CCAR to our planning process, so we think the planning process is well-constructed. We have been doing it the same way for a long time. I think by linking them together, if we deviated and deviated in a bad way, I think we would potentially adjust our capital disbursement. John, we have one back here. Steve Finley from AllianceBernstein. On the comment you made about no underwriting change goes through at a business unit without your corporate risk approval. Can you talk, I am not sure how you would quantify it, but maybe even just qualitatively, which areas of lending have the underwriting standards changed the most over the last year? Then in particular, I would be interested in your thoughts. It was asked earlier of the mortgage team, but your thoughts on how much the ball is really moving in terms of the risk of loosening the credit box in mortgage. Well, we review it frequently. I think we've made some moves to open the credit box, if you will, slightly. I need to say that anything that we've changed, I'm very comfortable with personally. But I think what's also important to know if you understand that we've slightly modified credit policy, for example, for mortgages, the quality of the borrower is significantly better than the borrower was two or four years ago. The borrowers in this country have de-levered. Many have gone back to work. So I don't think that's a particularly risky thing to do. Marty Mosby, Guggenheim. We talked about credit risk, but operational risk is becoming a bigger piece of what the complex large institutions have to deal with. How do you monitor operational risk and the chance that it's going to be getting worse or better as you go through the cycle? Are there things that you're doing to look at the trends that would either mean there's more or less operational risk ahead of you? Well, we're monitoring actual losses. As I mentioned, we are correlating them across the company to see if a loss occurring in one business could potentially be occurring in another. We are monitoring audit issues more heavily than we used to. We're auditing, reviewing regulatory MRAs probably more than we used to. We're monitoring what's going on in other institutions significantly more than we used to. We're doing a lot from an operational risk perspective. In addition to, I think it might have been Carrie talked about simplifying the process. We're trying to simplify a lot of the processes so that we might be able to reduce the operating risk. Other questions for Mike? Yes, one here. Scott. Hi, Mike. Scott Siefers, Sandler O'Neill. I was wondering if you could just talk about, I guess, cyber risks for just a second, whether it's hacking, customer privacy. Yeah et cetera. It doesn't tend to get a lot of investment attention, but obviously pretty big in the press and seems to be more of an emerging regulatory concern. Are you guys better positioned because you have the resources to devote to it or worse position than smaller banks because you're such an obvious target? What's sort of the feel as you talk to regulators, just any color? I would tell you that I believe cyber risk is currently our biggest risk. We have had multiple presentations to the full board. I can think of three or four in the last two years. Starting about two years ago, we have added significant staff from outside Wells Fargo into a cyber team. In addition, we have retained multiple third parties to probe Wells Fargo for weakness. I would argue, I don't know whether we're more at risk or less at risk, being big or small. I might mention to you that one of the ways we think a cyber attacker could get into our system is through a third party. We have made a significant effort on how we manage third parties and are making them really up their game in all things cyber so that we close off not only our own weaknesses as we find them, we have to close off the weaknesses that the third parties have. Anything else from Mike? Well- Okay. Thank you. I am afraid I brought the mood of the party down somewhat. That is my job. With that, I would like to introduce to you Paul Ackerman, who we believe is the finest treasurer in financial services. Paul. Good afternoon. I will try and lighten things up a little bit. Capital distributions tend to do that to investors. It is my privilege to be the treasurer. Jim Rowe keeps telling me it is my privilege to be the anchor, and given liquidity and capital and how dry that can be, I am not quite sure how to take that. I am happy to be at Investor Day because one of the things we get to do at Investor Day is go into a little more depth on topics that are of interest to you, our investors. To help me do that, I have organized my presentation today around the most common questions that I get asked. Here is a summary of it. I am not going to walk through all of the questions, but I did provide them, they are in your materials. You can keep me honest to make sure that I have addressed those by the time we get to the end of the presentation. Why don't we begin with liquidity? I think it is important. Here we go. I think it is important to ground any discussion that we have in liquidity with the structure of our balance sheet. On this slide, you can see just how straightforward our balance sheet is. 53% of our assets are in loans. Nearly 20% are investment securities. The primary purpose of our investment security portfolio is to manage interest rate risk. We have got 16% in cash and short-term investments. Most of that is for liquidity management purposes. On the liability side, what is really important here is that 92% of our assets are funded by long-term stable sources, long-term debt, equity, and deposits. And I think the key message of this is that this balance sheet looks like a very traditional commercial bank balance sheet. We take deposits, we make loans, and this structure works really well in today's regulatory environment. Our deposits are really a source of competitive advantage for us. First and foremost, they're the beginning of what we hope is a long and increasingly deep relationship. I'll say cross-sell one more time to see if I can up that count. By my count, we were at 67. So I think we're at 68 now. So they're really important for many of our businesses. You heard that from Carrie Tolstedt, you heard that from Danny Peltz. But from a treasury perspective, they're important because they tend to be stable and relatively inexpensive. And you can see how much they've grown on the bottom panel of this chart. They've increased $257 billion in three years from about $838 billion in the first quarter of 2011 to $1.1 trillion in the first quarter of 2014. They've significantly outpaced the growth in loans, and as a result, it's changing the structure of our balance sheet, with our loan deposit ratio going from 90% to 76% in the same period. And you can see the impact of this on this next chart. The blue bars represent government and agency securities. The green bars represent cash and short-term investments. And they're a pretty good proxy for liquid assets. You can see they've gone from about $187 billion in the first quarter of 2011 to $367 billion in the first quarter of 2014. And as a percent of assets, they've grown from 15% to 24%. Now, there are really three reasons for this. One is deposit growth that I just talked about. Another one is we've not been as active as we might have been in deploying some of that liquidity into long-term securities because of our concern about the rate environment. We're very concerned about the performance of securities in a backup, and so we've been very cautious in that scope. Then finally, both our internal view of liquidity and regulatory expectations for GSIB liquidity have risen sharply in the last couple of years. So, oops, sorry. Went too fast. So with that as a backdrop on the liquidity position of the firm, let me talk a little bit about where we are in liquidity ratios. Given the structure of our balance sheet, we think the NSFR is not going to be a problem for us. We're compliant with the international LCR and with the domestic LCR. How we end up on that will depend on the final version that we hope is going to come out late in the second quarter or potentially early in the third quarter. There's a number of items in play in that. The largest one for us is the treatment of collateralized municipal deposits. And depending on the outcome of the revisions that get made, which we're hopeful for, we'll either be fully compliant or we'll be nearly compliant. Now, if we're nearly compliant, and we do have to raise a little more liquidity to get fully compliant by year's end, the balance sheet structure, the capital structure that we have provides us with the flexibility to do that, and we shouldn't have any material impact on our financial performance. Ah, thank you. Okay. Now let me move to net interest income and NIM. One of the things that's been impacted by the build in cash has been our net interest margin. For those of you that model us, it's kind of a particularly tough confluence of events because that's occurred precisely at the same time that the balance sheet has repriced from a high-rate environment down to a low-rate environment. We tried to provide a little bit of perspective here in this chart. In the purple line, you can see our actual net interest margin. First quarter of 2011, we started at 405. We were at 320 by the first quarter of 2014. In the gray line up above it, what we tried to do is strip out the impact of this build in cash, which is very dilutive to net interest income. It's hard to pick out the exact number, but I'll tell you that if we hadn't had a big buildup in cash, our margin at the end of the first quarter would have been 46 basis points higher than what we actually reported. Here's why that dilution is not really too bothersome to me. These deposits, which I've said earlier we really love, they're the foundation of many of our businesses, are not expensive. As we've talked about in many of our earnings calls, they're generally neutral from an income perspective. At a minimum, they're neutral. Long term, they're not neutral, but in the early period, they can be neutral from a very conservative perspective. In reality, we're likely much better off in the future with those. There's not much capital involved in these transactions now. We take the deposits. We're providing a service to our customers. Generally, they get invested in high-quality securities where they sit in cash at the Fed. It's dilutive to ROA. It's dilutive to NIM. It has no impact on ROE. I'm not terribly fussed or bothered by the diminution that this deposit growth has been causing on our NIM. There's two other things I'd like you to take away from this chart. First, that the slope of the gray line has flattened in recent quarters, indicating that the repricing of the balance sheet is slowing down. I'll talk more about that in a minute. The second thing is that net interest income, which is depicted by the blue bars, has been flattish despite a big drop in the NIM, and this represents a disconnect between two metrics that have historically been pretty tightly correlated. Moving to slide 8. I know there's a lot of interest in how our sheet is going to react to a high-rate environment. I'll get to the table in a minute. We've tried to provide you with some information about that. But before I do, let me give you a few overarching facts or items about the margin. First, we think that the majority of the repricing from the high-rate environment to the current rate environment is behind us. Most, maybe not all, but most of the NIM dilution from liquidity building is behind us. You can expect that we're going to be subject, from a NIM perspective, to pressure as deposits continue to grow, which we expect them to do in future quarters. Then finally, you need to know it's our intent to grow net interest income. The main driver of that is loan growth, and we are laser-focused on that and are convinced that we can deliver on that, as you have heard from many of our leaders today. Now let us move to the table at the bottom of slide 8. One of the most common questions I get is, how are we going to react to higher rates? You have heard people allude to it in almost every presentation today. To help you get a perspective, we prepared a very summarized view of the balance sheet to give you a little feel for this. Even though it is very summarized, there is a lot of numbers on here. Let me start walking through it. Let us start with investments just so you can see how the table works. We have $262 billion of investments in the first quarter, actual balance, yield of 3.33%. We have taken a very simple view of a backup in rates. We said to construct this table, what would happen to the yield on that portfolio if we had an instantaneous 100-basis-point parallel backup in rates? The answer is 30%-40% of the change in rate would make its way into the yield. We would see 333 go to 363 to 373. That kind of a change makes sense given the duration of the investment portfolio, which is reasonably long but not terribly long. Okay, so that is how the table works. Let us walk through some of the other line items. Short-term investments, you can see those are going to react nearly 100% to the change in rates. So 95% there. Commercial loans are predominantly variable rate. Those are going to react very quickly. You can see 75%-85%. Consumer loans that include first mortgages and have a large preference for fixed rate reprice much more slowly, 20%-30%. Total earning assets then, when you add it all up, is about 55%-65%. Okay? On the liability side, the betas for our interest-bearing deposit we think are between 40% and 50%. Market funding, as you might expect, is a lot more sensitive, so 75%-85%. Then we have got about $350 billion of our sheet that is funded by non-bearing sources, capital and deposits, and of course, those have no beta. We end up with funding sources that reprice 35%-45%, and a net interest margin benefit of 10%-30%. A lot of details here, but when you put it all together, the key message is this: net interest income is going to react very positively to an increase in rates, with 100 basis point increase in rates resulting in a 10 to 30 basis point increase in NIM in the first year alone. Okay, now let me move on to capital. This slide should be pretty familiar to you. It is a slide that I laid out for you at last Investor Day to describe the capital structure we thought we would operate under. That is on the left-hand side. Probably the most impactful part of that is common equity tier one under Basel III. That is depicted in the blue bars. If you recall, last time we met, we said we would operate at about 9%. On the right-hand side, you can see our current target for 2014, and we have upped that to 10%. The good news about that is that is where we are. In the center, you have our capital as of 3/31/2014, and we are just above our target. The primary driver of this is CCAR, and I will go over that in a minute, but let me also walk you through some of the puts and takes that exist on the level of our capital structure. First of all, there is OCI. We have had a pretty tame rate environment for the last few quarters. Absent the backup that we had last summer, things have been pretty stable. It is tempting to kind of ignore the fact that Basel III includes an enormously volatile component in it called OCI. Given where rates are, that might add a little pressure to the upside of our capital ratio. On the other hand, if we get a little relief from the way the Fed goes about treating capital distributions in CCAR, that could put a little downward pressure on our ratio. Finally, the last thing is a little more upward pressure, and that is Fed statements on GSIB buffers. As you know, we have got an international GSIB standard out there. There is no domestic GSIB standard. But Fed governors, including Chair Yellen and Governor Tarullo, have been pretty clear that they thought that the international GSIB levels were drawn too low and maybe not steep enough. I think it is likely that when we see a domestic GSIB regulation coming out, we could be faced with higher levels there. That is not terribly concerning to us. If you recall the way the GSIB buffer works, it is based on a number of risk factors. We tend to score at the very low end of those risk factors. As we think about it, even though there may be a little bit of upward pressure there, if the domestic GSIB buffer is based on risk factors, we think we are well poised, and it should not have a big impact on us. Let me say that even though we have increased our CET1 target to 10%, we are affirming our ROE targets of 12%-15%. All other things aside, a 1% increase in CET1 would cause ROE to drop by 1%. But what that does not take into account is the fact that we are constantly looking for sources of capital efficiency and for sources of returns to help mitigate the impact to our investors. Today, we are affirming the 12%-15%, as you have heard. Let me also switch gears, but use the capital stack on the right-hand side to talk about what we know of OLA. Under Title II of Dodd-Frank and the Orderly Liquidation Authority, the agencies are actively looking at the need to have instruments that can recapitalize a bank should it get into trouble. There are no rules out on this. The timeline is uncertain. It could be soon, it could be far away. But what we know and have pieced together from talking to regulators and other firms is this. We think that there could be a requirement to have 18%-24%. What does that mean? Well, we think the numerator of that is going to be the Basel III capital stack on the right-hand side, plus some level of unsecured senior debt issued out of the holding company, and that will be the numerator. The denominator, we think, is Basel III RWA. The way you get cited in between 18%-24% is based on risk characteristics. What does that mean for Wells Fargo? Well, if we assume based on risk characteristics that we might be at the low end of that, say 18%, right now, between the capital stack that we have as of 3/31/2014 and the senior debt we have at the parent company, we are at about 17%. You can see that that is going to grow a little bit because we still do not have our buffers, or we still do not have our full amount of sub-debt and preferred stock built. Net-net, we think if it comes out as is being speculated, it really should not have a terribly large impact on us from a financial perspective. Now let me talk a little bit about CCAR. I think it is important you understand how CCAR is driving the level of capital that we have to hold. This chart kind of walks us through the impact of CCAR. It is a little bit complex, but we are going to start from the left and we are going to move to the right. We start with our CET1 at 9/30/2013. These are under transitional rules. We have 10.2%. Now, under the stress test, under CCAR, the Fed gives us this severely adverse scenario, and we have to estimate three things coming out of that scenario. One is, how much income are we going to earn during that nine-quarter period? Two, what kind of losses might we experience? Three, what kind of capital distributions are we going to undertake? The net of all that, in our view, is 40 basis points, 0.4%, and our ending ratio is 9.8%. Now, that is pretty consistent with the way the firm performed during the crisis, where we had solid income. You remember those charts that John put up there earlier in the day, where even throughout the crisis, we had reasonably good earnings. That feels pretty good to us, and it is pretty well supported by a lot of the work that Mike's team does. But of course, our opinion is not the one that matters. The calculation that really matters is the Fed's. The first thing is that their estimate of losses are a good bit higher than ours. While we do not know a lot of the details of that, we do know that they are about 1.35 times the losses we submit in aggregate. If you express that, it is about $24 billion. It is a lot of money. If you express that as a percent of RWA, it is 2.4%. This is a conscious decision that the Fed has made. They have been explicit about the fact that they are going to be conservative in their risk estimates, and it affects everybody in the industry similarly. The next item is that in the Fed's approach, we have to assume that the capital decisions we make under our base case are held constant during the severely adverse case. That means that we are not allowed the benefit of any capital conservations we may take in response to a really adverse economic scenario. Now, ironically, that disproportionately hurts firms that, one, are at their target, and two, have a lot of ROE, or an ROE at a very high level. We are a little bit of an outlier here because we are at or are near our targets, and we have a high ROE, high relative ROE. When the Fed gets done calculating it, they conclude that we have 5.2% remaining versus a requirement of 4.5%. That 70 basis points is a reasonable buffer. The process is a little bit variable, as Andrew Morphew mentioned. We think it is prudent that we keep a little bit of buffer above the minimum, and that is how we get to about a 10% level of CET1 that we need to hold. Let us talk about how we are going to manage capital under this target structure. I think this slide is important to walk through as kind of some foundational elements of it. First of all, you may not have realized it, but we have been talking about capital management all day because the executives that you have heard from have been talking about how they grow their business and how they generate income all day. My job is immensely easier because of the hard work they do. I actually have the easy end of this. But when you think about size and capital distributions, there are two other things that you have to take into account. One is the return on equity, which we are relatively high on. You can see there, 13.9%. The other one is volatility. If you take time to deconstruct that chart, what it says is we have got not only a high level of earnings, but stable earnings. These characteristics have allowed us to do what we said we were going to do two years ago. That is gradually increase the payout in the form of both dividends and share repurchases over time. You can see that since 2011, we have more than doubled our net payout ratio. In 2013, we returned $11.4 billion on a gross basis, $7.2 billion on a net basis. Net is the one that counts. The net payout ratio was 34% in 2013. So far in 2014, in the second quarter, we announced a $0.35 dividend. In addition to that, we have been very clear that we will repurchase more in 2014 than we did in 2015. Excuse me, 2013. This slide lays out how we think we are going to operate the firm. An ROE of 12%-15%. We then have to make some assumption about how much of that capital we are going to retain to support growth. We have made that assumption. We think 4%-6%. When you do the math of that, it results in a potential net payout ratio of 55%-75%. What is really different about this payout ratio from the payout ratio that I shared with you last year is that, or two years ago when we did Investor Day, is that at that point, we were not yet at our targets. That was more of an aspirational goal, and we are very clear to say, when we get to our targets, here is what we think the payout ratio will be. We now think we are at or very near our targets. And so you can take this as the way we expect to operate the firm over the next couple of years, subject, of course, to the board's approval and to successful approval of our CCAR submissions. Okay. In summary, here's my take as the treasurer. The proposed liquidity requirements should be manageable. On NIM and net interest income, we're through the most significant impact of our balance sheet pricing, but NIM will probably still be under pressure from strong deposit growth. But while NIM may decline, we're still confident in our ability to grow net interest income. From a capital perspective, we're affirming our ROE targets, and having achieved what we think is our target operating model for capital, we can operate with a net payout ratio of 55%-75%. And with that, I appreciate your attention for what's been a pretty dense set of materials and numbers, and I look forward to answering your questions. Betsy Graseck here. Hey, thanks very much, Paul. Hi, Betsy. So a couple of questions back on the slide where you were going through the NIM outlook in a rising rate environment, and just a couple of questions on that page. Clearly, the improvement in rates comes from being able to have a low deposit rate beta. Right? So maybe you could speak to that 40%-50%, and is that historically based on what you've experienced over prior rate hike periods? Yeah. Is there any thought to maybe in an LCR environment with banks that are not as well-balanced as you, that your competitors might have to increase their rate betas a little bit? Would you need to respond? Just want to understand the deposit rate beta side. And then the other piece is the non-interest-bearing deposit piece, where while NIBs typically haven't gone down that much in the past in a QE environment where QE is going away, do you have any thoughts if that could change at all? Yes. Really good questions. So let's address the first one, which gets to the beta of our interest-bearing deposits. We have 40%-50% on there. The product betas, the individual product betas, are very similar to what we've experienced in the past. Right? So if the top tier money market accounts moved 80% of the move in rates, same now. So that's unchanged from the past. What's different is our estimate of what I'll call the portfolio beta. So we believe we will observe the phenomenon of products or of dollars moving from relatively low-rate products into high-rate products. So that 40%, 50% is our estimate of not only the product betas themselves but the change in mix that we would occur. You don't see it so much in this view because it's only based on 100 basis point backup. We think that that is most pronounced when you're in the 200-400 basis point backup range. So if you had a line, you'd see the slope increase as the rates increased. Same phenomenon for non-interest-bearing. There's a concern about non-interest-bearing deposits suddenly flooding out of the banks. There's really not a clear consensus around academics here. On the one hand, no offense to the folks in the wholesale bank, they will tell you, "We expect deposits to be drawn down in advance of lending picking up as people take their cash and invest it." That mostly occurs at budget time when they don't want to sign up for big deposit growth. The economist would tell you that if a company takes cash out of its DDA account and spends it on building a building, it's going to buy supplies, it's going to hire laborers, et cetera, and that's just going to go back into the system. That's kind of more consistent with our understanding of the money supply, especially with a national franchise. If you're a regional player, I can really understand why there'd be concern about deposits flowing out and not coming back, maybe less so for a national player. I think what we're expecting internally is that deposit growth may very well flatten out. If the Fed starts tightening, certainly it could flatten out. I don't think for a long time they're going to reduce the money supply. They could, but I don't think that. So our best guess is that deposits flatten out but don't go down. Yep, John. Oh, sorry. That's your job, Jim. Sorry. Thanks, Jim. Paul, the net payout ratio, the new target of 55%-75%, that's a big step-up from last year's 34% that you show on the page prior. Is this something that we could expect you to step up to this year? And what factor Yes? Yes. What factors will drive where you're at the low end or the high end, the 55%-75%? What'll drive the differences between the low and high? Yeah. It is a big step up. I think it is important to understand that when we ended 2012, began 2013, our capital position was very different. I think we had a CET1 ratio of 8.2 at 12/31/2012. So 2013, we still had to retain a bit to get to this 10% level that we are at today. Now having achieved that and thinking that is about where we need to be, the dollars that we previously used to build capital can be returned to the shareholders. So what cites us in the 55%-70%? I think that is going to be kind of the basics, how we earn, right? How we return. And then what we retain for growth, what the growth prospects look like. Yep. Yes. We have one question over here. Oh, I am sorry. I am doing his job. That is all right, Paul. I will let him do it. Okay. We will get to you, sir. Hi, Paul. It is Jimmy Hanna with PEAK6. I want to ask about slide 8 as well on the net interest income and looking at the betas. So I understand in a rising 100 basis point rise in rates that maybe total deposits sort of stay flat. But wouldn't you expect a mix shift, so out of the non-interest bearing? And if that is the case, what kind of mix shift would you look for out of those non-interest-bearing deposits? Yeah. That is- I have one follow-up. Okay. We are not expecting that we will have a mix shift. Look, this is a stylized example. We used a static balance sheet, right? With the exception of some mix shifts within interest bearing because we just could not do that. So this is a stylized example. So it is very likely that the example that we saw probably would have a little bit of migration from non-interest bearing to bearing. But we are anticipating that that is mainly going to occur in the 200 to 400 basis point range. So probably not a big issue with 100 basis point, but we are definitely going to experience some of that in a larger range. We are in uncharted territory there, so I do not really even feel comfortable giving you a range. We are modeling for a variety of outcomes. But I think the key point is we are short, right? Even if the non-interest bearing gets deployed into interest bearing, the firm is still short and is still going to respond very positively to a rise in rates. The one follow-up, if I were thinking about 200 basis points to 400 basis point rise, is it fair that the betas on the asset side will be relatively consistent, but it is the betas on the liability side where the slope increases? It depends on how quickly that occurs. If it occurs over time, yes. Then I think you can apply this. If it occurs very quickly, then no. If we have a very sudden backup of 200 basis points, then you are going to see very little reprice as a percent of that in the same period of time. If we have a very gradual period, then we are going to see something more like you have got on the slide. Thanks. Sure. We had one over here. Yes, Steve Finley. Steve Finley with AllianceBernstein. On your slide about keeping the ROE target basically the same range while increasing by 100 basis points the common equity Tier 1 target, you mentioned that the reason you can keep the ROE target the same is that you are always looking for efficiencies and higher return stuff. Can you identify for us some of the things that you think are different than two years ago that allow essentially, basically, I think what you are saying is a higher ROA than you were thinking of in 2012. Is that right? No, I don't think so. There is really nothing different than we said in 2012. I think in 2012, I talked about being a little more capital efficient. I think I even had a chart in my presentation that showed RWA to GAAP assets and how we were a little bit of an outlier on that. We have worked a lot on the capital efficiency side, and so that has paid for, to some extent, the increase in the target. Got it. So it's more the return on risk-weighted assets that's different rather than just an ROA difference. That's correct. Yep. Other questions for Paul? There's one here, Jim. Yes. One more, Jim. Thanks. Joe Morford, RBC. There's been a lot of focus on the impact of rising rates, but it seems like some of the comments coming out of the Bernanke meetings last week suggest that we could be in this lower rate environment for a whole lot longer than people think. If that scenario plays out, do you foresee managing the balance sheet any differently than you are or expenses overall for the company? I'll probably let John or John deal with the expense issue. I'll talk about the balance sheet management issue, though. We've had an eye to flat to lower rates. We've not let the sheet get too short, and although it kills me, once a week I send an email saying I really don't like to buy assets at these levels. We know we can't let the sheet get too short if that comes to pass. So you'll see if you look at our investment securities portfolio from a year earlier, we're up about $30 billion, $35 billion. That's mainly because we can't let the sheet get much shorter than it is. We're kind of at about the end of our tolerance for the sheet being short. So we are managing a little bit to that. If we suddenly became convinced that rates were going to be sideways for a long time, it wouldn't be that much of a change that we'd have to do to get ourselves relatively square. Does that make sense? Yeah. One more question here. Yeah. John. Hey, Paul. Just on the level of cash, the short-term investments, $213 billion, 16% of earning assets. You have enough in the ballpark for the liquidity requirements, it feels like. Can you have a sense of how much extra liquidity is in there? I know you can't give us a number, but are you under-invested? Is some of this just waiting for better investment opportunities? Is there any way to dimension how much extra liquidity you're holding? Yeah. We don't know the rules, and we don't know how we'll operate under the rules when they do come out. There is a little bit of uncertainty. Here's what I would say, though, John. I think for all practical purposes, we're not really constrained. What I mean by that is, it would be very difficult to put $60 billion, $70 billion, $80 billion to work in any kind of a very rapid fashion. For all intents and purposes, I think we're not terribly constrained. You can understand that we have tens of billions of liquidity that we could put to work, some of which might impact our LCR. If we bought securities that were not LCR or HQLA eligible, that would impact our liquidity. Other securities, though, we could buy governments if we ended up liking the entry point for governments and have no impact on our liquidity. We have a lot to deploy from that perspective. Yeah. Okay. Seeing no other questions for Paul, this is an opportunity for us to pivot to the last segment of the day, which is team Q&A. John Stumpf will lead the senior presenters in the final Q&A of the day. We're going to need your mic. I don't have a mic. John. Yeah. Well, thank you, Jim. Thanks to all of you again. Great day. We really appreciate you sticking with us throughout the whole day. We do have refreshments later, and that later will be as soon as you decide. Why don't you go ahead? We'll take questions. We'll start with Mike Mayo. Mike, thank you for joining us and Just one question. Is the lead director still around? The lead director is around. Steve Sanger. Is it okay to ask a question from him? Because we've never had a chance to ask a question from him before. Steve, would you take a question? Sure. Okay, go ahead. Okay. Well, it's- He said go ahead with the question. He won't answer it, but- All right. Well, it's a question for the whole panel and for the lead director. Clearly, you're riding high right now on your horses. The stock price, the performance, the targets, and you laid it out. But those of us in the room have seen a lot of successful management teams and banks stumble over the last couple of decades, and in a big way. And sometimes they were feeling as good as you are on the stage right now. So I want to know what's the biggest risk for each one of you, what you think about, what keeps you up at night, something more than just taking the eye off the ball. And for the lead director, someone who doesn't want to have a situation like Citibank or Bank of America, the other large banks. What questions are you asking when you are quizzing management to make sure that Wells Fargo doesn't stumble like some of the other big banks? Maybe an answer from each one of you. Well, Mike, I would say the board as a whole, and the risk committee of the board, and me as the lead director, for all of us, we probably are spending orders of magnitude more time exploring the whole area of risk, and particularly operational risk. You have heard many times today that the company is very confident in its credit risk management skills and has demonstrated over a long period of time. There are operational risks, and in specific, as a subset of that, cyber risk, which are really new on the scene. I would say we are consistently pushing back on the management saying, "Okay, what are we doing about this? What are we doing about that?" These are not questions that surprise them at all. They are very forthcoming with answers, and I think you heard from Mike Loughlin and others that these are risk concerns that concern them, too. I think the model is such that it is built to operate in a variety of conditions. Some of these risks are things that are relatively newer on the scene, and those are the things that we are spending more time in our engagement with management than we ever have before. Is that responsive to your question? Let me just take a shot at just trying to maybe nuance a couple of things here. All of us are proud of this company. We grew up here. I hope we do not come across as riding high. I grew up on a farm. I have been around horses a long time. We are confident, but we go to work every day. We try as hard as we can. With respect to the board, in the last couple of years, we have added two new committees. We have added a reputation and responsibility committee. Pat Callahan, she is not up here, but she plays an integral role in that, and a risk committee. Our chief risk officer reports to the board, as does our chief auditor reporting to the board. We are fully aware that when you have 265,000 team members serving 70 million unique, discrete customers and have over 10,000 customer interactions a minute, sometimes it doesn't always go right. We understand that. Confident, optimistic, but not riding high. Mike, the other thing I would also add to what Mike Loughlin was talking about, there's been significant investment in the second and third lines of defense, in addition to within the business. In terms of reviews, validating, looking at new growth opportunities, how we think about our credit policies, those kinds of things, I could assure you that there is significantly more reviews at all levels in the organization, including the board. If anything, I think there is even more checks and balances than there were 5 years ago. Mike, I would add that the biggest risk we have is people risk. Hopefully, one of the things that we've gotten across to you today is the quality of the management team. Also the depth of the management team. We have a large, complicated organization. There's a lot more regulation. Things have changed. We completely understand that. I hope you don't think that we're riding too high. But it's this team and thousands of other people behind them that drive this company. If this team wasn't here, that would be more risk than I think we'd be willing to take. It's all about the people, and it's all about the culture. As I think about it, I think about the last 5 years we've gone through with all of the regulatory changes from the Durbin amendment to Reg E to integrations, and our team has adapted, and the business model has adapted. That's comforting. We've got a team who knows how to make the shifts when they need to make the shifts and makes really good fundamental, disciplined decisions. In terms of the things I worry about are the things I can't see or can't know. We do a lot of scenario planning. We try to think of all the different scenarios and make sure we're ready and prepared so that we know what we would do. But it's the unknown that is always a bit nerve-wracking to me. I think our team does a great job. I'm confident in them. I think all you have to do is look at the last five years to see how well they have adapted to significant change, more change than I have ever gone through in my 20-plus years at the bank, just in the last eight years. Mike, I think about that a lot. In our part of the company, it is not credit risk, it is something in operational risk. Our team is doing a lot of work on this right now to up our game around all things operational. My worry is that something could occur in our part of the company that would sully the company's reputation, something around trading, something around pricing, a fiduciary breach, something that would challenge the otherwise sterling image of the company. We have got a body of work underway right now for our 35,000 team members intended to elevate risk consciousness. I do not worry about my direct reports, but the risks that we take are in the mid-office, the back office, and the front office, in thousands of locations around the world. We have got to get 35,000 people mildly more paranoid than maybe they have been in the past. So a managed level of paranoia. There are three things, whether you are a dividend clerk, a financial advisor, a private banker, a regional director, that we can all do towards that. One is much better, quicker self-identification of a problem or the hint of a problem. The second is to escalate it. Self-identify, escalate. The third would be to document it. These are all things from a governance standpoint, we know we can do a little bit better in our part of the world. Another question? Oh, right here. Hey, guys. It's Jimmy Hanna with Peak6. An income statement type question. As we think about the efficiency target 55%-59% and where we are today, I always think of Wells as being able to adjust the expenses. Sometimes a quarter lag, sometimes the quarter lag relative to revenues. Where do we stand today in the mortgage business in terms of right-sizing the expenses? Just because sometimes there is a lag, have you gotten the mortgage business to as efficient as you want it to be today based on the outlook for volumes? Yeah, absolutely. Great question. As Mike Heid very much talked about this, the production part of the business is very cyclical. We absolutely look at revenues, pipeline of applications, and what needs to happen, and what do we have the right capacity. Second half of last year, starting the third quarter, we started downsizing, and we continued with that even into the first quarter of this year. In fact, in the first quarter, we had 1,100 FTEs that were noticed. Cumulative since the second half of 2013 through the end of the first quarter, we had over 7,000 team members that we had noticed, and that does not include the natural attrition. When we look at, for example, our home mortgage consultants, if their production is not at the level that they would like to have, then there's some opting out as well. But we continue to look at our production levels. We look at our pipeline. We look at what are the expectations, and we continuously do look at that and adjust accordingly. Question here. Question, Andrew. We have one back here. Joe Morford, RBC. John, I guess following up a little bit on my earlier question, there is just a lot of mixed signals lately about the strength of the economy, and the market lately seems to be taking a different view than maybe some of the recent data points. Just given all your touch points across the company, what is your current assessment of just how well the economy is doing right now and what we may be in store for over the coming year? My view is, and I would be interested anybody else who wants to answer that, but my view is that the second, third, and fourth quarter will be a bit stronger than maybe some of the consensuses. It would not surprise me that one of those quarters would start with a 3 in GDP. People are feeling a little better. Now, I know that there has been the winter that would never end, and there is people wondering how much that had influence on jobs and the other thing, and housing and so forth. We are starting to see a re-regionalization of the economy. So states or areas that are deepened or have a lot of energy, things are booming. Agriculture is doing quite well. Now there is a drought in certain places. Certain manufacturing is doing better, technology doing well. So it depends on what drives the economy. One of the benefits that we are seeing is less dysfunctionality in Washington. What we have had in the past is cliffs and ceilings and all the other things that really suck some of the energy out of the economy. Now I know in the last couple of weeks it does not feel that way, but I think the press tends to overreact to the bad news as they overreact to the good news. I am a bit more optimistic than maybe others are. Thanks. John, you used to refer to over time you could get double-digit top and bottom line growth. Been tougher on the top line for everybody. Do you think that we have to wait for a higher rate environment before we can get there, or is there a scale issue now in terms of tougher to get double digit even in a higher rate environment for you guys at this point? I have a follow-up question. Okay. Well, clearly, we are facing some headwinds. You saw today about half of our revenue, half our earnings come from the margin. We are facing a lot of headwinds. Even if you exclude the part of the margin that is related to things that do not affect net interest income, it still is a headwind. So there is a lot of pent-up earnings. I think, well, said another way, we have a hugely undervalued liability side of the balance sheet. I think this is the best $1.1 trillion of deposits on the planet. I do not know that double digit, I do not necessarily think in those terms right now, but I do know this. Over a long period of time, like each quarter, I am not going to guess what next quarter, even next year, but over a longer intermediate period of time with a normalized situation where rates reflect what is happening in the economy, I sure like our chances. Thanks. Then a separate follow-up question, if I might. Can you talk about potential areas where you would like to expand, not de novo, right? That you see strategic opportunities, asset opportunities to purchase. Where might there still be opportunities? Depositories solutions clearly kind of off the list now. Correct given where you are. Where are the most opportunities that you may see still in the intermediate time? related, are there anything that you might look to consider shedding? Obviously, deposit advanced type lending is off now. Sure. Things like that. Anything that we should consider? Is that considered in your new payout ratio as well, or would that be additive in terms of deployment? Thanks. Well, first of all, let's talk about things we cannot do. We can't do depositories, anything. those are the kind of businesses that are the heavy capital acquisition businesses. The other things that we've done recently, or in the recent past 2 years, are what I would call bolt-on businesses. We love the BNP thing, Mike Johnson talked about that today. Mark Myers talked about the things that we did in commercial real estate. We love those. We love the thing we just did recently with Dillard's. So those are wonderful opportunities, we'll continue to look at those. I don't know. We might be later in the game on some of those things, but they do come up. The things that are most attractive to us. Well, first of all, we don't need to do anything. Our highest return to our shareholders, do what we're doing better more often. That is the highest return, but there are some businesses where we're underdeveloped. David Carroll talked about the huge opportunity, along with Mary, what's going on in wealth brokerage retirement. If there were an opportunity to jump a curve with a add-on there, that'd be quite attractive. But culture really matters in those cases. We play team ball here, not everything in his space understands the plural pronouns game. We talk about insurance. We've actually shed some things there, but we would look for some things there as an opportunity. We like the card space. We like not only our own cards, but we like some of the third-party things. So there are some opportunities. But again, I would say bolt-on opportunistic. You guys all know us well. We are very careful acquirers. Anything we don't need? We're always looking at things. We looked at some insurance things, but nothing jumps out. Nothing would move the needle. Question back here. Betsy? We'll get you next. Oh, is there one back here? Okay. Yes. Thanks. I was hoping maybe a couple of you might address non-bank competition. It kind of runs the gamut. I guess, on the one hand, banks are just increasingly heavily regulated, obviously, but you still have these non-financial components. It can go from tech companies encroaching on the payment space to the reemergence of some pockets of the shadow banking system. To what extent are you guys thinking about these things? What kind of a threat do you see them posing, et cetera? Sure. Well, I can tell you on the wholesale side of things, with respect to non-bank competition, there are alternative asset managers and other permanent forms of capital that have come together to compete in the leverage loan space. While they're busy and prolific, they don't really cut to the core of who our customers are. They're more likely to be found around the small leverage buyout sort of activity that isn't a core customer group of ours to begin with. In fact, the alternative asset managers themselves and the BDCs themselves are good customers of ours. We provide them with capital and advice, et cetera, and it's actually been a source of business for us. With respect to payments, it's probably, Yeah, and maybe if I could comment on the consumer space. In the payment space, clearly a lot's happening. I think you've heard John often talk about the competitors that we are most concerned about in that space are the Google and Apple and some of the technology companies. It's an evolving space, a lot happening, a ton of innovation. Still unclear in terms of what would be the winning model. How we approach it is to make sure that we are participating in a number of initiatives, that we are placing bets. We are doing our own proprietary wallet that's in pilot. We are participating in a number of other pilots like ISIS, for example. Absolutely, we're watching it. We are testing different things. We are participating in different things and would be ready to continue to evolve our model. In other parts of the consumer business, we are seeing some non-bank competitors, for example, in mortgage servicing. There are some assets that have moved from banks to non-bank mortgage servicers. What's good about the current cycle is we have regulators like CFPB that covers banks and non-banks. In terms of expectations for what would be the standards, what would be their service levels, over time, it should be more consistent. Okay, Scott, I would also add to what Avid and John have said is that the competitive environment today is just that. It's a little bit more competitive than it was yesterday, and it probably will be a little bit more competitive tomorrow. But when you step back and think about where we are today versus where we were in 2006 and 2007. Think about the lack of foreign bank competition here in the U.S. and the fact that we've actually been a net beneficiary as they've exited, right? Now that's not going to continue forever, but that's been a benefit. Think about the number of investment banks that just don't exist anymore, that used to be our competitors, that used to be very aggressive, that drove spreads and drove yields. Think about the number of monoline competitors that just don't exist. There's always going to be an ebb and flow. I would tell you today, it's a much better competitive environment in wholesale and maybe across the board than it was five years ago. But the fact of the matter is, we got to wake up every morning, and we got to be terrified that somebody's got a better idea than we do, and we've got to make sure that we get to it first, right? If we don't get to it first, we better get to it second, right? But again, the environment, much more attractive today than it was a few years ago. Betsy. Hi, two questions. One ticky-tacky, one just on capital. You have not yet exited Parallel Run, right? I just wondered, the increase in the capital ratio that you outlined earlier, that embeds your assumption for what you may have to up your capital charge to exit Parallel. Is that fair? That's correct. Okay. Yeah. We have an estimate of that. Yep. Yeah, okay. Then just separately on international. You have been active in building out the cash management business and other core banking facilities for the international business. I know, John, you mentioned earlier 97% U.S., but I'm looking to understand what your strategy is for the next three years on international because it feels like you've put the groundwork in there to really expand from here. We see it in the repo business, but maybe you could speak to where you want to take that over the next few years. Well, I'll start. We're going to go where our customers want us to go. Mark Myers gave a great example today of why did we think that it would be a good idea to move into commercial real estate lending in the U.K. It wasn't because one day Mark thought, "Hey, let's be in the U.K." It was because we were getting inbound calls from our existing U.S. customer base saying, "We really could use your expertise in this environment." It just so happened that the Eurohypo acquisition came in at about the same time. We talked a lot about that. We talked a lot about that for a year ahead of that. So we're going to go where our customers take us, but we're not going to go too quickly. That said, I hope that our international business continues to grow at a double-digit rate. But we're going to do it, Betsy, very prudently. We also need to be very mindful that there could be potentially additional capital requirements because of how the GSIB buffers are calculated, whether it's a domestic or international, as we grow our international operations. So we're going to be very mindful of that. But I don't think you're fundamentally going to see two years from now that even if we grow international, that somehow that's going to be a disproportionate share of our revenues or earnings. I would just add very simply to confirm that. First of all, we have a terrific international group. We're essentially in two businesses internationally. Following our U.S.-based customers as they do business internationally, and we have this business called the Global Financial Institutions business, where it's a 100-year-old plus business that came originally out of the old Philadelphia National, where we are the correspondent bank for many central and commercial banks around the globe. We do foreign exchange, payments, and other things. A terrific business. A low-risk, high-return business. We got to do it right. We don't do business with everyone. So that's essentially what we're doing. We have no desire, for example, to buy a retail distribution business. We couldn't do it anyhow, but that's just not who we are. I hope the business grows, but it'll never be a dominant part of who we are because we choose to be in the business of serving and helping our customers in this global GFIs business. John, I think we're ready for any closing comments you may have. Okay. Well, I wanted to say here, again, thank you. Many of you, your investors have been with us for years. You've heard today about how much we value relationships. Thank you for your investment, your trust in us. We don't take that lightly. It's your capital that you've given us a privilege to deploy to give you the kind of returns you're looking for. For all of you who are in the analyst community, thank you for your thoughtful, good questions. We like getting pushed. We like being asked the tough things. That helps us stay sharp. For all of you who are colleagues, thank you for joining us, and thanks for the great work you do. Jim, I think we go from here. Are you going to tell them where we go next? Again, thank you, and we'll do this again in two years.

Data Source: Quartr Last updated: May 20, 2014

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