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Executives

Timothy Sloan - Chief Financial Officer and Senior Executive Vice President

John Stumpf - Chairman, Chief Executive Officer and President

Jim Rowe - Director of Investor Relations

Analysts

Ed Najarian - ISI Group Inc.

John McDonald - Sanford C. Bernstein & Co., Inc.

Paul Miller - FBR Capital Markets & Co.

Betsy Graseck - Morgan Stanley

Joe Morford - RBC Capital Markets, LLC

Christopher Mutascio - Stifel, Nicolaus & Co., Inc.

Nancy Bush - NAB Research

Christoph Kotowski - Oppenheimer & Co. Inc.

Michael Mayo - Credit Agricole Securities (USA) Inc.

Matthew O'Connor - Deutsche Bank AG

Wells Fargo & (WFC) Q1 2011 Earnings Call April 20, 2011 9:30 AM ET

Operator

Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to Wells Fargo First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn today's call over to Jim Rowe, Director of Investor Relations. Please go ahead, sir.

Jim Rowe

Thank you, Celeste, and good morning, everyone. Thank you for joining our call today during which our Chairman and CEO, John Stumpf; and CFO, Tim Sloan, will review first quarter results and answer your questions.

Before we get started, I would like to remind you that our first quarter earnings release and quarterly supplement are available on our website. I'd also like to caution you that we may make forward-looking statements during today's call, and that those forward-looking statements are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today and the earnings release and quarterly supplement included as exhibits.

In addition, some of the discussion today about the company's performance will include references to non-GAAP financial measures. Information about those measures, including a reconciliation of those measures to GAAP measures, can be found in our SEC filings and in the earnings release and quarterly supplement available on our website at wellsfargo.com.

I will now turn the call over to our Chairman and CEO, John Stumpf.

John Stumpf

Thank you, Jim, and good morning, and thanks for joining the call and your interest in Wells Fargo. We're extremely pleased with the performance of the company in the first quarter with record earnings of $3.8 billion, up 48% from a year ago. Each of our business segments contributed to the overall profitability and the value of our diversified model was never more evident.

We generated broad-base growth across our business segments, including revenue growth in businesses as diverse as commercial and corporate banking, investment banking, commercial real estate, international banking, wealth management, brokerage, auto dealer services, merchant and payroll services. We also achieved significant improvement in credit quality during the quarter, and here, too, our improvement was broad based across our portfolios. These strong business results enabled us to continue to grow capital internally, producing an estimated Tier 1 common equity ratio under current Basel III capital proposals of 7.2%.

We're extremely pleased that we're able to reward our loyal shareholders by increasing our quarterly dividend rate, by reinstating our stock repurchase program and by calling $3.2 billion in Trust Preferred Securities. And as we just announced today, our board authorized a second quarter dividend of $0.12 per share.

As I have said many times, our merger with Wachovia is exceeding our own high expectations and has created, in our view, the most powerful platform in the industry. We completed the conversion of banking stores in Connecticut, New Jersey, Delaware and New York in the first quarter. And late last week, we completed the Pennsylvania integration. Including Pennsylvania, 74% of our banking customers are now on a single system. We've had positive customer response to the new store design and enhanced product offering while continuing to provide the same focus on providing excellent customer service.

We are successfully meeting the financial needs of our customers throughout the East as evidenced by our cross sell, now reaching 5.22 products per household, up from 5.02 just a year ago. Checking accounts in North Carolina grew by 8.5% and in Florida by 12%. Sales of credit cards more than doubled in the East from a year ago. This success will help drive revenue growth for years to come as we continue to deepen the relationships of our existing customers and grow market share.

The steady progress in consolidating our company across the nation is coming at a time of transition for our industry. Two changes that have been top of mind for investors are the fate of debit interchange revenue as part of Dodd-Frank and the recent regulatory and legal actions related to the mortgage servicing and foreclosures.

Regarding debit interchange, we believe lawmakers should take the necessary time to better understand the direct and indirect consequences of the proposed reduction in debit interchange fees on consumers, merchants and banks. Banks should be fairly compensated for the value that debit cards provide for merchants and the convenience they offer consumers. Government price controls that wouldn't even enable banks to cover the cost of providing the service make no sense, particularly for consumers. We are hopeful that congress will do the right thing, which is to delay the scheduled implementation until these issues are addressed.

As you are aware, federal banking regulators recently issued consent orders regarding foreclosure policies and practices. We take this issue seriously and are committed to complying with those orders. In addition, Wells Fargo supports the idea of national servicing standards suggested by the regulators, which we hope will provide greater clarity for customers, servicers and investors.

We are not perfect, but Wells Fargo has been and always will be committed to doing the right thing for our customers and our country. We remain dedicated to helping our at-risk customers as evidenced by our over 665,000 active trial and completed modifications we've done since the beginning of 2009.

Our outreach efforts continue to grow as we have now conducted 22 of our home preservation workshops across the country, and we plan to hold twice as many this year as we did last year. We have met with over 20,000 customers face-to-face at these events, and this effort has helped us complete almost twice as many modifications for customers as foreclosures since 2009.

We have been working with our regulators for an extended period on improving our servicing practices, and we’ve already begun instituting meaningful changes to our processes. Last summer, we adopted a single point-of-contact strategy to help customers seeking loan modifications. In the fourth quarter, we established a uniform foreclosure affidavit for each judicial state subject to local rules. So we have already started making some of the operational changes and incurring some of the costs that will result from the expanded servicing responsibilities outlined in the consent order.

While we continue to focus on helping our customers, our first quarter results demonstrate that we are off to a great start in 2011. The rest of the year holds additional opportunities as we work to convert the remaining Wachovia banking stores in the East, focus on improving our efficiency, invest our liquid assets wisely and continue to lend to our commercial and consumer customers. At the same time, we continue to reduce our exposure to higher risk portfolios, benefit from improved credit quality and build capital internally.

Now let me turn this over to our CFO, Tim Sloan.

Timothy Sloan

Thanks, John, and good morning, everyone. My remarks will follow the slide presentation included in the quarterly supplement available on the Investor Relations section of the Wells Fargo website.

As you have seen from our press release today, we had a very strong quarter. Our record earnings were driven by continued improvement in credit quality, higher sales and deposit growth and lower expenses. These results generated strong returns with our return on asset increasing to 1.23%, the highest in three years, and our ROE, up 103 basis points from the fourth quarter to 11.98%. Liquidity remained very strong, including cash and fed funds' balances, up $13.3 billion from the fourth quarter. And we ended the quarter with our capital ratios at record highs, including our 7.2% Tier 1 common ratio estimate under current Basel III capital proposals. I'm going to highlight the drivers behind these strong results on the call today.

Moving to Slide 3. Our first quarter EPS was $0.67, our highest quarterly EPS since the merger. This ties our previous record of $0.67 in the second quarter of 2007 when we had approximately 40% fewer diluted shares outstanding. Revenue in the first quarter of $20.3 billion was down $1.2 billion from the fourth quarter primarily due to lower mortgage banking revenue and lower net interest income. The decline in net interest income reflects 2 fewer days in the quarter and an 11-basis-point decline in the margin. Approximately half of the margin decline was due to a lower level of accelerated income from PCI loan resolutions and securities redemptions, predominantly related to the legacy Wachovia positions, both of which tend to be uneven. The remaining portion of the decline in margin was related to higher levels of lower-yielding cash and short-term investments, which reflects our disciplined interest rate management.

Our cash and short-term investments averaged $101 billion and earned a yield of 29 basis points in the first quarter. When thinking about the margin in an improving credit cycle, we believe it is useful to look at risk adjusted NIM. Ours has improved for 4 straight quarters, ending the first quarter at 2.85%, up 10 basis points from the fourth quarter and 60 basis points from a year ago.

There were a number of selected items in the first quarter that I'd like to highlight as shown on Slide 4. Merger integration expenses totaled $440 million in the quarter, down $94 million from the fourth quarter and consistent with our prior estimate for 2011 costs. Operating losses were $472 million in the quarter, substantially all from additional litigation accruals for foreclosure-related matters. Incentive compensation and employee benefits, which are seasonally higher in the first quarter, were up $352 million from the fourth quarter. Reflecting continued improvement and credit quality across our consumer and commercial portfolios, we released $1 billion in reserves in the first quarter and would expect additional releases in the future absent significant deterioration in the economy. Finally, our effective tax rate was 29.5% in the quarter, which included the benefit associated with the realization for tax purposes of a previously written-down investment. Currently, our estimated full year 2011 effective tax rate is approximately 32%.

Let me now turn to key growth drivers across our diversified model. On Slide 5, you can see that average loans increased $402 million from the fourth quarter driven by commercial loans, which grew for the second consecutive quarter and increased 4% linked quarter annualized. Growth in this portfolio was broad based, including growth in commercial and corporate banking, asset-backed finance, commercial real estate, SBA lending and in international. This growth reflected loans to new customers as well as increased line utilization, both positive signs of continued growth.

Average consumer loans declined from the fourth quarter, although the rate of decline has slowed for the past 4 quarters. There was growth in brokerage, private student lending and in auto. Auto dealer services had record originations in the first quarter with average loans up 14% linked quarter annualized. This strong volume enabled us to increase our margins in this business while we continue to benefit from lower charge-offs in delinquencies.

While average loans increased slightly from the fourth quarter, period-end loans declined $6.1 billion, reflecting the expected runoff in our nonstrategic portfolios, which declined $6.5 billion in the quarter. We are no longer originating these loans, including legacy Wells Fargo Financial indirect auto, liquidating home equity, legacy Wells Fargo financial debt consolidation, government student loans, Pick-a-Pay mortgages and other PCI loans. Other than these portfolios, our core loan portfolios grew $371 million from the fourth quarter.

As you can see on Slide 7, deposit growth was strong again this quarter with average core deposits up $37.7 billion or 5% from a year ago and up modestly from the fourth quarter. Average core deposits were 106% of average loans. Retail core deposits, which exclude wholesale banking and mortgage escrows, had stronger growth, up 7% annualized from the fourth quarter.

For the first time since the merger with Wachovia, retail core deposits grew in the Eastern markets as deposit balances are no longer facing the headwinds from the intentional runoff of $117 billion in high-rate Wachovia CDs that have matured over the past 2 years. At the time of the merger, approximately 41% of our retail core deposits in the Eastern markets were in CDs compared with only 17% at the end of the first quarter. These high rate CDs now account for only 2% of our total core deposits.

Average checking and savings deposits were $723 billion, up 9% from a year ago and were 91% of average core deposits, up from 88% a year ago. We continue to see strong account growth across our franchise with net retail checking account growth of 7.4%, including 7.9% growth in California, 8.5% growth in North Carolina and 12% growth in Florida. Our ability to generate such strong growth in states throughout our footprint reflects our unrelenting focus on providing industry-leading distribution, convenience and customer service, which benefits our current customers and attracts new customers. Our continued strength in attracting low-cost deposits is reflected in our overall low deposit funding costs of 30 basis points in the first quarter.

Turning to noninterest income on Slide 8. The $753 million linked quarter decline in noninterest income in the quarter was almost entirely due to a $741 million decrease in mortgage banking fees. Mortgage fees reflected a $44 billion decline in origination volume in the quarter as higher mortgage rates reduced refi volume. These higher rates also increased the value of our servicing portfolio, with net MSR results of $379 million and the ratio of MSRs to loan service for others at 92 basis points. MSR valuation adjustments included a reduction of $214 million in the first quarter for higher projected servicing and foreclosure costs. It is important to note that factoring in servicing and foreclosure costs in our MSR value is not new for Wells Fargo. In fact, we reduced the value of our MSR by over $1 billion in 2009 and by over $1 billion in 2010 as servicing and foreclosure costs rose.

Let me highlight a few other key drivers of fee income this quarter. Service charges on deposit accounts were down 2% linked quarter, due to seasonality, and down 24% from a year ago, due to the impact of Regulation E. The Reg E impact this quarter, along with the estimated 2011 impact from regulatory reform, is in line with estimates we provided last quarter. We continue to refine our estimate of lower debit interchange fees from Dodd-Frank, if implemented, which we now estimate will be approximately $325 million quarterly after-tax but before any offsets. This estimate also reflects the higher debit card transaction volume our consumer and small business customers are generating.

Card fees were up 2% from the fourth quarter, which is strong considering the usual seasonality in first quarter results. Year-over-year card fees were up 11% reflecting an 11% increase in debit card volume and a 6% increase in consumer credit card volume driven by new account growth and increased card usage by our existing customers. Trading gains were up 15% from the fourth quarter and 14% from a year ago, reflecting strong sales and trading volume driven primarily by interest rates and commodities trading activity on behalf of our customers.

On Slide 9, you'll see that expenses improved in the quarter, down $607 million from the fourth quarter. As I mentioned earlier, expenses in the first quarter included $440 million of merger integration costs, higher operating losses related to a build in our litigation reserves and seasonally higher incentive compensation and employee benefit expenses. We also continued to have higher loan resolution and loss mitigation costs of $792 million this quarter. The lower expenses we had in the first quarter does not yet reflect the benefits we expect to realize from Project Compass, our company-wide effort to reduce core expenses while not compromising future growth opportunities. While Compass is focused on reducing our core fixed cost, our total expenses in any given quarter will depend on many factors, including the variable costs associated with many of our businesses, including residential mortgage originations.

Residential mortgage origination is one of the largest variable cost businesses at Wells Fargo, and it is important to consider the impact of expenses, not just revenue, on the bottom line. To manage this variable cost effectively, we utilize a temporary workforce for a portion of our origination activities that we can expand or contract depending on current and expected origination and application volume. In order to ensure a strong customer service and preparedness for rate volatility, we manage these costs carefully, and increases and decreases can lead or lag actual volume. As the graph on Slide 10 indicates, we ramped up production to support demand from the refi boom in the third and fourth quarters of last year. Now we are in the process of resizing the organization to reflect current demand levels as well as -- as we always do in mortgage cycles. This is not new for us.

Importantly, expenses can lag changes in volume since we need to provide notice to temporary staff before the end of their assignments with us. As mortgage volumes slowed in the first quarter, we took actions to reduce retail fulfillment staff by over 4,500 people. However, at the end of the quarter, over 2,000 were still on the payroll due to the required notification period. We expect to realize the expense savings from these reductions in the second quarter.

Turning to our segments, which starts on Slide 11. Community Banking earned $2.2 billion, up 13% from the fourth quarter, with $12.6 billion in revenue. We continued to sell more products to more customers across our banking footprint, achieving a record combined cross sell of 5.79 products in the first quarter, up from 5.6 a year ago. This growth reflects continued increases in the West with cross-sell reaching a record 6.21 products while the East grew cross-sell from 5.02 a year ago to 5.22 this quarter. Cross-sell improvement reflects record sales, with core product sales up 16% in the West reaching 3 million sales in a single month for the first time ever.

We also continued to increase sales in the East by introducing new sales and service practices as well as new products. Let me highlight a few examples. Approximately 33% of households in the West have a Wells Fargo credit card compared with less than 14% in the East. In the first quarter, credit card sales in the East more than doubled from a year ago. In the first quarter, partner referrals in the East that resulted in the sale, including products such as insurance, mortgage and merchant services, were more than 6x a year ago.

Wholesale Banking earned $1.7 billion on $5.5 billion in revenues in the first quarter. Loans grew 9% linked quarter annualized with broad-based growth in commercial banking, international, commercial real estate, asset-backed finance, government banking and corporate banking. Loan growth was driven by new customer activity and an increase in line utilization, up 50 basis points from the fourth quarter.

Linked quarter revenue was down primarily due to lower loan resolution income in the Wachovia portfolio. This decline was expected since we have already recognized the benefits from the largest loans in that portfolio. Many businesses within Wholesale Banking grew revenue linked quarter by adding new customers and continuing to focus on cross-selling. These included fixed-income sales and trading, equity sales and trading, investment solution, commercial mortgage servicing, equipment finance and real estate capital markets.

Let me give you a couple of quick examples of the momentum building in the first quarter. Commercial mortgage servicing won 6 master servicing deals in the first quarter compared with 13 for all of 2010. Wells Fargo Capital Finance arranged and syndicated the largest transaction in their history with a $1.8 billion refinancing for Hertz. Investment banking revenue with corporate and commercial customers increased 68% from the first quarter last year due to attractive capital markets conditions and continued success in selling investment banking products to our wholesale customer base.

Wealth, Brokerage and Retirement had a very strong quarter, earning $339 million, up $142 million from the fourth quarter. Revenue was $3.2 billion, up 4% from the fourth quarter. Revenue growth was driven by strong asset base fees with managed account assets up 7%. This growth benefited from the strongest quarterly net client asset flow since the merger. Expenses were down 2% from the fourth quarter resulting in positive operating leverage. Average core deposits were a record $125 billion, up $4 billion from the fourth quarter.

WBR results are already benefiting from the systems conversion completed early in the first quarter. Over 15,000 financial advisors in all 50 states are now on one common platform. Loan originations by financial advisors are up 56% from the first quarter 2010. Cross-sell continued to improve to 9.82 products per WBR customer, up from 9.67 products a year ago.

Our results this quarter continued to benefit from significant improvement in credit quality as shown on Slide 14. Charge-offs declined again for the fifth consecutive quarter, down $629 million from the fourth quarter and 41% below the fourth quarter 2009 peak. Nonperforming loans declined for the second consecutive quarter, down $1.3 billion from last quarter. Provision expense was $2.2 billion, down $779 million from the fourth quarter, including $1 billion reserve release.

Absent a significant deterioration in the economy, we believe future reductions in the allowance -- we can expect future reductions in the allowance for loan losses. The allowance for credit losses was $22.4 billion at the end of the quarter, and we also have $12.9 billion of nonaccretable difference to absorb losses in our PCI portfolio with the nonaccretable difference equal to 29.6% of remaining PCI unpaid principal balance.

The key credit metrics highlighted on Slide 15 point to continued improvement. NPAs were down 5% from the fourth quarter, our second straight quarterly decline. Nonperforming loans declined $1.3 billion from the fourth quarter with reductions in commercial and industrial, commercial real estate construction and each of the consumer loan categories. Total nonperforming inflows were down 11% from the fourth quarter. This is a second consecutive quarter of reduced inflows, which is a key driver of our NPA improvement.

We had the fifth consecutive quarterly decline in loans 90 days past due and still accruing, and early stage delinquencies also declined from the fourth quarter, the second consecutive quarter of improvement. This improvement in credit quality, in part, reflects the ongoing balance decline in nonstrategic portfolios, down a total of $64 billion or 34% since the merger with Wachovia.

The PCI portfolio continued to perform better than expected. Due to improved expected cash flows in this portfolio, largely Pick-a-Pay and resolved commercial loans, we have released a total of $5.5 billion of nonaccretable difference, $1.5 billion of which has been recognized in earnings since the merger from loan resolutions and most of the other $4 billion will be recognized through accretable yield over the life of the loans. This benefit has been partially offset by reserve bills netting to $3.9 billion improvement over original expectations. While the nonaccretable balance has absorbed $28 billion of losses related to PCI loans, we have $12.9 billion of nonaccretable difference remaining to cover 29.6% of remaining PCI unpaid principal balance. As we said at the time of the merger, we wanted to ensure that our portfolio marks were accurate, and we are pleased with the performance so far.

As we have done over the last few quarters, we updated the information on our mortgage servicing portfolio as well as our repurchase demands on Slide 17. The delinquency and foreclosure rate continued to decline to 7.22% in the first quarter, the lowest in 2 years and down significantly from a peak of 8.96% in fourth quarter 2009. Once again, based on the most recent publicly available data as of 12/31, our rate was the lowest among large bank peers. We believe these results reflect the relative strength of the Wells Fargo portfolio and the sustained improvement in the industry.

Our outstanding agency repurchase demands declined for the third consecutive quarter with the number and dollar volume of demands outstandings down over 50% from the second quarter 2010 peak. The most problematic vintages in terms of losses continue to be 2006 through 2008, but new demands in those vintages have dropped significantly from a year ago. New non-agency repurchase demands based on loan count have declined for 4 consecutive quarters, and we only had $69 million in total non-agency repurchases in the first quarter.

Total repurchased losses declined substantially in the first quarter to $331 million, down $175 million or 35% from the fourth quarter as repurchase volume declined. We added $249 million to the repurchase reserve this quarter, down $464 million in the fourth quarter.

As John spoke earlier on the call when he addressed the regulatory consent orders and as highlighted on Slide 18, we have already made many improvements to our servicing and foreclosure practices. As we have responded to changes in the housing market and strengthened our servicing practices, we have added over 10,000 team members to our home preservation staff, bringing the total to 16,000 team members. We plan to add or reassign approximately 1,000 additional team members over the next year with much of these costs already reflected in our current MSR value.

As we disclosed in last quarter's release, estimating the expenses we will incur to service our portfolio is a routine part of our quarterly MSR valuation process. We reduced the value of our MSR asset by $214 million this quarter due to increased servicing cost and have reduced the asset value by over $1 billion in each of the past 2 years as servicing and foreclosure costs have risen.

As shown on Slide 19, capital ratios continue to increase with strong internal capital generation. Tier 1 common grew to 8.9%, up over 60 basis points from the fourth quarter and up over 180 basis points from a year ago. Under current Basel III capital proposals, we estimate our Tier 1 common ratio grew to 7.2% this quarter.

Our other capital ratios continued to grow as well with Tier 1 capital increasing to 11.5% and Tier 1 leverage to 9.3%. These ratios will reduce by approximately 30 basis points in the quarter as we called $3.2 billion of Trust Preferred Securities that under regulatory capital guidelines, no longer qualify as capital once we gave notice of redemption. Our capital levels continue to demonstrate the ability of Wells Fargo to generate capital organically and as it relates to Basel III standards, the benefit of our diversified lower risk model relative to our large bank peers.

As John mentioned at the start of the call, our strong capital position enabled us to begin to return more capital to our shareholders. We took several actions that were contemplated in the capital plan we submitted to the Federal Reserve, including increasing our quarterly dividend rate to $0.12 a share, which is just the first step toward returning to a more normalized payout ratio of 30% over time.

I would also highlight that we not only increased our quarterly rate, we actually paid this higher rate in the first quarter, in full, to our shareholders, and the board has already authorized the same payment for the second quarter dividend. We also increased our share repurchase authority by 200 million shares starting this month -- and starting this month, we began to buy back shares. We also expect to call additional Trust Preferred Securities that will no longer count as Tier 1 capital under both Dodd-Frank and Basel III.

In summary, we had a very strong first quarter. We are very pleased with our record earnings, reflecting growth across our businesses. The strength of our franchise is reflected in the continuing growth in deposits and high-quality loan originations and deepening customer relationships with record cross-sell. The quality of our loan portfolios resulted in continued reductions in charge-offs, NPAs and early stage delinquencies across our portfolios. Internal capital generation remained strong, enabling us to return more capital to our shareholders. Liquidity remains at a very high level. We believe that our franchise remains very well positioned for the future.

I'd like to now open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Joe Morford from RBC Capital.

Joe Morford - RBC Capital Markets, LLC

I guess, Tim, maybe to start, could you talk a bit more about Project Compass and how you're going about that? And more specifically, what are the goals or opportunities for the program, and when we might start seeing -- should see that start to flow through in the numbers?

Timothy Sloan

Sure. I'd be happy to, Joe. We started talking about Project Compass in the fourth quarter. And in the fourth quarter, we mentioned that we were going to provide more guidance and more detailed guidance in the summer. And the reason for that is that we look at Project Compass as a very important effort on behalf of the company, and we look and we structured it as a bottoms-up process. What we want to do is make sure that we can improve our efficiency and become more cost effective without a reduction in revenue. And so we want to start from the bottom up and talk to all of our folks, as many of our folks as we can, that are closest to the customers, figure out what we can do to improve their ability to deliver better products and services more efficiently to the customers. So in terms of outlook and expectations, we'll provide more detail this summer.

Joe Morford - RBC Capital Markets, LLC

And then just one follow-up.

John Stumpf

Joe, let me add to that.

Joe Morford - RBC Capital Markets, LLC

Sure, John.

John Stumpf

This is about getting, clearly, more efficient, but it's also becoming more nimble. We want to be able to grow revenues faster, and we think by simplifying some of the things that we do that don't affect customers, actually can help our team spend more time with customers and enhance our revenue growth and become more relevant to our customers. So really it has -- yes, it does have the expense feature, and that's going to be an important part of it, but it's all about growing the business.

Joe Morford - RBC Capital Markets, LLC

And then just a follow up, it sounded like, from your comments, that your expectation for the impact of the Durbin amendment has increased?

Timothy Sloan

That's correct. Last quarter, our estimate was $250 million after tax, and we've increased that estimate to about $325 million a quarter after tax primarily because of higher volume in the underlying product.

John Stumpf

If you grow checking accounts, of course, yes, and we’re growing them as fast as I've seen in experience I've had with this company for many, many years. It becomes a bigger issue, of course.

Operator

Your next question comes from the line of John McDonald with Sanford Bernstein.

John McDonald - Sanford C. Bernstein & Co., Inc.

Just wondering if -- could you give us any feel for how much in dollars a reduction of 4,500 FTEs in mortgage could help the mortgage expense area?

Timothy Sloan

No, we don't have that detail on a per person basis.

John McDonald - Sanford C. Bernstein & Co., Inc.

But it's something that we should see move the needle...

Timothy Sloan

Yes.

John McDonald - Sanford C. Bernstein & Co., Inc.

Over the next couple of quarters. That alone should move it.

Timothy Sloan

Yes. John, in terms of timing, as we mentioned, we ended the fourth quarter with a good pipeline of mortgages that we needed to underwrite and close, and so we closed those through the first quarter. So we did not begin the reduction in that staff until late in the quarter, so you should expect that, that the reduction in the origination staff should be completed by the end of the second quarter.

John McDonald - Sanford C. Bernstein & Co., Inc.

But in terms of magnitude, it's something that we should see move the needle of your overall expense numbers.

John Stumpf

Well, yes. It's a meaningful number for the mortgage company, absolutely. And think of it, John, these are processors and fulfillment kind of people. So think about -- and you can do the math there as well as I can. The average compensation, pick a number and you can do it. These are people that, as Tim mentioned, because of the Safe Act, they're actually on payroll as temporaries, and we have a different process in how we reduce that. So you have to give them a couple months notice. So yes, it's a meaningful number.

John McDonald - Sanford C. Bernstein & Co., Inc.

Last quarter, you had a slide, entitled expense discipline, that showed a sense of cyclically elevated expenses and where you thought they could go to in 2011 and '12, and I don't see that in today's packet. Do those thoughts still hold about those items that you talked about last quarter?

Timothy Sloan

John, they do. I think that -- last quarter, we had a few line items in there. One was integration cost, which we provided some detail for this quarter, which were -- and the $440 million was within the range that we talked about for 2011. We continue to be pleased with the rate of loan resolution and loss mitigation cost reduction. We haven't broken out Wells Fargo Financial residual cost, and we're not going to do that anymore because all those portfolios have now been spread across the rest of the company, and it's not necessarily material. But we still feel confident about those ranges that we provided in that slide in the fourth quarter deck.

John McDonald - Sanford C. Bernstein & Co., Inc.

Okay and then in terms of Project Compass, you said on the second quarter call, we could expect you to discuss that in a little more detail. And should we think about you announcing some specific targets around that?

Timothy Sloan

You know what, I don't know if we're going to announce specific targets beyond, for example, the type of guidance that we provided in that fourth quarter page, but you will see more detail this summer. We'd like to try to put it together by the time of the second quarter earnings announcement, but it may be a little bit later than that.

John McDonald - Sanford C. Bernstein & Co., Inc.

But you might do something like that, that former slide where you get some potential quarterly expense progressions.

Timothy Sloan

Yes, I think that you should expect something like that.

John McDonald - Sanford C. Bernstein & Co., Inc.

My last question is just on the liquidity position, Tim. Why do cash and fed funds portfolios increasing so much? And what will lead you to start investing some of that cash?

Timothy Sloan

Well, the primary driver for the increase in our liquidity is our deposit growth. As we mentioned, the deposit growth continues to be beyond our expectations. And we were really, really pleased with that growth, particularly, as we mentioned, in the Eastern markets where we're completing the integration and consolidation of the Wachovia stores. But in terms of the timing and decisioning around how and when we might invest that cash in other assets is going to be a function of growth. And then clearly, we want to make sure that we can meet all of our customers’ needs in terms of our loan demand. And then secondly, we were hoping to invest that, those funds, as interest rates go up. We continue to believe that we're more likely to see interest rates go up and go down than go down. And we want to be very careful about investing a lot of funds in this kind of environment, because we don't want to find ourselves a year or 2 from now having invested at a low point in the cycle.

John Stumpf

And John, I view this as a real asset of the company. Just think about it, we're growing deposits, and this liquidity is -- we have $100 billion or so invested at 29 basis points. Just think of when we do employ that. And in this point in the cycle, this is not atypical as a recovery happens. You have uneven loan growth. Corporate balance sheets have never been in better shape. Consumers paying down debt. So it's just going to take us and it's going to take the industry some time to and customers some time to borrow and start to draw on lines and we're seeing some of that in the corporate side, but this -- I view this good news, the potential here.

John McDonald - Sanford C. Bernstein & Co., Inc.

Okay, thank you, guys.

John Stumpf

Thank you.

Operator

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

Matthew O'Connor - Deutsche Bank AG

If you could just talk about the NIM trajectory going forward. There might be a little bit of benefit from calling the higher cost TruPS. But how should we think about some of the other moving pieces?

Timothy Sloan

In terms of the direction of the NIM?

Matthew O'Connor - Deutsche Bank AG

Correct.

Timothy Sloan

Yes, well, it's going to depend. It's going to depend on loan growth and the mix of that loan growth. As we mentioned, we saw a nice loan growth in our Wholesale groups. We haven't seen as much loan growth yet in the consumer portfolio. It's going to depend on the rate of decline in our nonstrategic portfolios, which, as we mentioned, we're down about $6 billion for the quarter. It's going to depend on our decisions, as we were just talking about, related to investing the treasury portfolio. And then it's going to depend on deposit growth. I really can't give you a specific direction in terms of the NIM. I will reinforce, though, that we don't think about running this company based upon the NIM. We think about running the company based upon making sure that we can meet our customers' needs. What comes out of that is, one of the measures, is the NIM. But I can assure you, we're not managing the company based upon NIM.

John Stumpf

And the other thing we -- I know you know this, but we, for the big bank peers, we have the best NIM in the industry by some distance. And there is some impact as to how we recognize the PCI resolutions. But I think Tim said, we don't run the company based on that.

Matthew O'Connor - Deutsche Bank AG

Well, maybe just to rephrase the question. I mean, the net interest income dollars came down a bit quarter-to-quarter, and you point to a couple of things that seem like they might be onetime or lumpy. And I'm just trying to get a sense of what you might be thinking from here in terms of some of these moving pieces, or do we just look at this as kind of a run rate and it'll all be driven by loan growth from here?

Timothy Sloan

Well, again, the current NIM might be the run rate. We'll continue to watch that as we go through each quarter. We do expect that the PCI loan resolution effect within the NIM is going to be lumpy, and it has been ever since the first quarter of 2009.

Matthew O'Connor - Deutsche Bank AG

And then just separately, the mortgage originations were down pretty similar to what we're seeing for the overall industry. But if we look at the loan production revenue, that might have come down a little bit more than I would've expected given the decline in originations. And I appreciate the gain on sale came down a little bit this quarter, but I thought it was still pretty solid. So wondering what might have driven down the origination revenue a bit more than the originations there?

Timothy Sloan

Well, the gain on sale margins declined in the quarter, and that's just a question of the spread in the loans. You saw the refinance. As you pointed out, you saw refinance volume going down, but also, the gain on sale went down because spreads went down.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley

So just a question on PPOP [ph] . I mean, you got a couple of big levers that you have in the expense line, with merger integration charges coming down and the mortgage line coming down. Obviously, you're going to reinvest some of that into Project Compass. On the top line, you got the rebranding of Wells Fargo going on the entire East Coast. Could you just give us a sense as to how you are thinking about managing all those levers as we go through the next couple of quarters here, maybe even into 2012? Just want to make sure I understand how you're thinking about doing these reinvestments and timing it with what you hope to get from the cross-sell.

John Stumpf

Well, Betsy, let me take that. So you think about the company -- there's a lot of stuff going on right now. So we want to complete the Wachovia merger and do that exceedingly well, and I couldn't be happier with how that has gone. Secondly, let's not forget, the improvement in credit quality here. This was, in some people's minds, a big bet on credit, and we thought we did a good job analyzing upfront. And the proof in the pudding is in the eating, as they say, and we sure liked the results. In fact, if you look at the numbers, we've had a better news there than we had planned for. We want it to stay that way, and we're very pleased with that. So those expenses, to complete the merger, will largely extinguish at the end of the year as we finished that integration. We're on schedule. We're on budget. And we have a plan -- I think we have 5 or 6 more events to finish the Eastern integration. So think of that as on schedule and largely in place. And as the passage of time, those will happen. With respect to credit quality, we expect that we will see improvement. And we will get the numbers we're looking for. We've put a lot of people, add a lot of people in this company as the industry has to serve customers who are having challenges. On the mortgage side, for example, we've seen dramatic improvement in our past due. In fact, we are, for the large servicers, an industry-leading position. We've gone from almost 9% delinquency of our servicing portfolio of all of our mortgages, down to just a little over 7% now. That's a 20% improvement. That's a huge move in 5 quarters. There is real people attached to that, and we'll be able to see improvement over time as that happens. And even with what's going to happen in some of the new servicing standards, there'll probably be as much reassignment of some people as anything, but we should see the improvement there. Then with respect to Compass, when you have an opportunity that we have to get rid of some expense that doesn't add to customer value, to make us more efficient, more relevant, we expect that those things are going to happen. And we'll give you more information on that. So there's a variety of things going on. In the meantime, we're growing accounts. We're growing households. In the middle market and wholesale side, we're growing the business there. We have a wonderful global financial institutions group that we're doing a lot of business there. The wealth management business is growing. So there's lots of good things that are happening. But at a time -- in the cycle right now, it's uneven. So that's to be expected. But I'm encouraged that during this period of time now, we're doing all things that we can manage to make a difference for the long-term prosperity of this company.

Betsy Graseck - Morgan Stanley

So on the East Coast integration, where you've rebranded, to date, how the cross-sell is tracking relative to expectations?

John Stumpf

It's better. It's better -- in fact, I can’t tell you -- the only thing we didn't expect is how many pictures people we take into the stagecoach in Manhattan. If we could have figured how to -- what it would cost per every picture, we -- but no, that's just -- it's been much better. In fact, as you recall, we did the economics of the merger. We never put in the revenue synergies, but we had expectations because we saw in other places. But I can tell you, cross-sell is growing faster now than it has since we started measuring this, some 15 or 20 years ago. I can't be more encouraged. And I think you're going to see that accelerate now because all of a sudden, people are seeing the signs. They're seeing the connectivity.

Betsy Graseck - Morgan Stanley

And when do you see that hitting the top line, do you think?

John Stumpf

I would say it takes a while for that to run through. Typically, you add products arithmetically. The profitability goes geometrically. So yes, you're going to start seeing that, I think, accelerate the next number of quarters. That's when it comes through. But if you think about the East, and again I want to go back to it one more time, under cross-selling consumer, small numbers times big numbers equals big numbers. We went from just a little over 5 products per household to 5.22 in 1 year. That's huge. We used to add 3 or 4 basis points per year. Adding 20 basis points is -- you just don't see stuff like that.

Betsy Graseck - Morgan Stanley

And then just lastly on buybacks. When would you start the repurchase? Are you waiting for the P-buffer [ph] for discussions, or are you good to go before that.

John Stumpf

No, we're buying.

Timothy Sloan

Betsy, we started buying shares back this quarter from our benefits plans, which we were allowed to do. And you should expect that we'll, as we've done historically, buyback shares at opportune times. We're going to take advantage of the fact that we've got that authority, so we can deliver more returns for our shareholders.

John Stumpf

In fact, we are growing, we’re sitting at the highest capital levels I ever recall in this company. We're growing capital very rapidly. Look at what's happened just the last quarter or the last year. And the one thing I think that Basel did get right is the way they looked at risk. And this company runs with a whole lot less risk than our big bank competitors. So when you look at our capital ratios and the reduction that comes from the Basel III side, it's a fraction of other companies, and that's really important.

Betsy Graseck - Morgan Stanley

When does your blackout period end after the quarter? When can you start repurchasing?

Timothy Sloan

Later today.

Betsy Graseck - Morgan Stanley

Okay, thanks.

Operator

Your next question comes from the line of Paul Miller with FBR Capital Markets.

Paul Miller - FBR Capital Markets & Co.

Thank you very much. And on -- some of the banks that released earnings this week talked about how they saw a significant slowdown in borrowers’ interest in the second half of the quarter, probably most likely March, driven by events globally, Japan and whatnot. Can you just talk a little bit about what you're seeing out there on a global sense, so out there for borrower demand?

Timothy Sloan

We didn't see any significant decline in our commercial, corporate, real estate customer borrowing levels toward the second half of the quarter. And in fact, our loan volume for international was up. As John mentioned, we have a very, very strong financial institutions business, on an international basis that the combined company has been in for over 100 years, it's called our GFITS business, and we saw good demand in the first quarter.

John Stumpf

I would describe loans more as a re-regionalization, if you will, or more product type of the kind business you're in. If you're in the commodities business, that business is doing quite well. We saw activity there. On the other side, if you're on the consumer side, consumers are paying down debt. So it depends on the kind of business, the kind of consumer or the kind of customer. But because of our national franchise because we're in so many different businesses serving customers, we see a variety of things, but we did not see that phenomenon that others have talked about.

Paul Miller - FBR Capital Markets & Co.

And then on the side of the jumbo market, I mean, there has been some banks that have reported some increases in jumbo loans on their balance sheets. Have you seen the jumbo market improve, especially since some of the discussions with treasury where they want to lower the conforming loan rates?

Timothy Sloan

No, not in reaction to any changes that are coming from the treasury. I mean, as you can imagine, given our platform, we originate a large number of jumbo loans. And we're continuing to keep some on the balance sheet. We didn't keep as many on the balance sheet in the first quarter as we did in the fourth quarter, just because the volume was so high in the third and fourth quarter. If you look at our individual business line segments, you can -- we can say that within our wealth management and brokerage business that a good portion of the loan growth was related to jumbo loans.

John Stumpf

The jumbo volume is more dependent -- is more connected to just the activity in the marketplace. That's the biggest...

Paul Miller - FBR Capital Markets & Co.

Okay. Hey, thanks a lot, guys.

Timothy Sloan

Thank you.

Operator

Your next question comes from the line of Mike Mayo with CLSA.

Michael Mayo - Credit Agricole Securities (USA) Inc.

I'm stuck on Page 28 of the presentation, the PCI accretable yield. And a very technical question, did you shorten the amortization period for the accretable yield roll forward?

Timothy Sloan

No.

John Stumpf

So there's different terms or different time premise depending on the type of loan. I think it was consumer, it was something like 9 years and commercial, something like a couple of years, but...

Michael Mayo - Credit Agricole Securities (USA) Inc.

But the gist to my question is why did accretable yield contribute more this quarter than last quarter?

Timothy Sloan

Oh, the first quarter included a gain of about $150 million from the sale of a pool of consumer real estate loans.

John Stumpf

So Mike, if you look at Pick-a-Pay, just last quarter, we had the average life was 9.4 years. This quarter, we thought we would be 9.3 years which we’re one more quarter into it. And on the commercial side, we were at 1.8 years with the life of that portfolio. Now we're at 2 years. So they're largely unchanged. And Tim had the answer for that.

Michael Mayo - Credit Agricole Securities (USA) Inc.

Maybe if I can back up a little bit, but I look at the end-of-period balance for the accretable yield roll forward from the third to the fourth quarter that stayed about flat. And from the fourth to the first quarter, that was $800 million less. So does that mean that you had an $800 million benefit in net interest income? And if so, what does that mean for the future quarters?

Timothy Sloan

No, Mike. We could provide you with -- I'll have Jim follow up and provide you with more detail. But you shouldn't expect that the results for the first quarter are going to have any material impact on what you should expect for the future quarters. As John pointed out, the duration in our expectations is pretty similar to the fourth quarter.

Michael Mayo - Credit Agricole Securities (USA) Inc.

All right, yes, I can follow up offline. Just another technical accounting question. So it seems like your guidance for the tax rate stays about the same at 32% for the year, but you had an adverse decision in the Court of Appeals in Washington D.C. on Friday.

Timothy Sloan

Right.

Michael Mayo - Credit Agricole Securities (USA) Inc.

And so how much might you have to pay to the IRS? And why doesn't that get reflected in your tax guidance for the year? Can we talk to that line item?

Timothy Sloan

Good question, Mike. We were obviously very disappointed in the decision. We originated the underlying leases in early part of the last decade. And what's ironic is that both state and federal governments were very, very much encouraged us and encouraged those products at that time. We feel very strongly about our position. Obviously, the court felt differently, but we were fully reserved for that decision. So there's not going to be an impact from that decision this year.

Michael Mayo - Credit Agricole Securities (USA) Inc.

Okay, that's helpful. And then lastly, this is a very sensitive question but it's still a question that still comes up in a lot of my discussions. And that is, why did the prior CFO leave the firm? Could you add anything to the topic?

John Stumpf

Mike, that is so yesterday. I mean, we've got a terrific CFO. We're moving forward. I can't be happier with how things are going here, and we're looking to the future.

Michael Mayo - Credit Agricole Securities (USA) Inc.

All right. Well, I look forward to working with you, Tim.

Timothy Sloan

Thanks, mike.

Operator

Your next question comes from the line of Ed Najarian with ISI Group.

Ed Najarian - ISI Group Inc.

As I look at the operating expense base currently, and I know there's been a few questions related to this but just trying to sort of run through it mathematically, I see $440 million of integration costs, $472 million of operating losses. You talked about potential benefits from reducing the headcount on the mortgage side of the business and then also Project Compass, so those four things. I don't know what they all would quite add up to, but it strikes me that you could potentially be running at a quarterly expense run rate of $12 billion or less by 2012. Is that a reasonable conclusion on my part?

Timothy Sloan

Well, based on the math that you just described, you can get to that number. I think and the way that we think about our expenses are going to be much more a reflection of what our revenue looks like in the mix in our businesses. Some of our businesses are more efficient and have less expenses per dollar of revenue than others. I know you wish I could give you a more defined answer, but I'm not able to do that. It's really going to be much more an effect on the mix of the business as well as our projects on -- our progress, excuse me, on expenses. But there's no question that we're going to make progress.

Ed Najarian - ISI Group Inc.

Let me ask you a different question, let me ask it a slightly different way. If I come up with sort of my own math on those numbers, would you expect the underlying growth, sort of excluding those four things, in the franchise, the underlying expense growth in the franchise to be fairly minimal in '12 versus '11? So if these things sort of come out, there's not going to be a big offset from sort of underlying core expense growth or will there be?

Timothy Sloan

Well, again, when we think about core expense growth, we think about it based upon the opportunities we have to grow our businesses. And so, for example, we've been adding new salespeople and relationship managers in Wholesale Banking for the last year. So would that affect core expense growth? You bet it would. The reason we've done it is because we've got opportunities to bring new people on to the platform. We've done that. We've done the same in our wealth management business, because there's terrific financial advisers to bring out. That would affect the core expenses, too. So I appreciate the difference in how you asked your question, but I'm afraid you're going to get the same answer.

John Stumpf

Ed, here’s how I think about that. I think about the 275,000 or 280,000 team members we have, there's a group that are servicing -- there's group that sell products and services to our customers. There's a team that services that, and there's a team that supports that. And we want to make sure that we have the business aligned around our customers in a way that we can react to customer opportunities and to company opportunities and not be burdened with additional expense that makes it more difficult for us to do that business, that we're slower. So for example, how many data centers do we need? And how many different customer information files do we need? How many different places do we need to do the same business in how many different divisions? So those are the kind of things that we're going to -- that we are attacking, that we are -- and it's a good time to do it because now we're almost done with the Wachovia merger. And we can see how it is to operate in this new larger platform. But as Tim said, we don't -- this is hopefully going to help us accelerate growth. So we're surely going to -- and take the mortgage company, for example. If all of a sudden, we get a housing boom, we're going to want to add team members to capture that growth. And I know you'll appreciate that, but that's how we think about it.

Ed Najarian - ISI Group Inc.

Okay, that's helpful. And then to follow up, you talked about how you already have been repurchasing some stock. You can get back in there this afternoon and start buying back more. Is it reasonable for us to think that you're going to repurchase or get close to repurchasing that whole 200 million share authorization this year?

Timothy Sloan

You know what, it's going to be a function of how we view the stock price more than anything. We're going to repurchase stock based upon the capital plan that we submitted to the Fed. And it's going to be based upon that. It's going to be based upon what the stock price looks like, and it's going to be based upon liquidity. But I wouldn't necessarily conclude that we're going to buy 200 million shares next month, or by the end of the year, we might. But it's really going to depend on market conditions and our performance.

Ed Najarian - ISI Group Inc.

And then just one final question. Any insight on when down the road, I know this is sort of tough to look out, but you might get to the point where you're no longer incurring a significant mortgage repurchase cost and you can sort of play out the remaining repurchases through the existing reserve. Is that several quarters away? Or is that more like a couple of years away?

Timothy Sloan

You know what, I don't have a good answer for you. My crystal ball is a little bit cloudy there. What we do know is that things are improving faster than we would have expected 3 months ago, 6 months ago and 9 months ago. Again, I think that's a reflection of the fact that our portfolio, both what we own and we service for ourselves and what we service for others, is just a higher quality than everybody else's. So I think that the industry, while it continues to be under stress, I think when you look at Wells Fargo, we're just a little bit different. But I really couldn't tell you exactly when it's going to go away, but it sure to improve this quarter.

John Stumpf

I think if you think about how that portfolio was built and how it performs and you look at what the risks are in the industry, I think the biggest risks are in the private side. And if you look at our portfolio, a small percentage of our servicing is private, and about half of that doesn't carry a lot of the traditional reps and warranties. And it's evidenced by the kind of repurchase we've been seeing. When you have 7% of your portfolio, 7.22% past due versus some of our competitors at 10%, 12% or even 14%, that's a huge difference. Secondly, if you have 7% of your portfolio private, of which half of that doesn't carry traditionals, it makes the math such that it's not something that I spend a lot of time worrying about. Now if we have a double dip, if we have another whole thing that I don't expect, all bets are off. But I sure like the trajectory and the trend, you can't argue with that. I couldn't be happier there.

Ed Najarian - ISI Group Inc.

Okay, thank you very much.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer.

Christoph Kotowski - Oppenheimer & Co. Inc.

Yes, I'm wondering with regard to what's required of you under the consent orders for mortgage servicing. I don't care so much about the existing stock of problems that we're working through, but does it change the underlying economics of the mortgage servicing business going forward? I mean, does it structurally impact your cost? And can you recover those costs in pricing? And how, on a going forward basis, can you price the product effectively to reflect those costs?

John Stumpf

Well, we like the mortgage servicing business. It's been a good business for a lot of years. It still a good business. Part of what we get in that business is the servicing fee, the 25 basis points. We get a higher propensity when those customers refinance. They refinance with us, and we also sell those customers other products and services. So we like that a lot. As Tim mentioned in his comments, with respect to the existing, what we know about the changes that have come about through either legislation or through the performance of the portfolio, we have priced it into our MSR. And what we don't know, we actually put a reserve up. We added to -- substantially all of the litigation charge we took was related to mortgage for this quarter. But going forward, I think is where your comment or your biggest part of your question is, it's going to be 1 or 2 things, either we're going to get paid for it and we're going to be in the business or if you can't get paid for it, people are going to do something else with their money. And this is a necessary important part of the mortgage business, and quality matters. And others might have a different view because they have a much more troubled portfolio, ours doesn't have that. And it's a business that I suspect will be part of a discussion as in the future GSEs get reformatted or we figure out how -- what life is like in the future. And my guess is that it'll continue to be a good business for those who do it well.

Christoph Kotowski - Oppenheimer & Co. Inc.

So I mean, I guess what you're saying is that, I mean, the ultimate business model will take years to figure out and shake out. In the meantime, we're kind of stuck with a 25 basis point servicing fee, and the only way you protect yourself is by being very, very careful on underwriting, right?

Timothy Sloan

Well, I wouldn't describe it as being stuck with a 25 basis point servicing fee. I mean, this is a very profitable business for us. We like this business. And even with the incremental cost that we've incurred for servicing and foreclosure, it's still a profitable business for us. And so as John mentioned, we like it. We think we're good at it. In the past, we've made some mistakes. We fix them when we find them, but we think we're very good at it. And again, our servicing businesses are also a reflection of the quality of the portfolio, and the quality of the portfolio that we service is the highest of our big bank peers. So overall, we like the business.

Operator

Your next question comes from the line of Nancy Bush with NAB Research.

Nancy Bush - NAB Research

This is sort of an add-on to Chris's question, I guess. Given what is going on in the mortgage business, generally, all these proposals or thoughts that are sort of swirling around Fannie and Freddie, et cetera, et cetera, your company has always been, and rightfully so, regarded as the major mortgage player among the large banks. And that has always helped your stock, I think. But in the past few weeks or couple of months, I think your stock has begun to be sort of negatively impacted by this speculation around mortgage. John, could just give us your view of how you see the mortgage business shaking out over the long term with regard to Fannie and Freddie, and how it may impact the relative size of the business for you?

John Stumpf

Well, I was hoping you'd ask Tim that question.

Nancy Bush - NAB Research

Well, he can answer.

John Stumpf

I'm just teasing, Nancy. It's an important question because for most families, the home purchase is the most significant financial transaction they'll ever have. It affects the whole family. The whole family gets involved in it, and it's an important thing. And we want to make sure we get it right. I give credit to the administration and to members of congress. It's now becoming part of the active discussion and debate in Washington. As you saw, there were 3 proposals. Wells Fargo has opined, and we've made some of our own comments known about -- and I actually had an article not too long ago in the FORTUNE Magazine about some views about this. So I'm hopeful, let's just put it that way. I'm hopeful when we get all done with this, whatever that timeframe is, and it'll take -- it probably won't happen this month or this year, it's going to take some time because there's very divergent views on this, that mortgage money will be available for consumers. It'll be available broadly at prices that make sense but also reflect the risk. Whatever the government's involvement is ought to be explicit and they got to get paid for it. The private sector ought to play a large role in this. And this whole idea about risk retention, ought to reflect the fact that everybody who touches a mortgage ought to be interested in making sure it's a good mortgage. So whatever happens there. So I think, when we get all said and done, I'm optimistic we'll get this right.

Nancy Bush - NAB Research

But you were, correct me if I'm wrong, but you were a supporter of the QRM guidelines or suggestions as they came out from the FDIC. Is that correct?

John Stumpf

Yes, But we have a view that we ought to be careful about QRM to this extent that we'd not punish the mortgage that don't make it into the QRM. So if you start to broaden the QRM view, the qualified residential mortgages, when you have one that does not qualify, it could be so price different, in other words, more expensive, that you got to be careful there. And if the QRM is too broad, not enough discipline around that, then you're going to have more people trying to force things in the QRM to get around the retention side. So I mean, this is just one of many, many issues.

Nancy Bush - NAB Research

Okay, thank you.

John Stumpf

Thank you.

Operator

And your next question comes from the line of Chris Mutascio with Stifel, Nicolaus.

Christopher Mutascio - Stifel, Nicolaus & Co., Inc.

Hey, Tim, just a quick question. I want to go back to John McDonald's question and ask it little differently. On the $100-and-so billion in cash and short-term investments, when the new world order is set from Basel III in liquidity, what do you think a run rate for that type of cash and that type of balance will be? Will it be half that? I'm try to figure out how much revenue you're leaving off, off the table, if you will, by investing $100 billion in 25 bps. Can $50 billion be invested in 5-year treasuries over time?

Timothy Sloan

Chris, that's a good question. I wish I could give you the answer. And the reason I'm hesitant is that we're in the midst of discussions with regulators, with the Fed, very, very productive discussions from our perspective, a lot of give and take. But until we complete the discussions, I couldn't comment specifically on whether it's 1/2 or 3/4 or 2/3 or what. Clearly, we're not maintaining, and I want to make sure this is really clear, we're not maintaining $100 billion of liquidity because we're concerned about where the LCR is going to end up. That's not what's preventing us from investing more of that. What we're hesitant about is investing more today on what we think are lower rates.

Christopher Mutascio - Stifel, Nicolaus & Co., Inc.

Yes, I understand. I'm looking at your unrealized gains of $9 billion. So clearly, you're taking on less risks than some others. If I use $50 billion at 175 basis point spread, assuming a 5-year treasury at 2%, but you're already earning 25 basis points on this, you're going to be leaving over $220 million a quarter off the table?

John Stumpf

I would not disagree with your math.

Christopher Mutascio - Stifel, Nicolaus & Co., Inc.

Okay, all right. Thank you very much.

Operator

That was your final question. I will now turn the floor back over to you.

John Stumpf

Well, I want to thank all of you for joining the call. I appreciate your questions. And again, thank you for your time, and we'll talk to you next quarter. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's call. You may now disconnect.

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