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For Wells, pressure from energy, rates and regulators

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For Wells, pressure from energy, rates and regulators

characteristically generated a strong top line for the , bolstered by loan growth,but it grappled with mounting energy-related challenges and persistently lowinterest rates that dinged its bottom line.

TheSan Francisco-based bank on April 14 said it grew first-quarter total revenuemore than 4% from a year earlier to $22.2 billion. Total loans of $947.3billion grew about 3% during the quarter, the company said in itsearnings release. Amajority of the growth came from a series of acquisitions of loans and lendingoperations from General Electric Co. in 2015. But Wells also said organic loandemand remains steady across both its commercial and consumer business lines,with growth coming from commercial-and-industrial, commercial real estate,credit cards and auto lending, among other areas.

"[W]hile signs of economic uncertainty remain in theglobal economy as well as volatility in the capital markets, the U.S. economy,which is the primary driver of Wells Fargo's results, continues tobe resilient," Chairman and CEO John Stumpf told analysts during acall after reportingresults.

He said that while an energy slump hurts oil-and-gasborrowers — oil prices are off some 70% from their 2014 highs, and natural gasprices also are low — American consumers are benefiting from the low gasolineprices that are linked to the drop in oil. Stumpf also noted that the U.S. jobmarket continues to advance, a positive sign for both businesses and consumers.Employers added 215,000 jobs inMarch, according to the most recent federal estimate, and theyaveraged additions of more than 230,000 over the past 12 months. And while low interestrates are a drag on banks' earnings, they continue to benefit borrowers,bolstering affordability of mortgages and other loans and fueling overalleconomic activity, he added.

"From a revenue side, it looksrelatively strong," Marty Mosby, director of bank and equity strategies atVining Sparks, said in an interview after Wells posted its results.

Revenuegrowth fueled Wells' first-quarter profit. It reported first-quarter net incomeapplicable to common stock of $5.09 billion. On a per-share basis, it postedearnings of 99 cents, beating the S&P Capital IQ consensus estimate of 97cents.

ButEPS declined from $1.04 a year earlier, with Wells citing in part the downsidesof low rates and the energy recession. Even with the loan growth, the bank'snet interest margin declined to 2.90% from 2.92% the previous quarter and 2.95%a year earlier.

Wellssaid it did get some initial benefit in income from the Federal Reserve's movelate in 2015 to bump up short-term interest rates by 25 basis points — the first lift in years, one that brought rates offa zero-bound range. But the bank chose to hold onto more liquid assets duringthe first quarter, curbing some of the benefit of the rate increase, Mosbysaid.

Additionally, the follow-on rate hikes that big lenders suchas Wells had hoped for have yet to materialize, with the Fed refraining fromadditional moves amid global economic weakness and the domestic energyconcerns. As such rates remain near historic lows and lending profitabilitycontinues to prove difficult to boost.

Onthe credit quality side, deterioration in Wells' energy loan portfolio bruisedthe bank during the first quarter. Its energy book accounted for only about 2%of overall loans. But the level of energy loans it marked"classified" — identified asvulnerable for late payments or defaults — climbed to 57% in the first quarter,up from 38% at the end of 2015. "And that reflects the environment that weare in, and that reflects what's going on with the stress of theborrowers," CFO John Shrewsberry said during the earnings call.

Shrewsberry said Wells charged off $204 million in energy loansin the first quarter, more than doubling the previous quarter's level. Net loan charge-offs totaled $886 million, or 0.38% ofaverage total loans, in the first quarter, up from $831 million, or 0.36%, inthe previous quarter.

The company's provision for credit losses was $1.09 billionin the first quarter, compared to $831 million in the previous quarter.Shrewsberry cited a $200 million reserve build in the oil-and-gas portfolio. Hesaid Wells was confident that it is appropriately reserved at this stage, buthe also said that with no clear signs on where oil prices are headed in thenear term, the bank will continue to scrutinize its energy book and makeadjustments if needed as the year wears on.

"My assumption is we're going to be talking about this all year," Shrewsberry said. "I don't know that we will continue to reserve at this pace all year,because we feel great about our reserve at the end of the first quarter, andthat reflects everything that weknow. But I would be hesitant to tell you that this was the big quarter"and conditions would improve going forward.

Mosby said Wells appears proactive on the energy front."They are focused on making sure they can get ahead of it and that theycan provide for any losses they may see down the road," he said.

Overall expenses also are an area to watch at Wells, Mosbysaid. Noninterestexpense in the first quarter was $13.0 billion, up from $12.6billion the previous quarter.

Wellssaid part of the bump came from higher employee benefits and incentivecompensation — typical for the start of a year —but it also said it experienced an increase in costs tied to the integration ofthe General Electric transactions. It did not break out the portionattributed to the GE deals, but Mosby said he suspects that the "pressurebubbling through expenses right now" is largely due to those deals, andthat should fade over time.

Meanwhile,not long after the first quarter finished, Wells endured a surprise reprimandfrom federal regulators. The Federal Reserve andthe FDIC this week jointly ruled that Wells' living will — a plan required of large andcomplex U.S. banks detailing how they would steer through a potentialbankruptcy — contained "materialerrors." Wells must now revise its plan notably by Oct. 1 or face morerigorous regulatory requirements.

Regulators rebuked the living wills of five of the eightmajor banking companies under evaluation, including and , but Wellswas the only one singled out for having serious material errors. The pushbackfrom regulators against Wells surprised Wall Street because, in the previousround of the living-will exercise, the bank was the only company in themegabank group deemed to have crafted a feasible bankruptcy plan.

"It is surprising," Scott Siefers, an analyst at Sandler O'Neill & Partners, saidin an interview after the living will rulings were issued. "For better orfor worse, the expectations for them are so much higher," he said ofWells, noting the company's consistent profitability and overall balance sheetstrength.

Stumpf, the CEO, said during the earnings call that he isconfident Wells will be able to meet regulators' demands. "While we weredisappointed to learn that our submission was determined to have deficienciesin certain areas," he said, "we are focused onfully addressing these issues as part of our 2016 submission."

Stumpf later added: "We own this, and we're going to getthis right."

Siefers said that the living-willobjection is a reflection of high levels of regulatory scrutiny on megabanks,and Wells got a strong reminder that it is not immune to this. But the analystalso said he is confident Wells will address any problems without it affectingthe bank's operations or earnings.

"Clearly, it's unfortunate, but I don't see anyimmediate business ramifications," Siefers said. "I don't see this asa critical thing for Wells Fargo."