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Edited Transcript of WFC earnings conference call or presentation 12-Oct-18 2:00pm GMT

Q3 2018 Wells Fargo & Co Earnings Call

SAN FRANCISCO Oct 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Wells Fargo & Co earnings conference call or presentation Friday, October 12, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John M. Campbell

Wells Fargo & Company - Head of IR

* John Richard Shrewsberry

Wells Fargo & Company - Senior EVP & CFO

* Timothy J. Sloan

Wells Fargo & Company - CEO, President & Director

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Conference Call Participants

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* Betsy Lynn Graseck

Morgan Stanley, Research Division - MD

* Brian Matthew Kleinhanzl

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Erika Najarian

BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - Analyst

* John Eamon McDonald

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* John G. Pancari

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD

* Nancy Avans Bush

NAB Research, LLC, Research Division - Research Analyst

* Robert Scott Siefers

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Saul Martinez

UBS Investment Bank, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo Third Quarter Earnings Conference Call. (Operator Instructions)

I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

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John M. Campbell, Wells Fargo & Company - Head of IR [2]

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Thank you, Regina. Good morning, everybody. Thank you for joining our call today where our CEO and President, Tim Sloan; and our CFO, John Shrewsberry, will discuss third quarter results and answer your questions. This call is being recorded.

Before we get started, I would like to remind you that our third quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website.

I will now turn the call over to our CEO and President, Tim Sloan.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [3]

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Thank you, John. Good morning, and I want to thank you all for joining us today.

We earned $6 billion in the third quarter, which was $1.13 per diluted common share, and we grew revenue and reduced noninterest expense on both a linked quarter and a year-over-year basis. These results reflect the transformational changes that we've been making at Wells Fargo. And I want to focus my comments on the progress that we've made on the 6 goals that the operating committee and I established last year.

The first goal I focused on is risk management. We were working hard to transform how we manage risk at Wells Fargo, and our goal is not only to meet but exceed regulatory expectations so that we have the best risk management in the industry. We're pleased with the expertise our new Chief Risk Officer, Mandy Norton, has brought to the process, and we continue to make progress. We've had constructive dialogue with our regulators, and we're taking their detailed feedback and making changes across the company, especially in our operational and compliance risk management structure. A key milestone in this process is our newly enhanced risk management framework, which fundamentally transforms how we manage risk throughout the organization in a comprehensive, integrated and consistent manner.

In addition, during the third quarter, we successfully completed the requirements of the consent order with the OCC related to compliance with provisions of the Servicemembers Civil Relief Act. Satisfying this consent order is a great example of why effective risk management is not only good for Wells Fargo but also good for our customers.

As part of our goal to provide exceptional customer service and advice, Wells Fargo Advisors launched Envision scenario, which allows our clients to model how changing their investment decisions can impact their investment goals.

In addition, our retail customers continue to benefit from consumer-friendly initiatives we implemented last year, including Overdraft Rewind, which has helped over 1.8 million customers avoid overdraft charges. As some of you may have seen, we recently launched a new ad as part of our national advertising campaign highlighting this industry-leading feature.

Also in the third quarter this year, we eliminated monthly service fees for Teen Checking and Everyday Checking for young adults. While this latest change does not have a material impact on our deposit service charges since the monthly fees were minimal, it does encourage younger customers to join and stay with Wells Fargo. The changes we are making are having a positive impact. For example, retention of our primary consumer checking customers reached a 5-year high in the third quarter.

We've also continued to introduce industry-leading innovations, including using technology to provide our customers more control and transparency. In September, 28% of all retail mortgage applications were done through our online mortgage tool, which we introduced in March. We also recently launched Control Tower, which provides customers with a single view of their digital financial footprint, including where their Wells Fargo debit or credit card or account information is connected, such as with recurring payments. It also allows customers to quickly turn on or off their Wells Fargo debit and credit card from their mobile device. I'll also highlight that the response to our newly enhanced Propel credit card has exceeded our expectations.

Leadership and corporate citizenship is one of our 6 goals because we believe Wells Fargo should play a role in building stronger communities. According to a recent survey on corporate giving by the Chronicle of Philanthropy, the Wells Fargo Foundation was the #2 corporate cash giver in the U.S. We've always been a large donor, but earlier this year, our foundation announced it would target $400 million in contributions to communities across the U.S., a 40% increase from a year ago, and we are on track to reach that milestone. This latest increase was not part of the ranking from the Chronicle of Philanthropy since that ranking was based on 2017 data.

Most recently, Wells Fargo announced 2 separate $1 million donations to support Hurricane Florence and Hurricane Michael relief efforts. We are committed to working with organizations and agencies on the ground to help our communities recover and providing continued assistance to our team members and customers who have been impacted, including reversing certain fees and allocating $3 million to our We Care fund, which provides grants to team members who face a catastrophic disaster or financial hardship resulting from an event beyond their control.

We also want to be an industry leader in team member engagement, and our efforts to make Wells Fargo a better place to work are reflected in continued low voluntary team member attrition. Third quarter voluntary attrition was stable compared with the second quarter, which was at the lowest level in over 5 years. Next week, we'll launch a new company-wide team member experience survey, which is being conducted by an outside vendor and is another way we will receive feedback from our team members to make progress towards our goal of being the leader in engagement.

As part of our goal of delivering long-term shareholder value, we are committed to generating high returns and then returning more capital to shareholders. We returned a record $8.9 billion to shareholders through common stock dividends and net share repurchases in the third quarter, more than double the amount returned a year ago. We're also committed to evolving our business model to meet our customers' financial needs in a more streamlined and efficient manner. We are on track with our expense savings initiatives, including a recently established 2020 expense target of $50 billion to $51 billion, which includes approximately $600 million of typical operating losses and excludes litigation and remediation accruals and penalties.

While there is more work to do, the substantial progress we are making on our goals demonstrates how hard our team is working to transform Wells Fargo. We are addressing past issues, enhancing our focus on our customers, strengthening risk management and controls, simplifying our organization and improving the team member experience. I'm confident that these changes are building a better Wells Fargo for all of our stakeholders, and we are encouraged by the positive business trends we had in the third quarter, including year-over-year growth in primary consumer checking customers, debit and credit card usage, loan originations and autos, small business, home equity and personal loans and lines.

John Shrewsberry will now discuss our financial results in more detail.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [4]

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Thank you, Tim, and good morning, everyone. We highlight our third quarter results on Page 2, which included an ROE of 12.04% and ROTCE of 14.33%. We generated positive operating leverage on both a year-over-year and a linked-quarter basis. We continue to have strong credit quality and high levels of liquidity and capital, and we doubled our capital return compared with the third quarter last year, including a 10% increase in our common stock dividend.

As Tim highlighted, we had positive business momentum, including primary consumer checking customers up 1.7% from a year ago; increased debit and credit card usage, with debit card purchase volume up 9% and consumer general purpose credit card purchase volume up 7% from a year ago; and higher loan originations, with auto up 10%, small business up 28%, home equity up 16% and personal loans and lines up 3% from a year ago.

On Page 3, we highlight noteworthy items in the third quarter. Our earnings of $6 billion included a $638 million gain on the sale of $1.7 billion of Pick-a-Pay PCI mortgage loans; $605 million of operating losses, primarily related to remediation expense for a variety of matters, including an additional $241 million accrual for previously disclosed issues related to automobile collateral protection insurance; a $100 million reserve release reflecting strong credit performance as well as lower loan balances; and an effective income tax rate of 20.1%, which included net discrete income tax expense related to the remeasurement of our initial estimates for the impacts of the 2017 Tax Cuts and Jobs Act recognized in the fourth quarter. We currently expect the effective tax rate for the fourth quarter of this year to be approximately 19%, excluding the impact of any future discrete items.

Our results also included the redemption of our Series J preferred stock, which diluted -- which reduced diluted EPS by $0.03 per share due to the elimination of the purchase accounting discount recorded on these shares at the time of the Wachovia acquisition.

We highlight some important trends in our year-over-year results on Page 4. Revenue growth included the increase in net interest income as a higher NIM offset lower earning assets. Expenses declined, driven by lower operating losses. However, we also had lower expenses in a number of other categories, including outside professional services, outside data processing and travel and entertainment. Strong credit performance as well as lower loan balances resulted in lower provision expense. And our capital levels remained strong while we increased our share buyback and reduced common shares outstanding by 4%.

I'll be highlighting the balance sheet and income statement drivers on Pages 5, 6 and throughout the call, starting with loans on Page 7. So jump to Page 7.

Average loans declined $4.6 billion from the second quarter. The decline in average loan balances was driven by strategic loan sales, continued reductions in Commercial Real Estate reflecting our conservative underwriting, declines in auto as we've transformed that business and runoff of legacy junior lien mortgage loans. Period-end loans were down $9.6 billion from a year ago. Over the last 12 months, we've sold or moved to held for sale $6.8 billion of Pick-a-Pay PCI loans and Reliable Financial Services loans.

Commercial loans declined $1.2 billion from the second quarter despite C&I loans increasing $1.5 billion, with growth in Corporate and Investment Banking, Commercial Capital and Commercial Real Estate credit facilities to REITs and non-depository financial institutions. This growth was more than offset by Commercial Real Estate loans declining $2.8 billion. The decline in CRE mortgage loans was due to ongoing paydowns on existing and acquired loans as well as lower originations, reflecting continued credit discipline in competitive and highly liquid financing markets. CRE construction loans increased $753 million, with growth in community lending, hospitality and senior housing.

As we show on Page 9, consumer loans declined $746 million from the second quarter, which was driven by the sales of $1.7 billion of Pick-a-Pay PCI mortgage loans and $374 million of auto loans transferred to held for sale.

Let me highlight our largest consumer loan portfolios in more detail, starting with the first mortgage loan portfolio, which increased $1.3 billion from the second quarter. Nonconforming loans grew $6.4 billion, which was partially offset by the Pick-a-Pay PCI loan sales. In addition, $249 million of nonconforming mortgage loan originations that would have otherwise been included in this portfolio were designated as held for sale in anticipation of future issuance of RMBS securities. Junior lien mortgage loans continued to decline as paydowns more than offset new originations, which grew 3% from the second quarter and 16% from a year ago.

Credit card loans increased $1.1 billion from the second quarter. New accounts grew 27% from the second quarter, benefiting from the launch of the new Propel Card, which exceeded our expectations, and higher originations through digital channels, which generated 45% of all new credit card accounts.

Auto loans were down $1.6 billion from the second quarter due to expected continued runoff and the transfer of the remaining $374 million of Reliable Financial Services auto loans to held for sale. Auto originations increased 8% from the second quarter and 10% from a year ago with high-quality loan -- high-quality origination growth driven by changes we've made to the business, which makes it easier for customers to do business with us, including increased automated underwriting. We're well positioned for originations to continue to increase, and we expect the portfolio balances to begin growing by mid-2019.

Average deposits declined $40 billion from a year ago, reflecting lower Wholesale Banking deposits, including the actions taken in the first half of the year to manage to the asset cap, as well as lower Wealth and Investment Management deposits as customers allocated more cash to higher-rate alternatives. The $4.9 billion decline in average deposits from the second quarter was driven by lower consumer and small business banking deposits, which includes Wealth and Investment Management deposits as consumers continued to move excess liquidity to higher-rate alternatives.

Our average deposit cost increased 7 basis points from the second quarter and was up 21 basis points from a year ago compared with the 100 basis point change in the Fed funds rate. The increase in our average deposit cost was driven by increases at Wholesale Banking and Wealth and Investment Management deposit rates, while rates paid on other consumer and small business banking deposits have not yet meaningfully responded to rate movements. Deposit betas continue to outperform our expectations.

On Page 11, we provide details on period-end deposits, which declined $2.3 billion from the second quarter. Wholesale Banking deposits increased $9.1 billion in the third quarter, with most of the growth coming later in the quarter after we made targeted adjustments to our pricing in a competitive rate environment. We also had growth in Corporate Treasury deposits, including brokerage CDs, which we use as an alternative source of balance sheet funding. Consumer and small business banking deposits declined $13.7 billion from the second quarter, driven by customers in Wealth and Investment Management and Community Banking moving excess liquidity to higher-rate alternatives, which was partially offset by modest growth in small business banking deposits.

Net interest income increased $31 million from the second quarter. This growth included approximately $80 million of benefit from 1 additional day in the quarter and a $54 million benefit from hedge ineffectiveness accounting. These benefits were partially offset by $105 million decline from all other balance sheet mix, repricing and variable income.

Our NIM increased 1 basis point from the second quarter to 2.94%, driven by a reduction in the proportion of lower-yielding assets and a modest benefit from hedge ineffectiveness accounting. Net interest income was relatively stable for the first 9 months of this year compared with the year ago, and we currently expect net interest income to be up modestly for the full year, reflecting better-than-expected deposit betas.

Noninterest income increased $357 million from the second quarter, with growth in other income, market-sensitive revenue, mortgage banking, service charges on deposits and card fees. Let me highlight a few of the business drivers in more detail.

Deposit service charges were up $41 million from the second quarter, primarily driven by seasonality and partially offset by a higher earnings credit rate for our commercial customers. Trust and investment fees declined $44 million from the second quarter on lower investment banking results and lower retail brokerage and transaction activity.

Mortgage Banking revenue increased $76 million from the second quarter from higher net gains on residential and commercial mortgage loan originations. While residential mortgage loan originations declined $4 million from the second quarter, the production margin increased to 97 basis points, primarily due to an improvement in secondary market conditions. Fourth quarter mortgage originations are expected to be down, reflecting seasonality in the purchase market. Pricing margins remained historically tight due to excess capacity in the industry, and although we've seen stabilization in pricing margins in the recent quarters, we've not seen any meaningful improvement. We expect the production margin in the fourth quarter to be within this year's quarterly range of 77 to 97 basis points.

Turning to expenses on Page 14. Expenses declined from both the second quarter and a year ago. We're on track to achieve our expense targets of $53.5 billion to $54.5 billion this year, $52 billion to $53 billion in 2019 and $50 billion to $51 billion in 2020. Each of these annual expense targets include approximately $600 million of typical operating losses and exclude litigation and remediation accruals and penalties.

Given our commitment to improving efficiency, the transformational changes we're making across our businesses as well as our changing customer preferences, including adoption of digital self-service capabilities, we recently announced that we expect our headcount to decline by approximately 5% to 10% within the next 3 years as part of achieving our expense targets. This projected decline is expected to be achieved through displacement as well as normal team member attrition. An important priority for us as we move forward will be supporting those team members who are impacted.

Let me explain the trends in our third quarter expenses in more detail, starting on Page 15. Expenses were down $219 million or 2% from the second quarter. We had declines in most of our expense categories on a linked-quarter basis, including compensation and benefits; revenue-related; running the business, both discretionary and nondiscretionary; and third-party services. The increase in infrastructure expense was driven by higher equipment expense, primarily due to PC purchases related to the company's migration to Windows 10.

As we show on Page 16, expenses were down $588 million or 4% from a year ago, driven by lower operating losses. We also had lower revenue-related expense and third-party services expense. The increase in compensation and benefits expense was primarily due to higher salary expense, higher severance as well as higher 401(k) matching expense and higher expenses from the broad-based restricted stock award granted to eligible team members in the first quarter. These higher expenses were partially offset by the impact of the sale of Wells Fargo Insurance Services and lower FTEs as part of our efficiency initiative. Total FTEs were down 2% from a year ago.

The increase in running the business discretionary expenses was driven by higher advertising expense due to the reestablished campaign, partially offset by lower T&E expense. While we have more work to do, our efforts to improve efficiency are already being reflected in areas such as outside professional services, outside data processing, T&E, postage and supplies, and we currently expect that we'll meet our 2018 expense target.

Turning to our segments, starting on Page 17. Community Banking earned increased -- earnings increased $320 million from the second quarter, driven by lower net discrete income tax expense. On Page 18, we provide the Community Banking metrics. Teller and ATM transactions declined 6% from a year ago, reflecting continued customer migration to virtual channels. Digital secure sessions increased 20% from a year ago. In the third quarter, we consolidated 93 branches, and we're on track to consolidate approximately 300 branches this year. Additionally, in the fourth quarter, we expect to complete the previously announced divestiture of 52 branches.

Primary consumer checking customers have grown year-over-year for 4 consecutive quarters and grew 1.7% year-over-year in the third quarter of this year compared to 0.2% growth a year ago. In the third quarter, we continued to have improvements in primary customer retention, which is at the highest level since we started tracking the metric in 2013. Growth in new checking customers was driven by digital, with 12% of new checking customers acquired from the digital channel. Growth in new checking customers also reflected the benefit of ongoing marketing initiatives and strength in acquiring college-age customers.

On Page 19, we highlight strong growth in credit and debit card purchase volume. We also had steady improvement in both customer loyalty and overall satisfaction with most recent visit survey scores throughout the third quarter, and we ended the quarter with both scores rebounding from the second quarter.

Turning to Page 20. Wholesale Banking earnings increased $216 million from the second quarter, reflecting lower operating losses and higher revenue.

Wealth and Investment Management earnings increased $287 million from the second quarter, reflecting lower OTTI, which was elevated in the second quarter due to the impairment related to the announced sale of our ownership stake in RockCreek. Results in the third quarter also reflected lower operating losses.

Turning to Page 22. Our strong credit results continued with 29 basis points of net charge-offs in the third quarter. For the fourth consecutive quarter, all of our commercial and consumer real estate loan portfolios were in a net recovery position. Nonperforming assets declined $410 million from the second quarter, the 10th consecutive quarter of decline.

Turning to Page 23. The linked-quarter decrease in our estimated Common Equity Tier 1 ratio fully phased-in reflected our increased capital return in the third quarter, partially offset by a decline in our risk-weighted assets. The reduction in RWA included a onetime impact from our implementation of the newly issued regulatory guidance covering high-volatility commercial real estate, which benefited our CET1 ratio by approximately 10 basis points.

So in summary, we continue to work hard in the transformational changes we're making throughout our businesses, including our expense initiatives, and we're on track to meet our expense targets. Our positive business trends in the third quarter included growth in primary consumer checking customers; increased debit and credit card usage; and higher loan originations in auto, small business, home equity and personal loans and lines, which are all up from a year ago, and we generated positive operating leverage on both a year-over-year and linked-quarter basis.

And with that, Tim and I will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Scott Siefers with Sandler O'Neill + Partners.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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Just had a quick question. So appreciate the reiteration on the expense guide for the next couple of years. I think one question I wanted to ask about -- back at the conference in mid-September when you made the 2020 expense guide, when it went from simulation to guide, I think a lot of people presume that the same must hold true for the other aspects of the simulation as well, specifically like flat revenues from 2017 out through 2020. So I mean, is that the case? And if not, I guess, as you look out over the course of the next 1 to 2 years, what do you see as the main drivers or opportunities of reaccelerating revenue growth as you look forward?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [3]

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Sure. So in the simulation that we served up in May at our Investor Day, that the -- what we were trying to demonstrate is that, let's just say even with flat revenue, we would -- and with expenses as we guided them, with credit as we described it and with our capital plan in place that in 2020, we would be delivering a 15% ROE and a 17% ROTCE. We don't have a single solid number for 2020 in revenue for all the reasons that you can imagine in terms of where rates go, where industry loan growth, deposit growth and a variety of other things happen. So we have a range of outcomes for 2020. Our -- my current best guess, a big portion of that range that we think about for 2020 has us delivering a 15% ROE and a 17% ROTCE. So in that respect, I would say that we haven't -- we're not -- we don't feel any differently today than we did when we first made that commitment or re-upped it. We've been more specific about expenses because we deem them to be entirely within our control as we described them. And so that's how I think about it.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [4]

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Okay. Perfect. And then just on the revenue side specifically, even if you don't want to get into specific numbers or anything. Just a couple main opportunity points you see over the next 1 or 2 years.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [5]

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Sure. There's a variety, but I would say a lot of them have to do with driving interest income through ongoing improved net loan growth, again, depending on what market conditions we're operating within. And then there are a handful of drivers on the noninterest income side and as we work to increase share in many of the businesses that we're in. Some of them, as we've talked about, are on different cycles than others like mortgage, for example, where if that market is shrinking and if the industry gain on sale is as it is today, then the outcomes in the future will reflect the size of the market, our position in the market and what profitability looks like overall. We've got some businesses that are meaningfully levered to the S&P, for example, like the drivers of our trust and investment fees. All those things are going to reflect what's going on in the world as much as they do, how well we're competing and how hard we're working to win business. All of that goes into it.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [6]

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And, Scott, I would just reinforce John's comments by looking at some of the specific examples if you can see in the results this quarter. I think, for example, our auto business. I mean, we've been making significant changes in the business, and we've been talking about the fact that once we've made those changes, and Mary Mack and Laura Schupbach doing a great job, that we thought we'd see and expected to see some loan growth. And now you've seen that for 2 consecutive quarters, and we reiterated that we think by the middle of next year, we'll see growth in the overall portfolio. I think the exciting thing about the auto business is not only are we seeing quarter -- year-over-year and sequential quarter growth in loans, but we're doing it more efficiently because about 40% of all the loans that we're originating are being originated on an automated basis in terms of the credit decisioning as opposed to a manual basis. And I could go on and on and give you some additional examples this quarter, but I would just encourage you, as I know you will, to go through the detail and see the many examples that -- of our businesses that show year-over-year and sequential growth.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [7]

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I would modify, let's say growth in originations.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [8]

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Originations, yes, exactly. Thanks, John.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [9]

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Okay. Perfect. And then one final, just ticky-tack question. I know you've been -- obviously, huge repurchase numbers for the full quarter. I know more recently, you've probably been out due to blackout periods during earnings. When are you able to get back into repurchase shares?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [10]

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Monday.

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Operator [11]

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Your next question comes from the line of Erika Najarian with Bank of America.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [12]

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I just wanted to follow up on Scott's line of questioning. As we think about the $50 billion to $51 billion for 2020, outside of the headcount trajectory that you've announced, is the 2020 target a result of something incremental that you had unearthed in terms of an expense opportunity? Or is it really just a continuation of the process improvement that you started a few years ago? And I'm going to ask this question another way. If revenues happen to be better than expected and the market is wrong about banks or at the top end of the range, is that $50 billion to $51 billion a firm dollar number to expect?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [13]

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Sure. So I would say that without a doubt, we've continued to uncover incremental opportunities, and that's a way of business now where we have a fully staffed program that is -- that goes from function-to-function and business-to-business looking for ways to drive continuous improvement. And so the gross opportunity for us to take out different kinds of expense, third-party expense, we talked about some of the team member activities, real estate, other things that contribute will be ongoing. But there's also areas where we're constantly investing and there's new -- there are new dollars being spent, and the net of it is what gets us to $50 billion to $51 billion. I would say if there's an extraordinary revenue environment -- depends where that revenue is coming from because not all dollars and revenue have the same expense load attached to them, but if we were to miss on the high side because there was a big revenue opportunity -- and you guys probably remember what happened when we did this at the beginning of this cycle and when we had a hard dollar expense target and then the biggest mortgage refinancing opportunity ever presented itself, we missed our expense target on the high side because we were producing billions of dollars of incremental revenue, and it was the right thing to do. We'll be very transparent in talking about it if that's the situation that we find ourselves in, either on the high side or, frankly, on the low side. If revenues -- if the revenue environment just toughens and we think that we need to do something different about structuring our business and capacity, et cetera, and it needs to take us lower, then we would be open minded certainly about that. We're trying to drive this return on equity outcome regardless of what the market delivers to us. If it's a big upside, then we'll try and take full advantage of it. If it's a rougher -- depending on where the economy is, the business cycle, et cetera, if it's a rougher revenue environment, then we'll take the necessary measures as well.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [14]

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We can all hope, right? On the -- I had another question. Commercial loan growth across the industry hasn't quite matched what we'd hoped as we thought about GDP and CapEx expectations. And I'm wondering if you could give us a little bit better sense on the nonbank competition. And specifically, I'm interested in the different structures that are available to your clients, the competition from private middle-market direct lending. And the other thing, and I'm sorry to jumble this all in one question, I noticed that Wells' C&I portfolio, 20% of your exposure is to asset managers. And I'm wondering, is that all sort of more short duration in nature like CLO warehousing? Or do you have any term exposure in that asset manager bucket?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [15]

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Yes. So, Erika, no problem with 3 questions. We won't charge you extra. That's fine. I think maybe in reverse order, you're absolutely right. I mean, we have a really strong asset-backed finance business. And we've seen good growth in that business for some of the reasons that you allude to, which is that we've seen nonbank competition in a variety of forms continue to increase. We've seen nonbank competition throughout the history of the company. It's in a little bit different form right now because some of the legacy nonbank competitors have gone away, gone out of business, whatever. But the fundamental underwriting in that group is relatively short duration. It tends to be structured on an asset-by-asset basis, which gives us approval rights and the likes so the -- and any advanced rates are very attractive. So we like that business. Sometimes we're financing one of our competitors on a deal, and sometimes we're sharing the credit. But that's okay. I mean, that's just part of the overall business to make sure that we're providing credit to all of our customers.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [16]

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Yes. Sometimes just do a securitization takeout, sometimes it's got some term to it. We've got -- I think we talked about this at the last conference that I spoke at. There's a distribution of consumer and commercial asset types. Interesting, most of which were deeply in the underlying business, although sometimes these nonbanks, as where you started the question, are competing in a way that we wouldn't directly, and so we like the cross-collateralization and the haircut that we get in order to be willing to take the exposure. But more broadly, with respect to the competitive set being widened, and I can tell you in Commercial Real Estate, for example, which is really the early warning indicator that we've talked about for a while in terms of where markets have gotten hotter, bank lending in Commercial Real Estate was just about 1/3 of the market in 2016, and it's about 15% in 2018. And it's CMBS, it's CREs, CLOs. It's direct lending, real estate funds. It's life companies and it's others that are competing in different ways. And usually, it's just a question of more leverage, and from our perspective, risk-adjusted return, that doesn't make sense for what belongs on the bank's portfolio as a whole loan. You might go back around the other way and finance them at a haircut on a cross-collateralized pool, but they're taking more risk on a whole loan than a national bank would or should. And I think other banks have reflected that same concern. On the C&I side of things, there's really -- there's a lot of direct lending going on in higher leverage categories or in, call it, non-traditionally bank-eligible categories. But most of the action still seems to be around -- about -- around middle-market CLOs or middle-market LBOs being financed by CLOs on the one hand, and we're not -- we were never in that business in a meaningful way, so it doesn't really hurt in terms of a loss. It's also a business that we can pursue on a pool basis with a haircut after the fact. But you've got all manner of sovereign wealth funds and alternative asset managers and others who are aggressive in an unregulated way and doing things on a whole loan basis that the bank won't do.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [17]

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And, Erika, I think overall and what we're seeing is that the -- because of the economic growth here in the U.S., in particular, but around the world, the credit quality for our customers in commercial corporate world has never been better. They have -- their balance sheets are strong. They've extended their maturities. Their interest coverage is higher than it's ever been because their debt service is lower. So I think the fact that we've got very buoyant capital markets, very liquid capital markets and we have high credit quality for our customers means that loan growth is a little bit slower than we would have all imagined in an economic growth level that we're seeing right now.

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Operator [18]

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Your next question comes from the line of Ken Usdin with Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [19]

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Just one clarification. John, your intro remarks, you had mentioned that you still expect NII to be -- I think you said slightly higher. Or did you say flat? And I just want to make sure that -- just clarify that and talk about -- are you talking about on an FTE basis or a non-FTE basis?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [20]

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On a taxable equivalent basis, is that the question?

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [21]

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That's the question, what -- are you talking about on a fully taxable equivalent basis or a non-fully FTE basis?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [22]

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On a GAAP basis, we expect it to be flat to a little bit stronger. That's how I think -- I mean -- and by a little bit, it's close enough that -- plus or minus flat.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [23]

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Okay. GAAP basis, understood. So second question, just on the mix of the balance sheet. We see, obviously, rising rates, OCI is going up a little bit, and this is a balance that I think you've talked about for a while now, John. So what are you doing in terms of the -- tons of cash on the balance sheet, still a lot of room here to remix. But obviously, you're keeping the portfolio in check. Just talk to us about how your investment strategy is evolving given where rates have now been moving and that balancing act.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [24]

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Sure. So we have a certain amount of maturity, amortization and prepayment from our bond portfolio that has to be reinvested every quarter, and we're more enthusiastic about those reinvestment possibilities in the low 3 percents versus the high 2 percents. It's not that different. When we -- if you roll back the tape a couple of years, the tradeoff used to be 0 yield on cash and 2% on 10 years. And so the question was how much more duration risk, how much more OCI exposure do we want to have by taking on that much more duration when we are otherwise earning nothing on the cash. Today, we're earning 2-plus percent on the cash, and the opportunity is an extra, call it, 100 or 125 basis points in 10 years or more than that in mortgages if we load up in mortgage securities. There are some liquidity constraints in agency mortgages. We have a very full portfolio in that category, and our LCR calculation is -- hovers around probably as much as it could be given our current -- the rest of our current liquidity profile. So it's really more a question of straight 10 years or whatever the maturity profile is, but treasuries are for Ginnie Mae securities. And I think we've been -- while this backup is happening and not knowing exactly where it's going to end, and we've been a little bit circumspect about incrementally moving from 2-and-change percent on cash further out the curve, there is an opportunity. And if rates continue to back -- it's a March backup, then it's going to be that much more attractive if the curve is steepening with it. And if we have, like most people do, at least a few more Fed moves built into our expectations over the next year or so, so the return on cash actually is relatively attractive over time if the curve's going to flatten as a result of that rather than long and continuing to move up. So that's what we're thinking about. We're thinking about it in the context of our existing capital plan as well. So all of that OCI exposure is more meaningful when you're actually moving down. Although you didn't see much of a move down in CET1 this quarter because of the RWA calculation, but the further -- the closer we get to our 10%, the more precise we have to be about our exposure to OCI. And the last thing I'd say about it is in a post-tax reform world, that's a bigger deal because those losses -- those OCI losses have less shield from them from a higher tax rate. So they have more of an impact on capital than they used to.

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Operator [25]

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

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [26]

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John, I was wondering, what's your confidence in the outlook for the auto loans to inflect positively to growth by mid-2019? And then separately, do you have a time line for stabilization to the home equity [report]?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [27]

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Two good questions. I'd say in auto, autos, one of those businesses, as you know, everyday, you're faced with a new series of options loan by loan. And you have choices to make on every loan about the risk reward. I think we like what we're seeing now. We're up 10% year-over-year. And both Laura and Mary are giving indications that we should continue along those lines. So that the combination of that level of growth and the level of amortization that's in the book has those lines crossing at some point in 2019. So we currently estimate mid-2019. Could it be a little bit sooner? Could it be a little bit later? It's -- yes, but we're estimating it happens in the middle of the year. But the trends, like our enthusiasm for the business, the risk reward that we're seeing today, the way we're competing, the fact that we're through, that we've reached the complete restructuring of that business in a much more durable well risk-managed way, all feels very good. And then with respect to home equity, that's interesting. So I mean, you can market a spreadsheet pretty clearly what the tick down of the legacy home equity portfolio looks like. But the origination and utilization of new home equity loans is we're in on uncharted territory, all right? So we're just getting to a point now where everybody who has refinanced their first in the last few years is suddenly in the money for -- they're not willing to give up that first if they want more leverage. They won't do another refi or cash-out refi. They're going to think if they're using their home as a source of borrowing. They're going to think about a second to not disturb the first. So how quickly people take advantage of that, to what extent people are interested responsibly in that incremental amount of leverage is a whole new world. I think we're really encouraged by the referral activity. What we've described in the quarter-over-quarter and year-over-year up activity really is an expression, I think, of people in our branches, our own people in our branches getting more comfortable with the referral process given events in the last couple of years. So that, in combination with this new phenomenon of a second is the way to go because you can't refi your first without upping your payment on the whole mortgage amount is what we're going to see unfold over the next couple of quarters.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [28]

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John, the only other point I'd make and just -- and I know you know this, but I think any time we talk about loan growth, it's important to reemphasize it. And that is our goal is not to grow loans. Our goal is to service customers and originate good credit. So based on what we're seeing today, we see more than ample opportunity to grow the auto originations. And so as John and I've said the best estimate is mid-next year, but we're going to do it in a very responsible way.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [29]

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I guess I'd also say on home equity, I'll be surprised if -- more than surprised if we ever end up with the same percentage of our balance sheet in second lien mortgage paper versus where we were, both Wells Fargo alone precrisis and then the combination of Wells and Wachovia right after the merger.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [30]

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Yes. I think that's a good point, John.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [31]

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Okay. And then just in terms of reputational issues and negative headlines, I just wanted to ask you each a question. John, if you could elaborate on your comments in September that these issues perhaps are hurting some of your loan growth trends? And then Tim, if you could talk on the wealth management side where you've kind of underperformed peers in asset flows and net advisory pension. How are headlines and reputational issues affecting your performance in wealth management on the adviser and customer front?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [32]

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Sure, I'll -- in terms of wholesale, we've talked about some specifics of this, but it's really more about -- it's mostly a -- the business that we call GIB, Government and Institutional Banking, in wholesale where it's just a little bit more politically charged environment in terms of how we compete and having reputational issues has made it harder for that team. It's probably a little bit of that in some other wholesale categories. It's not -- you can't point to it. It's not measurable, but it's a headwind, I'd say, for some of our people. But the -- where it really demonstrated or reveals itself is in Government and Institutional Banking.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [33]

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And John, on the Wealth and Investment Management side, in particular, FAs, we saw in the third quarter hiring being relatively flat to the second quarter. And as you recall, we were down in the second quarter. And the primary factor was the termination of the A.G. Edwards agreements, which had a 10-year term, and they ended in the second quarter 2018. In addition, attrition in the third quarter was down from the second quarter. In fact, we were net up in September, which was great. And then finally, when we think about FA headcount, what we're really focused on is FA productivity. And what we've seen is that for our existing FA population and team that we're seeing improvements in loan origination as well as improvements in the overall size of their books. So there's been some impact from some of the reputation issues that we had. But I think the important thing is that you see in the overall numbers and performance this quarter, the improvement in us getting beyond some of those reputational issues. We still have some headwinds we're going to deal with, but we're making progress.

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John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [34]

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Okay. And then last quick thing, I'm sorry if I missed this at the beginning, Tim, but do you have any progress report or update in terms of the Federal Reserve's requirements and your tone of dialogue with them and any projected time line for getting removed from the asset cap?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [35]

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Well, John, I've made a thrilling update so -- you know what? The dialogue continues to be very good, and I described it earlier as being very constructive. They're providing feedback to the risk management framework that I've mentioned earlier in the broadcast here. But we're still planning on operating under the asset cap through the first part of next year.

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Operator [36]

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

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [37]

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A couple of questions. Obviously, we can track the branch rationalization, the branch cuts on a weekly basis, and it looks like there was a nice uptick in churning the branch numbers over the past quarter. And I just wondered, how much of that benefit to the expense line is in the run rate in 3Q? How much potential improvement comes in 4Q? And do you feel that you're at the run rate for branch rationalization at this stage?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [38]

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Yes. I think the amount of noticeable benefit quarter-by-quarter would be pretty tough to see from that 93 branches. What tends to happen when we're consolidating a branch is we will dispose of the real estate one way or the other. If there's a lease that still has some tail to it, that expense won't come out until it's been dealt with one way or the other. And then on the people front, we're really trying to absorb those people into the branches in which that's been consolidated, and then they'll allow just natural retail business to rightsize the right amount of people for the remaining branches over some period of time. So we've talked in the past about the aggregate number, but it takes a while to be revealed. I'd expected it, for this year's actions, you'll start to really feel it next year, not -- we wouldn't notice it this year. And then of course, for the branches that we're selling, the 50-odd that we're selling that will close this quarter, that will be a little bit more immediate because everything -- team members are transferring over to the acquirer premises and all related expenses are transferring over. Again, that's only 52, but that will be much more of the light switch.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [39]

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Sure. Got it. Can you just -- on the ones that you're closing, obviously, not the ones you're selling, but the ones you're closing, can you talk a little bit about the efforts underway to retain the customers of those? And can you give us a sense as to what you've seen in either -- in deposit attrition and how you're dealing with that?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [40]

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Yes. So on the ones that we've consolidated, I believe the game plan is to retain everything. And that's because we've got such close physical proximity of the ones that we're consolidating, which is why we're choosing to consolidate them rather than to sell them or dispose of them in some other way or leave them open if they're serving a discrete or distinct market area. So I think that the realized outcomes to date are that we retained, almost 100% of the deposits from the consolidated branch. I think I've seen 1% or 2% deposit attrition, which you can't even really attribute to the consolidation. It's also in this rising rate environment we've been, -- had deposits migrate for other reasons. But the intention is to keep all of the customers and all of the deposits, and we've had a great front at that.

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Operator [41]

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

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD [42]

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So revenue ticked up a little bit both linked quarter and year-over-year as you pointed out. And obviously, there was a gain this quarter, but there also was last quarter. Is this the inflection of revenues as you think about maybe year-over-year, given those -- some seasonality on a Q-Q basis? Or are there still enough drags in maybe parts of the loan portfolio in some of those D categories that make it hard to call?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [43]

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Matt, I hope you're right. We feel confident about our ability to grow revenue over time. Each quarter is going to have a story to it. But I think the important thing is that when you look at -- you look across the income statement, you're seeing more of our business, more of our products grow on a sequential-quarter basis and year-over-year. So I think that's a good sign. As John said, the -- we're a large mortgage provider in this country. We love the business. It's in overcapacity right now. It's unclear exactly how long it's going to take that to shakeout, but it will and that'll be good for us. And we clearly have the ability to compete in that business given the broad scope of our mortgage business. But overall, we're optimistic about growing revenues. Whether September 30th was the exact inflection point, I can't promise you that.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD [44]

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And then I guess, specific on the -- some of the drivers of net interest income. As you look out on loans, it seems like you're starting to bottom out on a period-end basis. Obviously, you just talked about the confidence in the auto growing around mid-year of next year, so maybe that drag is a little bit less. Do you start to see loans level out in the fourth quarter?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [45]

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I hope. It's going to be as much of a function of customer demand than anything. I think when you take apart the components on the consumer side, the fourth quarter tends to be, in terms of mortgage origination, it tends to be a little bit slower than the third quarter. But credit card tends to be a little bit stronger from a seasonal standpoint, so that's good. As John described it, I think we're in a new world as it relates to home equity loans. But the fact that we saw growth across the consumer portfolio was actually good. On the commercial side, we're cautiously optimistic about growth in the fourth quarter, again, ex maybe some of the Commercial Real Estate portfolio for the reasons that John described because we saw reasonable uptick toward the end of the third quarter.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD [46]

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Okay. And then just lastly, on the NIM, anything to flag there? I know there's -- your selldown of some the PCI reduced the accretable yield over time, but I think it actually accelerates a little bit near term. On the flip side, in the back of the long rates, I think it would be a little bit of a drag in fourth here if it holds here. So just any near-term commentary on NIM would be helpful.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [47]

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Yes. I think the biggest drivers in the very near term will be what happens with deposit pricing. We've talked about this, but we think we're still -- we're outperforming what we would have -- what we had modeled based on historical experience as this increase in policy rates has occurred. And if we continue to outperform, then that will be helpful for the NIM. But if there's a big catch up, if something different happens, then that will be a headwind. But to me, that's probably the biggest hard to forecast. We certainly -- we all model it a certain way, but we're realizing it a little bit better than that. That'll make a difference.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD [48]

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Okay. So the hedge ineffectiveness from the long end moving up is not all that material with the move that we've had?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [49]

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I don't think so. I mean, its impact at the end of the quarter, we'll be calling on at that time. I tend to discount that because it's uneconomic. It's really just a -- it's an accounting outcome that nets back to 0 over the life of the hedge instruments and the hedge itself. From the real fundamentals of the business, the cash flow that we're generating, I think deposit pricing is probably the biggest variable in the quarter. Over the next few quarters, it's going to determine how strong net interest margin expansion could be.

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Operator [50]

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Your next question comes from the line of John Pancari with Evercore ISI.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [51]

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Tim, just around the sales practice issues. One of the key investor concerns are just around the likelihood of new issues. I mean, lately, we've been seeing a lot of headlines, but it's in development of existing issues. So I mean, can you talk about how you view the likelihood of brand new issues? And I guess, where are you in the process of scrubbing the business for similar issues that can create some type of new development?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [52]

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Yes. So I'm hopeful that we won't have any new issues. And you're right, I think the pace of new issues in the recent reporting has been much more focused on updated developments. And part of that is just because we're -- we want to be very transparent about where we are so that you're all informed. And to some of that development we created ourselves, we think in the long run, that makes a lot of sense. John, we have and will continue to look across every office, every business, every geography in this company. I meant what I said in my opening remarks and that is that we want to not only meet but exceed regulatory expectations because that's the right thing to do for our customers. So we're very far along in the process. We'll continue to be very transparent, but we're ultimately going to do the right thing for our customers and make sure that you're informed about it.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [53]

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Okay. That's helpful. And then on the capital side, just -- I know you gave us your 10% CET1 target, and you're just shy of 12% now so clearly, a lot that you continue to deploy. Can you just talk to us about any changes? Or how you're feeling about that 10% target? A little -- any update to the timing of when you think you can get there? And then maybe just a color around how the payout over time can trend? I know you're -- post your most recent CCAR result, we're looking at about 150% combined payout. How do you think that, that can trend from here?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [54]

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Sure. So there's a lot there. First of all, with respect to 10%, I think Neal, at Investor Day, had indicated that, that both the implementation of CECL and the implementation of the stress capital buffer and how both of them work in CCAR, these are things that we need to know to confirm or modify our 10% target. If I had to guess, I would say that our target once both of those things have been worked through would be a little bit higher than 10%, although its 10% today because those things are not in full -- we don't really know how they're going to work. I don't anticipate it will be much higher than 10%, but it probably would be a little bit higher. And we had talked before this enacting this capital plan, about a 2- to 3-year run rate to get from where we were to where we're going. Embedded in that is the known trajectory of payout, along with estimations for capital generation and for RWA growth because those all matter in the calculation. So we've been more RWA-efficient, I think, than we had originally estimated, which mean -- this is why we're 11.8% or 11.9% today even after paying out almost $9 billion in the quarter, as you say again $6 billion worth of net income. So you know how much we're intending to pay out as a result of the last CCAR. And I would expect that the deployment will continue to look like it has recently. We're not -- with respect to the dividend portion of that, we should all expect that, that remains relatively contained versus precrisis levels of payout ratio for all the reasons that we've talked about. It's regulatory guidance. It's prudent in containing it so that it can be sustained throughout the cycle, then the balance of it would happen through share repurchase like it has. We mentioned earlier this year that we intend to do more of it in the first half of the 12 months of this first year of the most recent CCAR and less of it in the second 6 months of that 12-month period. And we showed you that in the third quarter and then expect the fourth quarter to look similar.

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Operator [55]

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Your next question comes from the line of Saul Martinez with UBS.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [56]

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So on NII, maybe I'm taking the guidance a little bit too literally of flat to slightly up. But if you keep -- a flat NII basically would imply a $12.2 billion number on my calculation for fourth quarter, which is actually a step down versus the last couple of quarters. So I mean, is that the messaging that you're trying to get across? Or is it more -- a little bit more broad that within a reasonable range of assumptions, you're kind of within a band of outcomes of being flat to slightly higher?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [57]

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The latter. That will be too succinct.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [58]

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Okay. No, that's good. That's kind of what I was expecting to hear. And I guess, on noninterest revenues, obviously, a big part of the investment case is sort of a level setting of expectations on revenues. And maybe this question is a little bit too much into the weeds as well. But it seems like the lot of the core revenue items seemed to have stabilized and maybe you're starting to grow again. But there's a whole host of items that are significantly volatile, including the other income line. And if you look at that line normalizing for noncore items, it's been kind of flat to down in recent quarters. Can you just give us a sense of, again, what's sort of in that number and how we should think about the -- think about it on an ongoing basis and what a more normalized level or how we should think about modeling it would be?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [59]

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Other, in particular?

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [60]

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Yes. Other, in particular, yes.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [61]

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Yes. So we call out the major infrequent things that occur as they happen, like the sales, Pick-a-Pay, for example. In many of the past quarters, we've sold other portfolios of Pick-a-Pay, and we've had private equity or invested capital gains go through there. We've had a variety of things. As you point out, they're volatile. They -- there tends to be something meaningful in that line item in most quarters, not in every quarter. It's harder to predict, et cetera. So we're happy to have them when they occur. They're capital-generating. They're good for the overall platform. But I -- I would be hesitant to put a run rate on it and say, "Take it to the bank. That's something that you can rely on." Of the component pieces, the smaller component pieces, like charges on fees and loans, cash network fees, commercial real estate brokerage, letters of credit, wire transfer, these are things that go into all other fees. That actually has been relatively stable over time. And I would look for those things to reflect the continued ongoing growth of the business. They add up on a quarterly basis to, call it, $800 million or $900 million. So if it's that other fees that you're looking at, then I think you should feel reasonably good about that. Commercial real estate brokerage can be actually quite volatile because it reflects where we are in the cycle. It reflects the time of year. There's a lot that goes into that. But the other items are much more run rate and predictable. But back to the episodic gains, I would say, the deeper we get into these -- into the markets that we're in, so the tighter credit spreads get, we've already seen rates go -- move back up. It gets harder to generate those types of gains, I would say, whether it's precrisis things, they've been on the balance sheet for 10 years that were marked a certain way or appreciated investments that we've made over the last 10 years, the further we get into the cycle, my sense is the harder it is to continue to regenerate those because asset pricing levels are so rich to begin with.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [62]

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Got it. And if I could just fit one more in there. CECL, can you just comment a little bit on your preparations there? And when you think you might be able to give more color on what the estimated financial impact could be?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [63]

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Yes. So I think we're feeling like we're quite prepared with our own capabilities. We're still working with our accountants, still working with our regulators to help them understand how it's going to work. I wouldn't anticipate us to be early adopters, so we'll be continuing to recalculate and prepare until adoption occurs. I think we've said, which will be -- you'll hear more about our expected numbers next year. But specifically, as it applies to us and our observations about how it applies to others, and we've talked about this, but on the consumer side of things, it tends to increase the calculated allowance. On the commercial side of things, it tends to decrease the calculated allowance. It nets specifically because these are calculations of expected loss to term and terms are shorter in commercial loans than the emergence period approach that we have taken in the past where we anticipated a certain amount of renewal. So the net impact will be the net of an increase on the consumer side and a decrease on the commercial side based on what I can see today. And so as you look from bank to bank, I would think about their mix of those things, and that probably reflects what their outcome might be as well. We haven't seen the competition changing loan terms or loan pricing or competing differently for loans that will have a more or less difficult CECL impact. At some point, I would expect to see that once people really know how it works. As I mentioned before, we don't know how it's going to work in CCAR, and it could be incrementally punitive, right? It could be a doubling up of a big front-end loss and that matters. And then lastly, it's not clear -- crystal clear yet, and this matters in CCAR also, what the -- how it's going to feel when people are -- today people are calculating life of loan estimates based on the environment that we're in today. When we're in tougher times. We're going to be calculating life of loan expected loss based on those conditions, which is going to be worse. I think we're all trying to understand what that means, especially in CCAR because you're given conditions that are worse. And so it could be a doubling up.

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Operator [64]

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Your next question comes from the line of Gerard Cassidy with RBC.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [65]

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Can you guys share with us -- you talked to John a bit about raising some deposit rates in the wholesale business, and that enabled you to grow that deposits at the end of the quarter. Can you share with us what that might do for the fourth quarter in terms of deposit growth in that area and also the net interest margin?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [66]

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Yes. So I think we also mentioned that we did that later in the quarter, so you wouldn't have seen it in the interest cost as much in the quarter even though the spot balance at the end of the quarter was up. So all things being equal, I'd expect us to compete strongly for wholesale deposits in the fourth quarter. And you would expect there to be a higher interest cost into wholesale in the fourth quarter. The growth rates that we're seeing, anticipating in wholesale at still low single digits in terms of deposits, call it, 3% to 4%, something like that. But the way we price those tends to be very targeted, based on relationship. Some of those -- some of our -- many of our wholesale relationships are sole bank relationships, very rich ones, where it's important for us to retain those and maintain those. We've got some types of wholesale customers who are sitting on lots of excess liquidity, and it's up to them every day to think about whether they move it from 1 bank to another. And those deposits incidentally have their own LCR liquidity waiting and liquidity value or runoff factor. And so we think about those in a certain way. So that's -- it's just as a little bit of context. There's a balance between how much we want to pay for what kind of deposit based on what value it has to Wells Fargo. It's one thing to retain a relationship, which is very important. It's something else just to track the dollars that sit on our books but don't provide a lot of incremental liquidity benefit but just gross up a side of the balance sheet. We've talked about that in the extreme on the FI side, where at the beginning of the year, we just took those down because they were really just a balance sheet gross up rather than a valuable deposit that we can use to fund loans, for example.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [67]

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But Gerard, I think it's really important to put in perspective that we're talking about tens of billions of dollars of deposits on a $1.3 trillion of deposits. So even an increase to be appropriately competitive, as John described, is not going to have a material impact on how much Wells Fargo earns in the fourth quarter.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [68]

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Very good. And then coming to the asset side of the balance sheet, when you talk about your commercial industrial loan portfolio, I think in the second quarter, you indicated that the loans to non-depository financials was about $94.5 billion. What did that grow to in the third quarter?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [69]

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I don't know yet, but it's not going to be that much different. I'd call it in the plus or minus 90 range. We'll call that out at the -- I'm going to be speaking at a conference in a couple of weeks, I'm sure we can probably talk about it then. But that hasn't changed that much. Those balances will revolve up and down a little bit. I think Erika asked earlier about how much of that is warehousing to securitization, et cetera. So portions of that will pop up and down a little bit more rather than just layer on top of each other like term types of financing. So there's some seasonality to it.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [70]

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Very good. And then speaking of the C&I loans, what was the utilization rate on your traditional C&I credits? Are you seeing that creep up or is it sliding down a little?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [71]

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It's been super flat in the 40% area for a good long time. Now that 40% is the weighted average of a variety of different types of revolving facilities, some of which are generally fully drawn, some of which are seasonally drawn and some of which are never drawn. So I wouldn't want you to -- it is a weighted average. But it hasn't changed in at least the last couple of years as I had looked at the quarter-to-quarter information, which incidentally, when we think about the demand for credit, I'd generally expect that customers use available revolving facilities before negotiating and paying for a new incremental available credit, and we haven't seen much of that.

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Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [72]

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Okay. And then just lastly, Tim, you and I chatted about this last time on the call, about credit and credit quality and comparing it to before the financial crisis. Asking the question a little differently, what kind of influence do you think the CCAR process has had on your organization? I know your credit standards are strong. But when you kind of think back pre-CCAR to today, are the big banks like your own maybe sticking a little more conservatively to the credit metrics because of CCAR than they otherwise would have? Or is that totally off base?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [73]

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I don't want to speak for other banks. But as it relates to Wells Fargo, I don't think it's had a material impact on how we underwrite credit at the company. I think we've always been conservative, and we'll continue to be on the conservative side. I mean, some of the more aggressive lending that was done in a precrisis on some bank balance sheets is now being done by nonbanks. I think that is both CCAR and other kind of regulatory guidance-related more than anything. But I wouldn't say it's had a material impact.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [74]

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And there have been -- there's been a regulatory impact on what's on bank balance sheet.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [75]

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Right, but not because of CCAR.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [76]

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Not because of CCAR. But so for example, pre-financial crisis, there was a whole range of single-family mortgage credit on the banks of balance sheets, most of which doesn't exist any longer. So on banks' books, it's mostly prime jumbo. We've got some home equity, but the modern home equity is a much better risk reward trade-off in precrisis. Credit cards are probably impacted by the CCAR process for certain things because they get hit so hard in the severely adverse scenario. As Commercial Real Estate, we're our own very careful steward of how much Commercial Real Estate and what type we want on our books. And then C&I, it's really around the most leveraged lending. There has been the agency, both Fed and OCC, leverage loan guidance, which has kept the CCAR banks or at least the OCC banks away from most of that, which will look different, but it looks different as a result of regulation but not necessarily CCAR, although we get treated better on CCAR for not having it on the books.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [77]

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But Gerard, if you step back and maybe even set CCAR aside, I think overall, what you see on our balance sheet today is not only really good credit performance but a much stronger mix in terms of credit quality even if we would go into some sort of an economic downturn, which is one of the reasons why we -- as we provided updates to you all at Investor Day that we think our through-the-cycle losses are just lower.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [78]

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Yes. Gerard, you didn't ask this, but the other rest of the loss side of the balance sheet in terms of securities portfolios, trading portfolios, derivatives, NPV, et cetera, those are probably more directly impacted by stress outcomes for a lot of the CCAR banks because of the treatment that they get in CCAR. And I think the direct link to what capital they attract and what net return you have to generate would have caused people to manage those risks differently.

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Operator [79]

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

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [80]

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Two questions for you. You've mentioned the overcapacity in the mortgage market, and we all know that we have multiple headwinds in that business right now. Given that you have -- I think you announced, what, a 600-or-so headcount reduction in mortgage. Is the mortgage company, at this point, sized for what you see coming? And what might change your minds about that?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [81]

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So Nancy, the way that we think about the mortgage business today is that we've got to be able to improve our results based upon the environment that we're in. I mean, our guess, and you'd probably agree with this, given that we both see the few cycles that over time, it's probably going to improve, but we're in the midst of an overcapacity period today. So Michael DeVito and the mortgage team, who I think are doing a great job, are looking at the business and trying to see how can we originate more mortgages, how can we do that in a more efficient way. Part of the reason we do that is -- part of the way we do that is by introducing technology like the digital mortgage application. But -- and also, it's not just about origination. It's also about the servicing side. And what's happening on the servicing side of the business is as the portfolio quality continues to improve, the portion of the business that was focused on managing modifications or defaults and so just declines because you have fewer -- you have a lesser need for that. So I think what you're going to see is a continued improvement in the efficiency of that business assuming that we're in -- overall but particularly, in an environment that we're in right now.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [82]

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So basically, you're saying you have built in, as of right now -- the mortgage company is rightsized for what you see coming down the road right now?

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [83]

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Well, it's rightsized for today, but our expectation, not only for mortgage, but for all of our business, and this gets back to John's comments about how we think about efficiency and expenses is what can we do to improve the returns to the business. So okay, today, it's at yes. But are we saying to all of our businesses, what can you do to improve it? Absolutely. That's how you get down to $50 billion to $51 billion over the next couple of years.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [84]

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Okay. Okay. Secondly -- John, this is probably a question for you. Part of your year-over-year decline in expenses was a fairly large decline in operating losses, I think 700 and something million dollars. Now if my memory serves me right, most of operating losses are fraud losses. Is that still the case? And what's going on in that decline?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [85]

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Yes. No. So I would -- we estimate that every year, around $600 million worth of operating losses are the, as you described, fraud and other standard losses, bank robberies, just the things that go wrong in banks. The amount above that is really litigation, remediation. It's things related to the sales practices' outcome and some of the other items that have occurred or have been uncovered and then fixed over the last couple of years. So you'll see some -- I mean, I don't want to take too much credit of the company. We shouldn't take too much credit for the easy comps we have as a result of having had outsized operating losses in the last year or so. But if anything, back to what I would call baseline regular operating losses, they're probably continuing to tick up over time as fraud efforts are more persistent and more sophisticated and maybe particularly, as we become a bigger credit card bank, we'll be even a little bit more incrementally exposed to that. But that part of the business, that's a growth risk for banks like Wells Fargo.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [86]

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Okay. So basically, you're saying now that this large year-over-year decline is probably going to flatten out?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [87]

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I think that's right. And specifically, the third quarter of last year included $1 billion accrual for the precrisis RMBS working group settlement that we ultimately finalized in the last couple of quarters this year. So yes, that was very idiosyncratic. And that benefit, if you will, wouldn't be there. But having said that, in the fourth quarter of last year, we did take some big litigation reserves. So in the fourth quarter of this year, given everything that I know, I would expect there that, that same relationship to exist versus fourth quarter of last year.

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Operator [88]

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Our final question will come from the line of Brian Kleinhanzl with KBW.

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [89]

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One quick question, first, on the paydowns that you saw in the quarter. I know it's still headwinds of loan growth overall, but for the paydown specifically, was that an acceleration from the previous quarter? Or did it decelerate? And kind of what are your expectations going forward?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [90]

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Are you talking about loan growth or just on loans?

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [91]

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Yes, just the paydowns on loans.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [92]

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Commercial Real Estate.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [93]

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Oh, in Commercial Real Estate. I would just describe that as being reflective of just the underlying terms and conditions and the duration of the portfolio.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [94]

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There were some loans that we acquired from the GE Commercial Real Estate acquisition of a few years ago that came to term and got refinanced out on -- into the capital markets, et cetera. So that's, well, probably a little bit idiosyncratic.

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [95]

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Okay. And then the second one, you mentioned that you're still seeing some good progress with Propel credit card offering. But you haven't put any kind of numbers around that. Is there any way we can kind of quantify what the success has been thus far?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [96]

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Well, it's still early in the process, which is why we're being a little bit hesitant at declaring victory. But we're really excited about the performance today. I think what we're seeing is we're seeing, which is exciting, is that about half of the cards that are being originated digitally, which is good, because we made a lot of investments from a digital standpoint to be able to provide that service and convenience to our customers. I think we're seeing our existing customers be very attracted to the card, which is great. But overall, the performance has been -- has exceeded our expectations, and we're really, really excited about it. I mean...

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [97]

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We'll probably be more specific after we have a few quarters under our belt to look back and say, here's what it looked like over in the first 6 months and 9 months. I think we mentioned earlier, new accounts, in general, purpose credit card, including Propel, were up 27% linked quarter and 17% year-over-year, which is good momentum. That has to translate into spend, they have to translate into balances. You know those things are lagging indicators, but the new accounts -- the new cards issued are up along the lines of what I mentioned.

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Timothy J. Sloan, Wells Fargo & Company - CEO, President & Director [98]

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And that's really, Brian, one of the reasons why we're being somewhat conservative in providing a lot of details because when you think about the business model and returns for that card, you've got to see all the additional metrics that John's describing. But the point is so far, so good.

Well, thanks, you all, for listening today, spending time with us. And I also want to shout out to our 260,000 team members. The progress that we're making in transforming Wells Fargo is a reflection of your hard work and effort. And we are very, very focused on achieving all of the 6 goals that we have for the company. So thank you very much.

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Operator [99]

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Ladies and gentlemen, this concludes today's conference. Thank you all for joining and you may now disconnect.