Wells Fargo & Company (WFC)

Earnings Call: Q3 2017

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Oct 13, 2017

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 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference. Thank you, Regina. Good morning. 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. Thank you, John. Good morning, and I want to thank you all for joining us today. Over the past year, we've made fundamental changes at Wells Fargo in order to build a better and stronger bank, and John and I will be highlighting our progress throughout the call. But first, I want to discuss our financial performance. In the third quarter, we earned $0.84 a share, including the impact of a $1 billion discrete litigation accrual for previously disclosed mortgage-related regulatory investigations. This was not tax-deductible and reduced our EPS by $0.20. This accrual was for a pre-financial crisis mortgage-related regulatory matter. While this accrual impacted our financial performance in the quarter, the commitment of our team members to put our customers first and help them to succeed financially remained strong and was demonstrated by average deposits growing 4% from a year ago, client assets reaching record levels in Wealth and Investment Management, debit card purchase volume increasing 5% from a year ago, balances in our consumer general purpose credit card portfolio also growing 5%, and illustrating the benefit of the GE Capital acquisition and strong collaboration across our wholesale businesses. We led more syndicated asset-based loans than any other firm in the third quarter. As part of our priority of rebuilding trust, we provided expanded disclosure in our second quarter 10-Q filing, detailing our efforts to identify and address other areas and instances where customers may have experienced financial harm. Let me update you on a few recent actions and milestones. At the end of August, we announced the completion of an expanded third-party review of retail banking accounts covering 165 million accounts over a nearly eight-year period. As we committed to a year ago, we reviewed more accounts over a longer period of time and identified additional customers who may have been impacted. All customers identified as having potentially unauthorized accounts are being notified directly as to how they can participate in a $142 million class action settlement, and we are refunding customers for any of these accounts that experience fees and charges. Last week, we completed another round of broad customer outreach via email and 43 million statement notifications to encourage anyone with questions about their accounts, regardless of when they were open, to let us know so we could address their questions. We also announced in August a plan to remediate auto loan customers who may have been financially harmed due to issues related to collateral protection insurance policies, which we purchased on their behalf when customers' insurance policies lapsed. We discontinued our CPI program last year, and we began issuing checks to affected auto loan customers this month. Last week, we announced plans to reach out to all home lending customers who paid fees for mortgage rate lock extensions requested from September 16, 2013 through February 28, 2017, and to refund customers who believe they shouldn't have paid those fees. In March of this year, we changed how we manage the mortgage rate lock extension process by establishing a centralized review team that reviews all rate lock extension requests for a consistent application of our policies. We are working diligently to make things right for our customers. We will continue to be transparent, and we will be reporting more progress in the months ahead. We are working hard to transform Wells Fargo into a better bank for our customers, our team members, shareholders, and our communities. I'm proud of the progress our team members have made to strengthen our culture, improve our business practices, and risk management. We've made fundamental changes to our business model, organizational structure, and compensation and performance management programs. One reason I'm confident that we're on the right path is that in the third quarter, total team member attrition at Wells Fargo reached its lowest level in over six years. Within community banking, attrition is also at its lowest level in over six years, and it has improved every quarter over the past years. Our customers are also responding positively to the changes we've made. While branch customer loyalty and satisfaction with most recent visit scores declined slightly in September, after our announcement of the completion of the expanded third-party account review, both metrics had reached individual post-sales practices settlements high earlier in the quarter, and we saw improvement in loyalty scores near the end of September. We also continue to invest in innovation to better serve our customers. Let me highlight a few examples. Since launching the Zelle person-to-person experience in June, we've seen significant growth in both the number of transactions and the dollar sent. In the third quarter, P2P payments sent by our customers increased 46% from a year ago. We recently launched a pilot of our online mortgage application. It combines the power of Wells Fargo data with a digital interface to create a know-me customer experience. We expect to complete rollout in the first quarter of next year. Later this month, we will roll out Intuitive Investor, a new digital advisory offering providing low-cost allocation, portfolio selection, and rebalancing. We launched CEO Mobile Token, which allows our treasury management customers a secure, convenient way to provide secondary authentication anytime they need to complete a transaction. Since the first quarter, when we became the first large bank in the U.S. to offer card-free access to all of our ATMs through a one-time access code, our customers have used card-free ATM access codes 3 million times. Just this last week, we announced that more than 40% of our ATMs are now NFC-enabled, which allows our debit card customers to use their mobile wallet at the ATM, providing another option for card-free access. Citing our card-free ATMs, along with a number of new capabilities, Wells Fargo was also recognized as the industry leader in Business Insider's mobile banking study that was released this week. Before turning the call over to John, I want to acknowledge the devastation many of our communities have faced from the recent hurricanes. To help our impacted customers in those areas recover, we're providing payment relief and proactively waiving fees. Our mobile response unit was deployed to impacted areas in Texas a month ago, and we are deploying three additional units to Florida so customers can receive in-person assistance from Wells Fargo disaster recovery specialists. The Wells Fargo Foundation donated $2.6 million for hurricane relief efforts in Texas, Florida, and Puerto Rico, and our customers have generously donated over $2.6 million to the American Red Cross Disaster Relief Fund through our ATMs nationwide. We're also working with our customers impacted by the wildfires in California, and the Wells Fargo Foundation made a donation to help these communities this week. John Shrewsberry will now discuss our financial results in more detail. Thank you, Tim, and good morning, everyone. We earned $4.6 billion in the third quarter, down $1.2 billion from the second quarter. This decline was driven by higher operating losses from the $1 billion discrete litigation accrual that Tim described. Linked quarter trends were also impacted by the $100 million reserve release we had in the second quarter. This quarter, we did not have a release, as improvements in credit performance in certain portfolios were offset by $450 million of reserve coverage for potential hurricane-related losses, based on an initial review of our portfolio. As a reminder, our results in the second quarter also reflected a $309 million gain on the sale of a Pick-a-Pay PCI loan portfolio. On page three, we highlight our results compared with a year ago. While net interest income increased $524 million, revenue declined $402 million, reflecting lower non-interest income, driven by lower mortgage results. Average loans declined 1% from a year ago, as growth in our commercial loans was more than offset by lower consumer loans, while average deposits increased 4% from a year ago. We have maintained exceptionally strong capital levels, even as we have returned more capital to shareholders, including a 96 million reduction in common shares outstanding through net share repurchases. Turning to page four, I will be highlighting trends in loans, deposits, and credit later on the call, so let me just call out a few items from this slide. Cash and short-term investments increased $7.4 billion, reflecting lower loan balances and growth in deposits. With our strong liquidity levels, we could deploy tens of billions of dollars and remain LCR-compliant. Investment securities increased $5 billion in the quarter. We had approximately $31.2 billion of gross investment purchases in the quarter, primarily agency MBS in the available-for-sale portfolio, which were largely offset by runoff and sales. Turning to the income statement overview on page five, I will describe revenue and expense trends later on the call, so let me just highlight that our effective income tax rate in the third quarter was 32.4%. This included net discrete tax expense of $186 million, primarily resulting from the nondeductible treatment of the $1 billion discrete litigation accrual, partially offset by discrete tax benefits arising from favorable resolutions of prior period matters with certain state tax authorities. As shown on page six, the benefit from higher rates increased average loan yields five basis points in the quarter, the seventh consecutive quarter of increasing loan yields. Average loan yields were down $5.2 billion from a year ago, with growth in commercial loans offset by declines in consumer loans and down $4.6 billion from the second quarter with declines in both commercial and consumer loans. H.8 data continued to indicate that there was softness across the industry, particularly in certain categories like C&I. But there are also specific actions that we have taken, primarily driven by our own risk discipline, which have impacted our growth. Let me explain the primary factors in more detail. Starting with commercial loans on page seven, line utilization rates remained stable at approximately 40% in the third quarter, and balances increased $3.7 billion from a year ago, but declined $5.7 billion from the second quarter. We have previously highlighted expected runoff within our consumer portfolios, but we have also had expected runoff in certain portfolios of commercial loans. We provided $6.5 billion of financing related to our government-guaranteed student loan sale in the fourth quarter of 2014, which has been securitized in several tranches over the past couple of years, with $1.3 billion remaining at the end of the third quarter, down approximately $800 million from the second quarter. We fully anticipated the rundown of a couple of the loan portfolios we acquired from GE Capital, and paydowns have totaled $7.9 billion over the past 18 months, including $1.7 billion in the third quarter, with approximately half of the reduction in the quarter in C&I and half in commercial real estate. On this slide, we provide details on the individual loan portfolios that drove commercial loan trends this quarter. We summarized our consumer loan portfolios on page 8. This portfolio declined $13.1 billion from a year ago, primarily due to $7.4 billion of lower auto loans and $7 billion of lower junior lien mortgage loans. However, consumer loans increased $200 million from the second quarter with growth in first mortgage loans and credit card. Our first mortgage loans increased $3.6 billion from the second quarter, reflecting $7.5 billion of growth in non-conforming mortgage loans, partially offset by the continued runoff of higher-yielding legacy portfolios. Our junior lien mortgage loan portfolio continued to decline as expected, as paydowns more than offset new originations. In terms of our credit card portfolio, over the past three years, our annual growth rate was the largest among the large banks. Clearly, the sales practice announcement last year had an impact, but we started to regain a bit of momentum. Our credit card portfolio increased $944 million linked quarter, driven by higher spend per active account. We've invested in our rewards program and have continued our migration to digital acquisition while staying within our risk appetite. In fact, 42% of card openings in the third quarter were through digital channels, up from 17% in the full year of 2016. Our auto portfolio continued to decline as expected and was down $2.5 billion from the second quarter as a result of tightening underwriting standards. We expect auto loans to continue to decline. Other revolving credit and installment loans declined $252 million from the second quarter, driven by declines in personal loans and lines, which we expect to continue to decline due to lower branch referrals over the past year. As highlighted on page 9, average deposits were $1.3 trillion, up $44.9 billion or 4% from a year ago, and up $5.2 billion from the second quarter. Based on the latest FDIC data, we retained our number 1 ranking in retail deposits. Our average deposit cost was 26 basis points in the third quarter, up five basis points from the second quarter and up 15 basis points from a year ago. We've not made material changes in rates paid on consumer and small business banking deposits within our retail bank, with the majority of our peers also holding these rates steady. We have implemented some incremental deposit repricing for commercial and wealth and investment management customers as market rates have increased. Net interest income increased $524 million or 4% from a year ago, primarily driven by growth in earning assets and higher interest rates. However, net interest income declined $7 million from the second quarter as the impacts of lower investment portfolio yields driven by accelerated prepayments and lower average loan balances were largely offset by the impact of one additional day in the quarter and a modest benefit from all other growth and repricing. The net interest margin declined 3 basis points to 2.87% as the impacts of lower investment portfolio yields driven by accelerated prepayments, lower average loan balances, growth in average deposits, and growth in trading assets and related funding were partially offset by lower average long-term debt and a modest benefit from all other growth and repricing. For the first nine months of the year, we've grown net interest income by 5%, which is consistent with our previously stated expectation of low to mid single-digit growth for the full year 2017. Non-interest income declined $926 million from a year ago, driven by lower mortgage banking revenue, and was down $236 million from the second quarter. Let me highlight a few of the drivers of this decline. Card purchase volume increased, but card fees declined $19 million from the second quarter due to higher rewards expense. We offer competitive rewards, and our expenses increased due to higher purchase volume, more spending on our highest reward card, and higher acquisition bonuses. Mortgage banking non-interest income declined $102 million from the second quarter. Servicing income declined $91 million from the second quarter, primarily due to higher unreimbursed direct servicing costs driven by an increase in estimated costs for aged FHA foreclosures. While origination volume increased, residential mortgage origination revenue declined due to a lower repurchase reserve release. Residential mortgage origination volume was $59 billion in the third quarter, up 5% from the second quarter on higher refinancing volume. The production margin on residential held-for-sale mortgage originations was 124 basis points in the third quarter, consistent with the second quarter. Compared with the second quarter, there was a favorable impact of $72 million from net hedge ineffectiveness accounting. The FASB has issued new hedge accounting guidelines that we will adopt in the fourth quarter, which will significantly reduce the interest rate related to foreign currency related ineffectiveness associated with our long-term debt hedges. Due to the way we structure our hedging instruments, we may continue to experience some ineffectiveness volatility, primarily related to required differences in the discount rates for our foreign currency-denominated long-term debt and associated cross-currency interest rate swaps. On page 12, we provide details on trading-related revenue and the impact to net interest income and non-interest income. Despite declines in customer trading activity revenue driven by lower volatility and seasonally lower trading volumes, trading-related revenue increased $52 million from the second quarter. Trading-related revenue was down $29 million from a year ago, reflecting lower volatility and lower transaction volume. As shown on page 13, expenses increased $810 million from the second quarter, driven by the billion-dollar litigation accrual. The discrete litigation accrual increased our efficiency ratio by 456 basis points in the third quarter. Last quarter, we said that we expected our efficiency ratio to improve in the second half of the year, and that our full-year efficiency ratio was expected to be 60%-61% in 2017, not including any potential non-recurring expenses, including not-yet-accrued litigation expense. We currently expect our full-year 2017 efficiency ratio to be ±61%, excluding the billion-dollar discrete litigation accrual and any other non-recurring expenses, including not-yet-accrued litigation expense. The reason why our 2017 efficiency ratio is now expected to be higher than we anticipated last quarter is due to lower-than-expected earning asset growth and higher-than-expected expenses, primarily for cyber regulatory initiatives and data modernization. These expenses are part of building a better bank. However, we are fully committed to improving our efficiency ratio and achieving our target of a total of $4 billion of expense reductions. As you can see on page 14, we had linked-quarter declines across many of our expense categories, except for revenue-related expenses and running the business non-discretionary expenses, which is a category impacted by the billion-dollar litigation accrual. The increase in revenue-related expenses was primarily due to higher commissions and other incentive compensation driven by wholesale banking and brokerage. The $24 million decline in compensation expense was driven by seasonally lower payroll tax expense. Third-party service expense declined $82 million from the second quarter, driven by lower project-related legal and outside data processing expense. Running the business discretionary expense was down $34 million from second quarter, primarily from lower T&E and advertising expense. On page 15, we show the drivers of the year-over-year increase in expenses. Compensation and benefits expense increased $338 million, driven by higher salaries from annual salary increases and higher health benefits expenses. Also, these expenses in the third quarter of 2016 were reduced by the forfeiture of unvested equity awards. Revenue-related expense declined $131 million from lower commissions and incentive compensation driven by lower mortgage and wholesale banking activity. Third-party service expense increased $184 million, driven by higher project spending and legal expense. Approximately $80 million of this expense was sales practices related in the third quarter. The $665 million increase in running the business non-discretionary expense was driven by higher operating losses reflecting the billion-dollar litigation accrual. We have previously described the main drivers of the first $2 billion of targeted expense saves by the end of 2018, and we have now identified initiatives and programs for the total $4 billion expense target. On page 16, we summarize these initiatives and the expense categories that will be impacted, and we are committed to achieving these reductions. These levers have evolved slightly from Investor Day, but are still focused on areas like centralization and optimization and evaluating capacity to achieve savings in areas such as corporate properties and workforce optimization. As you can see on this page, some of these initiatives will generate savings throughout the periods, while others are not expected to be realized until later. We are making progress on the work that needs to be done on these initiatives, but many of the changes that drive savings are longer-term efforts and are in the earlier stages of being realized. For example, while we are seeing benefits from centralizing our functional areas, the savings for corporate properties, including savings from the 200 branches we plan to close in 2017. We are on track as we have closed 145 branches during the first nine months of this year. However, there are minimal immediate savings recognized from branch closure due to initial closing costs. Therefore, most of the expense benefit from the branches we close this year will not be realized until next year. It's also important to note that these initiatives do not include the benefit of the expected runoff of core deposit intangibles by 2019, which resulted in $640 million of expenses in the first nine months of the year. It also doesn't include the expected completion of the FDIC special assessment in 2018. Finally, it doesn't include an expense savings due to the sale of businesses we've announced, including commercial insurance and share owner services businesses, which are expected to close in the fourth quarter and first quarter, respectively. On slide 17, we provide details on the expected timing of our target expense reductions. We expect to achieve 21% of the $4 billion of the annual expense saves by the end of this year, and 50% by the end of next year. The rest of the expense saves are expected to be achieved by the end of 2019. As a reminder, the first $2 billion of targeted expense saves will support our investment in the business, and we expect that the additional $2 billion target in annual expense reductions by the end of 2019 to go to the bottom line, and to be fully recognized in 2020. Turning to our business segment, starting on page 18, community banking earned $2.2 billion in the third quarter. The impact from the $1 billion litigation accrual, which is reported in this segment, was the primary driver of the year-over-year and linked quarter decline. On page 19, we highlight that customers continued to actively use their accounts. Branch and ATM interactions declined 6% from a year ago. This decline was driven in part by customers migrating to our digital channels, with digital secure sessions up 6% from a year ago. As teller interactions migrate to self-service options, teller FTEs have been reduced 4% from a year ago. While we continue to invest in more specialty bankers, which were up 5%, as part of our goal of providing better customer service and advice. Primary consumer checking customers declined modestly from the second quarter and a year ago. While our attrition rates have remained stable, the decline in new account openings has impacted primary consumer checking customer growth. However, as we highlighted at Investor Day, our new customers continued to have higher balances and to use their debit cards more frequently. On page 20, we highlight balance and activity growth. Average consumer and small business banking deposits grew by 2% from a year ago. Debit card purchase volume increased 5%, and consumer general purpose credit card purchase volume increased 4% from a year ago. Customer experience survey scores predictably declined after we announced the completion of the expanded third-party review of retail banking accounts at the end of August. However, as Tim mentioned earlier, we continued to improve these scores prior to this announcement. While this past year has been challenging, the changes we've made are creating more consistency and simplicity for our branch team members, which will result in a better experience for our customers. We know that improving the experience for customers and team members is critical to growing our business. It's more than being nice, it's offering the right products and services to meet the financial needs of our customers. It's also about making changes with real customer impact. For example, empowering managers in the branches to immediately resolve some customer issues, such as fees and service requests, rather than having to redirect customers to a call center. I'm confident that the changes we're implementing will improve customer service and also drive growth. Wholesale banking earned $2 billion in the third quarter, stable from a year ago and down 14% from the second quarter. Results from the second quarter included the tax benefit resulting from our agreement to sell Wells Fargo Insurance Services, which is expected to close in the fourth quarter and result in a gain in the fourth quarter. Wealth and investment management earned a record $710 million in the third quarter, up 5% from a year ago and up 4% from the second quarter. Revenue increased 4% from a year ago, driven by a 19% increase in net interest income. WIM total client assets were a record $1.9 trillion, up 8% from a year ago, driven by higher market valuations and continued positive net flows. Turning to credit quality on page 23, the quarterly loss rate was 30 basis points, up three basis points from the second quarter, but is still near historically low levels. Commercial losses increased three basis points with higher losses in C&I. Consumer losses increased two basis points as continued net recoveries in consumer real estate and lower credit card and other revolving credit were offset by higher auto losses. Non-performing assets continued to decline, down $512 million from the second quarter, the sixth consecutive quarter of decreases, and NPAs are now less than 1% of total loans. We did not have a reserve build or a release this quarter as continued improvement in consumer real estate and commercial loan portfolios, including continued improvement in the oil and gas portfolio, was offset by $450 million of reserve coverage for potential hurricane-related losses, based on an initial review of our portfolio. Our preliminary estimate includes coverage for potential losses in our Reliable Auto business, which is based in Puerto Rico, where it's been especially challenging to determine the full impact from Hurricane Maria. Turning to page 24, our estimated Common Equity Tier 1 ratio, fully phased in, increased to 11.8% in the third quarter, remaining well above our internal target level of 10%. The growth in our CET1 ratio reflected lower RWA, driven by lower loan balances and commitments, as well as improved RWA efficiency. We remain focused on returning more capital to shareholders. Third quarter was the first quarter under our 2017 capital plan, and we increased our net share repurchases by 34% from the second quarter. We returned a total of $4 billion to shareholders through common stock dividends and net share repurchases, which was up 16% from the second quarter. Before I conclude, I want to update you on our resolution planning efforts. We've made a decision to move from a multiple point of entry resolution strategy to a single point of entry preferred resolution strategy for our next resolution plan submission. We've concluded that developing an SPOE strategy will enhance the flexibility of strategic options available to resolve the firm. This decision is not related to any agency feedback we've received in our 2017 submission and is not expected to result in any additional TLAC issuance or liquidity requirements. In summary, while our financial results in the third quarter were impacted by the billion-dollar discrete litigation accrual, our asset quality, liquidity, and capital levels all remain very strong. We highlighted throughout the call the transformational changes we're making, and I'm optimistic that these changes will help drive our long-term success. We'll now take your questions. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question will come from the line of John McDonald with Bernstein. Please go ahead. Hi. Good morning. Good morning. Hi, guys. John, I wanted to try again to ask about the idea of the timing differences between the initial $2 billion of expense saves to be realized by the end of next year and when the spending that it is offsetting that is occurring. If you could kind of comment on that, and then if you have any initial thoughts on the type of efficiency ratio that you guys might strive for next year, I am sure folks would love to hear any thoughts on that. Sure. We provided this slide in the deck this time that shows what portion of that first $2 billion should be out of the run rate by the end of this year and what portion should be out of the run rate by the end of next year, which is incremental information. The part that's hard to convey is what is already being spent as reinvestment of that for a variety of programs. We've talked about a lot of this, but we've had and will continue to have elevated spending around various regulatory and technology-related activities. I'll just tick a few off for you, including resolution planning this year, which doesn't completely go away. There's BSA/AML activity going on, a lot of cyber work going on. I mentioned data modernization earlier in our remarks, which is a big undertaking. There's technology re-platforming, and of course, there's sales practices issues that are lingering. Some of those are in the run rate today, and many of those will continue to be in the run rate throughout 2018 and maybe some of it even into 2019. There are bits and pieces of getting more efficient on those programs that are part of that $2 billion save that we're working on. It's not dollar for dollar as if as these things roll off and that first $2 billion gets realized, there's a benefit. But with respect to efficiency ratio, we think that we'll be sort of in the, as I mentioned, plus or minus 61% from the fourth quarter. It is definitely our goal to be at 59% or below at some point next year. There's two parts to that. One is expenses, which we're talking about, but it's also what happens with revenue. Rate increases, if there are any loan growth, which is very important, will contribute to that, too. So there's both a numerator and a denominator that we're working on. But I would say we're shooting for plus or minus 61% in the fourth quarter, and we'd like to get to 59% or below at some point during 2018. Okay. Separately, could you talk about some of the factors affecting net interest income and net interest margin for next quarter? With the loan growth headwinds and not having a rate hike in September, is it possible to have net interest income growth going forward? Or what are your thoughts there? That's a good question. It depends on a few things, including what you mentioned. It also depends on what happens to deposit pricing and what the market response is in retail deposits in particular. I wouldn't anticipate a lot of incremental growth in interest income in the fourth quarter. I think we're at 5% year-to-date on a year-over-year basis, and we've been imagining and telegraphing low to mid 4%-5% for the year as a whole. I think the fourth quarter will probably reflect that, especially because, as you said, nothing's moved on the short end. The long end's moved up a little bit, but that only matters at the margin as we reinvest. Okay. Then one quick last one for me. The business sales that you mentioned in the fourth quarter and the first are helpful to the efficiency ratio. Are those relatively earnings neutral? Is there any loss of earnings as those businesses go away? The run rate which I think is what you're referring to, is relatively earnings neutral going forward. Okay. Meaning when you sell them, there's no net income that goes away. They were pretty P&L neutral? Yeah. The only complication to that is indirect expense because we have work to do to take out the associated indirect expense. But in general, I would say that we will not be giving up a lot of net income. Okay. Meaning it will just take some time to get the expenses out from them. Yes. Okay. Thank you. Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead. Yes. Hi. Thank you for taking my question. You are welcome. My first question is for you, Tim. I think that as I speak with your current and prospective shareholders, the biggest sort of question mark in terms of visibility into next year is not really on the expense management side, but really on the revenue side. You started out this call with a list of the remedies that you have done on the community bank. I guess the question for me is, in terms of the overall culture of the bank, how much is the wholesale bank being impacted by the issues and the scandal in the community bank? In other words, is it impacting risk appetite? Is it impacting growth initiatives? Is it impacting your ability to hire? The short answer as it relates to wholesale banking, Erika, it is a great question, is no. At the margin in our government institutional banking business, there is a little bit of impact on some municipalities that have put us on probation or just said they are not going to use us as much for a period of time. Though we have had some municipalities that have taken us off that because we have executed on everything we said we are going to execute over the last year. So it is not impacting our ability to hire people. I mentioned attrition for the entire company, but the same would go for wholesale banking in terms of lower attrition, so we are not losing people. It is not affecting our credit appetite at all. Again, I think wholesale banking's performance in the quarter was good. I would say the same thing for wealth and investment management. You saw real good performance there. So there's no question that there's impact. We've talked about that. John provided a number of details in his presentation as relates to some of our consumer businesses. But for the rest of the company, we're continuing to move forward. Got it. And thank you so much for providing the new slide 17, in terms of what we can expect to be achieved when. I'm wondering, as we think about 4Q 2019, John, is it as simple as saying, okay, let's assume a core run rate for Wells Fargo. Let's say it's the $13.3 billion this quarter, excluding the $1 billion in litigation accrual. Assume a growth rate off of that and then deduct $500 million. Is that what fall into the bottom line means by 4Q 2019? That's elegant. I guess the way I think about it is, you have to take a snapshot of a business mix, each component of which throws off its own efficiency ratio. And I expect us, frankly, to get more efficient in the businesses as we roll forward. But as you look forward a year, we should have taken out, call it, 40% of the first $2 billion and the rest of it to be coming out at the end of next year. So obviously, that'll be phasing in through that period of time. You'll have these harder-to-gauge, elevated program-related expenses for the types of items that I mentioned that are sort of happening over the top, that have been for a little while, and I anticipate the next 12 or 18 months there'll be a lot of it going on. I don't know how much will be rolling off exactly at the end of next. Nobody knows exactly how much will be rolling off at the end of next year. But that's a big number. Then we begin to have these structural takeouts, like the amortization of deposit intangible, the extra FDIC premium, and the costs of the exited businesses, although those will be happening earlier in 2018. So those are the moving pieces as I see them. Now something new could occur too that changes the business. But those are the big items and the way that they're moving that as we forecast through 2018 and into 2019, are the drivers of where we're going to be. And with that, an expectation for revenue, that's what makes us think that we'll get down to 61% for 2017 in the fourth quarter, then hope to get to 59% in 2018. Just one last question to follow up on the revenue side of the 2018 efficiency equation. Are there idiosyncratic catalysts for the margin decline that you'd like to point out that impacted the performance for this year? Or maybe a better way to ask, if the Fed does raise rates in December, could you walk us through what the impact would be for 1Q 2018 that would be perhaps different from what we saw this quarter? Yep. So with respect to year-over-year margin and what's going on, it's what you imagine. We've got different categories of earning assets that price differently, investment securities, loans, short-term investments, et cetera. We've got mix, and we have repricing. The sort of weighted average of that matrix is the benefit in a rising rate environment. To them, we've got deposits, we've got long-term debt, other funding liabilities. We've got mix, and we've got repricing. That's the negative in a rising rate environment. That's what gave us, I think we're 5 basis points up year-over-year. But if there's a move in December and we roll into the beginning of the year, the easy calculations actually are a parallel move. So I'll give you the number for a parallel move. We think all things being equal, that's probably worth $90 million a quarter, including in the first quarter. Now things don't happen in parallel. We don't know what's going to happen at the longer end. The big question mark about that is what is the deposit response in retail that bigger banks either cause or are impacted by on the next move? Because we model a reasonably meaningful response, yet we haven't seen one yet. There could be upside to that. Got it. Thank you. Yep. Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead. Hi, guys. Hey, Ken. Hey, guys. How you doing? Good morning. Hey, can you talk a little bit about just loan growth expectations? I know, John, in your prepared remarks, you talked through a couple of the buckets where you're continuing to let things roll off. But obviously, we're seeing the period ends come in lower than the averages, in part, because of that. Can you just talk about end demand and try to separate end demand and customer growth from perhaps any lagging ramifications of retail sales and slower account growth in terms of how you expect loans to traject going forward? Thanks. Ken, it's Tim. You're talking about fourth quarter next year from a timeframe standpoint? Yeah, just your general outlook for Yeah when do we see a bottoming in loan growth, and how much of that let go part is weighing on the overall amount of growth that you're seeing? Let me start with the portfolios that are likely to decline over that period, and then we'll get to the ones that are going to increase. As we've highlighted for the last few quarters, I think it's likely that the auto portfolio will continue to decline over the next few quarters, and our expectation is it'll probably bottom out sometime second half of next year. I think the home equity portfolio will also continue to decline, though our expectation is that next year, all other things being equal, we'll originate more home equity loans than what we did this year. But again, recall, there's still that legacy portion of that portfolio that's burning off that we used to be very concerned about from a loss standpoint. It is now performing beyond all of our expectations. I expect the credit card portfolio to continue to grow. We saw that this quarter. That was absolutely terrific, driven by some really good improvement in digital acquisition. All the investments that we're making in the credit card business and our digital platform are working. I expect the on-balance sheet mortgage portfolio to grow during that period. There'll be some seasonality in the fourth and the first quarter, as we've seen. But again, like we saw this quarter, we saw good growth in the first mortgage residential portfolio. Then on the wholesale side and commercial side, we expect to see growth throughout that period. John highlighted some of the idiosyncratic reasons why we saw some decline this year, but our expectation is going to continue to grow. Having said all that, the reason we became the largest lender in this country is because we look at the market, we look at our customer demand, and we want to make sure we're making good long-term credit decisions. Sometimes, in a quarter, it means you grow, sometimes you shrink. But over the long term, we are very confident we're going to be able to continue to grow. Okay. Then if I could just dig in on the commercial business specifically, the biggest of the loan buckets on the wholesale side. Even maybe some granularity there in terms of the specifics that John mentioned. But obviously C&I has slowed overall. What are you just seeing in terms of customer demand and where that growth would come from inside that commercial business? Well, I think, again, we called out some specifics. For example, in this quarter, we had a number of larger CRE construction loans that paid off, and again, that's going to be a little bit episodic. But our overall view is that we're going to see growth across the entire portfolio. Again, because we're in so many businesses, each business is going to have a little bit different complexion in the quarter. We highlighted the fact that because of the GE Capital acquisition, we're now the number one asset-based lender, and we're pretty excited about that. That hasn't necessarily happened over the last few years, so we think there's good upside there. But really across the board, we're optimistic about being able to grow. Okay, got it. On the flip side, if I can ask a question about credit in general. You kind of got to this point where your charge-off bounced up a little bit and you didn't really release for the first time in a while. There's a lot of moving parts, and you mentioned the hurricane impact. Can you just talk about outlooks for any credit normalization going forward in terms of also the mix and just the amount of recoveries that you've still been continuing to see on the commercial side? Yeah, Ken, it's a really good question. I think that everybody in the industry, and certainly been for us, too, we've seen such a benign credit environment except for the energy business, which we've all worked through. Whether you're at 27 basis points or 30 or 33, whatever the number is over the last few quarters, it's still really low. If you overlay the current economic environment, we continue to believe that losses will probably bounce around at lower levels, X things like the impact from the hurricanes. But overall, though, the portfolio has never been in any better shape in my 30 years at the company. So- Another- We continue to be optimistic. Sorry, John. I think for us, auto will look better because we've taken out the low end of credit quality. That's a good point. vintages or recent quarterly vintages of origination. I think with card, we've been adding more new cards. Our card portfolio is now probably 50% what you consider to be very seasoned vintages. So we should probably see a tick up because newer card vintages are going to experience front-end loaded losses. That's to be expected. But again, that's not necessarily because of any fundamental deterioration of the card portfolio. That's just the natural aging. That's the natural aging of new customers. Yep. Understood. Okay, thanks guys. Thanks, Kim. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead. Hi, Betsy. Hi, good morning. Betsy. I had a couple of quick questions. One was on the hedge accounting treatment that you said you were going to adopt next quarter. Could you give us a sense as to why you decided to adopt that? Could you also go through what you think the impact is on balance sheet? Are you going to be realizing any gains as you move over securities, et cetera? Yep. So this really relates to our owned liabilities. When we issue long-term fixed rate, either in dollars or in other currencies, we often hedge back to floating, and we generally hedge back to dollars, or at least historically we did. It is that accounting noise that gets reduced as a result of the new accounting. The only real impact that you are going to see is there will be some catch-up adjustment, a year-to-date adjustment in Q4, which I think might amount to, call it, $100 million-$200 million kind of range. We haven't finished all the math on that yet, but we will figure it out. That will come through in Q4. Then going forward, what you will see is a lot less volatility. The reason, of course, we're adopting it is because we were creating this noise in non-interest income that was bouncing around to the tune of hundreds of millions of dollars a quarter that was just as a result of different valuation schemes for the liability lag and the hedge lag on things that were permanently hedged. So we're happy with this kind of change. Okay. I thought in that there was a one-time opportunity to move some securities from held to maturity to AFS. I was just wondering if you were going to take advantage of that at all or not. Not going to. The impact for us is really on the liability side. Okay, got it. Then question on the living will. Living wills have been extended, right? The next one's not for another, what is it, 18 months or so. Just wanted to understand how you're thinking about that, because I know we had a conversation before around how you're thinking about the size of the investment bank versus the living will, and maybe give some updated thoughts on that. Sure. The MPOE strategy that we've had in our recent filings works great for us. I point that out because it's more unique to us among the larger banks because we've got a smaller non-bank affiliate activity going on, and that's a key driver of whether that works or doesn't work. In order to create more flexibility going forward, including more either size or complexity of some of our non-bank affiliate activity with nothing in particular or urgent in mind, but just in general, we get more flexibility with an SPOE strategy. We had to finish the process first of satisfying the deficiencies that were called out a couple of years ago, and then of filing the most recent plan. We stuck to our plan and delivered that, and the feedback thus far, it's not complete, but it's been fine. By doing this, we think we open up more flexibility for Wells Fargo going forward. As you've mentioned, the industry got word that there'll be, instead of an annual cycle, at least this time, an extra year. Whether we wait and file it at the end of that period or we file it in the middle of that period, we haven't really figured out yet. But the intention is to move toward SPOE, and we thought that the investment community should know that. Okay. Just on auto specifically, I know you mentioned your actions that you've been taking in the auto portfolio. What would drive you to get back into a growth mode there? I know there's been some chatter around demand picking up and obviously the hurricanes have had some impact. Yeah, just that. I think there's two things going on, Betsy. One, there's the execution of the fundamental changes that we're making in the auto business to make it much more efficient and much less complex. Then it's just going to be our view of what's going on in the business. If we think that there's more opportunity from a risk-reward standpoint as it relates to credit, then we'll take advantage of it. I think that the decisions that we've made over the last year have really worked because when you look at the average FICO scores of our customers, we did now increase, and that's exactly what we wanted. So it's going to be a function of the changes that we're making in the business and then our view of what's going on in the industry. Even said all that, I think you should expect that portfolio, and I am not being negative, I just want to make sure you reinforce the comment I made to Ken Usdin, that you should expect the portfolio, even if we turn things up a notch, to continue to decline through the fourth quarter this year, through most of next year, and probably bottom out again sometime, hopefully the second half of next year. I mean, we like that business, don't get us wrong. Our expectation is over time, we will continue to gain share in that business. But right now, we are cautious, and we have got a lot of changes going on in the business, and we have got to execute those. Those changes, which we have talked about, are taking 50 or 55 distributed origination, underwriting, and collecting centers down to three bigger regional centers. While that is happening, we would rather have a higher credit profile of the average customer, just so that we are dealing with fewer defaults, frankly, while we make that change. It will be end of 2018. Right. So that you get down to the three by the end of 2018, or is that 2019? Well, it is happening now. It should be by the end of 2018, Betsy. And then just lastly, on the reserve build for hurricanes, $450 million, is that right? Yes. It is not a net build. We would've had a release but for the analysis that we've done so far on the hurricane-impacted areas. Right. It is a little bit bigger than we've seen in other folks. Could you just give us a sense of exposures or what's included in that? Is that across all credit spectrum, consumer, incorporated? Is there anything that's really driving the bus on the size? It is, Betsy. Again, we're the largest lender in the country, and you've had significant hurricanes that have affected two very fast-growing states, Texas and Florida in particular. Puerto Rico. Puerto Rico. It is across all product types. I would also put it in the category of, it is early in our assessment. I think we have been appropriately prudent in wanting to be conservative. We could end up being a little bit too conservative, maybe a little bit less, but right now because there is so much going on in all those markets, we just thought it was prudent not to have a release until we get to the bottom of whatever the exposure would be. Our folks have been working very hard in terms of trying to get their arms around it, and every day is a little bit different. My guess is we will have updates throughout the quarter. Yeah. One of the first things we did in Texas and Florida was offer people a 90-day forbearance on their mortgage payments and add them onto the back end of the loan with no negative repercussions so they could just get their feet back on the ground. That is a great thing, although it does complicate figuring out who is going to make their payments or not. We have to wait a little, as opposed to just seeing all the information in every first-of-the-month payment cycle. We also have more complications here with our borrowers' insurance, whether it is auto insurance or homeowners insurance. How are they covered for flood? How are they covered for wind? Those types of things, which increases the uncertainty around what the performance is going to be. We noticed also that it was a bigger number than what some other people have talked about. Thank you. Thanks, Betsy. Your next question comes from the line of Scott Siefers with Sandler O'Neill. Please go ahead. Hey, Scott. Morning, guys. Morning. Morning. Morning. I was wondering if you could spend just a moment or two talking about the branch footprint overall. You guys have definitely been more aggressive here recently than you had been over, say, the last several years in sort of paring back where appropriate. I guess increasingly, I'm finding myself getting questions about why your branch footprint shouldn't be 1,000 or so branches if you were just given how many more branches you have than the other biggest players in the country. I'm just curious if you could maybe offer a little color on how you're thinking about the appropriateness of the footprint as you look forward and what any additional opportunities might be. Sure. Scott, I think it's a great question. Fundamentally, I think every institution's going to have a different footprint. We're really, really proud of this footprint that we've developed over decades and decades, which is one of the reasons why we have the largest market share from a deposit standpoint. That's incredibly valuable. I'd also just caution that it's not just about the number of branches. It's the size of the branches. It's how they're organized. It's where they're located, which drive cost and so on. I think as Mary Mack was very clear at our Investor Day in giving a couple of years of guidance in terms of what our plans are, and we're in the midst of executing on those plans. So far this year, as we've detailed, we're on track in terms of the branches that we're closing. We haven't seen any significant revenue impact, which is part of the goal, too. Most of our team members that were in those branches now are at other branches, which is absolutely terrific. So we've got an experienced crew. My guess is that over time, we will continue to respond to our customers because they're going to ultimately tell us how many branches they want. We transact billions of dollars, billions of interactions each quarter. Over 50 million times a month, somebody still comes into our branches, and they want to be able to use them. So I think it's likely, over time, the number of branches that you see will decline. If our customers tell us that they want fewer of them, then we will accelerate that. Candidly, if our customers tell us they want more, we're going to listen to them. I think you're also seeing, Scott, the impact from the investment that we're making from a digital standpoint. It's not just the investment in terms of opening new accounts, it's also how we're integrating that into the branch experience. So it's a long-winded answer to your question. We're going to execute on what we said for 2018 and 2019. We're going to have an Investor Day next May. We'll provide you with an update. Or, I'm sorry, 2017 and 2018. We'll have an Investor Day next May. We'll provide you with some updates, and we'll continue to move forward. Yeah. The only thing I'd add is that I think we're thinking very aggressively about what the right mix is. We own half of our branches. We have short leases on most of the other half. We're in a position to be as flexible as we need to be if we think the opportunity presents itself. Okay. That's perfect. I really appreciate the thought. Sure. Thank you, Scott. Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead. Good morning. Morning. Morning. Just wanted to- Sorry, but here, I just want to kick the dead horse on loan growth one more time, and I will be quick on this one. But the way we should think about it with loan growth and the potential impact of the sales practice and car and auto insurance issues, that if those issues did not happen at all, if you never had the sales practice issue emerge, nor the auto insurance gap and CPI issue and all that, loan growth headwinds that you are seeing right now, this decline in commercial, et cetera, that still would have happened? On commercial, for sure. Yeah, commercial. John, the sales practices impact for our loan growth has been primarily based on referrals from our branches to some of our other businesses. So, there's been an impact in terms of credit card referrals and first mortgage, home equity, and things like that. That's where the- Personal loans and lines. And personal loans and lines. Thank you, John. That's really where the impact has been. There has not been a material impact in wholesale or wealth and investment management for that matter. Okay, thank you. Then a couple quick more things. On slide 16 where you give us the targeted savings exclude, there's items there, including the CDI and the FDIC. What is the total of those items? Is it about $1 billion? On an annual basis, it's about $1 billion, yeah. Okay. All right, great. Lastly, on the credit side, the 90-plus day past dues up 14% on a linked quarter basis. I am sorry if I missed this, but how much of that is storm-related, and what is the amount that may be related to the storms, I guess, and could that continue to increase from here? Thanks. I don't- Storm-related. Yeah, I don't have a good answer for you, John. I don't think much because it just happened. I don't think that's a big driver. Okay. Yeah. All right, great. Thank you. Thank you. Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead. Hi, Matt. Good morning. Hey, Matt. Tim, you have been CEO now for about a year. A year and a day, I think. All right, well, that even Maybe two, I don't know. Yeah. Seems like forever, Matt. Yeah. Now that you've been there for some time, do you feel like you've identified all of the issues related to just call it sales practices and tactics that have become headline issues for the stock and obviously, weighed on results as well? Do you feel like you've identified those issues? Well, Matt, we've been working very hard to identify all the issues. I'm very pleased with the progress. Obviously, I'm not necessarily pleased that if you find something, it sometimes is not particularly positive. But we've made a commitment to look through everything and be very disclosive, and I appreciate that that can create a headline and weigh on the company and stock and team members and other stakeholders. But we've made a lot of progress. I can't commit to you, Matt, that we've finished everything because things are still in progress. But we're very far along. But I think it's also important to reinforce that our review of all of our policies, procedures, practices is going to continue for a long time, meaning that we've got to continue to ask more of ourselves every day. I think that was, in hindsight, one of the mistakes that we made, and I've taken responsibility for that. We've taken responsibility for it. It's a long-winded answer to your question. We're making a lot of progress. We've been transparent about everything that we've talked about or we discovered. I'm really pleased with the progress. If you had to guess, how much longer until you can say, "We've looked through everything. This is what we found. We're done." I can appreciate that issues can pop up at any company at any time. When can you kind of put the stake in the ground and say, "We've been through everything. It's a big company, lots of businesses, lots of employees, and we're moving forward. I can't 100% guarantee nothing will pop up, but we're essentially on par with everybody else, and we're feeling good from here." How long is that going to take? Well, Matt, I don't ever want to be on par with everybody else. I want to be better than everybody else. That's why we rolled out our six aspirational goals for our team in March. We've said, look, we want to be the best in the industry. We're not the best in the industry in every one of those right now, but that's what our goal is. Listen, I appreciate the question, and I understand the reason for the question and so on, but I don't have a specific date. I think it's a mistake, notwithstanding in the short term that might feel good, but in the long term, it would be a mistake. It's a mistake to put a stake in the ground and say everything's got to be done by a certain date because then what happens is people might rush to get to an answer, and I don't want them to rush the answer. I want them to get to the right answer. But again, we've made a lot of progress. As John described, we're spending a lot of money looking through everything and building a better company. We're going to continue on that journey. Okay. Yeah, I can appreciate it's hard to put a timeframe on it, but I do think it's important to come out when you feel confident and say that these legacy issues have been addressed, we're turning the page, and we're moving on. Understood. Okay. Thank you very much for taking the call. Thank you, Matt. Your next question will come from the line of Marty Mosby with Vining Sparks. Please go ahead. Thanks for taking the question. What I wanted to focus on is your deposit beta has been higher than the peers, which is abnormal compared to your history. That has really been, I think, reflective of you wanting to, especially with corporate and wealth management customers, not give them any other reason in this period to look anywhere else. So you've been defensive in your deposit pricing, which has not been the case in the past. You've been much more offensive and aggressive in being able to hold back those deposits. When you look at your asset structure, because of the duration that that would have had you to assume on your deposit side over time, you would've extended your assets. So what you're kind of getting is a fundamental shift in your deposit beta, which doesn't reflect on your asset side. So you got almost a mismatch. I'm just wondering if that's the way to think about this, and is this how and why we're not seeing the margin expansion that we're seeing in some of the other banks? Yeah. Sorry, John, go ahead. The aggregate deposit beta is a function of the component pieces of it. As I mentioned earlier, we're the number one retail deposit franchise, and the beta there has essentially been zero. In wealth and investment management, where we've got a sophisticated clientele with a lot of excess liquidity and a lot of options, I think our realized beta's been on the order of a third, 30%-35%. In wholesale, where we, as you point out, we have lots of sophistication, lots of competition, et cetera, I think the realized beta has been something on the order of two-thirds. So to the extent that we've been growing wholesale deposits a little bit faster, then the weighted average deposit beta moves up reflecting that mix. I don't know whether Perry would say that he's being more responsive in this cycle to not give people a reason to move money away from Wells Fargo. I think they're being judicious. They're going customer by customer or customer category by customer category. We're doing more, for example, with certain types of institutional borrowers, which probably have the most sensitivity to change in rates, but we need them for our total liquidity profile. It is what it is on average. When I think about NIM expansion in a rising rate environment, obviously, this is a big part of the outcome. There's also the change in the rest of our liability structure as well, right? We've got more long-term debt than we've ever had before, and that comes at more of a cost, which has been NIM depressing during the time that we've been adding it all. There's a few other structural items as well. Marty, let me just reinforce how we think about pricing deposits for our wholesale customers. It's very much done on a relationship-by-relationship basis. So it's not just about, hey, let's decide whether or not we want to keep these deposits. It's about what's the value of the overall relationship. So as you appreciate, it's a little bit more complicated than just the deposit. It's the relationship. It's very much coordinated with what we're doing on the wealth and the individual side. So there's a lot of coordination going on. As John mentioned, the betas are a little bit higher. But I wouldn't necessarily jump to the conclusion it's fundamentally changed the structure of the company. I was thinking that that might be temporary, in the sense that you used to be able to be the most aggressive lagger, which helped you to be able to expand when everybody else was expanding, but also maintain a higher margin because you have extended your duration on your assets prudently. So that defended your margin in a declining rate environment, but takes away a little bit of the punch on the way up that you used to be able to make by just being half of what everybody else did in deposit increases. My last question was, if you look at fee income, you've seen a disruption of activities related to these hurricanes and other things that have gone on in the last couple of months. Do you feel like we see what you've allocated on the loan loss reserve, but hasn't it also probably impacted some of your fee income in the third quarter? Well, I think at the margin, Marty, there's no question that when you have such an important market like Florida, without power, and still parts of Florida without power, or you have an important market like in and around Houston, which has been very dynamic from a growth standpoint, there's some impact. I don't know how much it is, but at the margin, there's some impact, and we'll work through it. Because again, that has an impact to the company in a very short-term. Over the long-term, those are great markets. They're going to recover. Generally, what you see post-hurricane in a hurricane situation, you see a V-shaped recovery in those markets, and we're looking forward to that. That's one of the reasons why we've really focused on making sure that we provided all the benefits to our customers possible to help them recover even faster. No, I think that's right. I just was saying, it's a kind of a hidden impact. There's no way to put your finger on it, but it is kind of underneath the numbers as you look at it, and it will rebound quickly. But thanks. Thank you. Your next question will come from the line of Gerard Cassidy with RBC. Please go ahead. Good morning, Tim. Good morning, Gerard. How are you? Good, thank you. Can you guys give us some color? Obviously, you are the leading mortgage originator in the U.S., residential mortgage originator. Can you give us some color on where you see the housing industry at this point in the cycle? Are we halfway through the cycle, two-thirds of the way through, or just starting out? Any color would be helpful. Yeah, I think everybody's got an opinion, and I wish Franklin was on the phone because he'd probably give you the best one. But my personal view is that I think this recovery is very different than what we've seen historically because of the impacts of demographics, and we just see the millennials forming households and therefore buying houses at a different pace than what we saw in earlier recoveries and/or prior recoveries and other demographics. I think there's and we believe there's a lot more room to grow. I don't know what inning it's in, but I would say it's in an again, assuming kind of the steady economic growth that we've seen. We see that demographic group aging more. They're starting to form families more. We're starting to see the benefit of that. My expectation is that we're early in that process, and we've got a lot to look forward to. That's one of the reasons why we've been so focused on rolling out our new digital mortgage application. Because I think particularly for that demographic group, they're used to a mortgage, and they want a mortgage experience that maybe you and I didn't experience when we bought our first homes. They're used to when they go online, they want all the information as they should have it. That's why we're very excited to roll this out in the first quarter, and we think that will be very positive to that demographic group. That application you described, Tim, that's equivalent to the Rocket Mortgage that Quicken Loans has right now? I want to be very respectful to Quicken. I think they've done a great job with Rocket Mortgage, but I would describe what we're doing as kind of the next generation because it's not just about giving a fast answer. That's part of it. Everybody expects that, and we're doing that across the platform from a consumer side. This is about, Gerard, you going online, you're a Wells Fargo customer, you type in a little bit of information like who you are and you want a mortgage, and we pre-populate your application. So that we're not asking you, and you're not having to give for the 44th time where you live, how much you make, and it's using the trusted data that we have here. What's even more exciting about that is that we're going to have the capability of pulling that data from outside Wells Fargo, too. We're going to have that same capability both inside and outside Wells Fargo. I would describe it as the next generation. I mentioned in my comments earlier that data modernization is one of our big initiatives because for reasons like this, with the breadth of reach that we have to, I'll call it 21 million households and 70 million customers in one way or another. We know so much about our customers that we should be able to, as in this case, pre-populate with trusted data, but present really customized, really personalized solutions when people are looking for a new product or a new service. We can use that same data in a fraud protection way that's very, very powerful, in a risk management way that's very, very powerful. The more we know because of the breadth of our relationship with customers, the stronger the value proposition is going forward. It's a huge initiative, and it should change the way retail banking is done. I see. Tim, sticking with home mortgage for a moment, I think very recently, the Mortgage Bankers Association came out with the top 20 originators. What's fascinating is the top 10, the number of non-banks that are in there, like a Quicken Loans or a Freedom Mortgage Corp., and they're growing very rapidly. How do you see them as a competitive threat to the traditional banks like your own? Well, I think the primary driver for the change in mix in the top 10 has been related to FHA direct mortgages. Again, set correspondent aside for a minute. Because the FHA has not adopted the same liability structures that Fannie and Freddie have, the larger originators, we would be one, and our other bank competitors would be others, have just said, "You know what? We're not going to sign up for the fact that 10 years from now, somebody could come back and say, a mortgage you originated today defaulted at that point in time. Right. That's really been the driver. I'm hopeful that with all the changes that are going to occur as we look at how homes are financed in this country, that that issue will be dealt with. I can assure you that if and when that occurs, we will be back into the FHA direct business, and you'll see an improvement in our share over time. That's been the driver, plain and simple. I don't mean to be negative about any of the competitors. They're all terrific, and I'm sure they're providing good service and so on to their customers, but that's been the driver. Great. With home equity loans, I think you mentioned, if I heard you correctly a moment ago, that you could see growth in that product in 2018. The vintage home equity loans are performing much better than you earlier thought. Is there any possibility that that type of product, whether it was an interest-only product for a 10-year term, would those come back when you think about growing the portfolio since they performed so much better than expected? There's no question that we want to try to retain as many of those customers as we can. The short answer is yes. I think that's part of our overall growth strategy. Many of those are just paying off because the customers don't need them anymore. I see. Just lastly, you guys talk about your expense initiative, of course, and that's $4 billion that you're going to reduce. I think you were, John, pretty clear that the expectations for the reduction in expenses do not include the core deposit premiums that you've been running every year, also the FDIC special assessment, and also expenses associated with businesses you've sold off. Could you frame out for us what that total could be from those three areas? That would be on top of the $4 billion? Yeah. Well, I think Betsy had asked about the sum of the FDIC premium and the amortization of deposit intangibles. That is about $1 billion a year in full run rate. The expenses from the businesses that we are selling, I do not think that we have called that one out yet. It is less than $1 billion. There is a portion of it that is direct and a portion indirect, so we need to make sure that we can drive out all of the indirect that is associated with it in order to take the full amount out. We will give some more clarity as those businesses actually close and are sold. Let us get the deal done, and then we will provide some more detail. Great. Thank you. Yeah. Your next question comes from the line of Saul Martinez with UBS. Please go ahead. Hi. Good morning, everybody. Morning. Two questions. First, client customer growth. Your primary checking account customers have essentially been flat over the last year. That compares to mid to high single digits historically, and it's really decelerated since the second quarter of last year. On top of that, small business account deposits and consumer deposits have been coming in as well. I mean, how important is it to stem that and to start to drive some consumer account growth again, and what do you need to do to kickstart that? At some point, does it suggest that maybe you do have to start to become a little bit more aggressive in terms of deposit pricing on the retail side as well? Let me answer the last part of your question and get to the beginning because it's a really good question. The short answer is no. The driver of this is not deposit pricing. I think that when you hit the margin, if you're competing on price, you're making short-term decisions and missing the opportunity to build long-term relationships. I would think about the primary checking account growth in two parts. One is quality and one is quantity. You were talking about quantity, which is an absolute fair point. Year-over-year, it's been flat. I think the reason for that is because we've been through and are going through a transformation in our retail business. When you think about how that sales practices settlements and related reputational impact affected our team and our customers, particularly in the third and the fourth quarter. Mary and team have been making fundamental changes to the business in terms of the new incentive plan, going through reducing a layer of management in terms of new training. I mean, there's been so much going on. I think that what we're seeing, and I just actually was talking to Mary about this over the last couple of days. What we're seeing right now in our branches are team members that are so much more confident and working so much better with their customers to provide them with solutions. I think you're going to see that in not only continued improvement in customer experience and loyalty scores, but you're going to see that in terms of growth. The quality, I think, is an important point. Mary highlighted at Investor Day that our average customer deposits per account were up about 8% year-over-year. Now we're seeing them be up about 11%. We've got work to do on quantity. Quality is already improving, but it's just the execution of all the plans that are in process right now, and we're seeing improvement every day. Okay. No, that's helpful. I guess I'll follow up with a bigger picture type of question. You guys have a lot of stakeholders as does any bank or any company. Employees, the communities you serve, your clients, your shareholders. You obviously want to be seen as a good corporate citizen whose actions are doing good for society at large. But in the grand scheme of things, I mean, how important is generating an 11%-13% ROE for shareholders? The question isn't meant to be confrontational or grandstanding in any ways, but it does feel like it's in the background of discussions you have with investors, is Wells going to pull the cost leverage as hard as they can? Are they going to communicate that? Are they going to be more apt to change pricing or increase deposit pricing or whatever it is. But I kind of wanted to just ask how do you think about the push and pull of how you run the business and decide how to address different stakeholders' interests? Yeah, I'll start, and I'm sure John will want to jump in. But look, we appreciate that we have a lot of stakeholders, and it is not lost on us that one of our most important stakeholders are you, our shareholders. We have historically provided exceptional returns on an absolute and a relative basis. I think our returns continue to be very good. Others have caught up. We appreciate that. But make no mistake, we understand that increasing our capital return to our shareholders like we did this quarter, where we were up to $4 billion and continuing to grow ROE, is very important. And that's one of the reasons why when we introduced our six aspirational goals to our team, that we were very clear that providing the best long-term returns to our shareholders in the industry is one of our goals, and we're going to achieve that goal. Okay. No, that's great. Thanks a lot. Your next question comes from the line of Vivek Juneja with JPMorgan. Please go ahead. Hi, Vivek. Hey, Vivek. Hi, Tim. Hi, John. Just a couple of questions. Mortgage applications, the issue that came out, you said you are refunding customers from September 2016. Just want to understand, did something change in the system that caused this thing to start from September 2016? Any color on that? What happened that it starts only at that point? Sure. Prior to 2013, we were in the midst of a refinancing boom, and everybody was so busy, everybody in the industry, but we certainly were, that we did not charge for any sort of rate lock extension. We put a new policy and practice in place at that point, which was in place until we changed it. It is that roughly 3-year timeframe that we are focused on, where some customers where we charged a rate lock extension maybe it should have been handled differently. That is the population that we are focused on. We have changed our practice. It is done centrally now, and that is why there is a focus. Okay. That, I guess brings a bigger picture question. With these kinds of little things that have come up, which are not always easy to find, is there something you are trying to do to, it is a big bank, in terms of processes so that you can catch more of these, Tim? Oh, absolutely. I think that's really been fundamental to the changes that we've been executing on in the last year. We've been very clear about the fact that one of the reasons that we had some issues in our retail banking business is because of how we were organized. We've centralized all of our control functions, whether it's compliance or HR or finance, you name it. We've got a better check and balance than we did before. That's number one. Two, we've been very focused on reinforcing to the entire team that if there's something they're concerned about, go ahead and raise your hand and escalate it. That's working, too. Then within our centralized risk functions, we've also created a conduct office. Within that, we're assembling data, to John's point about the investment we're making in data, so that we're using data better to triangulate into any area that we're concerned about. You take a call to an ethics line or attrition or complaints or whatever, you put that all together, then you can more quickly look at something and say, "Hey, we got an issue," or we don't. The good news is we're making lots of progress. Absolutely right. We have fundamentally changed this organization. We fundamentally changed it for the better, and we're seeing that every day. Now, sometimes in seeing that, it means that we find something. We're going to be very transparent about it because that's what we promised you to do. Even at things like product pricing, Tim? Product pricing. Because this is part of product pricing. Oh, sure. Because this is part of pro- Yeah. Okay. Different question. John, you mentioned something about spending on BSA/AML. Yes. I haven't heard that from you before. Something new? Is there an order, an event or something that's caused you to mention that? Nothing new. Can you just color on that? There's been an order in place for some time which just raises the standard for the level of borrower due diligence that's necessary in order to be satisfying from a regulatory perspective. So there's a lot of beneficial owner work. There's a lot of incremental memo writing, file cracking, et cetera, across hundreds and hundreds of thousands of wholesale customers. It costs at the margin hundreds of millions of dollars per year to accomplish. There's sort of a backlog issue. Okay. When do you expect you might be able to get out of this consent order? Well, I think the expectation is that the work necessary to deliver it would be finished in 2018. It's been underway for more than a year. That's a different question as to getting out of the consent order. Okay. Okay, great. Thank you. You bet. Thank you. I think we have time for one more. Our final question will come from the line of Brian Kleinhanzl with KBW. Please go ahead. Hey, Brian. Great. Hey, morning. So yeah, two quick questions, I think. When you looked at the C&I growth, I know it was down. I know you highlighted some of the declines and some of what was offset by growth in the presentation, but that still only accounts for $1 billion of the $3 billion declines. Can you just highlight where the rest of the decline came from? In light of some of your peers reporting really strong growth in large corporate banking, how did large corporate banking perform on the quarter? Well, large corporate was down. I don't have the specific number in front of me, but it was down a bit. I would say it was probably in line with what I've seen from some of our competitors. It was just a bit of a decline or a lull in some of the larger transactional activity. But we called out the specific areas that were the primary drivers. Everything else was relatively small. And we also called out the impact in terms of the commercial real estate. Okay. Then on the efficiency ratio for 2018, I know you've been saying that you hope that lending growth picks up and that you're optimistic it will, but what kind of lending growth is in the budget for you to hit that 59%? Can you still hit the 59% goal with 1% loan growth or 2% loan growth? We haven't exactly sent a budget for next year yet. But look, our assumption and belief is that we're going to be able to grow our commercial loans as we have year-over-year-over-year. We've had some impacts so far in the last couple of quarters. But I wouldn't describe that as the primary driver for what's going to happen from an efficiency standpoint because we've got a consumer loan portfolio, and we've got revenues coming from fees and the like. So it's a little bit more complicated than that in terms of the driver of the efficiency. But again, our goal is to get down to a 59% level sometime next year. So I'm sure we'll be talking about that again. Okay, thanks. Thank you. Listen, I really appreciate everybody's time this morning. I know it's been a busy morning for all of you. Just want to reemphasize that over the past years, we've made a number of fundamental changes to our business model, to the structure of the organization, which I was just mentioning, and to a number of our performance management programs to ensure that we're focusing on our customers and focusing on their financial needs. Again, I want to thank the hard work and effort of our 268,000 team members for their focus and resiliency in meeting those customer needs. We are seeking every opportunity to identify and fix any issues that we have at the company and make sure they're done correctly. As I mentioned, we've seen very strong progress in addressing those issues and also rebuilding trust with all of our stakeholders, including all of you. While we understand there's more work to do, I'm confident that we're absolutely on the right path as we continue to build a better, stronger Wells Fargo. Again, thank you very much for your time, and have a good day. Ladies and gentlemen, this concludes today's conference. Thank you all for joining, and you may now disconnect.

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