Wells Fargo & Company (WFC) — Q3 2018 Earnings Call Transcript

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 would 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. We earned $6 billion in the third quarter, which was $1.13 per diluted common share. And we grew revenue and reduced non-interest expense on both a linked quarter and a year-over-year basis. These results reflect the transformational changes that we have been making at Wells Fargo and I want to focus my comments on the progress that we have made on the six goals that the operating committee and I established last year. The first goal I will focus on is risk management. We are 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 are pleased with the expertise our new Chief Risk Officer, Mandy Norton, has brought to the process and we continue to make progress. We have had constructive dialogue with our regulators. And we are 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 a 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 the 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 five-year high in the third quarter. We have 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 six 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 number two 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 two 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 provide 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 faced 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 five 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 in auto, small business, home equity, and personal loans and lines. John Shrewsberry will now discuss our financial results in more detail.

Thanks, 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 continued 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 were $6 billion, which 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 of previously disclosed issues related to automobile collateral and protection insurance, $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 & 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 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 highlighted some important trends in our year-over-year results on Page 4. Revenue growth included the increase in net interest income as 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 will be highlighting the balance sheet and income statement drivers on Pages 5, 6 and throughout the call starting with loans on Page 7, so we will 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 have transformed that business and run-off of legacy junior lien mortgage loans. Period end loans were down $9.6 billion from a year ago. Over the last 12 months we have 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 through 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 pay-downs 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 pay downs 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 run-off 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 origination growth driven by changes related to the business which makes it easier for customers to do business with us including increased automated underwriting. We are well-positioned for originations to continue to increase and we expect 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 gap 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 continue 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 costs was driven by increases in 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 used 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 one additional day in the quarter and a $54 million benefit from hedge ineffectiveness accounting. These benefits were partially offset by a $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. Non-interest 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 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 billion from the second quarter, their 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 remain historically tight due to excess capacity in the industry. And although we have seen stabilization in pricing margins in recent quarters, we have 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 are 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 are 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 non-discretionary, and third-party services. The increase in infrastructure expense was driven by higher equipment expenses 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 expenses and third-party services expenses. The increase in compensation and benefits expense was primarily due to higher salary expenses, 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 expenses due to the reestablished campaign partially offset by lower travel and entertainment expenses. 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, travel and entertainment, postage, and supplies and we currently expect that we will meet our 2018 expense target. Turning to our segments starting on Page 17, community banking 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 are 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 four 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 continue to have improvements in primary customer retention, which was 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 related in the second quarter due to the impairment related to the announced sale of our ownership stake in Rock Creek. Results from 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. Non-performing 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 one-time 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 are making throughout our businesses, including our expense initiatives and we are 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.

Good morning, Scott.

Good morning. I just had a quick question. So, I 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 started to presume that they must hold through for the other aspects of the simulation as well specifically like flat revenues from 2017 up 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?

Sure. So, in the simulation that we have served up in May at our Investor Day, what we are trying to demonstrate is that, let’s just say even with flat revenue and with expenses as we guided them with credit as we have 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. My current best guess, the 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 don’t feel any differently today than we did when we first made that commitment or reupped it. We have been more specific about expenses, because we deemed them to be entirely within our control as we have described them. And so that’s how I think about it.

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

Sure. There is 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 are operating within. And then there are a handful of drivers on the non-interest income side as we work to increase share in many of the businesses that we are in. Some of them as we have 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 have got some businesses that are meaningfully levered to the S&P for example like the drivers of our trusted investment fees. All of those things are going to reflect what’s going on in the world as much as they do how well we are competing and how hard we are working to win business. All of that goes into it.

And Scott, I would just reinforce John’s comments by looking at some of the specific examples that you can see in the results this quarter in, for example, our auto business. I mean, we have been making significant changes in the business and we have been talking about the fact that once we have made those changes and Mary Mack and Laura Schubach are doing a great job that we thought we would see and expected to see some loan growth. And now, you have seen that for two consecutive quarters and we reiterated that we think by the middle of next year, we will 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 are doing it more efficiently, because about 40% of all the loans that we are originating are being originated on an automated basis in terms of 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 of our businesses that show year-over-year and sequential growth.

I would modify that to say growth in originations.

Originations, yes, exactly. Thanks, John.

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

Monday.

Monday, okay. Alright, perfect. Thank you guys very much for taking the questions.

Thanks, Scott.

Hi, Erika.

Hi, good morning. 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 have 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 am 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?

Sure. So, I would say that without a doubt, we have continued to uncover incremental opportunities and that’s a way of business now where we have a fully staffed program 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 have talked about some of the team member activities, real estate, other things that contribute will be ongoing. There is also areas where we are constantly investing and 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 is an extraordinary revenue environment, depends where that revenue is coming from because not all dollars of 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 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 will be very transparent in talking about if that’s the situation that we find ourselves in either on the high side or frankly on the low side. If the revenue environment is stopping and we think that we need to do something different about structuring our business and capacity, etc., and that needs to take us lower, then we would be open-minded certainly about that. We are trying to drive this return on equity outcome regardless of what the market delivers to us. If it’s just a big upside, then we will try and take full advantage of it. If it’s a rougher depending on where the economy is, the business cycle, etc., if it’s a rougher revenue environment, then we will take the necessary measures as well.

We can all hope, right. I had another question commercial loan growth across the industry hasn’t quite matched what we had hoped as we thought about GDP and CapEx expectations. And I am wondering if you could give us a little bit better sense on the non-bank competition. And specifically, I am 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 am 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 am 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?

Yes. So Erika, no problem with three questions, we won’t charge you extra. That’s fine. To think maybe in reverse order, you are absolutely right. I mean, we have a really strong asset-backed finance business and we have seen good growth in that business for some of the reasons that you allude to which is that we have seen non-bank competition in a variety of forms continue to increase. We have seen non-bank competition throughout the history of the company. It’s in a little bit different form right now, because of some of the legacy non-bank 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 like and the advance rates are very attractive. So, we like that business. Sometimes we are financing one of our competitors on a deal and sometimes we are sharing the credit, but that’s okay, I mean, that’s just part of the overall business to make sure that we are providing credit to all of our customers.

Yes. Sometimes it’s to a securitization takeout, sometimes it’s got some term to it. I think we have talked about this at the last conference that I spoke at, there is a distribution of consumer and commercial asset types, interesting most of which where we are deeply in the underlying business although sometimes these non-banks as where you started your 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, I can tell you in commercial real estate, for example, which is really the early warning indicator that we have talked about for a while in terms of where markets have gotten hotter, bank lending and commercial real estate was at about a third of the market in 2016 and it’s about 15% in 2018 and it’s CMBS, it’s CRE, 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 a question of more leverage and from our perspective, a risk-adjusted return that doesn’t make sense for what belongs on a bank’s portfolio as a whole loan. We might go back around the other way and finance them at a haircut on a cross-collateralized pool, but they are 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, it’s really – there is 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 middle-market CLOs or middle-market LBOs being financed by CLOs on the one hand and 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 pooled basis with a haircut after the fact, but you have 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 a bank won’t do.

And Erika, I think overall what we are seeing is that because of the economic growth here in the U.S., in particular, but around the world, the credit quality for our customers in the commercial, corporate world has never been better. Their balance sheets are strong. They have 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 have got very buoyant capital markets, very liquid capital markets and 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 are seeing right now.

Got it. Thank you.

Thanks, Erika.

Hey, Ken.

Hey, good morning, guys. Just one clarification. John, in your intro remarks, you had mentioned that you still expect NII to be, I think you said slightly higher or let’s say flat and I just wanted to make sure just clarify that and talk about it, are you talking about on an FTE basis or a non-FTE basis?

On a taxable equivalent basis, if that’s the question.

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

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.

Okay, GAAP basis. Understood, thank you. So, second question just on the mix of the balance sheet. We see that obviously with rising rates, your OCI is going up a little bit and this is a balance that I think you have 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 are keeping the portfolio in check. Just talk to us about how your investment strategy is evolving given where the rates have now been moving and that balancing act?

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 are more enthusiastic about those reinvestment possibilities in the low 3% versus the high 2%. It’s not that different. If you roll back the tape a couple of years, the trade-off used to be zero 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 were otherwise earning nothing on the cash. Today, we are earning 2% plus 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 the mortgage securities. There are some liquidity constraints in agency mortgages. We have been very full portfolio in that category and our LCR calculation 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 or Ginnie Mae securities. And I think we have been, while this backup is happening and not knowing exactly where it’s going to end, I think we have been a little bit circumspect about incrementally moving from 2 and change percent on cash further out the curve. There is an opportunity, if rates continue to back, it’s a March back up, then it’s going to be that much more attractive, it’s the curve that is steepening with it. And 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 is going to flatten as a result of that rather than long and continuing to move up. So that’s what we are thinking about. We are thinking about it in the context of our existing capital plan as well, so all of that OCI exposure is more meaningful when you are actually moving down, although if you didn’t see much of the move down in CET1 this quarter because of the RWA calculation. But the further – the closer we get towards 10%, the more precise we have to be about our exposure to OCI. And the last thing I would 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.

Okay, I got it. Thanks a lot for that John.

Yes.

Hi, good morning guys. 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 that timeline for stabilization to the home equity...?

Two good questions, I would say in auto one of those businesses as you know every day you are faced with the new series of option loan by loan and you have choices to make on every loan about the risk reward. I think we like what we are seeing now, we are 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. It’s been – we are estimating it happens in the middle of the year. But the trends like our enthusiasm for the business, the risk rewards that we are seeing today, the way we are competing, the fact that we are through that reached complete restructuring of that business is a much more durable well risk-managed way all feels very good. And then with respect to home equity, that’s interesting. So you can mark on 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 are in uncharted territory, right. So we are just getting to a point now everybody who has refinanced their first in the last few years is suddenly in the money for as they are not willing to give up that first if they want more leverage, they won’t do another refi or cash out refi, they are going to think of their – using their home to the source of borrowing. They are 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 are really encouraged by the referral activity what we have 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 branch is getting more comfortable with the referral process or given events over 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 are going to see unfold over the next couple of quarters.

John, the only other point I would make in just – and I know you know this, but I think any time we talk about loan growth is important to re-emphasize 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 are seeing today, we see more than ample opportunity to grow the auto originations. And so as John and I have said the best estimate is mid next year, but we are going to do it in a very responsible way.

I think I would also say on home equity, I would 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 pre-crisis and then the combination of Wells and Wachovia right after the merger.

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

Okay. And then just in terms of reputational issues and negative headlines just wanted to ask you each a question, John, if you could elaborate on your comments from 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 have kind of underperformed peers on asset flows and net advisory tension. How are headlines and reputational issues affecting your performance in wealth management on the advisor and customer front?

Sure. In terms of wholesale, we have talked about some specifics of this, but it’s really more of a – it’s mostly 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. There is probably a little bit of that in some other wholesale categories. You can’t point to it, it’s not measurable, but it’s a headwind I’d say for some of our people. But where it really demonstrates or reveals itself is in government and in institutional banking.

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 AG Edwards agreements which had a 10-year term and they ended it 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 are really focused on is FA productivity. And what we have seen is that for our existing FA population and team that we are seeing improvements in loan origination as well as improvements in the overall size of their books. So, there has 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 and us getting beyond some of those reputational issues. We still have some headwinds we are going to deal with, but we are making progress.

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

Well, John, I made a thrilling update. So, you know what that the dialogue continues to be very good. And I described it earlier as being very constructive. They are providing feedback to the risk management framework that I mentioned earlier in the broadcast here, but we are still planning on operating under the asset cap through the first part of next year.

Okay, thanks.

Thank you.