Wells Fargo & Company (WFC) — Q3 2021 Earnings Call Transcript

Thank you. Good morning, everyone. Thank you for joining our call today. Our CEO, Charles Scharf, and our CFO, Michael Santomassimo, 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 materials including the release, financial supplement, and presentation deck 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 materials. 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 materials available on our website. I will now turn the call over to Charlie.

Thanks, John. And good morning, everyone. I will make some brief comments about our third-quarter results, the operating environment and update you on our priorities. I'll then turn the call over to Mike to review the third-quarter results in more detail before we take your questions. Let me start with some third-quarter highlights. We earned $5.1 billion or $1.17 per common share in the third quarter. These results included a $1.7 billion decrease in the allowance for credit losses as credit quality continued to improve. Revenue declined on lower gains from equity securities, which were elevated in the second quarter, though still strong. Expenses continue to decline, reflecting progress on our efficiency initiatives and included $250 million associated with the September OCC enforcement action. And for the first time, since the first quarter of 2020, we grew both period-end loans and deposits in the third quarter. We continue to see that our customers have significant liquidity and consumers are continuing to spend, while lower than the peak in March, our consumer customers’ median deposit balances continued to remain above pre-pandemic levels, up 48% for customers who received federal stimulus, and up 40% higher for those who did not receive federal aid. Weekly debit card spending during the third quarter was up every week compared to 2019 and in the week ending October 1st was up 14% compared to 2020 and 26% compared to 2019. Areas hardest hit by the pandemic have recovered, including travel up 2%, entertainment up 39%, and restaurant spending up 20% during the week ending October 1 compared with 2019. Consumer credit card spending activity continued to increase by 18% in the third quarter compared to 2019, and 24% compared to 2020. During the week ended October 1st, travel-related spending, which was the hardest hit during the pandemic, was up significantly from 2020 but remains the only category that has not yet fully rebounded to 2019 levels, still down 8% compared to 2019. Commercial banking loans were up slightly at the end of the third quarter, while line utilization was stable at historic lows. Supply chain difficulties and labor shortages continue to represent significant challenges for our client base. And as I said earlier, overall credit performance continues to be strong. Now, let me update you on the progress we've made on our strategic priorities. First, building an appropriate risk and control infrastructure has been and remains Wells Fargo's top priority. We reached a significant milestone with the termination of the CFPB consent order issued in September 2016 regarding improper retail sales practices. Its exploration reflects years of hard work by employees across Wells Fargo intended to ensure that the conduct at the core of the CFPB order will not recur. As a reminder, this is the second important regulatory milestone we achieved this year with the OCC terminating a consent order related to our BSA/AML compliance program in January. But the recent OCC actions are a reminder that the significant deficiencies that existed when I arrived must remain our top priority. I believe we're making meaningful progress, and I remain confident in our ability to close the remaining gaps over the next several years. Having said that, it continues to be the case that we are likely to have setbacks along the way. We are a different bank today than we were several years ago. We run the Company with greater oversight, transparency, and operational discipline. We have a new leadership team; 15 of 18 Operating Committee members are now new to their roles. I've spoken of our new leaders in many of our control functions, but we also have many new business leaders. This includes new leaders in consumer banking, small business banking, auto-lending, home lending, credit card, merchant services, retail services, and personal lending, digital strategy, wealth and investment management, and commercial banking. Our control infrastructure is different and we continue to invest in it. We take a different approach to the consumer today. We created a sales practice oversight and management function and an office of consumer practices. Our approach to consumer remediation is dramatically different as we have meaningfully increased the amount paid to consumers and have accelerated payments to customers. While we're committed to devoting the resources necessary to our risk and regulatory work, we are also focused on improving the products and services we offer. We're making investments in digital capabilities and making it easier for customers to do business with us. In the third quarter, we announced our new long-term digital infrastructure strategy that will move us to a multi-cloud environment. This is a critical step in our multi-year journey to be digital-first and offer easier-to-use products and services. We also joined AutoFi's North American network to provide car buyers and dealers with fast and easy online sales and financing. And as I've spoken about previously, we're on track to roll out a new consumer mobile app at the beginning of next year. We've also been making significant enhancements to our payments capabilities and are seeing that momentum pull through on our customers and Zelle usage, with Zelle users increasing 24%, transactions up 50% and volumes up 56% from a year ago. We're executing on our work to simplify our products and build compelling offerings tailored to different customer segments. Clear Access, our no-fee overdraft checking product now has over 1 million outstanding customer accounts. As a reminder, this launched in September 2020 and all of our retail accounts, which received ACH direct deposit have our overdraft rewind feature, which automatically reevaluates transactions from the prior business day that have incurred in overdraft. This feature has helped over 1.3 million customers avoid overdraft-related fees on 2.5 million transactions in the third quarter. For the emerging affluent and affluent segments, we're making substantial changes to more consistently and intentionally serve these customers including products, service, marketing, and management routines. You'll hear us talk more about how we're executing on this in the coming quarters. After successfully launching Active Cash, our new cash back credit card in July, earlier this month, we launched the Reflect Card that rewards customers for making on-time payments. Our new head of the small business, Derek Ellington will start in just a couple of days, and we believe this is another attractive growth segment for us. Next month, Paul Camp will be joining Wells Fargo as the Head of our Global Treasury Management businesses. This new role brings together our Treasury Management and Global Payment Solutions Teams into one organization, which will enable us to be more efficient and leverage our capabilities more effectively to help clients manage their funds and process payments worldwide. While we've been focused on improving the products and services we offer to our customers, we've continued to support our communities. We voluntarily committed to donating all gross processing fees from PPP loans funded in 2020 and created the Open for Business fund to support small businesses impacted by the pandemic. We've now donated $305 million in support of small business recovery, including 215 CDFIs, which in turn is expected to help nearly 150,000 small business owners maintain more than 250,000 jobs. Additionally, in the third quarter, we launched the Connect to More resource hub for women-owned businesses and a mentoring program partnering with Nasdaq Entrepreneurial Center to empower 500 women-owned businesses. We committed to invest $5 million through the Neighborhood Lift program to help more than 300 low and moderate-income residents in Philadelphia with home down payment assistance. And we published our updated ESG report and goals and performance data, which includes new disclosures on our workforce by race, gender, and job category. As we look forward, while there certainly are risks that remain, including the latest wave of COVID infections, the recent U.S. fiscal policy stalemate, and inflation concerns, the outlook for the economy is promising. Consumer financial condition remains strong with leverage at its lowest level in 45 years and the debt burden below its long-term average, and companies are also strong as well. We remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we've discussed in the past on a run-rate basis at some point next year, and will then discuss our plan to continue to increase returns. I want to thank our employees for continuing to work hard to make Wells Fargo better for our customers, shareholders, and communities. I will now turn the call over to Mike.

Thanks, Charlie. Good morning, everyone. Charlie summarized how we're helping our customers and communities on Slide 2. So, I am going to start with our third-quarter financial results on Slide 3. Net income for the quarter was 5.1 billion or $1.17 for the common share. Our results included a $1.7 billion decrease in the allowance for credit losses. This reflects the continuing improvement in credit performance and the economic recovery. Pretax, pre-provision profit grew from a year ago as lower revenue driven by a decline in net interest income was more than offset by lower expenses. We continue to execute on our efficiency initiatives, which have helped improve the expense run rate. And as Charlie highlighted, the third quarter included $250 million in operating losses associated with the September OCC enforcement action. Non-interest income was relatively stable from a year ago. Within that, equity gains declined from the second quarter, but increased by 220 million from a year ago, predominantly due to our affiliated venture capital and private equity businesses. We also had an increase in investment advisory and other asset-based fees from a year ago, as well as in card, deposit-related, and investment banking fees. These increases were more than offset by declines in other areas, including lower mortgage banking revenue and lower markets revenue in corporate investment banking. Our effective income tax rate in the third quarter was 22.9%. Our CET1 ratio declined to 11.6% in the third quarter as we repurchased 5.3 billion of common stock. As a reminder, our regulatory minimum will be 9.1% in the first quarter of 2022, reflecting a lower GSIB capital surcharge. Additionally, under the stress capital buffer framework, we have the flexibility to increase capital distributions. And if possible, we will be able to repurchase more than the 18 billion included in our capital plan over the four-quarter period, depending on market conditions and other risk factors, including COVID-related risks. Turning to credit quality on Slide 5, our net loan charge-off ratio was 12 basis points in the quarter. Commercial credit performance continued to improve and net loan charge-offs declined by $42 million from the second quarter to 3 basis points. The improvement was broad-based and included modest net recoveries in our energy portfolio and in commercial real estate. The commercial real estate portfolio has continued to perform well. The recovery in retail and hotel properties reflected increased liquidity and improved valuations. While we have not seen any widespread stress in the office, we continue to watch this sector closely and believe that any impact as a result of a return to office or hybrid working plans will take time to play out. Consumer credit performance also continued to improve with strong collateral values for homes and autos and consumer cash reserves remaining above pre-pandemic levels. Net loan charge-offs declined by 80 million from the second quarter to 23 basis points. We continue to have net recoveries in our consumer real estate portfolios and losses in both credit card and auto declined. Non-performing assets declined 321 million or 4% from the second quarter, driven by lower commercial non-accruals with declines across all asset types. The energy was the largest driver, given significant improvement in fundamentals on the back of higher commodity prices. Our allowance level at the end of the third quarter reflected continued strong credit performance. The continuing economic recovery and the uncertainties still remain. If current economic trends continue, we would expect to have additional reserve releases. On Slide 6, we highlight loans and deposits. Average loans were relatively stable from the second quarter with a decline in residential mortgage loans largely offset by modest growth in our most of our consumer and commercial portfolios. Total period-end loans grew for the first time since the first quarter of 2020 and we're up $10.5 billion from the second quarter with growth in commercial and industrial loans, auto, other consumer credit card, and commercial real estate. Average deposits increased $51.9 billion or 4% from a year ago with growth in our consumer businesses and commercial banking, partially offset by continued declines in corporate and investment banking and corporate treasury, reflecting targeted actions to manage under the asset cap. Turning to net interest income on Slide 7, net interest income grew by $109 million or 1% from the second quarter and was down $470 million or 5% from a year ago. The decrease from a year ago was driven by lower loan balances and the impact of lower yields on earning assets, partially offset by a decline in long-term debt and lower premium amortization on our mortgage-backed securities. We had $20 billion of loans we purchased out of mortgage-backed securities or EPBOs at the end of the third quarter, down $4 billion from the second quarter. These loans do contribute to net interest income and we expect these EPBO loan balances to decline substantially by the end of 2022. At the end of the third quarter, we also had $4.7 billion PPP loans outstanding. And we expect the balances to steadily decline over the next several quarters and to be under a billion by the end of next year. We continue to expect net interest income to be near the bottom of our initial guidance range of flat to down 4% from the annualized fourth quarter 2020 level of $36.8 billion for the full year. Turning to expenses on Slide 8, non-interest expense declined 13% from a year ago. The decrease was driven by lower restructuring charges and operating losses and the progress we've made on our efficiency initiatives. During the first 9 months of this year, these initiatives have helped to drive a 16% decline in professional and outside services expenses by reducing our spending on consultants and contractors. An 8% reduction in occupancy costs by reducing the number of locations, including branches and offices. Occupancy costs have also declined from lower COVID-19 related costs, and a 5% decline in salaries expense by eliminating management layers and increasing expansion control across the organization, and optimizing branch staffing. Now let me provide some specific examples of the progress we're making on some of the initiatives. We are continuing to work on reducing the underlying costs to run our consumer banking business. The pandemic accelerated customer migration to digital, which continues with mobile logons up 14% in the third quarter from a year ago. While teller transactions were flat from a year ago, they were over 30% lower than pre-pandemic levels as transactions have migrated to ATMs and mobile. Over the past year, we've reduced our number of branches by 433 or 8% and lower headcount in branch banking by 23%. We continue to focus on generating efficiencies in our branches and have a number of initiatives designed to further reduce expenses, including reducing cash handling time and simplifying certain branch processes. Wealth and investment management has had strong increases in revenue-related compensation. However, by executing on efficiency initiatives, non-revenue-related expenses in the third quarter declined 6% from a year ago, and non-advisor headcount was down 10% from a year ago. We have aligned our wealth management business and our eight divisional leaders creating better coordination and efficiency. We have also implemented a more efficient client service model across all distribution channels and have reduced total square footage by rationalizing our real estate footprint. Corporate and investment banking has continued to make progress on various efficiency initiatives. These efforts include reducing headcount, supporting products, regions, or sectors with low levels of market activity and opportunity, optimizing operations and support teams, vendor optimization, and insourcing, and reducing spending on contractors and consultants. We're also working on initiatives in centralized functions including operations, where we have realized savings from location optimization, lower third-party spending by eliminating consulting arrangements, and consolidating vendors. The operations group has also reduced spans and layers with savings coming from eliminating manager roles. Automation efforts and strategy enhancements have driven process improvements while reducing costs in many areas, including fraud management and card collections. We've also been working on additional opportunities through technology enablement that has longer lead times, but should result in benefits that we expect will reduce operations-related expenses over time. With three-quarters of actual results already, our current outlook for 2021 expenses, excluding restructuring charges and the cost of business exits is approximately $53.5 billion. Note that we had $193 million of restructuring charges and cost of business exits during the first nine months of the year. This outlook includes an expectation of higher operating losses and higher revenue-related expenses than we assumed earlier in the year. Our expense outlook also assumes a full year of expenses related to Wells Fargo asset management and our corporate trust services business and we expect these sales to close during the fourth quarter. We will update you on the expense impact of these initiatives after they close. As mentioned, the outlook accounts for the fact that we expect full-year operating losses to be approximately $250 million higher than our assumptions at the beginning of the year. This includes approximately a billion dollars of operating losses incurred during the first 9 months of the year. And our outlook assumes $250 million of operating losses in the fourth quarter. Just to remind you, operating losses can be lumpy and unpredictable, especially as we continue to address the significant work needed to satisfy our regulatory requirements. Our current outlook also assumes revenue-related compensation will be approximately a billion dollars this year, which is higher than the $500 million we assumed at the beginning of the year. Strong equity markets have driven revenue-related expenses, which is a good thing as the associated revenue more than offsets any increase in expenses. Now, turning to our business segments, starting with consumer banking and lending on Slide 9. Consumer small business banking revenue increased 2% from a year ago, primarily due to an increase in consumer activity, including higher debit card transactions and lower COVID-related fee waivers. The lending revenue declined 20% from a year ago, primarily due to a decline in mortgage banking income driven by lower gains on sale margins, origination volumes, and servicing fees. Net interest income also declined driven by lower loan balances. These declines were partially offset by higher gains from the securitization of loans we purchased from mortgage-backed securities last year. Credit card revenue was up 4% from a year ago, driven by increased spending and lower customer accommodations and fee waivers in response to the pandemic. Auto revenue increased 10% from a year ago in higher loan balances. Turning to some key business drivers on slide 10. Our mortgage originations declined 2% from the second quarter, with correspondent originations growing 2%, which was more than offset by a 5% decline in retail. We currently expect our fourth quarter originations to decline modestly given the recent increase in mortgage rates and the typical seasonal trends in the purchase market. Despite strong consumer demand for autos, inventory shortages are putting downward pressure on industry sales and driving higher prices. The competitive environment has remained relatively stable, and we've had our second consecutive quarter of record originations with volume up 70% from a year ago. Turning to debit card, transactions were relatively stable from the second quarter and up 11% from a year ago with increases across nearly all categories. We had strong growth in new credit card accounts of 63% from the second quarter, driven by the launch of our new active cash card. Credit card point-of-sale purchase volume was up 24% from a year ago and 4% from the second quarter. While payment rates remain high, average balances grew 3% from the second quarter, the first time balances have grown since the fourth quarter of 2020. Turning to commercial banking results in Slide 11, middle-market banking revenue declined 3% from a year ago, primarily due to lower loan balances and lower interest rates, which were partially offset by higher deposit balances in deposit-related fees. Asset-based lending and leasing revenue declined 12% from a year ago, driven by lower loan balances and lower lease income. Non-interest expense declined 14% from a year ago, primarily driven by lower salaries and consulting expenses due to efficiency initiatives, as well as lower lease expenses. After declining for four consecutive quarters, average loans stabilized in the third quarter, line utilization remains low, and loan demand continued to be impacted by low client inventory levels and strong client cash positions. However, there was some increase in demand late in the quarter and period-end balances increased $1.6 billion or 1% from the second quarter. Turning to corporate investment banking on Slide 12, total revenue increased 12% from a year ago. This growth was driven by higher advisory and equity origination fees and an increase in loan balances, partially offset by lower deposit balances predominantly due to actions taken to manage under the asset cap. Commercial real estate revenue grew 10% from a year ago, driven by higher commercial servicing income, loan balances and capital markets results in stronger commercial gain on sale volumes and margins and higher underwriting fees. The markets revenue declined 15% from a year ago, driven by lower trading activity across most asset classes primarily due to market conditions. Non-interest expense declined 10% from a year ago, primarily driven by reduced operations expenses due to efficiency initiatives. Wealth and investment management revenue on Slide 13 grew 10% from a year ago, with a decline in net interest income due to lower interest rates more than offset by higher asset-based fees, primarily due to higher market valuations. Revenue-related compensation drove the increase in non-interest expense from a year ago. I highlighted earlier the progress we've made in efficiency initiatives to reduce non-revenue-related expenses, including salaries and occupancy expenses. Client assets increased 13% from a year ago, primarily driven by higher market valuations. Average deposits were up 4% from a year ago and average loans increased 5% from a year ago driven by continued momentum in securities-based lending. Slide 14 highlights our corporate results. Revenue declined from a year ago, driven by lower net interest income, primarily due to the sale of our student loan portfolio, and lower non-interest income due to lower gains on the sale of securities in our investment portfolio. The decline in revenue from the second quarter was primarily driven by lower equity gains from our affiliated venture capital and private equity businesses. And expenses included the $250 million operating loss associated with the OCC enforcement action in September. With that, we will now take your questions.

Good morning. Thanks for taking my question. I was hoping you could address the cost outlook. I certainly appreciate the commentary regarding the fourth quarter in particular. I think as we look forward, you guys have had the expectation that costs could come down year-over-year for the next couple of years. Of course, that puts you guys in a very unique position vis-a-vis many of your peers, but so many people are talking about things like wage inflation right now. Just curious, to what degree are you seeing that, and more importantly, is there enough flexibility in your existing outlook such that even despite higher wage pressures you could still see costs down year-over-year for the next couple of years?

Sure. This is Charlie. Thanks for the question. Let me start with wage inflation. We are definitely experiencing it, though it varies across different parts of the Company and among different job categories. We are being very careful to ensure we remain fair to our employees while also paying competitively. We're providing additional compensation to our branch employees, amounting to roughly $2.50 an hour from the beginning of October through the end of the year as a way to acknowledge their efforts and remain competitive. We're also assessing what makes sense for the long-term. In areas where we face wage pressure, we're taking appropriate action, but it's not a universal issue across the entire Company or every job function. We are actively monitoring it regularly alongside factors like attrition. Regarding the broader question, we are currently working on our budgets, as many companies do this time of year. Our objective remains the same: we want to see net reductions in our overall expense base. We are in a unique situation for two reasons. Firstly, we have significant expenditures related to regulatory orders, and we do not expect to achieve efficiencies from that anytime soon. However, once we implement everything necessary, there will be an opportunity for us, though that’s not our focus right now. Secondly, we still see considerable excess expenses within the Company, evident in headcount and inefficiency ratios across our businesses. I’ve noticed, as have others, that addressing these inefficiencies is like peeling an onion. What seems clear at first can reveal deeper issues once the initial problems are resolved, and this approach becomes ingrained in our culture. We believe there are still substantial efficiencies to be gained that will hopefully enable us to achieve net reductions while also allowing for investment in key areas like technology and products, which we are intensely focused on.

Perfect. Thank you very much. And then, I was hoping, Mike, you might be able to expand on a comment you made about loan growth, or excuse me, loan demand improving later in the quarter. There seems to be a little bit of a divergence emerging between the demand we're seeing in say smaller and middle-market companies, for instance, versus what we're seeing with larger corporates that might have better access to the capital markets. Curious if you could just provide a little more color on where you're seeing that improved demand, please.

We expect to see some differences among peers regarding this issue. For instance, in the Commercial Bank, demand is increasing in the middle and upper ends of our client base, while the lower end has shown less demand so far, which may differ from how you framed your question. This trend seems to be due to clients at the lower end having ample liquidity and facing supply chain challenges that limit their need for credit. Over time, as conditions evolve, we anticipate more consistent demand across all client segments within the commercial bank. On the consumer side, we've observed growth in auto and card balances. The home lending data indicates growth in our core, non-conforming mortgage book, although this is somewhat offset by declines in loans acquired from securities last year, but growth is still present. Additionally, the corporate investment bank is experiencing growth across several sectors, including real estate and subscription finance. While the overall growth we've seen is modest, it’s encouraging to note some positive signs so far. I recommend considering both period-end balances and averages, as they are crucial to understanding the situation. Lastly, regarding credit and pricing practices, we are maintaining our established disciplines and not compromising our standards to achieve certain results, indicating that any rise in balances isn’t merely due to increased customer activity.

That's terrific. Thank you, guys very much.

Good morning, Mike. Can you discuss some details about the net interest income beyond just the balance sheet changes? I noticed a slight increase in premium, so could you explain how that works in terms of what rates are needed for further improvement? Also, are we nearing the point where your additional purchases or replacements in the securities portfolio are aligning more with what's maturing? Thank you.

Yes. Thanks, Ken. I think when you think about premium amortization, I think you said it backward, but like we're getting a benefit from premium amortization coming down in the quarter. And you saw that in our results which is roughly $90 million a little bit, maybe a couple of bucks less, but so we expect, as we've been saying, we expect that to continue to come down. I think it will be somewhat gradual as we look at the next couple of quarters. You're not going to see big step-downs. I think it'll come down again in the fourth quarter, maybe a little less than we saw from the second to the third quarter. As rates, as you've seen over the last three months, rates have been a little all over the place. It's a bit of a function of where mortgage rates are, and there's a little lag to it as it comes through the data. But we still expect the general trajectory to be coming down on premium amortization. It's just a matter of exactly how fast and over what time period that'll happen. I think on the second part of the question, what was the second part again, Ken?

Just about reinvestment rates versus the underlying portfolio and the securities book.

Yes, I want to remind everyone that in the third quarter, interest rates were significantly lower than they are now for most of the second quarter. We've observed a rally toward the end of the quarter, and they have stabilized before decreasing slightly over the past week. The gap between what's rolling off and the overall average in the portfolio is closing, but we still have some distance to cover for reinvestment rates to align with what is exiting the portfolio.

Okay. Got it. And just last quick one. Just long-term debt you've been meaningfully reducing the footprint and helped by that mix, improving on the balance sheet. How much more of an opportunity is that to continue to lower the long-term debt footprint and reduce the cost of it? Thanks, Mike.

Yeah. No. It's a good question and I think our constraints going to be TLAC, you know, how much TLAC we have to hold. And I think you can probably model that out a little bit. So we have a little bit more room to go to continue to optimize the mix here and bring the long-term debt down. But it's likely at some point next year, that'll start to change.

Hi, good afternoon. I'd ask a follow-up on Ken's last line of questioning around the NII outlook. And if I take all the different component pieces that you mentioned, it is stored in the blender. So more constructive loan growth commentary, some modest but steady premium, and benefit, but still some reinvestment headwinds. Is it reasonable to expect that you can grow NII versus the lower end of the guidance range for '21 and separately, what's your appetite to deploy excess liquidity just given your excess reserves parked at the Fed, at least as a percentage of the overall balance sheet, is still quite elevated relative to many of your peers.

Yes. I'll start with the second part and return to the first, Steven. As we consider redeployment, we are still being quite patient. Recent months have shown that rates were significantly lower but have rallied recently. At the same time, the difference between treasuries and mortgages has narrowed, making them relatively more expensive. We also see that with inflation and tapering on the horizon, there appears to be more risk of rates increasing than decreasing at this moment. Thus, we remain patient as we look at redeployment. When the right opportunities arise, we will act on them. For instance, towards the end of the third quarter, we accelerated some purchases due to the recent spike in rates. We will continue to approach this cautiously while monitoring developments in the coming months. We have been providing a range for the full year because there are many variables at play and several months remaining. If we experience faster loan growth than we anticipate, that could be a benefit. Likewise, if rates rise beyond what the forward curve suggests, that would be positive as well. We need to make a significant number of purchases in the fourth quarter to keep pace with our securities portfolio. The final rates will be crucial in that regard. Additionally, factors such as PPP and client forgiveness trends will influence the margin. There are scenarios where our outcomes could exceed our projections, as well as scenarios where they could fall short, depending on how these elements unfold.

And that's great color. Thanks for taking my question.

Hi, I wanted to follow up on the expenses. Considering the goal of reducing expenses next year and recognizing that you've completed budgeting, can we view your target in relation to the 53.5 without factoring in assistance from the business exits?

Yeah, John. We think about the business exits just separate from the core efficiency we're driving. And for lack of a better way to describe it, if we think that there's going to be a savings of X dollars as these businesses roll off, take the $53.5% and subtract the X and that'll be our new goal in your starting place. When we gave you a high level, some detail about that in April, and when these close and we've got good clarity on it, we'll be very transparent about how to reset the baseline and starting point.

Sure. In terms of the expected gains on sales, I assume you believe those will likely occur in the fourth quarter?

They may not all be in the fourth quarter given how the deals were structured, not 100% of the gains will be in the fourth quarter, but a good chunk of it will be in the fourth quarter. And obviously, we'll be clear on what that was when it happens.

Okay. And the last thing for me is if we want to dream about loan growth coming back for the industry, how do we think about how much capacity you have to grow loans while staying under the asset cap and where does that come from? Does it come from cash liquidity mix and moving other stuff around the balance sheet? Can you just give us some thoughts on that?

We all aspire for quicker loan growth, and I believe we share that goal. There is significant potential for us to expand on the lending side. Initially, this could stem from the cash held at the Federal Reserve. However, if necessary, we can also decrease our securities portfolio if loan growth exceeds our expectations, which would be a positive challenge. At this moment, we have ample capacity for growth.

Hey, good morning. I guess just one big picture question, Charlie. Appreciate you mentioning the risk of setbacks as you go through the whole regulatory process. At the same time, when we talk to investors, I think there is a concern that the longer you stay within that asset cap. I was wondering if you could address just in terms of when we think about the franchise, both from a talent and client standpoint, how well your shareholders be about that? Or do you think that's well taken care of?

I believe we are managing the situation effectively. We are actively taking measures to remain below the cap, and as Mike mentioned, we have considerable capacity on the asset side of our balance sheet to support our clients' needs, whether they are consumers or corporations. Our experience shows that we consistently find ways to optimize our balance sheet with minimal impact on our clients. When it’s necessary to move deposits off the balance sheet, we collaborate with customers to develop alternative solutions. Customers have generally been very understanding of this process. Importantly, we haven't restricted the growth of deposits on the consumer side at all. While we would have preferred to be in a different situation if it were up to us, we are focused on minimizing any negative impact on our franchise through smart decision-making and clear communication with our customers. The team at Wells has done an excellent job of maintaining this balance, and I believe we remain very open for business on the asset side, which customers also appreciate.

Thanks for sharing that insight. Mike, regarding the net interest income, does your full-year guidance suggest that fourth-quarter NII will at least increase compared to the third quarter? Also, could you provide the PPP impact on the third-quarter NII number?

Yes. In the fourth quarter, you can make your own projections based on your assumptions. As I mentioned, we expect to be near the lower end of the range, and you can decide where you think we will land based on your views. For the third quarter, the impact from the PPP was approximately $115 million, which was slightly lower than what we experienced in the second quarter. We anticipate that the fourth quarter may see a similar decrease, depending on the rate at which we receive forgiveness requests from clients. Overall, the impact is relatively minor, and that’s our forecast.

Understood. Thank you.

Good morning. On the expense side, how should we think about the timing and the magnitude of the remaining $4.3 billion in cost saves? And would you say that any of the latest regulatory developments impacted how you're thinking about the magnitude or the timing of the realization of those saves? Thanks.

Yeah, John, it's Mike. As we said in the beginning of the year, we were going to get about $3.7 billion of the 8 billion this year and the annualized impact starts to build as you go through the year. So some of that you get in the run rate coming out of 2021. And some of that will take more time to get at. And as I mentioned, where we have to introduce new technology or other new capabilities, it just takes longer to get at some of it. And as we said at the beginning of the year, this is a multi-year plan, so we're not going to get all of that in the first 12 months by any stretch. And as we get to January, we'll give you a better view of what to expect in 2022.

Okay. Got it. And then separately on the loan front, can you just maybe give us more detail on trends you're seeing in the card business, including spending volume and payment rates? And then separately, any thoughts on the impact of the buy now, pay later product on how you're thinking about your product set? Thanks.

Payment rates remain quite high, though there has been some variation month-to-month over the last quarter. The growth in the balance reflects an increase in point-of-sale purchase volumes. Despite various statistics highlighted by Charlie, overall spending patterns have remained strong and stable compared to the second quarter and the same periods last year and in 2019. Naturally, different categories do fluctuate from week to week or quarter to quarter due to various influences. It's worth noting that point-of-sale volumes decreased 24% year-over-year and 4% sequentially. However, new account growth has increased significantly, up nearly 50% from a year ago and 63% from the second quarter, attributed to the launch of new products. Overall, I would describe the activity levels as still robust, despite the uncertainties related to the Delta variant and other factors.

This is Charlie. I would describe buy-now, pay-later as another way to provide credit and support merchants. Although it's still a relatively small part of the market, I believe it will find its place without replacing all the other types of credit available. We have our own retail services and personal lending businesses, along with numerous merchant relationships. This will be an addition to our existing products. Over time, I expect to see more participants in this area, but eventually, the market will likely consolidate, similar to other industries, especially those that can offer a unique experience for merchants. I hope that clarifies things.

Thanks, Charlie. Appreciate it.

Hi Charlie. I want to revisit the regulatory consent orders. I’d like to understand your perspective. Considering the challenges we faced this quarter with the new consent order, you've clearly invested heavily in this area, bringing in numerous experts and consultants over the past two years. What changes do you feel are necessary, especially as a management team, to avoid further setbacks and steer things in the direction you were aiming for?

Yes. I would say there's nothing new that we have to do as far as reaching an endpoint. So if you said pre-consent order or post-consent order, does it change what we have to do to build out the right capabilities with the right controls, in this case, in mortgage? The answer is absolutely not. And so again, whether or not it's being done fast enough, in the regulators’ minds relative to how long some of these things have been going on, which predate many of us. That's the context which they need to look at this end. Because that's who they regulate and how they have regulated. So again, I think for us, and I'm not minimizing a consent order. A consent order is a very big deal. But the work that's embedded in there, the end-state, is the same end-state that we would have contemplated. Building ourselves. And so there's a lot more formality that's part of the process now, and the OCC will be more deeply involved in the series of the checkpoints, and things like that. And there certainly is some more work that comes out of an exercise like that. But the end-state is the same.

When you mention several years, Charlie, should we consider that in a three-year context? Regarding the five-year timeframe, you're correct; we've been facing these challenges for over five years now. Do you have any insights on the direction we are heading?

In an ideal situation, we would share all our plans openly, but we're not in a position to do so right now. I encourage you to focus on the progress we've made so far. You'll be able to form your own judgments based on that. We still have significant flexibility to grow our fee-based businesses and those that utilize our balance sheet. I can't provide detailed specifics at this time because we don't want to mislead anyone. We are definitely considering the future, and we aim to strike a balance in our communications. Many employees focus on serving customers daily, and while many are dedicated to addressing the consent order, we have a large team working on it. We're also developing new products in the card and retail services sectors, as well as across our digital platforms. By executing these initiatives, we can build regulators' confidence. You don't have to wait for everything to be completely finished before moving forward with your confidence and that of the regulators. We believe we are making progress, and we are allocating our resources to enhance the pace while ensuring that everything is completed properly as we advance our business.

Thanks.

Great, thank you all for the time today. We appreciate it. And we're all here to answer any follow-up questions you have.