Q3 2019 Earnings Call
At this time I would like to welcome everyone to the Wells Fargo third quarter 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 answer session.
He would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
I would like to withdraw your question price to Pam 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, everyone. Thank you for joining our call today, where our interim CEO and President Alan Parker 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 in quarterly supplement are available on our website at Wells Fargo Dot 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 FCC 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 FCC filings in the earnings release and in the quarterly supplement available on our website.
Now I'll turn the call over to Alan Parker.
Thank you John Good morning, everyone and thanks for joining us for today's discussion of our third quarter results.
Our earnings included a number of significant items that John Shrewsberry will discuss what I'll note at the outset that our underlying business fundamentals were strong.
That strength, which demonstrated by among other things increases and loan and deposit balances both from a second quarter and from a year ago.
Our highest branch customer experience scores on over three years and continued growth in primary consumer checking customers.
As you all know Charlie Sharp will join Wells Fargo next week, as our new CEO and president.
I had the opportunity to spend a great deal of time would Charlie and I'm convinced that he has the right combination of experience business shabby and leadership ability to position Wells Fargo for an even more successful future.
I look forward to working with Charlie on a seamless transition as he assumed his responsibilities as CEO and I returned to my role as the company's General counsel.
It's been an honor for me to service, our interim CEO and president over the last six months I'm proud that during my time in this role the company continue to move forward and we made progress on our top priorities, which includes focusing on our customers and team members meeting the expectations of our regulators.
And continuing our company's important transformation.
Let me provide just a few examples of our most recent progress.
In the area of leadership, we made important hires during the third quarter technology merchant services and wealth management.
In addition, within consumer banking, we named leaders to new roles. They will help us better serve our customers.
David Co watch who was most recently they had at Wells Fargo Advisors assumed a new role is to head of community banking reporting to Merrimack.
We created this role because we believe that having a single dedicated leader supporting our team members and customers and our branches will significantly further our ongoing transformation.
We also formed within consumer banking, a new enterprise customer excellence group that will overtime bring together functions from across the company and give us broader insight into the customer experience.
This new group this under the leadership of Andy ROE, who led consumer segments and consumer strategy for the last two years.
And in the area of innovation and technology, we made several important announcements during the third quarter.
Wells fargo's ongoing commitment to exploring and investing and emerging technologies through the wells Fargo startup accelerator program, which demonstrated by our adding two new companies one focused on augmented reality.
And the other focused on climate change risk. The total number of companies in that portfolio is now 25.
We also announced plans to pilot next year Wells Fargo digital cash, which is designed to enable us to complete internal book transfers of cross border payments running on our first distributed ledger technology platform.
This new technology should drive operational efficiencies by providing longer operating windows in real time processing.
Finally, we announced a data exchange agreement with Plaid, a leading data platform with disagreement our customers will have greater control over the bank account information they share with planned supported apps, including the ability to turn on or off for data sharing through wells Fargo's control tower.
I want to conclude my comments. This morning by thanking the members of our operating committee are other senior leaders and all our team members for their efforts dedication and perseverance during the last six months.
In particular I want to thank Doug Edwards for is strong and thoughtful leadership.
Our interim general counsel during this period of transition.
We continue to have a lot of work ahead of us, but the unwavering focus of our team members on serving our customers. While also working tirelessly to transform wells Fargo has enabled us to make substantial progress toward our goals over the last six months.
Looking forward I'm confident that the extraordinary string so the wells Fargo franchise, when combined with our new leadership and our collective commitment to work hard to achieve further improvements will result in a company that is well positioned to benefit our shareholders and all our other stakeholders.
John will now discuss our financial results in more detail. Thank you Alan and good morning, everyone.
We had a number of significant items in the third quarter that impacted our results, which we highlighted on slide two.
We had $1.9 billion of operating losses, predominantly reflecting litigation accruals for a variety of matters, including the $1.6 billion discrete litigation accrual previously disclosed retail sales practices matters that was not tax deductible and reduced EPS by 35 cents per share.
We had a $1.1 billion game from the sale of our institutional retirements and trust business.
Which contributed 20 cents per share gdbs.
We had gains of $302 million from the sales of $510 million of picking pay PC and other PCIA residential mortgage loans.
We had $244 million in mortgage servicing rights valuation adjustments driven predominantly by higher prepayment rate estimates on their MSR as these valuation adjustments resulted in our mortgage banking revenue declining from the second quarter. Despite an increase in mortgage originations and higher production margins.
We had a 105 million dollar impairment of capitalized software, reflecting a reevaluation of software under development.
We also had a modest $50 million reserve build compared with the $150 million reserve release last quarter.
Finally, we partially redeemed our series K preferred stock, which reduced diluted EPS by five cents per share as a result of the elimination.
Of purchase accounting discount recorded on the shares at the time of the Wachovia acquisition.
As partial redemption will reduce the amount of our quarterly preferred stock dividends by approximately $23 million starting in the fourth quarter.
While our financial results in the third quarter were impacted by these items as Alan summarized and we highlight on slide three we continued to have positive business momentum with strong customer activity.
We review some of our year over year results on page four.
Compared with third quarter 2018 revenue was stable with an increase of $1 billion in non interest income driven by the sale of our institutional retirement and trust business.
Largely offset by a $947 million decline in net interest income.
Our expenses increased $1.4 billion from a year ago, driven by $1.3 billion of higher operating losses, reflecting higher litigation accruals.
Our net charge off rate remains near historic lows at 27 basis points, we had a $50 million reserve build in the third quarter compared with a 100 million dollar reserve release a year ago.
We maintained a strong capital levels, even as we reduced common shares outstanding by 9% and increase our quarterly common stock dividend by 19% from a year ago.
I will be highlighting most of the balance sheet drivers on page five throughout the call. So we'll turn to page six.
Our effective income tax rate increased to 22.1% in the third quarter, reflecting a net discrete income tax expense of $443 million predominantly related to the non tax deductible treatment of the $1.6 billion discrete litigation accrual.
Currently expect the effective income tax rate for the fourth quarter to be approximately 17.5%.
Excluding the impact of any on anticipated discrete items.
Turning to page seven average loans were up $10.3 billion from a year ago and increased $2.3 billion from the second quarter. This was the first time, we've had both year over year and linked quarter growth in average loans in nearly three years.
Period end loans increased $12.6 billion from a year ago with growth in Cnine first mortgage credit card and auto loans, partially offset by declines in commercial real estate junior lien mortgage and other revolving credit and installment loans.
We grew loans, even as we sold or moved to held for sale a total of $7.4 billion of consumer loans over the past year.
I'll highlight the drivers of the linked quarter growth and load starting on page nine.
Commercial loans were stable linked quarter as growth in Cnine loans at least financing was largely offset by declines in commercial real estate loans.
Hi loans were up $2 billion with broad based core growth in corporate and investment banking and the purchase of Siloed and loan form in the credit investment portfolio. These increases were partially offset by declines in commercial banking on lower government and institutional banking and middle market lending.
And in commercial capital driven by seasonally lower commercial distribution finance dealer floor plan loans.
Commercial real estate loans declined $2.2 billion from the second quarter with declines in both commercial real estate mortgage and commercial real estate construction loans, reflecting increased market liquidity higher refinancing activity and continued credit discipline.
Refinancing increased $276 million from the second quarter driven by growth in large ticket direct finance leases in equipment finance.
As we show on page 10, consumer loans increased $5 billion from the second quarter.
The first mortgage loan portfolio increased $4.2 billion from the prior quarter driven by $19.3 billion of originations held for investment in the purchase of $1 billion loans as a result of our exercising service or cleanup calls to terminate over 20 pre 2008 securitizations.
This growth was partially offset by paydowns as well as sales of $510 million PCIA mortgage loans.
Junior lien mortgage loans were down $1.2 billion from the second quarter as Paydowns continued to outpace new originations credit card loans increased $809 billion, primarily due to seasonality.
Our auto portfolio continued to grow with balances up $1.1 billion from the second quarter originations increased 9% to $6.9 billion, we've been successfully regaining market share while maintaining our credit discipline our market share growth reflects the benefit of the transformational changes we've made in the business include.
And process improvements that have resulted in faster credit decision response times.
Turning to deposits on page 11 average deposits increased 2% from both a year ago and the second quarter average deposits increased $22.4 billion from the second quarter with growth in wholesale banking as well as retail banking deposits, which continued to benefit from from a promotional rich and offers are.
Average deposit cost of 71 basis points increased one basis points in the second quarter, the lowest linked quarter increase since the fourth quarter of 2016, the increase from the second quarter was driven by continued retail deposit campaign pricing for new deposits, although we've begun to lower promotional rates and terms in response to market conditions. The increase was off.
Also impacted by unfavorable deposit mix shifts.
On page 12, we provide details on pure good and deposits, which grew 3% from a year ago in 2% from the second quarter.
So sale banking deposits were up $6.6 billion from the second quarter, driven by seasonal growth and middle market business banking as well as growth in our commercial real estate business consumer and small business banking deposits increased $11.9 billion from the second quarter, driven by higher retail banking deposits, including growth in high yield savings.
Cds.
Wealth and investment management deposits grew as clients reallocation of cash into higher yielding liquid alternatives slowed during the quarter.
Mortgage escrow deposits grew $4.1 billion from the second quarter, reflecting higher mortgage pay offs.
These increases were partially offset by a 2.5 billion dollar reduction in corporate treasury deposits, the second consecutive quarter of declines.
Net interest income declined $470 million from the second quarter, primarily due to balance sheet repricing driven by the impact of the lower interest rate environment.
As well as $133 million of higher MBS premium amortization costs due to higher prepayments. We currently expect MBS premium amortization to continue to increase in the fourth quarter, but at a slower pace. We also had lower variable income and smaller positive impact from hedge ineffectiveness accounting results. These decay.
Lines net interest income were partially offset by favorable balance sheet growth and mix and the benefit of one additional day in the quarter.
As you can see on the chart on this page rates have been volatile and the yield curve has flattened significantly over the past year.
Net interest income was down 8% in the third quarter and down 4% in the first nine months of 2019 compared with the same periods a year ago.
As we stated last month, we currently expect net interest income to decline approximately 6% for the full year compared with 2018 as always net interest income will be influenced by a number of factors, including loan growth pricing spreads the level of rates and the slope of the yield curve.
Turning to page 14, non interest income increased $896 million from the second quarter driven by the gain from the sale of our institutional retirement and trust business.
Let me highlight a few of the other linked quarter trends Trust and investment fees were down $9 million growth in retail brokerage advisory fees asset based fees in our asset management business and investment banking fees was offset by the decline in trust and investment fees as a result of the sale of our IR tea business, while we no longer recognized.
Justin investment fees from this business, we will continue to administer client assets for up to 24 months and the buyer will pay a fee for certain costs. We incurred during this transition period. This fee was $94 million in the third quarter and was recognized in other noninterest income.
Mortgage banking revenue declined $292 million for the second quarter, driven by a $419 million decline in servicing income primarily due to the valuation adjustments on our MSR is reflecting higher prepayment rate estimates.
Partially offsetting this decline.
Was $127 million increase in net gains on mortgage loan originations in sales activities.
Mortgage originations increased $5 billion from the second quarter due to higher refi volumes from lower interest rates with revised increasing to 40% of originations in the third quarter.
We ended the quarter with a $44 billion unclosed pipeline consistent with the second quarter. We currently expect fourth quarter originations to remain at a similar level to the third quarter.
As essential held for sale mortgage loan originations totaled $38 billion in the third quarter and the production margin on these originations increased to 121 basis points with higher margins in both retail and correspondent channels.
Driven by capacity constraints.
We had $956 million of net gains from equity securities in the third quarter, primarily due to realized and unrealized gains from our affiliated venture capital and private equity partnerships. These gains were partially offset by lower deferred comp plan investment results, which are largely neutral.
Turning to expenses on page 15 expenses increased both from both the second quarter and a year ago, largely due to higher operating losses, primarily reflecting litigation accruals to explain the drivers will start on page 16.
Expenses increased $1.8 billion from the second quarter, driven by a $1.7 billion increase in operating losses, the increase in compensation and benefits reflected higher salaries expense, primarily driven by one additional day in the quarter.
A change in staffing mix and higher severance expense, partially offset by lower deferred comp expense.
Infrastructure expense increased due to higher equipment expense, reflecting the $105 million impairment of capitalized software predominantly in our wealth and investment management business as well as higher occupancy expense.
These increases were partially offset by lower advertising and promotion FDIC expense as well as lower t. any expense.
As we show on page 17 expenses increased $1.4 billion from a year ago, driven by $1.3 billion of higher operating losses.
As we've previously discussed investments into risk management, including regulatory compliance and operational risk as well as data and technology have exceeded expectations and have offset the expense efficiency. We've achieved in other areas. We currently expect our 2019 expenses to be approximately $53 billion, which is at the top end of our.
$50 billion to $53 billion target range.
This excludes annual operating losses in excess of $600 million. It also excludes deferred comp expense, which is largely PNM neutral and totaled $476 million through the first nine months of the year.
Turning to our business segments, starting on page 19 community banking earnings declined $2.1 billion from the second quarter, primarily driven by higher operating losses reflected reflecting higher litigation accruals.
On page 20, we provide our community banking metrics, we had 30.2 million digital active customers in the third quarter up 4% from a year ago, including 7% growth in mobile active customers.
Primary consuming consumer checking customers grew for the eighth consecutive quarter on a year over year basis.
Branch customer experience survey scores have increased for five consecutive quarters and reached their highest levels in more than three years in September . The continued improvements in these scores reflects the transformative change we've been making to provide a better customer experience, we've enhanced training and coaching for our team members in our branches, including an increased focus.
Saving our customers about our industry, leading digital capabilities.
On slide 21 teller, an ATM transactions declined 6% from a year ago, reflecting continued customer migration to digital channels.
Consolidated 130 branches in the first nine months of this year, including 52 branches in the third quarter.
We continue to have strong card usage with credit card purchase volume up 5% from year ago in debit card purchase volume up 6% from a year ago. This was the eighth consecutive quarter of achieving at least 5% year over year growth in both debit and credit card purchase volume.
Turning to page 22 wholesale banking earnings declined $145 million from the second quarter, driven by lower net interest income, reflecting the impact of the lower interest rate environment.
We've expanded the key metrics that we provide for this business and as you can see we grew unfunded lending commitments.
On both a year over year end linked quarter basis, we're a large processor of commercial payments as evidenced by our a CH payment transactions and commercial card spend and we grew our year to date market share in investment banking driven by higher market share in loan Syndications were also a market leader in the hydro in high grade issuances, we had record volume in the third quarter commenced.
With the industry with September being particularly strong in the fourth highest month on record for the industry fueled by the rally in treasuries.
In general our commercial customers continue to see moderate demand and no widespread issues related to trade uncertainty and interest rate changes, we'll continue to monitor business performance closely but to date, while our customers are cautious the most common concerned the identifies their ability to higher enough qualified workers.
Wealth and investment management earnings increased $678 million from the second quarter driven by the gain on the sale of our institutional retirements and trust business.
Turning to page 24, we continued to have strong credit results with our net charge off rate declining to 27 basis points in the third quarter all of our commercial and consumer real estate portfolios were in a net recovery position in the third quarter credit card net charge offs have been relatively stable as we've been thoughtful in our efforts to generate new occur.
How growth, including the launch of our propel American Express card last year.
And while auto net charge offs increase from the second quarter due to seasonality there were down from a year ago, even as we've grown originations by 45%.
Regenerating growth and originations, Wyoming, maintaining our strong credit discipline with consistent loan to value payment to income.
And FICO scores.
Non accrual loans declined $377 million from the second quarter with lower non accruals in both the commercial and consumer portfolios non accrual loans were 58 basis points of total loans their lowest level it over 10 years.
We closely monitor our commercial portfolio for signs of weakness and credit quality indicators remain strong our internal credit grades are at their strongest levels in two years since third quarter of 2017, our criticized loan balances have declined 20% with broad based improvement across all commercial asset classes.
We currently estimate that the impact of the adoption of Cecil at the beginning of next year will be a reduction in our allowance of approximately $1.4 billion.
Just over half of the reduction reflects the expected decrease for commercial loans given their short contractual maturities exceeding the expected incremental allowance for consumer loans that have longer or indeterminant maturities.
As a reminder, we have a smaller credit card portfolio than our large bank peers, which reduces the impact Cecil adoption will have on our consumer loans.
The remainder of the expected reduction in our allowance predominantly related to the increase in collateral value residential mortgage loans, which were written down significantly below current recovery value. During the last credit cycle. The ultimate effective Cecil will depend on the size and composition of our loan portfolio the portfolios credit quality.
And economic conditions at the time of adoption as well as any refinements to our models methodology and other key assumptions also as the industry experience is credit cycles, we anticipate more volatility under a lifetime reserving approach versus the incurred loss approach.
Turning to capital on page 25, our Cetone ratio fully phased in decreased 11.6 decreased to 11.6% driven by returning $9 billion to shareholders through common stock dividends and share repurchases in the third quarter. This was up 50% from the $6 billion we returned.
Last quarter as a reminder, similar to last year, our plan subject to market conditions and management's discretion is to use approximately 65% of the gross repurchase capacity under our most recent capital plan in the second half of 2019.
In summary, while we had a number of significant items that impacted our third quarter financial results, we had strong underlying business fundamentals, including growth in loans and deposits increased customer activity strong credit performance and higher capital returns I'm optimistic that our continued efforts to transform wells Fargo and the fundamental strengths of our franchise will.
Continue to position us well for success and Alan and I will 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'll pause for just a moment to compile the Q Monday roster.
Our first question will come from the line of Erika Najarian with Bank of America.
Good morning, good morning.
Morning.
As as we think about what the forward curve is telling us and obviously, it's been quite a volatile outlook for the forward curve and some of the momentum that you talked about onto growth side in lending.
We think about the 6% Eni decline in 2019, given sort of the forward curve plus that momentum how should we think about.
And I decline expectation for 2020.
Well, it's complicated say, there's a lot of things going into it, including where where rates go versus versus what the market is suggesting what happens with loan pricing deposit pricing a variety of things, but if we end the in the various scenarios that we run thinking about.
Let's say the 930 implied forward curve, which suggest fed funds in the 170 area at 12 31 of this year and the tenure just under 170, and then a year forward fed funds into 120 area and fed funds still in the Oneseventy pardon me tenure still in the 170 area that with the right.
Range of assumptions about loans and deposits probably gets us to down.
Low to mid single digits and net interest income.
Maybe not as much of a decline from 18 to 19, but but loses a number of scenarios, but it seems to be that would seem to capture.
Got it and my second question, obviously, you can't speak for than New CEO .
Questions that were getting from your Investor base is that they're trying to gauge how much further investment there needs to be sort of going forward and you mentioned yourself John that the investment in risk compliance indeed.
Had exceeded your expectations and.
Again, you can't speak for Charlie, but as you think about.
How those investments played out relative to.
Investment in lets say innovation and as you think about where you are with versus peers.
Is there a significant catch up gap because you spend it up spent a lot of those dollars on risk compliance and data or how should we think about investment spend from here.
So I think when Charlie arrives.
We'll conduct a complete strategic review of all the businesses stand of where we what are what our opportunities are et cetera, including a review how we've been investing on the risk compliance side et cetera, and then and then formulated view going forward. One one thing that that probably doesn't get enough folk.
This is that a lot of the money and time that we spend on the risk and control side of things really does enable.
Further innovation so the money we spend in technology and data for example has huge customer impact down the road. So there's not an either or necessarily there's a lot of mutual benefit from from running a more controlled environment, but that will be it will be work that we all do together with Charlie after the arrives and.
And then.
Present conclusions at the at the right time.
Got it thank you.
Your next question will come from the line of Scott Siefers with Sandler O'neill.
Morning, guys. Thanks for taking my question.
And that sort of a follow up question on cost. So I guess, if I look at the.
Reiterated the 2019 expense got it implies a pretty meaningful downdraft in costs in the Fourq you. Maybe if you could just take a moment to go through sort of the puts and takes and how you bring costs down in the coming quarter and then just along the lines of cost into 2020, I know Youd previously suggested that cost could be flat in 2020 is that.
Something you're thinking or now with Charlie coming on board.
Sort of.
Sort of wait till wait till he comes on takes a look at things and then.
Give him.
Complete discretion on what the cost outlook looks like yep. So on the second half.
Thank you you answer that which as we should wait and allow him to have an input onto onto the composition of how we're spending money in the future.
For Q4, though as you pointed out it does imply a step down and I think the biggest sources of that.
Our other professional fees and and.
In some labor related expense, but it does require that that's out of math works and Thats, how we are forecasted right now.
Okay.
Thank you and then just separately on.
Mortgage I think you had said that the origination should stay around this quarter's level into the fourth quarter.
That correctly, maybe if you could just sort of comment on where you see gain on sale margins trending with a nice uptick this quarter and overall given the moving parts that you see should we expect mortgage revenues to be at or above what we saw this quarter, particularly if we don't get the same sort of MSR noise.
Yes, so on the origination side, it's hard to say with the full quarter gain on sale as but we do think it'll be in the neighborhood of where it's been recently was just call it 120 basis points.
Which was a big pickup and welcome on the servicing side, while I wouldn't expect there to be a revaluation in the fourth quarter. We think we got that in the third quarter. We recall that we are at a flatter curve environment and so the carry for holding treasuries as a hedge to to the MSR, sometimes it works for us in a steeper curve environment and sometimes it it's either.
Neutral or works against us when the curve goods flat or so so we shouldn't earn as much on the hedge but we probably wouldn't have the type of valuation items.
Right.
Okay, Alright, perfect. Thank you very much better color yes.
Your next question comes from the line of John Mcdonald with Autonomous research.
Hi, John Hi, Good morning, Hey, John wanted to ask about deposits on deposit pricing with the deposit cost increases slowing might we have seen kind of the end of the deposit costs rise for you guys. This quarter I'm, assuming rates stay flat to down from here kind just trying to think of this could be the Max Payne quarter for NIM, where you had.
Deposit costs up and loan yields down and maybe just some puts and takes for the fourth quarter on NIM versus this quarter. Yes. So my expectation is that deposit costs will be cheaper in the fourth quarter.
Reflecting what you described in terms of the kind of the burning out of the higher cost deposits that Vicki layered in before.
The fed began to.
Yes.
Having said that that Theres still this was less room to go down on the deposit side and so if rates continue to move down on the asset side is still works against us.
Even if deposit costs aren't rising so.
We have to be as vigilant as we can to keep deposit costs as low as it makes sense for the for the businesses and customers that we serve but.
Even if they're not rising theres still there's still leverage working against us in a declining rate environment.
And in terms of.
Good guys bad guys in the fourth quarter versus third what's worse and whats maybe better than what you experienced this quarter on than just the NIM presented.
Well I think we are imagining having a little bit higher level of.
MB MBS premium amortization so.
That will be working for us in the fourth quarter.
Depends.
In terms of wholesale pricing.
Wholesale banking deposit pricing.
Working with the higher beta customers to make sure that we reduce those as quickly as possible is probably more room to run on that with a little bit of the passage of time that can be a benefit.
The burn out of more promotional activity on the consumer side. It was probably a net benefit.
And was there some of the bigger items.
Okay, and then guys one more follow up on the expenses is that accurate for us to think that there are some elements of your inflation and expenses that are temporary helping you get to the best in class and satisfy regulators and then other parts that are permanent unlike helping you stay best in class and keep satisfying regulators and so.
And then what you are building might give more efficient overtime and then obviously a lot of it will stay.
I think thats, a good point and there's there's a real opportunity for.
For taking best in class and then making it and then making it much more efficient I think it was maybe it was last quarter. What are the things that you mentioned is that we're we're building a control environment for the company as it exists today.
And there is just through process consolidation and process reengineering, there's an opportunity for the company to be a whole lot more simplified as we roll forward.
And both the cost of delivery and the cost of overseeing that from a risk and control perspective would be expected to be.
More efficient some of that is converting multiple manual processes to fewer processes and so some of it has come converting manual process to automated process, but all of that is upside from from where we.
From the data that we we determined that we think we've achieved the the.
Best in class requirement from an operational risk and compliance perspective.
Okay. Thanks.
Your next question comes from the line of can you say with Jefferies.
Hey, Thanks, Hey, John one follow up on the Eni side. So you keeping that minus six and I guide for the year kind of gets you 11 for us for the year and down even down even five next year kind of holds you at that 11, Fourish and so I know theres. So many potential permutations of what happens with the rate environment, but maybe you can just help us talk through.
How much you expect the balance sheet to grow then or how versus how close you are starting to get towards the asset cap and what what constraints. If anything might you have us as this gets further out thanks.
Yep.
We've been there within the relevant range of expectations of loan and deposit growth I Wouldnt think of the asset cap is being as as as really coming into play in our forecast horizon.
And in part because there are plenty of levers that we can pull that don't have.
Real customer impacts in terms of consumers and our business customers and we've talked about some of those before in terms of some of the institutional deposits that we take or other wholesale funding that we use.
And then there are some assets that don't don't worked hard for us from a balance sheet perspective. So.
I guess, the low single digit growth rates for loans and deposits is probably a reasonable proxy for are reasonable place holder for thinking about how.
2020 unfolds could be a range of different outcomes, but.
That would be consistent with what I mentioned earlier in terms of how you might forecast the different great pads and getting too.
Hey.
Low to mid single digits down percentage and net interest income for 2020 versus 2019.
Understood, Thanks, and a follow up on that on the fee side, Yes got the IR T. come out do you spoke about and was in the deck and then you've got he still.
Can you just help us understand how youre thinking about how that just nets out as we get passed this year as well in terms of the revenue and expense trajectory. Thanks John .
Well, so with our T I.
I think we actually have a page in the back of the supplement that shows you exactly what to expect there and not to oversimplify, but it's on the order of $100 million a quarter I think from both revenue and expense at least as we as we process it.
He still coming out starting in the fourth quarter.
Probably a little bit bigger in terms of dollars or revenue per quarter.
You'll see it mostly in the commercial mortgage brokerage line item in the piano. It shows up in a couple other areas to and have investment banking fees, but similarly, the expenses approximate the revenue at our in our own experience. So when we finished Q4 and we talk about our.
2019 expenses and we will provide a reconciliation for people to be able to to show, where we ended up and will be sure to to call out both of those things actually what really impact.
Our to you on impacted because the expenses are still in our run rate and we're recovering them. He still will be a minor adjustment because they won't be expenses for Q4.
Understood. Thank you John .
Your next question comes from the line of John Pancari with Evercore.
Hi, John .
Morning.
All staying on the loan growth topic, you saw some pretty good declines in the commercial real estate portfolios this quarter again and.
Just wanted to get your updated thoughts there is that still one area that you're.
Expect to see some runoff still or or or another words lack of growth I guess thanks, yes.
So.
We had a couple of quarters with small growth and then we shrunk again, a little bit this quarter as I understand it I think our commitments for construction financing are actually up in the in the third quarter, which will come through as funded loans that really is one market where.
This late cycle behavior, there's lots of non bank competitors, they're more non bank competitors than bank competitors and so we really have to pick our spots in order to to maintain our risk reward credit in pricing and loan terms quality.
And it's also one of those areas, where frankly your weakest loans end up getting refinanced away from you, which is which is also late cycle behavior. So we're still very comfortable with with what we have on the books, but I wouldnt look forward to grow meaningfully.
Until the cycle turns and until our best customers have really interesting opportunities to to put their own capital to work and we hope and do it so I.
Could be wrong, but it feels to me like it's going to be it's going to be treading water well, our while our best customers.
Hi, there refinanced deals that that were already in or.
Or prudently take advantage of what the market offers them, but I don't see it as an area for outsized growth.
Okay. That's helpful and then separately on the fee side the.
Equity investment gains saw a pretty good jump in the quarter. If you could just give us a little bit of color on what drove additive.
You give us a little thoughts and your outlook there, yes sure. There's a couple of things that drive that one is just it's a great time to be realizing from both private equity and venture portfolios and so our teams have been selling into that and that's where we've been at the high point in the cycle for a while now so.
With respect to the second part of your question.
I expect that to reflect.
What kind of private market, we're in and if it's still is a strong and financings as accommodating it as it is today than I expected that they'll continue to harvest and things will be good.
It's a little bit harder of an environment for them to be putting capital to work because asset prices are so high the other thing that contributes to is we had to change and accounting.
A year or so ago, which is causing us to to recognize unrealized gains where there's some theres a subsequent capital raise in the private deal that causes us to have to mark up our position and that's always been true if one of those companies goes public but our our affiliates still ends up owning shares for a period of time that we that we write up.
The we recognize the gain even though we havent, we havent liquidated our position so thats contributing that will contribute to some more volatility here because that can only be one way, even though it's been a benefit for the last.
For the last the last year.
Okay got it thank you.
Yes.
Your next question comes from the line of Matt O'connor with Deutsche Bank.
Hi, Matt good morning.
So it seems like the NIM percent could bottom somewhere in the two fiftys and I'm just trying to get a sense of.
Is that like a reasonable NIM when I think about your mix right I just want to compare you to both your from your peers and your smaller and you don't have as much credit card is some that hurts you also not as much trading bucket some session help you.
And then just throw a couple things like there's still some assets where it seems like you're over earning like in the securities book, but there's also some deposits that your overpaying.
So what are your thoughts around kind of again based on some things that you said it for 2020 that III and thinking about.
Just keeping rates for the forward curve is like that NIM in the 250 is like is that.
In normal them for you and this backdrop for their Stockton.
So we're not we're not currently forecasting over our horizon two to quite at that level. I mean, it's not that far off either of where we are today or or what's likely to unfold I agree that.
Well.
While we do have some special things on the asset or the liability side the sale of.
The pickup payloads and what they were contributing to interest income and to NIM is probably something the isn't going to be replicated. So I think that once that fully runs through the comparison period I mean, it's affecting them already that's out and I don't think there's that much more on the loan side thats its high yielding that's rolling off.
On the on the liability side, we did mentioned that there are some some promotional deposits and other things that are that will that are burning down because they were they were in place as we were on the way up in rates.
And and so so that will be a benefit but.
I don't think we get tried to quite to 250 in our and our forecast horizon lot of things go into that of course, and we don't manage to NIM were much more thinking about $1 of net interest income, but if thats helpful.
Yes, I was thinking.
I was kind of ticket to 15 is broadly speaking, but southern is helpful.
And then just specifically like as we think about.
Exiting fourth quarter net interest income, you're obviously going to be carrying or absorbing higher than normal bond premium amortization. So we don't want to run rate all that what is the level of the bond premium amortization. This quarter you said the increased 131, but what's the run rate.
Yes the.
The from for MBS, It's just under $400 million for the quarter and it was just under $250 million for the second quarter. When we think it will be up a little bit in the fourth quarter. So it's been about $775 million.
Year to date through the third quarter.
Okay and then just last question all this as we think about exiting this year just assuming rates stay where they are now does that go to zero or there is still going to be just some ongoing amount.
No I assume that there's I assume there will still be some ongoing amounts.
If we stay in this context for tenure and mortgage rates with.
The velocity of prepayments you heard me mentioned that we're at about 40% revise right now and our own production at our pipeline is as big coming out of the third quarter as it was going in.
And so that may take months or even quarters for the into Moneyness of the outstanding stock of mortgages agency mortgages to work their way through the system, but.
Theres a whole lot more people who are in the money for Wi Fi today than than was through a few quarters ago. So I don't think thats going to.
Abate quickly.
Okay I get asked me greedy here.
I guess the 300 squeeze then.
Thanks.
You've talked about the increase spending and regulation compliance controls related areas versus two or three years ago is there a dollar amount that you can provide all that increase or I think a one point you did talk about the head count increase maybe you could update documents you make some estimates if you can't give us dollar amount. Thank you.
I don't have a.
I don't have a crisp answer for you only because it appears everywhere. It appears in the front line. It appears in the second line. It appears and technology. It appears in a in a variety of areas I think we'll try and and put to put a a comparison together for folks to to get a picture of not only what we think about it how we think about it historically when how we think about it going for.
All right back to John Mcdonald's question of whether we look like at the high watermark versus what efficient looks like over time, I think that's detail that people.
Should be able to to understand as that story unfolds and I think as we as we finish this work that we deal with Charlie and we talk about what the what the next steps our expense wise, that's a reasonable expectation from our from our team.
Okay. Thank you.
Yes.
Your next question comes from the line of David along with Raymond James.
Hi, David David.
Good morning, everyone looking at your Securities portfolio, what what type of yield do you have rolling off the Securities book This quarter and then what are you looking at for for reinvestment for reinvestment Neil.
Yes, I think in general we're reinvesting about 25 basis points down from from what has been rolling off.
And of course, it depends on whether it's it's a it's agency MBS, which is the bulk of our purchases. We also have.
Some treasuries in agency debentures, and we have some structured products and other things but.
On average I think our purchases in Q3 were just north of 3% yield and what's what's been rolling off.
From a coupon perspective has been high threes from a yield perspective has been.
So not terribly different than 3% so.
In.
In.
Agency MBS in particular, I want to say that were probably down.
25 to 225 plus basis points on a on a eight reinvestment rate basis.
Okay.
Okay got it and then the second question I have relates to the.
Potential future litigation losses, and I know and then in your Q, you give that number and it seems to be rising in most quarters do you have that number what the number may be here in the as of September Thirtyth.
No. It will keep the number will keep being refined until we file the Q, which which will happen in a couple of weeks. So.
Be on the left out for that for the for the latest.
Which will include everything we we know up until that day.
Got it. Thank you for taking my questions you bet.
Your next question comes from the line in the back teenager with JP Morgan.
Hi.
Hi, John Hi, Scott.
Let me just start with a question that.
Hi, there if you could.
Respond to so there was an issue that came up in the middle of the third quarter.
The New York Times reported about accounts closed every bit of being charged fees. After the close can you give some color on this issue. When it was just covered a number of customers what's involved.
Where are you on the timeline of all of this.
And actually overarching ly this even kit is coming up now.
Perfect. Thank you. Thank you for the question I guess, what I would say is it at this point Theres really not any further information that we can give you with regard to that situation.
We have obviously in response to the the article that appeared gone back and looked at all our account closure information and we've we've been working very closely with our regulatory agencies ever. Since then we're at the point now.
We're coming to us to some conclusions about what happened, but it would frankly be premature at this point for me to really give you.
In any information in that regard me, we're taking a look at what happened we're trying to determine the veracity of what was said and the New York Times and perhaps most important we're trying to determine whether we ought to make any.
Any changes at all with regard to the way that we've been conducting ourselves and that in that arena.
I wish I could be.
More forthcoming in terms of information, but it's still in progress and it's been it's been.
An effort in which we've been engaged very closely with our regulators.
You mean, when you say conducting yourselves as and just the whole process, the hardware outflows or the center or something else.
Yes, the whole the whole process of account closures is complicated at any financial institution, because there are situations where people.
Close their accounts voluntarily whether they they call a call center or they walk into a branch and they're also situations where accounts have to be closed for legal or regulatory reasons and there's a variety of considerations that go into how that's done and we're going through very carefully and looking.
At all those considerations and coming to conclusion as to the changes if any that we ought to make with respect to the way that we've we've handle ourselves in the past.
Okay.
Completely separate question for John John You mentioned about the promotional retail deposits.
Are you completely stopping it all you just reducing the rates that you're offering by the amount of rate got so if you've seen it which is why several other players have done with their higher yield offering.
So there will always be some level of promotional activity should reflect the market conditions that were competing in both in terms of rates and terms.
I think like a lot of people with the expectation of lower Hcl shortening up initial terms. So that we're not we're not overpaying for a longer period of time than might have previously felt like it was necessary in the rising rate environment. So weve. There's some of it in the third quarter. We've we've used off on pricing we've used off on terms, but just like like your firm.
Always be some amount of it to.
Two.
To make sure that were competitive market by market and to to test and learn.
Right.
One last if I mean, you in the pasta have given us loans to non depository financials outstanding could you give the number what that is this quarter.
Let's see I'm looking at the papers around me here I don't think it's changed much during the course or the quarter.
Yes, I know well, we'll follow up with you on that there wasn't there wasn't a meaningful move in that category during the course of the quarter.
But I don't have any Andy.
Okay. Thanks.
Your next question comes from the line of Eric Compton with Morningstar.
Hi, Eric Thanks.
Good morning, Thanks for taking my question. My first question you made the comment that one of the areas of expenses that you expect to be.
The helping you meet your full year guidance is from that other professional fees line item and just curious if you have any more color around.
Why that might be dropping what might be causing that if thats related to perhaps progress on.
Some of the risk and compliance spending and may be taking some some more or higher percentage of those activities in house.
Anymore color on what's driving that yes. That's good question. So some of it will is definitely.
Having taken some of it in house, the amount by which we're talking about it changing.
Frankly isn't indicative of a giant pivot in one way or the other it's still a category that's too high it represents both consulting type firms, where we've been getting expertise as well as.
Labour augmentation or staff augmentation, particularly in technology labor, where we've been we've been hiring people as contractors, where we havent been able to hire as quickly as necessary I think like all firms as a portion of our workforce in that area that is on contract. So.
Well to the shift in the fourth quarter is the current forecast just based on on on whats roll down and whats rolled off in the current body of work, but there's still a lot of it going on it's still a level, that's too high and as we roll forward and think about what efficient looks like theres, no doubt that that category coming down.
Substantially will be will be high on the list of sources of Furthermore, a more efficient state to be operating.
Okay. That's helpful and then.
One last question I appreciate it if you don't want to comment on this too much but just going back to the legal reserve estimate understanding the official number will come out in the Q.
But we had that 800 million dollar jump and now we're getting that $1.6 billion charge or the jump in the high end of the legal reserve estimate and now the charge and the current quarter and just the operating losses and just curious if there's any color on do you get a sense, we're starting to get more towards.
The light at the end of the tunnel when it comes to this should we start see this legal reserve estimates starting to trend down is that your sense, just any more color around I guess behind the scenes what's going on there.
As as you as you preface sure your question with we really can't provide.
Anything in the way of color on this as you know we don't provide information as to the portion of our reserves thats applicable to any particular litigation or other items.
And with regard to.
The DJ and FCC investigations that began in 2006, we really don't have any update.
And what we said in our prepared remarks on what we previously disclosed in our last quarter 10-Q, our discussions with the DJ and FCC are ongoing and when we have more information to disclose will of course do so.
Can I just so that you definitely you said 2006, you meant 16, yes, I'm sorry. This theres nothing from 2000, it's nothing for 2006 thankfully.
Okay I appreciate it thanks for taking the questions sure and while the next ones coming back. The number is $104 billion as of September thirtyth for the exposure to total exposure to non bank financials.
Your next question will come from the line of Saul Martinez with DBS.
Hey, guys. Thanks for taking my question good morning.
So I feel like I hate to beat a dead horse with the Eni, but I feel like.
Either I'm, taking the guidance to literally or a missing something.
But if the outlook is still for Eni to declined 6% on a reported basis and I guess 1.8 billion decline versus the first half seems to suggest that the fourth quarter. Eni is roughly about 11 billion and even even if you do a little bit better than that it's still implies pretty.
The substantial declines in Eni in NIM, Devon degradation in the fourth quarter versus the third quarter and everything a lot of what you said John in terms of less incremental headwind from premium ma'am.
Deposit cost, maybe starting to pick out even reduce a little bit or fall a little bit next quarter.
The piece the headwinds from the purchase credit impaired PC I should start to moderate just because you are selling less of it.
Just on a sequential base it seems like the balance sheet mixing repricing element is is pretty pronounced to get there. So I guess what am I missing and is it is is the is it really just that the in the impact of a rate cuts the lower long and is that pronounced in terms of the impact on asset yields.
Well I think it's the asset side that.
That's sort of fully reflecting the repricing down we talked about the deposit costs being.
Not being higher probably being a little bit lower.
And it gets you to the types of numbers that you described.
Okay very very close.
Okay, but the math is where I guess, a math is right that 6% would be any 11 billion or short range for the fourth quarter on a reported basis that's right.
Okay.
Alright.
Just wanted to be clear.
So I wanted to just maybe.
Ask about it different topic and I apologize I was on little bit laid it Alan if you addressed it but any update on on.
Where you stand on.
The consent order and Remediating, the operational risk and controls and it seems like Theres a lot of blocking and tackling there in terms of.
It.
All of the processes that you're looking at identifying risking controls and where appropriate remediating. Those can you just give us a sense inc. on regardless of what the fed does and when they lift it where you feel like you are in that process and do you feel like you need to get passed that before you can really attack the cost structure in a meaningful way.
Thanks, Thanks, let me start on that and now I'll turn it over to John I mean.
Our conversation with our regulators your course confidential supervisory information.
But I can't say that our engagement with the regulators has been very constructive and very constant.
Hi, log with them on a number of fronts as everybody recalls several of the regulators made public statements earlier in the year in which they.
Expressed their disappointment with the progress we made up until that time.
In response to that criticism, which of course, we accepted over the last six months, we doubled our efforts with regard to trying to satisfy their expectations.
And I.
I've made clear I know Charlie will as well that the entire wells Fargo team must continue to act assertively in decisively to meet the regulators expectations going forward.
With regard to the the issues raised in the fed consent order the feedback that we are getting from the fed on a constant basis.
He is enabling us to continue to make progress in terms are responding to their expectations.
We are we're good waste down the road, but but I think it's fair to say that we have a substantial amount of additional work to do and of course at the same time, we've designed and implemented and we're constantly working doing enhance our new risk management framework and that's fundamentally transforming how we manage.
Risk every day throughout the organization and away that I would describe as much more comprehensive integrated and.
And consistent and at the same time.
We are enhancing frontline risk independent risk management and the audit functions. So that we can ensure multiple layers of review and better visibility into issues as they emerge and.
Obviously the goal of all this is to prevent the occurrence of kind of the kinds of issues that we had in the past and as John alluded to before we're also emphasizing operational excellence throughout the company.
Our biggest focused areas on business process management in an effort to try to deliver greater consistency.
So I guess, what what I will say and I'll turn it over to John to talk about some of the financial impacts is it.
There's a great deal of work to do to meet the expectations of our regulators to appropriately high.
But we're committed to completing that work, we're working very hard and we're confident that we'll be able to complete the work in a manner, that's timely and just as important up to the.
Hi, a standards have professionalism and durability going forward.
Yes, so there to the second part of your question. So we've had.
These efficiency programs in place for the last few years, which.
Began before this biggest push in response to the fed consent order in some other regulatory feedback but.
Through that process, we've got hundreds of programs that have gone activity by activity and and said about taking unnecessary cost down and then at the same time, we've embarked on this.
Getting it right from an operational risk compliance governance perspective, including all of the enabling technology, which is where all this money is being.
Reinvested so the my as I mentioned earlier on this call that the big.
Opportunity once wells Fargo.
Both internally and from a regulatory perspective has changed the bar for being excellent operational risk compliance and governance overall.
Like we believe that we are in credit risk and in some other areas.
Is a massive simplification because.
As we as we go down this business process management.
We we inventory and uncover the fact that we do just about everything we do and in many different ways.
There's a huge opportunity to compress that to get more consistent it improves the customer experience. The team member experience, it's easier to control, it's easier to automate and it's much less expensive to deliver.
And I think some of that from an investor perspective, it's important to know that we're we're fixing our status quo Wells Fargo. The way that our individual processes have have currently operate.
And then there's the opportunity to reengineer now that May look different after we've sat down and done a complete strategic review with with with Charlie but it is how the team has said about doing the business are doing the remediation as necessary to improve the company today, starting with the way things are done today.
But theres a there theres an from my perspective, and an extraordinary efficiency opportunity and modernizing that.
Great that's really helpful. Thank you.
Your final question will come from the line of Betsy Graseck with Morgan Stanley .
That's okay hi, good morning, two quick questions. One just on the MSR revaluation, I mean I realize that.
There was some prepays in the quarter and I know you guys. It really good estimating that so just wondering if there was something else or was it just a more violent moves unexpected and is it a one time or in your opinion that Tom it's not going to pop back up I would expect but just wanted to get your understanding on that.
Well it it was a bigger moving was expected and I'm I'm always.
I'm reluctant to say that it could never happened again, but the way we estimate.
The customer response to there in the Moneyness for a refinance given what we know about what type of cohort they fall in as the basis of how we estimate that and it happened it's been happening at a faster pace and so we've we think we've captured that in this valuation adjustment.
Okay, and then on the auto lending side I know you highlighted that.
You know the re configuration restructuring of that business is finished and we saw some really strong results this quarter with originations up what does that 9% linked quarter.
Do you feel like it's the start of the rebalancing of that auto business is this a run rate that you think PNM you can keep for the.
Foreseeable future.
I'm just trying to get a saw a sense of the sizing of the auto book that you think you can get back to post this restructuring that business, yes, my sense is that.
If.
If we still like to risk reward so if consumer credit stays about where it is and if used car values stay about where they are that there's there's an opportunity for us to grow further so as I mentioned the growth that we've gotten so far is really by doing more in the same.
Upper echelon credit tiers, and we previously ran the business with including a little bit more in the at least in the Nonprime category.
And my sense is that will probably begin to do that too over the course of the next couple of quarters were.
Where should we are using into it but I.
I don't think of this uptick as average and I think that there's more to do.
Okay. Thanks.
Yes.
Let me close our call by thanking all of you for your questions and for joining our third quarter conference call as always I'd also like to thank all our team members for their hard work dedication and enthusiasm.
Best regards to you all take care.
Ladies and gentlemen. This concludes today's conference. Thank you all for joining you may now disconnect.