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Edited Transcript of WFC earnings conference call or presentation 15-Oct-19 3:00pm GMT

Q3 2019 Wells Fargo & Co Earnings Call

SAN FRANCISCO Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Wells Fargo & Co earnings conference call or presentation Tuesday, October 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. Allen Parker

Wells Fargo & Company - Interim CEO, President & Director

* John M. Campbell

Wells Fargo & Company - Head of IR

* John Richard Shrewsberry

Wells Fargo & Company - Senior EVP & CFO

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Conference Call Participants

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* Betsy Lynn Graseck

Morgan Stanley, Research Division - MD

* David Joseph Long

Raymond James & Associates, Inc., Research Division - Senior Analyst

* Eric Compton

Morningstar Inc., Research Division - Equity Analyst

* Erika Najarian

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

* John Eamon McDonald

Autonomous Research LLP - Senior Analyst Large-cap Banks

* John G. Pancari

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

* Kenneth Michael Usdin

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

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD in Equity Research

* Robert Scott Siefers

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

* Saul Martinez

UBS Investment Bank, Research Division - MD & Analyst

* Vivek Juneja

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo third quarter earnings conference call. (Operator Instructions)

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

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

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Thank you, Regina. Good morning, everyone. Thank you for joining our call today where our interim CEO and President, Allen 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 and quarterly supplement are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website.

I will now turn the call over to Allen Parker.

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [3]

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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, but I'll note at the outset that our underlying business fundamentals were strong. That strength was demonstrated by, among other things, increases in loan and deposit balances both from a second quarter and from a year ago, our highest branch customer experience scores in over 3 years and continued growth in primary consumer checking customers.

As you all know, Charlie Scharf will join Wells Fargo next week as our new CEO and President. I've had the opportunity to spend a great deal of time with Charlie, and I'm convinced that he has the right combination of experience, business savvy 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 assumes his responsibilities as CEO and I return to my role as the company's General Counsel.

It's been an honor for me to serve as our interim CEO and President over the last 6 months. I'm proud that, during my time in this role, the company continued to move forward and we made progress on our top priorities, which include 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 in technology, merchant services and wealth management. In addition, within consumer banking, we named leaders to new roles that will help us better serve our customers. David Kowach, who was most recently the Head of Wells Fargo Advisors, assumed a new role as the Head of Community Banking reporting to Mary Mack. We created this role because we believe that having a single dedicated leader supporting our team members and customers in our branches will significantly further our ongoing transformation.

We also formed within consumer banking a new enterprise customer excellence group that will, over time, bring together functions from across the company and give us broader insight into the customer experience. This new group is under the leadership of Andy Rowe, who led consumer segments and consumer strategy for the last 2 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 in emerging technologies through the Wells Fargo Startup Accelerator program was demonstrated by our adding 2 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 and real-time processing.

Finally, we announced the data exchange agreement with Plaid, a leading data platform. With this agreement, our customers will have greater control over their bank account information they share with Plaid-supported apps, including the ability to turn on or off data sharing through Wells Fargo's Control Tower.

I want to conclude my comments this morning by thanking the members of our operating committee, our other senior leaders and all our team members for their efforts, dedication and perseverance during the last 6 months. In particular, I want to thank Doug Edwards for his strong and thoughtful leadership as 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 6 months. Looking forward, I'm confident that the extraordinary strengths of 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.

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

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Thank you, Allen, and good morning, everyone. We had a number of significant items in the third quarter that impacted our results, which we highlight on Slide 2. We had $1.9 billion of operating losses, predominantly reflecting litigation accruals for a variety of matters, including a $1.6 billion discrete litigation accrual for previously disclosed retail sales practices matters that was not tax-deductible and reduced EPS by $0.35 per share. We had a $1.1 billion gain from the sale of our Institutional Retirement and Trust business, which contributed $0.20 per share to EPS. We had gains of $302 million on the sales of $510 million of Pick-a-Pay, PCI and other PCI residential mortgage loans. We had $244 million in mortgage servicing rights valuation adjustments driven predominantly by higher prepayment rate estimates on our MSRs. This 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 $105 million impairment of capitalized software, reflecting 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 $0.05 per share as a result of the elimination of purchase accounting discount recorded on these shares at the time of the Wachovia acquisition. This 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 Allen summarized and we highlight on Slide 3, we continue to have positive business momentum with strong customer activity.

We review some of our year-over-year results on Page 4. Compared with third quarter of 2018, revenue was stable with an increase of $1 billion in noninterest 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 the $100 million reserve release a year ago. We maintained strong capital levels even as we reduced common shares outstanding by 9% and increased our quarterly common stock dividend by 19% from a year ago.

I'll be highlighting most of the balance sheet drivers on Page 5 throughout the call, so we'll turn to Page 6. 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 nontax-deductible treatment of the $1.6 billion discrete litigation accrual. We currently expect the effective income tax rate for the fourth quarter to be approximately 17.5%, excluding the impact of any unanticipated discrete items.

Turning to Page 7. 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 3 years. Period-end loans increased $12.6 billion from a year ago with growth in C&I, 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 in loans starting on Page 9.

Commercial loans were stable linked quarter as growth in C&I loans and lease financing was largely offset by declines in commercial real estate loans. C&I loans were up $2 billion, with broad-based corp growth in corporate and investment banking and the purchase of CLOs in 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.

Lease financing 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 and the purchase of $1 billion of loans as a result of our exercising servicer cleanup calls to terminate over 20 pre-2008 securitizations. This growth was partially offset by paydowns as well as sales of $510 million of PCI 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 million 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, including process improvement 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 promotional rates and offers. Our average deposit cost of 71 basis points increased 1 basis point from 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 also impacted by unfavorable deposit mix shifts.

On Page 12, we provide details on period-end deposits, which grew 3% from a year ago and 2% from the second quarter. Wholesale Banking deposits were up $6.6 billion from the second quarter driven by seasonal growth in middle market and 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 and 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 payoffs. These increases were partially offset by a $2.5 billion 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 declines in net interest income were partially offset by favorable balance sheet growth and mix and the benefit of 1 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 9 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. Noninterest 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 IRT business. While we no longer recognize trust and investment fees from this business, we will continue to administer client assets for up to 24 months, and the buyer will pay us a fee for certain costs we incur 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 from the second quarter driven by a $419 million decline in servicing income primarily due to the valuation adjustments on our MSRs reflecting higher prepayment rate estimates. Partially offsetting this decline was $127 million increase in net gains on mortgage loan originations and sales activities. Mortgage originations increased $5 billion from the second quarter due to higher refi volumes from lower interest rates with refis increasing to 40% of originations in the third quarter.

We ended the quarter with a $44 billion unclosed pipeline consistent with the second quarter, but we currently expect fourth quarter originations to remain at a similar level to the third quarter. Residential 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 corresponding 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 P&L-neutral.

Turning to expenses on Page 15. Expenses increased both -- from both the second quarter and the year ago largely due to higher operating losses primarily reflecting litigation accruals. To explain the drivers, we'll start on Page 16.

Expenses increased $1.8 billion from the second quarter driven by a $1.7 billion increase on operating losses. The increase in compensation and benefits reflected higher salaries expense primarily driven by 1 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&E 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 in 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 $52 billion to $53 billion target range. This excludes annual operating losses in excess of $600 million and also excludes deferred comp expense, which is largely P&L-neutral and totaled $476 million through the first 9 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 have 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 5 consecutive quarters and reached their highest levels in more than 3 years in September. The continued improvement 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 on educating our customers about our industry-leading digital capabilities.

On Slide 21, teller and ATM transactions declined 6% from a year ago, reflecting continued customer migration to digital channels. We've consolidated 130 branches in the first 9 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 a year ago and 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 and linked quarter basis. We're a large processor of commercial payments as evidenced by our ACH payment transactions and commercial card spend, and we grew our year-to-date market share in investment banking driven by higher market share on loan syndications. We're also a market leader in high-grade issuances. We had record volume in the third quarter commensurate with the industry, with September being particularly strong and 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 concern they identified is their ability to hire 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 Retirement and Trust business.

Turning to Page 24. We continue 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 on our efforts to generate new account growth, including the launch of our Propel American Express card last year. And while auto net charge-offs increased from the second quarter due to seasonality, they were down from a year ago even as we've grown originations by 45%. We're generating growth in originations while maintaining our strong credit discipline with consistent loan-to-value, payment-to-income and FICO scores.

Nonaccrual loans declined $377 million from the second quarter with lower nonaccruals in both the commercial and consumer portfolios. Nonaccrual loans were 58 basis points of total loans, their lowest level in 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 2 years. And 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 CECL 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 indeterminate maturities. As a reminder, we have a smaller credit card portfolio than our large bank peers, which reduces the impact CECL adoption will have on our consumer loans. The remainder of the expected reduction in our allowance is predominately related to the increase in collateral value of residential mortgage loans, which were written down significantly below current recovery value during the last credit cycle. The ultimate effect of CECL will depend on the size and composition of our loan portfolio, the portfolio's 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 experiences credit cycles, we anticipate more volatility under a lifetime reserving approach versus the incurred loss approach.

Turning to capital on Page 25. Our CET1 ratio fully phased in decreased 11.6 -- decreased to 11.6% driven by returning $9 billion to shareholders through common stock dividends and net 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 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 Allen and I will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Erika Najarian with Bank of America.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [2]

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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 on the growth side in lending, as we think about the 6% NII decline in 2019 given sort of the forward curve plus that momentum, how should we think about NII decline expectations for 2020?

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

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Yes. Well, it's complicated because there's a lot of things going into it, including where rates go versus what the market is suggesting, what happens with loan pricing, deposit pricing, a variety of things. But if we -- in the various scenarios that we run, thinking about, let's say, the 9/30 implied forward curve, which suggests Fed funds in the 1 70 area at 12/31 of this year and the 10-year just under 1 70; and then a year forward, Fed funds in the 1 20 area and Fed funds still in the 1 70 -- or pardon me, 10 years still in the 1 70 area, that with the range of assumptions about loans and deposits probably gets us to down low to mid-single digits in net interest income. Maybe not as much of a decline from '18 to '19, but it was just a number of scenarios, but it seems to be -- that would seem to capture it.

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Erika Najarian, BofA Merrill Lynch, Research Division - MD and Head of US Banks Equity Research [4]

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Got it. And my second question, obviously, you can't speak for the new CEO. The questions that we're 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 investments in risk, compliance and data had exceeded your expectations. And again, you can't speak for Charlie, but as you think about how those investments played out relative to investments in, let's say, innovation and as you think about where you are versus peers, is there a significant catch-up gap because you spent a lot of those dollars on risk, compliance and data? Or how should we think about investment spend from here?

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

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Yes. So I think when Charlie arrives, we'll conduct a complete strategic review of where all the businesses stand, where we -- what our opportunities are, et cetera, including a review of how we've been investing on the risk, compliance side, et cetera and then formulate a view going forward.

One thing that probably doesn't get enough focus is that a lot of the money and time that we spent on the risk and control side of things really does enable further innovation. So the money we spent in technology, in data, for example, has huge customer impact down the road. So it's not an either/or necessarily. There was a lot of mutual benefit from running a more controlled environment. But that will be work that we all do together with Charlie after he arrives and then present conclusions at the right time.

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Operator [6]

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Your next question will come from the line of Scott Siefers with Sandler O'Neill.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [7]

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Sort of a follow-up question on cost. So I guess if I look at the reiterated 2019 expense guide, it implied a pretty meaningful downdraft in cost in the 4Q. 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 you had previously suggested that cost could be flat in 2020. Is that still something you're thinking? Or now with Charlie coming onboard, do we sort of wait until he comes on, take a look at things and then give him complete discretion on what the cost outlook looks like?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [8]

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Yes. So the second half, I think you answered that, which is we should wait and allow him to have an input on to 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 are other professional fees and some labor-related expense. But it does require that. That's how the math works, and that's how we're forecasted right now.

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

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Okay. Perfect. And then just separately on mortgage. I think you had said that the originations should stay around this quarter's level into the fourth quarter. Hopefully, I heard 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 thought this quarter, particularly if we don't get the same sort of MSR noise?

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

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Yes. So on the origination side, it's hard to say what the full quarter gain on sale is, but we do think it will be in the neighborhood of where it's been recently, which is, call it, 120 basis points, which was a big tick-up and welcome.

On the servicing side, while I wouldn't expect there to be a revaluation in the fourth quarter. We think we've got that in the third quarter. Recall that we are in a flatter curve environment, so the carry for holding treasuries as a hedge to the MSR, sometimes it works for us in a steeper curve environment, and sometimes it's either neutral or works against us when the curve gets flatter. So we shouldn't earn as much on the hedge, but we probably wouldn't have the type of valuation items we saw in Q3.

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Operator [11]

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

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [12]

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John, wanted to ask about deposits, deposit pricing. With the deposit cost increases slowing, might we have seen kind of the end of the deposit cost rise for you guys this quarter, assuming rates stay flat to down from here? Just trying to think if this could be the max pain quarter for NIM where you had the deposit costs up and loan yields down. And maybe just some puts and takes for the fourth quarter on NIM versus this quarter.

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

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Yes. So my expectation is the deposit cost would be cheaper in the fourth quarter, reflecting what you described in terms of kind of the burning out of the higher-cost deposits that got layered in before the Fed began to ease. Having said that, that -- there still -- there's less room to go down on the deposit side. And so if rates continue to move down on the asset side, it still works against us even if deposit costs aren't rising. So we have to be as vigilant as we can to keep deposit cost as low as it makes sense for the businesses and customers that we serve. But even if they're not rising, there' still leverage working against us in a declining rate environment.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [14]

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And in terms of good guys, bad guys, fourth quarter versus third, what's worse and what's maybe better than what you experienced this quarter on just the NIM percentage?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [15]

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Well, I think we're imagining having a little bit higher levels of MBS premium amortization. So that will be working for us in the fourth quarter. It 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. There's probably more room to run on that. With a little bit of passage of time, that could be a benefit. The burnout of more promotional activity on the consumer side is probably a net benefit, and those are some of the bigger items.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [16]

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Okay. And can I have one more follow-up on the expenses?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [17]

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Sure.

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John Eamon McDonald, Autonomous Research LLP - Senior Analyst Large-cap Banks [18]

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Is it accurate for us to think that there are some elements of your inflation in expenses that are temporary, helping you get to the best-in-class and satisfy your regulators and then other parts that are permanent like helping you stay best-in-class and keep satisfying regulators, and some of them what you're building might get more efficient over time and then obviously a lot of it will stay?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [19]

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Yes. I think it's a good point. And there's a real opportunity for taking best-in-class and then making it much more efficient. I think it was -- maybe it was last quarter, one of the things that we mentioned is that 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 process just to fewer processes, and some of it is from converting manual process to automated process. But all of that is upside from where we -- from the day that we determined that we think we've achieved the best-in-class requirement from an operational risk and compliance perspective.

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Operator [20]

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

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

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John, one follow-up on the NII side. So keeping that minus 6 NII guide for the year kind of gets you $11.4-ish billion for the year and down even 5 next year kind of holds you at that $11.4-ish billion? And so I know there's 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 growth then or how -- versus how close you're starting to get towards the asset cap and what constraints, if anything, might you have as this gets further out.

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

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Yes. I mean within the relevant range of expectations of loan and deposit growth, I wouldn't think of the asset cap as being -- as really coming into play in our forecast horizon, 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 work out hard for us to from a balance sheet perspective.

So I guess the low single-digit growth rates for loans and deposits is probably a reasonable proxy for -- a reasonable placeholder for thinking about how 2020 unfolds. It 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 rate pads and getting to a low to mid-single digits down percentage in net interest income for 2020 versus 2019.

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

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Understood. And a follow-up on the fee side. I got the IRT coming out that you spoke about and was in the deck and then you've got Eastdil. Can you just help us understand how you think about how that just nets out as we get past this year as well in terms of a revenue and expense trajectory?

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

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Yes. Well, so with IRT, I think we actually have a -- there's a page in the back of the supplement that shows you exactly what to expect there. And not to oversimplify it, but it's on the order of $100 million a quarter, I think, from both revenue and expense, at least as we processed it.

Eastdil coming out starting in the fourth quarter is probably a little bit bigger in terms of dollars of revenue per quarter. And you'll see it mostly in the commercial mortgage brokerage line item in the P&L. It shows up in a couple of other areas, too, and they have investment banking fees. But similarly, the expenses approximate the revenue in our own experience.

So when we finish Q4 and we talk about our 2019 expenses, and we'll provide a reconciliation for people to be able to show where we ended up. And we'll be sure to call out both of those things. Actually, it won't really impact -- IRT won't impact it because the expenses are still in our run rate, and we're recovering them. Eastdil will be a minor adjustment because there won't be expenses for Q4.

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Operator [25]

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

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [26]

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Staying on the loan growth topic. You saw some pretty good declines in the commercial real estate portfolios this quarter again. And just want to get your updated thoughts there. Is that still an area that you expect to see some runoffs still or, in other words, lack of growth, I guess?

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

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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 third quarter, which will come through as funded loans. That really is one market where there's late-cycle behavior, there's lots of nonbank competitors. There are more nonbank competitors than bank competitors, and so we really have to pick our spots in order to maintain our risk/reward, credit and 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 also late-cycle behavior, by the way. So we're still very comfortable with what we have on the books. But I wouldn't look for it to grow meaningfully until the cycle turns and until our best customers have really interesting opportunities to put their own capital to work and we help them do it.

So I could be wrong, but it feels to me like it's going to be treading water while our best customers either refinance deals that were already in or prudently take advantage of what the market offers them. But I don't see it as an area for outsized growth.

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John G. Pancari, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [28]

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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 that. And if you can give us little thoughts on your outlook there.

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

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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 -- 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 still is as strong and financing is as accommodating as it is today, then I expect 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 it is we had a change in accounting a year or so ago, which is causing us to recognize unrealized gains where there's a subsequent capital raise in a private deal that causes us to have to mark up our position. And it's always been true if one of those companies goes public, but our affiliate still ends up owning shares for a period of time that we write up the -- we recognize the gain even though we haven't liquidated our position. So that's contributing. That will contribute to some more volatility here because that can't only be one way even though it's been a benefit for the last year.

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Operator [30]

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

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [31]

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So it seems like the NIM percent could bottom somewhere in the 2.50s. And I'm just trying to get a sense of is that like a reasonable NIM when I think about your mix, right? Everyone is trying to compare you to both your bigger peers, and you're smaller and you don't have as much credit card as some, so that hurt you. You also don't have as much trading book as some, so that should help you. And then just -- so a couple of things, there are still some assets where it seems like you're overearning, like in the securities book, but there's also some deposits that you're overpaying. So what are your thoughts around kind of, again, based on some of the things that you said for 2020 in NII and thinking about just keeping rates where the forward curve is, like that NIM in the 2.50s, like is that a normal NIM for you in this backdrop or there's still...

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

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Yes. So we're not currently forecasting over our horizon to quite hit that level. I mean it's not that far off either of where we are today or what's likely to unfold. I agree that while we do have some special things on the asset or the liability side, the sale of the Pick-a-Pay loans and what they were contributing to interest income and to NIM is probably something that isn't going to be replicated. So I think that -- once that fully runs through the comparison period, I mean it's affecting the NIM already, that's out. And I don't think there's that much more on the loans side that's high yielding that's rolling off.

On the liability side, we did mention that there are some promotional deposits and other things that are -- that will -- that are burning down because they were in place as we were on the way up in rates. And so that will be a benefit. But I don't think we get quite to 2.50 in our forecast horizon. A lot of things go into that, of course, and we don't manage to NIM. We're much more thinking about dollars of net interest income. But if that's helpful, that's what...

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [33]

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Yes. I was kind of thinking 2.50s broadly speaking, but that 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? We saw it increase 1 31, but what's the run rate?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [34]

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Yes. The -- for MBS, it's just under $400 million for the quarter, and it was just under $250 million for the second quarter. And 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.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [35]

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Okay. And just last question on this. As we think about exiting this year, just assuming rates stay where they are now, does that go to 0? Or there's still going to be just some ongoing amount in the...

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [36]

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I assume there will still be some ongoing amount if we stay in this context for 10-year in mortgage rates with the velocity of prepayments. You heard me mention that we're at about 40% refis right now in our own production in our pipeline. It's as big coming out of the third quarter as it was going in. And so that may take months or even quarters for the in-the-moneyness of the outstanding stock mortgages -- agency mortgages to work their way through the system. But there's a whole lot more people who are in the money for a refi today than was true a few quarters ago. So I don't think that's going to abate quickly.

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Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [37]

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Okay. If I could just be greedy here-- if I could just be greedy and squeeze in one other thing. You talked about the increased spending in regulation, compliance, controls-related areas versus 2 or 3 years ago. Is there a dollar amount that you can provide on that increase? Or I think at one point, you did talk about head count increase. Maybe you could update that, at least some estimates if you can't give us a dollar amount.

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

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Yes. I don't have a crisp answer for you only because it appears everywhere. It appears in the frontline. It appears in the second line. It appears in technology. It appears in a variety of areas. I think we'll try and put a comparison together for folks to get a picture of not only what we think about it -- how we think about it historically, but how we think about it going forward. Back to John McDonald's question of what do we look like at the high watermark versus what efficient looks like over time. I think that's a detail that people should be able to understand as that story unfolds. And I think as we finish this work that we do with Charlie and we talk about what the next steps are expense-wise, that's a reasonable expectation from our team.

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Operator [39]

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Your next question comes from the line of David Long with Raymond James.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [40]

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Looking at your securities portfolio, what type of yield do you have rolling off the securities book this quarter? And then where are you looking at for reinvestment yield?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [41]

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Yes. I think in general, we're reinvesting about 25 basis points down from what has been rolling off. And of course, it depends on whether it's agency MBS versus the bulk of our purchases. We also have some treasuries and agency debentures, and we have some structured products and other things.

But on average, I think our purchases in Q3 were just north of a 3% yield. And what's been rolling of from a coupon perspective has been high 3s, from a yield perspective has been not terribly different than 3%. So in agency MBS in particular, I want to say that we're probably down, gosh, 25 to 25-plus basis points on a reinvestment rate basis.

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David Joseph Long, Raymond James & Associates, Inc., Research Division - Senior Analyst [42]

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Okay. Got it. And then the second question I have relates to the potential future litigation losses. And I know 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 30?

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

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No. It will keep -- the number will keep being refined until we file the Q, which will happen in a couple of weeks. So be on the lookout for that for the latest, which will include everything we know up until that day.

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Operator [44]

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Your next question comes from the line of Vivek Juneja with JPMorgan.

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Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [45]

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I've got -- let me just start with a question that either of you could respond to. So there was an issue that came up in the middle of the third quarter that the New York Times reported about accounts closed that were being charged fees after they were closed. Can you give us some color on this issue, when it was discovered, number of customers, what's involved, where you are on the time line of all of this? And actually overarching, why this even is coming up now?

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [46]

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Vivek, thank you for the question. I guess what I would say is at this point, there's really not any further information that we can give you with regard to that situation. We have obviously in response to the article that appeared gone back and looked at all our account closure information, and we've been working very closely with our regulatory agencies ever since then. We're at the point now where we're coming to some conclusions about what happened, but it would frankly be premature at this point for me to really give you any information in that regard. I mean we're taking a look at what happened. We're trying to determine the veracity of what was said in the New York Times. And perhaps most important, we're trying to determine whether we ought to make any changes at all with regard to the way that we've been conducting ourselves in that arena.

I wish I could be more forthcoming in terms of information, but it's still in progress. And it's been an effort in which we've been engaged very closely with our regulators.

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Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [47]

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You mean when you say conducting yourselves, as in just the whole process of how it works, account closures, et cetera, or something else?

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [48]

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Yes. The whole process of account closures is complicated in any financial institution because there are situations where people close their accounts voluntarily, whether they call a call center or they walk into a branch. And there are also situations where accounts have to be closed for legal or regulatory reasons. And there are 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 a conclusion as to the changes, if any, that we ought to make with respect to the way that we've handled ourselves in the past.

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Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [49]

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Completely separate question for John. John, you mentioned about the promotional retail deposits. Are you completely stopping it? Or are you just reducing the rates that you're offering by the amount of rate cuts that we've seen, which is what several other players have done with their higher-yield offerings?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [50]

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There'll always be some level of promotional activity. It should reflect the market conditions that we're competing in both in terms of rates and terms. I think like a lot of people, with the expectation of lower rates, shortening up initial terms that we're not overpaying for a longer period of time that might have previously felt like it was necessary in a rising rate environment. So we've -- there's some of it in the third quarter. We've eased off on pricing. We've eased off on terms. But just like your firm, there'll always be some amount of it to make sure that we're competitive market by market and to test and learn.

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Vivek Juneja, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [51]

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One last thing, if I may. You, in the past, have given us loans to nondepository financial outstanding. Could you give the number, what that is this quarter?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [52]

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Let's see. I'm looking at the papers around me here. I don't think it's changed much during the course of the quarter. Yes. We'll follow up with you on that. There wasn't a meaningful move in that category during the course of the quarter. But I don't have it handy.

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Operator [53]

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Your next question comes from the line of Eric Compton with Morningstar.

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Eric Compton, Morningstar Inc., Research Division - Equity Analyst [54]

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So my first question, you made the comment that one of the areas of expenses that you expect to be helping you meet your full year guidance is from that other professional fees line item. And I was just curious if you have any more color around why that might be dropping, what might be causing that, if that's related to perhaps progress on some of the risk and compliance spending and maybe taking some more or higher percentage of those activities in-house. Any more color on what's driving that?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [55]

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Yes. That's good question. So some of it 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 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 labor augmentation or staff augmentation, particularly in technology labor where we've been hiring people as contractors, where we haven't been able to hire as quickly as necessary. I think like all firms, just a portion of our workforce in that area that is on contract.

So the shift in the fourth quarter, the current forecast is just based on what's rolled on and what's rolled off in the current body of work. But there's still a lot it going on. It's still a level that's too high. And as we roll forward and think about what efficient looks like, there's no doubt that, that category coming down substantially will be high in the list of sources of -- a more efficient state to be operating in.

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Eric Compton, Morningstar Inc., Research Division - Equity Analyst [56]

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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 jump, and now we're getting $1.6 billion charge or the jump into the high end of the legal reserve estimate and now the charge in the current quarter and just the operating losses, just curious if there's any color on -- do you get a sense -- are we starting to get more towards the light at the end of the tunnel when it comes to this? Should we start to see this -- the legal reserve estimate start to trend down, is that your sense? Just any more color around, I guess, behind the scenes, what's going on there?

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [57]

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As you prefaced 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 that's allocable to any particular litigation or other items.

And with regard to the DOJ and SEC investigations that began in 2006, we really don't have any update beyond what we said in our prepared remarks and what we previously disclosed in our last quarter 10-Q. Our discussions with the DOJ and SEC are ongoing. And when we have more information to disclose, we'll, of course, do so.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [58]

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Can I just...

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [59]

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Yes, please.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [60]

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You said 2006. You meant '16.

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [61]

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Yes. I'm sorry.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [62]

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There's nothing from 2006.

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [63]

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Nothing from 2006, thankfully.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [64]

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Sure. And while the next one is coming, Vivek, the number is $104 billion as of September 30 for the exposure -- total exposure to nonbank financials.

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Operator [65]

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

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [66]

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So I feel like -- I hate to beat a dead horse with the NII, but I feel like either I'm taking the guidance too literally or I'm missing something. But if the outlook is still for NII to decline 6% on a reported basis and, I guess, $1.8 billion decline versus the first half, it seems to suggest that the fourth quarter NII is roughly about $11 billion. And even if you do a little bit better than that, it still implies pretty substantial declines in NII, in NIM 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 am, deposit cost maybe starting to peak out and even reduce a little bit or fall a little bit next quarter. The headwinds from the purchased credit-impaired PCI should start to moderate just because you're selling less of it, at least on a sequential basis. It seems like that the balance sheet mix and repricing element is pretty pronounced to get there. So I guess what am I missing? And is it really just that the impact of the rate cuts lower long? And is that pronounced in terms of the impact on asset yields?

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [67]

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Well, I think it's the asset side that's sort of fully reflecting the repricing down. We talked about the deposit cost being -- not being higher, probably being a little bit lower. And it gets you to the types of numbers that you described, very close.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [68]

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Okay. But the math is -- I guess the math is right that 6% would be in the $11 billion-or-so range for the fourth quarter on a reported basis?

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

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That's right.

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Saul Martinez, UBS Investment Bank, Research Division - MD & Analyst [70]

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Okay. All right. I just wanted to be clear. So wanted to just maybe ask about a different topic. And I apologize I was on a little bit late, I don't know if you addressed it. But any update on where you stand on the consent order and remediating the operational risk and controls? And it seems like there's a lot of blocking and tackling there in terms of all of the processes that you're looking at, identifying risk and controls and where appropriate, remediating those. Can you just give us a sense 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 past that before you can really attack the cost structure in a meaningful way?

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [71]

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Yes. Thanks. So let me start on that, and I'll turn it over to John. I mean our conversation with our regulators are, of course, confidential supervisory information. But I can say that our engagement with the regulators has been very constructive and remain constant dialogue 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 6 months, we've redoubled our efforts with regard to trying to satisfy their expectations. And I've made clear, I know Charlie will as well, that the entire Wells Fargo team must continue to act assertively and decisively to meet the regulators' expectations going forward.

With regard to the issues raised in the Fed consent order, the feedback that we are getting from the Fed on a constant basis is enabling us to continue to make progress in terms of responding to their expectations. We're good ways down the road, 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 to enhance our new risk management framework. And that's fundamentally transforming how we manage risk every day throughout the organization in a way that I would describe as much more comprehensive, integrated and consistent. And at the same time, we're 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 focus area is on business process management in an effort to try to deliver greater consistency. So I guess what I will say, and I'll turn it over to John to talk about some of the financial impacts, is that there's a great deal of work to do to meet the expectations of our regulators. They're 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 highest standards of professionalism and durability going forward.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [72]

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Yes. And so 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 and some other regulatory feedback. But through that process, we've got hundreds of programs that have gone activity by activity and set about taking unnecessary costs out. And 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 -- as I mentioned earlier on this call, the big opportunity once Wells Fargo both internally and from a regulatory perspective has changed the bar for being excellent at 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 go down this business process management path, we inventory and uncover the fact that we do just about everything we do in many different ways. And 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 from an investor perspective, it's important to know that we're fixing our status quo Wells Fargo, the way that our individual processes have -- currently operate. And then there's the opportunity to reengineer it. Now that may look different after we've sat down and done a complete strategic review with Charlie. But it is how the team has set about doing the business -- or doing the remediation that's necessary to improve the company today starting with the way things are done today. But there's, from our perspective, an extraordinary efficiency opportunity in modernizing that.

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Operator [73]

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Your final question will come from the line of Betsy Graseck with Morgan Stanley.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [74]

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Two quick questions. One, just on the MSR revaluation. I mean I realized that there was some prepays in the quarter, and I know you guys are really good at estimating that. So just wondering if there was something else. Or was it just a more violent move than expected? And is it a onetimer, in your opinion, that is not going to pop back up, I would expect? I just wanted to get your understanding on that.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [75]

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Well, it was a bigger move than was expected. And then I'm always -- I'm reluctant to say that it could never happen again. But the way we estimate the customer response to their in-the-moneyness for a refinance given what we know about -- what type of cohort they fall in is the basis of how we estimate that. And it happens -- it's been happening at a faster pace, and so we think we've captured that in this valuation adjustment.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [76]

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Okay. And then on the auto lending side, I know you highlighted that the reconfiguration, restructuring of that business has finished, and we saw some really strong results this quarter with originations up. What is it, 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 you can keep for the, I don't know, foreseeable future? I'm just trying to get a sense of the sizing of the auto book that you think you can get back to post this restructuring of that business.

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John Richard Shrewsberry, Wells Fargo & Company - Senior EVP & CFO [77]

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Yes. My sense is that if we still like the risk/rewards or if consumer credit stays about where it is and if used car values stay about where they are, that 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 -- at least in the nonprime category. And my sense is that we'll probably begin to do that, too, over the course of the next couple of quarters where we're easing into it. But I don't think of this uptick as aberrant, and I think that there's more to do.

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C. Allen Parker, Wells Fargo & Company - Interim CEO, President & Director [78]

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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.

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Operator [79]

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