Wells Fargo & Co

NYSE:WFC

Earnings Call Transcript 2018-Q3

[Operator]

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.

[John Campbell, Director, Investor Relations]

Thank you, Regina. Good morning, everybody. Thank you for joining our call today where our CEO and President, Tim Sloan and our CFO, John Shrewsberry will discuss third quarter results and answer your questions. This call is being recorded.

Before we get started, I would like to remind you that our third quarter earnings release and quarterly supplement are available on our website at wellsfargo.com. I would also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release and in the quarterly supplement available on our website.

I will now turn the call over to our CEO and President, Tim Sloan.

[Tim Sloan, President and Chief Executive Officer]

Thank you, John. Good morning. And I want to thank you all for joining us today. We earned $6 billion in the third quarter, which was $1.13 per diluted common share. And we grew revenue and reduced non-interest expense on both a linked quarter and a year-over-year basis. These results reflect the transformational changes that we have been making at Wells Fargo and I want to focus my comments on the progress that we have made on the six goals that the operating committee and I established last year.

The first goal I will focus on is risk management. We are working hard to transform how we manage risk at Wells Fargo. And our goal is not only to meet, but exceed regulatory expectations so that we have the best risk management in the industry. We are pleased with the expertise our new Chief Risk Officer, Mandy Norton has brought to the process and we continue to make progress. We have had constructive dialogue with our regulators. And we are taking their detailed feedback and making changes across the company, especially in our operational and compliance risk management structure. A key milestone in this process is our newly enhanced risk management framework which fundamentally transforms how we manage risk throughout the organization in a comprehensive, integrated, and consistent manner. In addition, during the third quarter, we successfully completed the requirements of a consent order with the OCC related to compliance with provisions of the Servicemembers Civil Relief Act. Satisfying this consent order is a great example of why effective risk management is not only good for Wells Fargo, but also good for our customers. As part of our goal to provide exceptional customer service and advice, Wells Fargo advisors launched the Envision scenario, which allows our clients to model how changing their investment decisions can impact their investment goals.

In addition, our retail customers continue to benefit from consumer-friendly initiatives we implemented last year, including overdraft rewind which has helped over 1.8 million customers avoid overdraft charges. As some of you may have seen, we recently launched a new ad as part of our national advertising campaign highlighting this industry leading feature. Also in the third quarter this year, we eliminated monthly service fees for teen checking and everyday checking for young adults. While this latest change does not have a material impact on our deposit service charges since the monthly fees were minimal, it does encourage younger customers to join and stay with Wells Fargo. The changes we are making are having a positive impact. For example, retention of our primary consumer checking customers reached a 5-year high in the third quarter. We have also continued to introduce industry leading innovations, including using technology to provide our customers more control and transparency. In September, 28% of all retail mortgage applications were done through our online mortgage tool which we introduced in March.

We also recently launched Control Tower, which provides customers with a single view of their digital financial footprint, including where their Wells Fargo debit or credit card or account information is connected such as with recurring payments. It also allows customers to quickly turn on or off their Wells Fargo debit and credit card from their mobile device. I’ll also highlight that the response to our newly enhanced Propel credit card has exceeded our expectations. Leadership and corporate citizenship is one of our six goals because we believe Wells Fargo should play a role in building stronger communities. According to a recent survey on corporate giving by the Chronicle of Philanthropy, the Wells Fargo Foundation was the number two corporate cash giver in the U.S. We’ve always been a large donor, but earlier this year our Foundation announced it would target $400 million in contributions to communities across the U.S., a 40% increase from a year ago and we are on track to reach that milestone.

This latest increase was not part of the ranking from the Chronicle of Philanthropy since that ranking was based on 2017 data. Most recently Wells Fargo announced two separate $1 million donations to support Hurricane Florence and Hurricane Michael Relief Efforts. We are committed to working with organizations and agencies on the ground to help our communities recover and providing continued assistance to our team members and customers, who have been impacted including reversing certain fees and allocating $3 million to our WE Care Fund, which provides grants to team members who faced a catastrophic disaster or financial hardship resulting from an event beyond their control.

We also want to be an industry leader in team member engagement and our efforts to make Wells Fargo a better place to work are reflected in continued low voluntary team member attrition. Third quarter voluntary attrition was stable compared with the second quarter, which was at the lowest level in over five years. Next week we’ll launch a new company-wide team member experience survey, which is being conducted by an outside vendor and is another way we will receive feedback from our team members to make progress towards our goal of being the leader in engagement. As part of our goal of delivering long-term shareholder value, we are committed to generating high returns and then returning more capital to shareholders.

We returned a record $8.9 billion to shareholders through common stock dividends and net share repurchases in the third quarter, more than double the amount returned a year ago. We’re also committed to evolving our business model to meet our customers’ financial needs in a more streamlined and efficient manner. We are on track with our expense savings initiatives, including a recently established 2020 expense target of $50 billion to $51 billion, which includes approximately $600 million of typical operating losses and excludes litigation and remediation accruals and penalties. While there is more work to do, the substantial progress we are making on our goals demonstrates how hard our team is working to transform Wells Fargo. We are addressing past issues, enhancing our focus on our customers, strengthening risk management and controls, simplifying our organization and improving the team member experience.

I’m confident that these changes are building a better Wells Fargo for all of our stakeholders and we are encouraged by the positive business trends we had in the third quarter, including year-over-year growth in primary consumer checking customers, debit and credit card usage, loan originations in auto, small business, home equity and personal loans and lines.

John Shrewsberry will now discuss our financial results in more detail.

[John Shrewsberry, Chief Financial Officer]

Thanks, Tim, and good morning, everyone. We highlight our third quarter results on Page 2, which included an ROE of 12.04% and ROTCE of 14.33%. We generated positive operating leverage on both a year-over-year and a linked quarter basis. We continued to have strong credit quality and high levels of liquidity and capital and we doubled our capital return compared with the third quarter last year, including a 10% increase in our common stock dividend.

As Tim highlighted, we had positive business momentum including primary consumer checking customers up 1.7% from a year ago, increased debit and credit card usage with debit card purchase volume up 9%, and consumer general purpose credit card purchase volume up 7% from a year ago, and higher loan originations with auto up 10%, small business up 28%, home equity up 16%, and personal loans and lines up 3% from a year ago.

On Page 3, we highlight noteworthy items in the third quarter. Our earnings were $6 billion included a $638 million gain on the sale of $1.7 billion of Pick-a-Pay PCI mortgage loans, $605 million of operating losses primarily related to remediation expense for a variety of matters including an additional $241 million accruals of previously disclosed issues related to automobile collateral and protection insurance, $100 million reserve release reflecting strong credit performance as well as lower loan balances. And an effective income tax rate of 20.1% which included net discrete income tax expense related to the re-measurement of our initial estimates for the impacts of the 2017 Tax Cuts & Jobs Act recognized in the fourth quarter. We currently expect the effective tax rate for the fourth quarter of this year to be approximately 19% excluding the impact of any future discrete items. Our results also included the redemption of our Series J preferred stock which diluted – which reduced diluted EPS by $0.03 per share due to the elimination of the purchase accounting discount recorded on these shares at the time of Wachovia acquisition.

We highlighted some important trends in our year-over-year results on Page 4. Revenue growth included the increase in net interest income as higher NIM offset lower earning assets, expenses declined driven by lower operating losses, however we also had lower expenses in a number of other categories including outside professional services, outside data processing and travel and entertainment. Strong credit performance as well as lower loan balances resulted in lower provision expense and our capital levels remained strong while we increased our share buyback and reduced common shares outstanding by 4%.

I will be highlighting the balance sheet and income statement drivers on Pages 5, 6 and throughout the call starting with loans on Page 7, so we will jump to Page 7. Average loans declined $4.6 billion from the second quarter. The decline in average loan balances was driven by strategic loan sales, continued reductions in commercial real estate reflecting our conservative underwriting, declines in auto as we have transformed that business and run off of legacy junior lean mortgage loans. Period end loans were down $9.6 billion from a year ago. Over the last 12 months we have sold or moved to held for sale of $6.8 billion of Pick-a-Pay PCI loans and reliable financial services loans. Commercial loans declined $1.2 billion from the second quarter despite C&I loans increasing $1.5 billion with growth in corporate and investment banking, commercial capital and commercial real estate credit facilities through REITs and non-depository financial institutions. This growth was more than offset by commercial real estate loans declining $2.8 billion. The decline in CRE mortgage loans was due to ongoing pay-downs on existing and acquired loans as well as lower originations reflecting continued credit discipline in competitive and highly liquid financing markets. CRE construction loans increased $753 million with growth in community lending, hospitality and senior housing.

As we show on Page 9 consumer loans declined $746 million from the second quarter which was driven by the sales of $1.7 billion of Pick-a-Pay PCI mortgage loans and $374 million of auto loans transferred to held-for-sale. Let me highlight our largest consumer loan portfolios in more detail starting with the first mortgage loan portfolio which increased $1.3 billion from the second quarter. Nonconforming loans grew $6.4 billion which was partially offset by the Pick-a-Pay PCI loan sales. In addition $249 million of nonconforming mortgage loan originations that would have otherwise been included in this portfolio were designated as held-for-sale in anticipation of future issuance of RMBS securities.

Junior lean mortgage loans continued to decline as pay downs more than offset new originations which grew 3% from the second quarter and 16% from a year ago. Credit card loans increased $1.1 billion from the second quarter. New accounts grew 27% from the second quarter benefiting from the launch of the new Propel card which exceeded our expectations and higher originations through digital channels which generated 45% of all new credit card accounts. Auto loans were down $1.6 billion from the second quarter due to expected continued run off and the transfer of the remaining $374 million of reliable financial services auto loans to held-for-sale. Auto originations increased 8% from the second quarter and 10% from a year ago with high quality origination growth driven by changes related to the business which makes it easier for customers to do business with us including increased automated underwriting. We are well positioned for originations to continue to increase and we expect portfolio balances to begin growing by mid-2019.

Average deposits declined $40 billion from a year ago, reflecting lower wholesale banking deposits, including the actions taken in the first half of the year to manage to the asset gap as well as lower wealth and investment management deposits as customers allocated more cash to higher rate alternatives. The $4.9 billion decline in average deposits from the second quarter was driven by lower consumer and small business banking deposits, which includes wealth and investment management deposits as consumers continue to move excess liquidity to higher rate alternatives. Our average deposit cost increased 7 basis points from the second quarter and was up 21 basis points from a year ago compared with the 100 basis point change in the Fed Funds rate. The increase in our average deposit costs was driven by increases in wholesale banking and wealth and investment management deposit rates, while rates paid on other consumer and small business banking deposits have not yet meaningfully responded to rate movements. Deposit betas continue to outperform our expectations.

On Page 11, we provide details on period-end deposits, which declined $2.3 billion from the second quarter. Wholesale banking deposits increased $9.1 billion in the third quarter with most of the growth coming later in the quarter after we made targeted adjustments to our pricing in a competitive rate environment. We also had growth in corporate treasury deposits including brokerage CDs which we used as an alternative source of balance sheet funding. Consumer and small business banking deposits declined $13.7 billion from the second quarter driven by customers in wealth and investment management and community banking moving excess liquidity to higher rate alternatives which was partially offset by modest growth in small business banking deposits. Net interest income increased $31 million from the second quarter. This growth included approximately $80 million of benefit from 1 additional day in the quarter and a $54 million benefit from hedge and effectiveness accounting. These benefits were partially offset by a $105 million decline from all other balance sheet mix, re-pricing and variable income.

Our NIM increased 1 basis point from the second quarter to 2.94%, driven by a reduction in the proportion of lower yielding assets and a modest benefit from hedge ineffectiveness accounting. Net interest income was relatively stable for the first 9 months of this year compared with the year ago and we currently expect net interest income to be up modestly for the full year, reflecting better than expected deposit betas. Non-interest income increased $357 million from the second quarter with growth in other income, market sensitive revenue, mortgage banking, service charges on deposits and card fees.

Let me highlight a few of the business drivers in more detail. Deposit service charges were up $41 million from the second quarter, primarily driven by seasonality and partially offset by a higher earnings credit rate for our commercial customers. Trust and investment fees declined $44 million from the second quarter on lower investment banking results and lower retail brokerage transaction activity. Mortgage banking revenue increased $76 million from the second quarter from higher net gains on residential and commercial mortgage loan originations. While residential mortgage loan originations declined $4 billion from the second quarter, their production margin increased to 97 basis points primarily due to an improvement in secondary market conditions. Fourth quarter mortgage originations are expected to be down, reflecting seasonality in the purchase market. Pricing margins remain historically tight due to excess capacity in the industry. And although we have seen stabilization in pricing margins in recent quarters, we have not seen any meaningful improvement. We expect the production margin in the fourth quarter to be within this year’s quarterly range of 77 to 97 basis points.

Turning to expenses on Page 14, expenses declined from both the second quarter and a year ago. We are on track to achieve our expense targets of $53.5 billion to $54.5 billion this year, $52 billion to $53 billion in 2019, and $50 billion to $51 billion in 2020. Each of these annual expense targets include approximately $600 million of typical operating losses and exclude litigation and remediation accruals and penalties. Given our commitment to improving efficiency, the transformational changes we are making across our businesses as well as our changing customer preferences, including adoption of digital self-service capabilities, we recently announced that we expect our headcount to decline by approximately 5% to 10% within the next 3 years as part of achieving our expense targets. This projected decline is expected to be achieved through displacement as well as normal team member attrition. An important priority for us as we move forward will be supporting those team members who are impacted.

Let me explain the trends in our third quarter expenses in more detail starting on Page 15. Expenses were down $219 million or 2% from the second quarter. We had declines in most of our expense categories on a linked quarter basis, including compensation and benefits, revenue related, running the business both discretionary and non-discretionary and third-party services. The increase in infrastructure expense was driven by higher equipment expense primarily due to PC purchases related to the company’s migration to Windows 10.

As we show on Page 16, expenses were down $588 million or 4% from a year ago driven by lower operating losses. We also had lower revenue related expense and third-party services expense. The increase in compensation and benefits expense was primarily due to higher salary expense, higher severance as well as higher 401(k) matching expense and higher expenses from the broad-based restricted stock award granted to eligible team members in the first quarter. These higher expenses were partially offset by the impact of the sale of Wells Fargo insurance services and lower FTEs as part of our efficiency initiative. Total FTEs were down 2% from a year ago. The increase in running the business discretionary expenses was driven by higher advertising expense due to the reestablished campaign partially offset by lower T&E expense. While we have more work to do, our efforts to improve efficiency are already being reflected in areas such as outside professional services, outside data processing, T&E, postage and supplies and we currently expect that we will meet our 2018 expense target.

Turning to our segments starting on Page 17, community banking earnings increased $320 million from the second quarter driven by lower net discrete income tax expense. On Page 18, we provide the community banking metrics. Teller and ATM transactions declined 6% from a year ago, reflecting continued customer migration to virtual channels. Digital secure sessions increased 20% from a year ago. In the third quarter, we consolidated 93 branches and we are on track to consolidate approximately 300 branches this year. Additionally, in the fourth quarter, we expect to complete the previously announced divestiture of 52 branches. Primary consumer checking customers have grown year-over-year for four consecutive quarters and grew 1.7% year-over-year in the third quarter of this year compared to 0.2% growth a year ago. In the third quarter, we continue to have improvements in primary customer retention, which was at the highest level since we started tracking the metric in 2013. Growth in new checking customers was driven by digital with 12% of new checking customers acquired from the digital channel. Growth in new checking customers also reflected the benefit of ongoing marketing initiatives and strength in acquiring college-age customers.

On Page 19, we highlight strong growth in credit and debit card purchase volume. We also had steady improvement in both customer loyalty and overall satisfaction with most recent visit survey scores throughout the third quarter and we ended the quarter with both scores rebounding from the second quarter.

Turning to Page 20, wholesale banking earnings increased $216 million from the second quarter reflecting lower operating losses and higher revenue. Wealth and investment management earnings increased $287 million from the second quarter, reflecting lower OTTI, which was related in the second quarter due to the impairment related to the announced sale of our ownership stake in Rock Creek. Results from the third quarter also reflected lower operating losses.

Turning to Page 22, our strong credit results continued with 29 basis points of net charge-offs in the third quarter. For the fourth consecutive quarter, all of our commercial and consumer real estate loan portfolios were in a net recovery position. Non-performing assets declined $410 million from the second quarter, the 10th consecutive quarter of decline.

Turning to Page 23, the linked quarter decrease in our estimated common equity Tier 1 ratio fully phased-in reflected our increased capital return in the third quarter partially offset by a decline in our risk-weighted assets. The reduction in RWA included a one-time impact from our implementation of the newly issued regulatory guidance covering high volatility commercial real estate, which benefited our CET1 ratio by approximately 10 basis points.

So, in summary, we continue to work hard in the transformational changes we are making throughout our businesses, including our expense initiatives and we are on track to meet our expense targets. Our positive business trends in the third quarter included growth in primary consumer checking customers, increased debit and credit card usage and higher loan originations in auto, small business, home equity and personal loans and lines which are all up from a year ago and we generated positive operating leverage on both a year-over-year and linked quarter basis.

And with that, Tim and I will now take your questions.

[Operator]

[Operator Instructions] Our first question will come from the line of Scott Siefers with Sandler O’Neill & Partners. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Good morning, Scott.

[Scott Siefers, Sandler O’Neill & Partners]

Good morning. I just had a quick question. So, I appreciate the reiteration on the expense guide for the next couple of years. I think one question I wanted to ask about back at the conference in mid-September when you made the 2020 expense guide when it went from simulation to guide, I think a lot of people started to presume that they must hold through for the other aspects of the simulation as well specifically like flat revenues from 2017 up through 2020. So, I mean, is that the case and if not, I guess as you look out over the course of the next 1 to 2 years, what do you see as the main drivers or opportunities of reaccelerating revenue growth as you look forward?

[John Shrewsberry, Chief Financial Officer]

Sure. So, in the simulation that we have served up in May at our Investor Day, what we are trying to demonstrate is that, let’s just say even with flat revenue and with expenses as we guided them with credit as we have described it and with our capital plan in place that in 2020, we would be delivering a 15% ROE and a 17% ROTCE. We don’t have a single solid number for 2020 in revenue for all the reasons that you can imagine in terms of where rates go, where industry loan growth, deposit growth and a variety of other things happen. So, we have a range of outcomes for 2020. My current best guess, the big portion of that range that we think about for 2020 has us delivering a 15% ROE and a 17% ROTCE. So, in that respect, I would say that we don’t feel any differently today than we did when we first made that commitment or reupped it. We have been more specific about expenses, because we deemed them to be entirely within our control as we have described them. And so that’s how I think about it.

[Scott Siefers, Sandler O’Neill & Partners]

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

[John Shrewsberry, Chief Financial Officer]

Sure. There is a variety, but I would say a lot of them have to do with driving interest income through ongoing improved net loan growth again depending on what market conditions we are operating within. And then there are a handful of drivers on the non-interest income side as we work to increase share in many of the businesses that we are in. Some of them as we have talked about are on different cycles than others like mortgage, for example, where if that market is shrinking and if the industry gain on sale is as it is today, then the outcomes in the future will reflect the size of the market, our position in the market and what profitability looks like overall. We have got some businesses that are meaningfully levered to the S&P for example like the drivers of our trusted investment fees. All of those things are going to reflect what’s going on in the world as much as they do how well we are competing and how hard we are working to win business. All of that goes into it.

[Tim Sloan, President and Chief Executive Officer]

And Scott, I would just reinforce John’s comments by looking at some of the specific examples that you can see in the results this quarter in, for example, our auto business. I mean, we have been making significant changes in the business and we have been talking about the fact that once we have made those changes and Mary Mack and Laura Schubach are doing a great job that we thought we would see and expected to see some loan growth. And now, you have seen that for two consecutive quarters and we reiterated that we think by the middle of next year, we will see growth in the overall portfolio. I think the exciting thing about the auto business is not only are we seeing quarter, year-over-year and sequential quarter growth in loans, but we are doing it more efficiently, because about 40% of all the loans that we are originating are being originated on an automated basis in terms of credit decisioning as opposed to a manual basis. And I could go on and on and give you some additional examples this quarter. But I would just encourage you as I know you will to go through the detail and see the many examples of our businesses that show year-over-year and sequential growth.

[John Shrewsberry, Chief Financial Officer]

I would modify that to say growth and originations.

[Tim Sloan, President and Chief Executive Officer]

Originations, yes, exactly. Thanks, John.

[Scott Siefers, Sandler O’Neill & Partners]

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

[John Shrewsberry, Chief Financial Officer]

Monday.

[Scott Siefers, Sandler O’Neill & Partners]

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

[Tim Sloan, President and Chief Executive Officer]

Thanks, Scott.

[Operator]

Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Hi, Erika.

[Erika Najarian, Bank of America]

Hi, good morning. I just wanted to follow-up on Scott’s line of questioning. As we think about the $50 billion to $51 billion for 2020 outside of the headcount trajectory that you have announced, is the 2020 target a result of something incremental that you had unearthed in terms of an expense opportunity or is it really just a continuation of the process improvement that you started a few years ago? And I am going to ask this question another way, if revenues happen to be better than expected and the market is wrong about banks or at the top end of the range, is that $50 billion to $51 billion a firm dollar number to expect?

[John Shrewsberry, Chief Financial Officer]

Sure. So, I would say that without a doubt, we have continued to uncover incremental opportunities and that’s a way of business now where we have a fully staffed program that goes from function to function and business to business looking for ways to drive continuous improvement. And so the gross opportunity for us to take out different kinds of expense, third-party expense, we have talked about some of the team member activities, real estate, other things that contribute will be ongoing. There is also areas where we are constantly investing and there are new dollars being spent. And the net of it is what gets us to $50 billion to $51 billion. I would say if there is an extraordinary revenue environment, depends where that revenue is coming from because not all dollars of revenue have the same expense load attached to them. But if we were to miss on the high side, because there was a big revenue opportunity and you guys probably remember what happened when we did this at the beginning of this cycle when we had a hard dollar expense target and then the biggest mortgage refinancing opportunity ever presented itself. We missed our expense target on the high side, because we were producing billions of dollars of incremental revenue and it was the right thing to do. We will be very transparent in talking about if that’s the situation that we find ourselves in either on the high side or frankly on the low side. If the revenue environment is stopping and we think that we need to do something different about structuring our business and capacity, etcetera and that needs to take us lower, then we would be open-minded certainly about that. We are trying to drive this return on equity outcome regardless of what the market delivers to us. If it’s just a big upside, then we will try and take full advantage of it. If it’s a rougher depending on where the economy is, the business cycle, etcetera, if it’s a rougher revenue environment, then we will take the necessary measures as well.

[Erika Najarian, Bank of America]

We can all hope, right. I had another question commercial loan growth across the industry hasn’t quite matched what we had hoped as we thought about GDP and CapEx expectations. And I am wondering if you could give us a little bit better sense on the non-bank competition. And specifically, I am interested in the different structures that are available to your clients, the competition from private middle-market direct lending? And the other thing and I am sorry to jumble this all in one question, I noticed that Wells’ C&I portfolio, 20% of your exposure is to asset managers. And I am wondering is that all sort of more short duration in nature like CLO warehousing or do you have any term exposure in that asset manager bucket?

[Tim Sloan, President and Chief Executive Officer]

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

[John Shrewsberry, Chief Financial Officer]

Yes. Sometimes it’s to a securitization takeout, sometimes it’s got some term to it. I think we have talked about this at the last conference that I spoke at, there is a distribution of consumer and commercial asset types, interesting most of which where we are deeply in the underlying business although sometimes these non-banks as where you started your question are competing in a way that we wouldn’t directly. And so we like the cross-collateralization and the haircut that we get in order to be willing to take the exposure. But more broadly, with respect to the competitive set being widened, I can tell you in commercial real estate, for example, which is really the early warning indicator that we have talked about for a while in terms of where markets have gotten hotter, bank lending and commercial real estate was at about a third of the market in 2016 and it’s about 15% in 2018 and it’s CMBS, it’s CRE, CLOs, it’s direct lending real estate funds, it’s life companies and it’s others that are competing in different ways. And usually, it’s a question of more leverage and from our perspective, a risk-adjusted return that doesn’t make sense for what belongs on a bank’s portfolio as a whole loan. We might go back around the other way and finance them at a haircut on a cross-collateralized pool, but they are taking more risk on a whole loan than a national bank would or should. And I think other banks have reflected that same concern. On the C&I side of things, it’s really – there is a lot of direct lending going on in higher leverage categories or in call it non-traditionally bank eligible categories. But most of the action still seems to be around middle-market CLOs or middle-market LBOs being financed by CLOs on the one hand and we were never in that business in a meaningful way. So, it doesn’t really hurt in terms of a loss. It’s also a business that we can pursue on a pooled basis with a haircut after the fact, but you have got all manner of sovereign wealth funds and alternative asset managers and others who are aggressive in an unregulated way and doing things on a whole loan basis that a bank won’t do.

[Tim Sloan, President and Chief Executive Officer]

And Erika, I think overall what we are seeing is that because of the economic growth here in the U.S., in particular, but around the world, the credit quality for our customers in the commercial, corporate world has never been better. Their balance sheets are strong. They have extended their maturities. Their interest coverage is higher than it’s ever been, because their debt service is lower. So, I think the fact that we have got very buoyant capital markets, very liquid capital markets and we have high credit quality for our customers means that loan growth is a little bit slower than we would have all imagined in an economic growth level that we are seeing right now.

[Erika Najarian, Bank of America]

Got it. Thank you.

[Tim Sloan, President and Chief Executive Officer]

Thanks, Erika.

[Operator]

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

[Tim Sloan, President and Chief Executive Officer]

Hey, Ken.

[Ken Usdin, Jefferies]

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

[John Shrewsberry, Chief Financial Officer]

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

[Ken Usdin, Jefferies]

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

[John Shrewsberry, Chief Financial Officer]

On a GAAP basis, we expect it to be flat to a little bit stronger. That’s how I think, I mean and by a little bit, it’s close enough that plus or minus flat.

[Ken Usdin, Jefferies]

Okay, GAAP basis. Understood, thank you. So, second question just on the mix of the balance sheet, we see that obviously with rising rates, your OCI is going up a little bit and this is a balance that I think you have talked about for a while now, John. So, what are you doing in terms of the tons of cash on the balance sheet still, lot of room here to remix, but obviously, you are keeping the portfolio in check. Just talk to us about how your investment strategy is evolving given where the rates have now been moving and that balancing act?

[John Shrewsberry, Chief Financial Officer]

Sure. So, we have a certain amount of maturity amortization and prepayment from our bond portfolio that has to be reinvested every quarter and we are more enthusiastic about those reinvestment possibilities in the low 3% versus the high 2%. It’s not that different. If you roll back the tape a couple of years, the trade-off used to be zero yield on cash and 2% on 10 years. And so the question was how much more duration risk, how much more OCI exposure do we want to have by taking on that much more duration when we were otherwise earning nothing on the cash. Today, we are earning 2% plus on the cash and the opportunity is an extra, call it, 100 or 125 basis points in 10 years or more than that in mortgages if we load up the mortgage securities. There are some liquidity constraints in agency mortgages. We have been very full portfolio in that category and our LCR calculation is hovers around probably as much as it could be. Given our current – the rest of our current liquidity profile, so it’s really more a question of straight 10 years or whatever the maturity profile is, but treasuries or Ginnie Mae securities. And I think we have been, while this backup is happening and not knowing exactly where it’s going to end, I think we have been a little bit circumspect about incrementally moving from 2 and change percent on cash further out the curve. There is an opportunity, if rates continue to back, it’s a March back up, then it’s going to be that much more attractive, it’s the curve that is steepening with it. And we have like most people do at least a few more Fed moves built into our expectations over the next year or so. So the return on cash actually is relatively attractive over time if the curve is going to flatten as a result of that rather than long and continuing to move up. So that’s what we are thinking about. We are thinking about it in the context of our existing capital plan as well, so all of that OCI exposure is more meaningful when you are actually moving down, although if you didn’t see much of the move down in CET1 this quarter because of the RWA calculation. But the further – the closer we get towards 10%, the more precise we have to be about our exposure to OCI. And the last thing I would say about it is in a post tax reform world that’s a bigger deal because those losses, those OCI losses have less shield from them from a higher tax rate. So they have more of an impact on capital than they used to.

[Ken Usdin, Jefferies]

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

[John Shrewsberry, Chief Financial Officer]

Yes.

[Operator]

Your next question comes from the line of John McDonald with Bernstein. Please go ahead.

[John Shrewsberry, Chief Financial Officer]

Hi John.

[Tim Sloan, President and Chief Executive Officer]

Good morning John.

[John McDonald, Bernstein]

Hi, good morning guys. John, I was wondering what’s your confidence in the outlook for the auto loans to inflect positively to growth by mid-2019. And then separately do you have that timeline for stabilization to the home equity…?

[John Shrewsberry, Chief Financial Officer]

Two good questions, I would say in auto one of those businesses as you know everyday you are faced with the new series of option loan by loan and you have choices to make on every loan about the risk reward. I think we like what we are seeing now, we are up 10% year-over-year. And both Laura and Mary are giving indications that we should continue along those lines so that the combination of that level of growth and the level of amortization that’s in the book has those lines crossing at some point in 2019. So we currently estimate mid-2019 could it be a little bit sooner, could it be a little bit later, it’s yes. It’s been – we are estimating it happens in the middle of the year. But the trends like our enthusiasm for the business, the risk rewards that we are seeing today, the way we are competing, the fact that we are through that reached complete restructuring of that business is a much more durable well risk managed way all feels very good. And then with respect to home equity, that’s interesting. So you can mark on a spreadsheet pretty clearly what the tick down of the legacy home equity portfolio looks like, but the origination and utilization of new home equity loans is we are in uncharted territory, right. So we are just getting to a point now everybody who has refinanced their first in the last few years is suddenly in the money for as they are not willing to give up that first if they want more leverage, they won’t do another refi or cash out refi, they are going to think of their – using their home to the source of borrowing. They are going to think about a second to not disturb the first. So how quickly people take advantage of that, to what extent people are interested responsibly in that incremental amount of leverage is a whole new world. I think we are really encouraged by the referral activity what we have described in the quarter-over-quarter and year-over-year up activity really is an expression I think of people in our branches. Our own people in our branch is getting more comfortable with the referral process or given events over the last couple of years. So that in combination with this new phenomenon of a second is the way to go because you can’t refi your first without upping your payment on the whole mortgage amount is what we are going to see unfold over the next couple of quarters.

[Tim Sloan, President and Chief Executive Officer]

John the only other point I would make in just – and I know you know this, but I think any time we talk about loan growth is important to re-emphasize it. And that is, our goal is not to grow loans, our goal is to service customers and originate good credit. So based on what we are seeing today, we see more than ample opportunity to grow the auto originations. And so as John and I have said the best estimate is mid next year, but we are going to do it in a very responsible way.

[John Shrewsberry, Chief Financial Officer]

I think I would also say on home equity, I would be surprised if – more than surprised if we ever end up with the same percentage of our balance sheet in second lien mortgage paper versus where we were both Wells Fargo alone pre-crisis and then the combination of Wells and Wachovia right after the merger.

[Tim Sloan, President and Chief Executive Officer]

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

[John McDonald, Bernstein]

Okay. And then just in terms of reputational issues and negative headlines just wanted to ask you each a question, John, if you could elaborate on your comments from September that these issues perhaps are hurting some of your loan growth trends. And then Tim, if you could talk on the wealth management side where you have kind of underperformed peers on asset flows and net advisory tension. How are headlines and reputational issues affecting your performance in wealth management on the advisor and customer front?

[John Shrewsberry, Chief Financial Officer]

Sure. In terms of wholesale, we have talked about some specifics of this, but it’s really more of a – it’s mostly the business that we call GIB, government and institutional banking in wholesale where it’s just a little bit more politically charged environment in terms of how we compete and having reputational issues has made it harder for that team. There is probably a little bit of that in some other wholesale categories. You can’t point to it, it’s not measurable, but it’s a headwind I’d say for some of our people. But where it really demonstrates or reveals itself is in government and in institutional banking.

[Tim Sloan, President and Chief Executive Officer]

And John, on the wealth and investment management side, in particular, FAs, we saw in the third quarter hiring being relatively flat to the second quarter. And as you recall, we were down in the second quarter and the primary factor was the termination of the AG Edwards agreements which had a 10-year term and they ended it in second quarter 2018. In addition, attrition in the third quarter was down from the second quarter. In fact, we were net up in September, which was great. And then finally, when we think about FA headcount, what we are really focused on is FA productivity. And what we have seen is that for our existing FA population and team that we are seeing improvements in loan origination as well as improvements in the overall size of their books. So, there has been some impact from some of the reputation issues that we had, but I think the important thing is that you see in the overall numbers and performance this quarter, the improvement and us getting beyond some of those reputational issues. We still have some headwinds we are going to deal with, but we are making progress.

[John McDonald, Bernstein]

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

[Tim Sloan, President and Chief Executive Officer]

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

[John McDonald, Bernstein]

Okay, thanks.

[Tim Sloan, President and Chief Executive Officer]

Thank you.

[Operator]

Your next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Hi, Betsy.

[Betsy Graseck, Morgan Stanley]

Hi, good morning. Couple of questions. Obviously, we can track the branch rationalization, the branch cuts on a weekly basis and it looks like there was a nice uptick in trimming the branch numbers over the past quarter. And I just wondered how much of that benefit to the expense line is in the run-rate in 3Q, how much potential improvement comes in 4Q and do you feel that you are at the run-rate for branch rationalization at this stage?

[John Shrewsberry, Chief Financial Officer]

Yes. I think the amount of noticeable benefit quarter by quarter would be pretty tough to see from the 93 branches. What tends to happen when we are consolidating a branch is we will dispose of the real estate one way or the other. If there is a lease they still had some tail to it that expense won’t come out until it’s been dealt with one way or the other. And then on the people front, we are really trying to absorb those people into the branches in which that’s been consolidated and then they will allow attrition which is natural in a retail business to right-size the right amount of people for the remaining branches over some period of time. So, we have talked in the past about the aggregate number, but it takes a while to be revealed. I would expect for this year’s actions, you will start to really feel it next year. You wouldn’t notice it this year. And then of course for the branches that we are selling, the 50 odd that we are selling that will close this quarter that will be a little bit more immediate because team members are transferring over to the acquirer premises and all related expenses are transferring over. Again, that’s only 52, but that will be much more of a light switch.

[Betsy Graseck, Morgan Stanley]

Sure. Got it. Can you just on the ones that you are closing obviously not the ones you are selling, but the ones you are closing, can you talk a little bit about the efforts underway to retain the customers of those? And can you give us a sense as to what you have seen in deposit attrition and how you are dealing with that?

[John Shrewsberry, Chief Financial Officer]

Yes. So, on the ones that we have consolidated really the game plan is to retain everything and that’s because we have got such close physical proximity of the ones that we are consolidating, which is why we are choosing to consolidate them rather than to sell them or dispose of them in some other way or leave them open if they are serving a discrete or distinct market area. So, I think the realized outcomes to-date are that we have retained almost 100% of the deposits from the consolidated branch. I think I have seen 1% or 2% deposit attrition which you can’t even really attribute to the consolidation. It’s also in this rising rate environment. We have been fed deposits migrate for other reasons, but the intention is to keep all of the customers and all of the deposits and we have had a great run at that.

[Betsy Graseck, Morgan Stanley]

Okay. Thanks so much.

[John Shrewsberry, Chief Financial Officer]

Yes.

[Operator]

Your next question comes from the line of Matt O’Connor with Deutsche Bank. Please go ahead.

[John Shrewsberry, Chief Financial Officer]

Hi, Matt.

[Tim Sloan, President and Chief Executive Officer]

Hey, Matt.

[Matt O’Connor, Deutsche Bank]

Good morning. So, revenue ticked up a little bit both last quarter and year-over-year as you pointed out and obviously, there was a gain this quarter, but there also was last quarter. Is this the inflection of revenues as you think about maybe year-over-year given some seasonality on a QQ basis or are there still enough drags in maybe parts of the loan portfolio and some of the fee categories that make it hard to call?

[Tim Sloan, President and Chief Executive Officer]

Matt, I hope you are right. I mean, we feel confident about our ability to grow revenue over time. Each quarter is going to have a story to it, but I think the important thing is that when you look – if you look across the income statement, you are seeing more of our business, more of our products gross on a sequential quarter basis and year-over-year. So, I think that’s a good sign. As John said, we are a large mortgage provider in this country. We love the business. It’s in overcapacity right now. It’s unclear exactly how long it’s going to take debt to shake out, but it will and that will be good for us. And we clearly have the ability to compete in that business given the broad scope of our mortgage business, but overall, we are optimistic about growing revenues, whether September 30 was the exact inflection point, I can’t promise you that.

[Matt O’Connor, Deutsche Bank]

And I guess specific on some of the drivers of net interest income, as you look out on loans, it seems like they are starting to bottom out on a period end basis. Obviously, you just talked about the confidence in the auto growing around midyear next year. So, maybe that drag is a little bit less, do you start to see loans level out in the fourth quarter?

[Tim Sloan, President and Chief Executive Officer]

I hope. It’s going to be as much of a function of customer demand than anything. I think when you take apart the components on the consumer side, the fourth quarter tends to be in terms of mortgage origination it tends to be a little bit slower than the third quarter, but credit card tends to be a little bit stronger from a seasonal standpoint. So, that’s good. As John described, I think we are in a new world as it relates to home equity loans, but the fact that we saw growth across the consumer portfolio was actually good. On the commercial side, we are cautiously optimistic about growth in the fourth quarter, again, ex maybe some of the commercial real estate portfolio for the reasons that John described, because we saw a reasonable uptick toward the end of the third quarter.

[Matt O’Connor, Deutsche Bank]

Okay. And then just lastly on the NIM, anything to flag there, I know there is your sell down from the PCI reduces the accretable yield over time, but I think it actually accelerates a little bit near-term. But on the flipside, you have the backup the long rates I think could be a little bit of a drag in 4Q if it holds here. So, just any near-term commentary and that would be helpful?

[Tim Sloan, President and Chief Executive Officer]

I think the biggest driver is in the very near-term will be what happens with deposit pricing. We have talked about this, but we think we are still we are outperforming what we would have – what we have had modeled, based on historical experience as this increase in policy rates has occurred and if we continue to outperform and that will be helpful for the NIM. But if there is a big catch-up, there is something different happens then that will be a headwind. But to me that’s probably the biggest – hard to forecast. We certainly – we all model at a certain way, but we are realizing it a little bit better than that, that will make a difference.

[Matt O’Connor, Deutsche Bank]

Okay. So the hedge in effectiveness from the long and moving up is not all that material with the move that we have?

[John Shrewsberry, Chief Financial Officer]

I don’t think so, I mean it’s impact at the end of the quarter we will be calling out at that time, I tend to discount that because it’s uneconomic, it’s really just a – it’s an accounting outcome that’s back to zero over the life of the hedge instruments and the hedge itself from the – real fundamental of the business, the cash flow that we are generating I think deposit pricing is probably the biggest variable in the quarter. And over the next few quarters it’s going to determine how strong net interest margin expansion could be.

[Matt O’Connor, Deutsche Bank]

Okay. Thanks for taking all my questions.

[John Shrewsberry, Chief Financial Officer]

Yes. Thanks.

[Operator]

Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Good morning John.

[John Pancari, Evercore ISI]

Good morning, Tim just around the sales practice issues, one of the key investor concerns are just around the likelihood of new issues, I mean lately we have been seeing a lot of headlines, but it’s in development of existing issues, so I mean could you talk about how you view the likelihood of brand new issues and I guess where are you in the process scrubbing the business for similar issues that can create some type of new development? Thanks.

[Tim Sloan, President and Chief Executive Officer]

So I am hopeful that we won’t have any new issues. And you are right I think the pace of new issues in the recent reporting has been much more focused on updated development. And part of that is just because we want to be very transparent about where we are so that you are all informed and some of that development we create ourselves that we think in the long run that makes a lot of sense. John, we have and we will continue to look across every office, every business, every geography in this company. I met – I have said in my opening remarks and that is we want to not only meet, but exceed regulatory expectations because that’s the right thing to do for our customers, so we are very far along in the process. We will continue to be very transparent. But we are ultimately going to do the right thing for our customers and make sure that you are informed about it.

[John Pancari, Evercore ISI]

Okay. Thanks. It’s helpful. And then on the capital side, I know you gave us your 10% CET1 target and you are just shy of 12% now, so clearly a lot that you continue to deploy, can you just talk to us about any changes or how you are feeling about that 10% target, any updates to the timing of when you think you can get there and then maybe just color around how the payout over time can trend I know you are – post your most recent CCAR result we are looking at about 150% combined pay-out, how do you think that that can trend from here? Thanks.

[John Shrewsberry, Chief Financial Officer]

Sure. So there is a lot there. First of all with respect to 10%, I think Neil at Investor Day has indicated that the folks – the implementation of CECL and the implementation of the stress capital buffer and how both of them work in CCAR are things that we need to know to confirm or modify our 10% target. If I had to guess I would say that our target once both of those things have been worked through would be a little bit higher than 10%. Although it’s 10% today because those things are not in full, we don’t really know how they are going to work. I don’t anticipate it to be much higher than 10%, but it’s probably a little bit higher. We had talked before this enacting this capital plan about a 2-year to 3-year run rate to get from where we were and where we are going. Embedded in that is the known trajectory of pay-out along with estimations for our capital generation and for RWA growth, because those all matter in the calculations. So we have been more RWA efficient I think than we had originally estimated and this is why we are at 11.8% or 11.9% today even after paying out almost $9 billion in the quarter as you say again $6 billion worth of net income. So you know how much we are intending to pay out as a result of the last CCAR. And I would expect that the deployment will continue to look like it has recently. With respect to the dividend portion of that, we should all expect that that remains relatively contained versus pre-crisis levels of payout ratio for all the reasons that we have talked about, it’s regulatory guidance. It’s prudent in containing it, so that it can be sustained throughout the cycle. And then the balance of it would happen through share repurchase like it has. We mentioned earlier this year that we intend to do more of it in the first half of the 12 months of this first year of the most recent CCAR and less of it in the second 6 months of that 12-month period and we showed you that in the third quarter and then expect the fourth quarter, it will look similar.

[John Pancari, Evercore ISI]

Got it. Alright. Thanks, John.

[John Shrewsberry, Chief Financial Officer]

Yes.

[Operator]

Your next question comes from the line of Saul Martinez with UBS. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Hey, Saul.

[John Shrewsberry, Chief Financial Officer]

Hey, Saul. How are you?

[Saul Martinez, UBS]

Hey, good morning, guys. I am good. Hey, so on NII, maybe I am taking the guidance a little bit too literally of flat to slightly up. But if you keep a flat NII basically would imply a $12.2 billion number by my calculations for fourth quarter, which is actually a step down versus the last couple of quarters. So, I mean, is that the messaging that you are trying to get across or is it a little bit more broad that within a reasonable range of assumptions you are kind of within a band of outcomes of being flat to slightly higher?

[John Shrewsberry, Chief Financial Officer]

The latter. Not to be too succinct.

[Saul Martinez, UBS]

Okay. No, that’s good. That’s kind of what I was expecting to hear. And I guess on non-interest revenues obviously a big part of the investment case is sort of a level setting of expectations on revenues. And maybe this question is a little bit too much into the weeds as well, but it seems like a lot of the core revenue items seemed to have stabilized and maybe are starting to grow again. But there is a whole host of items that are significantly volatile, including the other income line. And if you look at that line normalizing for non-core items, it’s been kind of flat to down in recent quarters, can you just give us a sense of again what’s sort of in that number and how we should think about it on an ongoing basis and what a more normalized level or how we should think about modeling it would be?

[John Shrewsberry, Chief Financial Officer]

Other, in particular?

[Saul Martinez, UBS]

Yes, other, in particular, yes.

[John Shrewsberry, Chief Financial Officer]

Yes. So, we call out the major infrequent things that occur as they happen like the sales pick-a-pay, for example. And in many of the past quarters, we have sold other portfolios of pick-a-pay. We have had private equity or venture capital gains go through there. We have had a variety of things that. As you point out, they are volatile. There tends to be something meaningful in that line item in most quarters, not in every quarter. It’s harder to predict, etcetera. So, we are happy to have them when they occur. They are capital generating. They are good for the overall platform. But I would be hesitant to put a run-rate on it and say, take it to the bank. That’s something that you can rely on. Of the component pieces, the smaller component pieces, like charges on fees and loans, cash network fees, commercial real estate brokerage, letters of credit, wire transfer these are things that go into all other fees. That actually has been relatively stable over time. And I would look for those things to reflect the continued ongoing growth of the business. They add up on a quarterly basis to call it $800 million or $900 million. So, if it’s that other fees that you are looking at, then I think you should feel reasonably good about that. Commercial real estate brokerage can be actually quite volatile, because it reflects where we are on the cycle. It reflects the time of year. There is a lot that goes into that. But the other items are much more run-rate and predictable. But back to the episodic gains I would say there. The deeper we get into the markets that we are in, so the tighter credit spreads get, we have already seen rates move backup, it gets harder to generate those types of gains I would say, whether it’s pre-crisis things that have been on the balance sheet for 10 years that were marked a certain way or appreciated investments that we have made over the last 10 years. The further we get into this cycle my sense is the harder it is to continue to regenerate those because asset pricing levels are so rich to begin with.

[Saul Martinez, UBS]

Got it. And if I could just – one more in there, CECL, how – can you just comment a little bit on your preparations there and when you think you might be able to give more color on what the estimate of financial impact would be?

[John Shrewsberry, Chief Financial Officer]

Yes. So I think we are feeling like we are quite prepared with our own capabilities. We are still working with our accountants [ph], still working with our regulators to help them understand how it’s going to work. I wouldn’t anticipate us to be early adopters, so we will be continuing to recalculate and prepare until adoption occurs. I think we have said which you will hear more about our expected numbers next year. But specifically as it applies to us and our observations about how it applies to others and we have talked about this. But on the consumer side of things it tends to increase the calculated allowance. On the commercial side of things it tends to decrease the calculated allowance. That’s specifically because these are calculations of expected loss to term and terms are shorter and commercial loans then the emergence period approach that we have taken in the past where we anticipated certain amount of renewal. So the net impact will be the net of an increase on the consumer side and a decrease on the commercial side. Based on what I can see today and so as you look from bank to bank I would think about their mix of those things and that probably reflects what their outcome might be as well. We haven’t seen the competition changing loan terms or loan pricing or competing differently for loans that will have a more or less difficult CECL impact. At some point I would expect to see that once people really know how it works. As I mentioned before we don’t know how it’s going to work in CCAR and it can be incrementally punitive, right, it can be a doubling up of a big front end loss and that matters. And then lastly, it’s not clear – crystal clear yet and this matters in CCAR also what the – how it’s going to feel when people are calculating – today people are calculating life of loan estimates based on the environment that we are in today. When we are in tougher times we are going to be calculating life of loan expected loss based on those conditions which is going to be worse. I think we are all trying to understand what that means especially in CCAR because you are giving conditions that are worse and so it could be a doubling up.

[Saul Martinez, UBS]

Got it, alright, very helpful. Thanks a lot.

[Operator]

Your next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Hi, good morning.

[Gerard Cassidy, RBC]

Good morning, can you guys share with us you talked John, a bit about raising some deposit rates in the wholesale business enables you to grow that deposits at the end of the quarter, can you share with us what that might do for the fourth quarter in terms of deposit growth in that area and also the net interest margin?

[John Shrewsberry, Chief Financial Officer]

Yes. So I think we also mentioned that we did that later in the quarter, so you wouldn’t have seen in the interest cost as much in the quarter even though the spot balance at the end of the quarter was up. So all things being equal I would expect us to compete strongly for our wholesale deposits in the fourth quarter and you would expect there to be higher interest costs in the wholesale in the fourth quarter. The growth rates that we are seeing anticipating in wholesale still low single-digits in terms of deposit – if deposits call it 3% to 4% something like that, the way we price those tends to be very targeted based on relationship. Some of those – many of our wholesale relationships are sole bank relationships, very rich ones and we are – it’s important for us to retain those and maintain those. We have got some types of wholesale customers who are sitting on lots of excess liquidity and it’s up to them everyday to think about whether they move it from one bank to another and those deposits incidentally have their own LCR liquidity rating and liquidity value or run off factors that we think about those in a certain way. So just as a little bit of context there is a balance between how much we want to pay for what kind of deposit based on what value it has to Wells Fargo. It’s one thing to retain the relationship which is very important, it’s is something else to just track dollars that sit on our books, but don’t provide a lot of incremental liquidity benefit, but just gross up the size of balance sheet. We have talked about that and the extreme on the FI side where at the beginning of the year we just took those down because they are really just a balance sheet gross up rather than a valuable deposit that we can use to fund loans for example. But Gerard I think it’s really important to put in perspective and we are talking about to put it in perspective. And we are talking about tens of billions of dollars of deposits, it’s not a $1.3 trillion deposits. So, even it increased to be appropriately competitive, as John described, is not going to have a material impact on how much Wells Fargo earns in the fourth quarter.

[Gerard Cassidy, RBC]

Very good. And then coming to the asset side of the balance sheet, when you talk about your commercial and industrial loan portfolio, I think in the second quarter, you indicated that the loans to non-depository financials was about $94.5 billion, what did that grow to in the third quarter?

[John Shrewsberry, Chief Financial Officer]

I don’t know yet, but it’s not going to be that much different. I would call it in the plus or minus 90 range. We will call that out at the – I am going to be speaking at a conference in a couple weeks. I am sure we can probably talk about it then, but that hasn’t changed that much. Those balances will revolve up and down a little bit. I think Erika asked earlier about how much of that is warehousing to securitization, etcetera. So, portions of that will pop up and down a little bit more rather than just layer on top of each other like term types of financing. So, there is some seasonality to it.

[Gerard Cassidy, RBC]

Very good. And then speaking of C&I loans, what was the utilization rate in your traditional C&I credits, are you seeing that creep up or is it sliding down at all?

[John Shrewsberry, Chief Financial Officer]

Yes. It’s been super flat in the 40% area for a good, long time. Now, that 40% is the weighted average of a variety of different types of revolving facilities, some of which are generally fully drawn, some of which are seasonally drawn and some of which are never drawn. So, I wouldn’t want you to – it is a weighted average, but it hasn’t changed in at least the last couple of years as I have looked at the quarter to quarter information which incidentally when we think about the demand for credit, I generally expect that customers use available revolving facilities before negotiating and paying for new incremental available credit and we haven’t seen much of that.

[Gerard Cassidy, RBC]

Okay. And then just lastly, Tim, you and I chatted about this last time on the call about credit and credit quality and comparing it to before the financial crisis. Asking the question a little differently, what kind of influence do you think this CCAR process has had on your organization? I know your credit standards are strong, but when you kind of think back pre-CCAR to today, are the big banks like your own maybe sticking a little more conservatively to the credit metrics because of CCAR than they otherwise would have or is that totally off base?

[Tim Sloan, President and Chief Executive Officer]

I don’t want to speak for other banks. But as it relates to Wells Fargo, I don’t think it’s had a material impact on how we underwrite credit at the company. I think we have always been conservative and will continue to be on the conservative side. Some of the more aggressive lending that was done pre-crisis on some bank balance sheets is now being done by non-banks. I think that is both CCAR and other regulatory guidance related than anything, but I wouldn’t say it’s had a material impact.

[John Shrewsberry, Chief Financial Officer]

There has been a regulatory impact on what’s on bank balance sheets.

[Tim Sloan, President and Chief Executive Officer]

Right, but not because of CCAR.

[John Shrewsberry, Chief Financial Officer]

Not because of CCAR, but so for example, pre-financial crisis, there was a whole range of single-family mortgage credit on the banks of balance sheets, most of which doesn’t exist any longer. So, on banks’ books, it’s mostly prime jumbo. We have got some home equity. But for the modern home equity is a much better risk/reward trade-off than pre-crisis. Credit cards are probably impacted by the CCAR process for certain banks, because they get hit so hard in the severely adverse scenario. As of commercial real estate, where our own very careful steward of how much commercial real estate and what type we want on our books. And then C&I, it’s really around the most leverage lending. There has been agency both Fed and OCC leverage loan guidance which has kept the CCAR banks or at least the OCC banks away from most of that which looks different as a result of regulation, but not necessarily CCAR although we get treated better in CCAR for not having it on the books.

[Tim Sloan, President and Chief Executive Officer]

But Gerard, when you step back and maybe even set CCAR aside, I think overall what you see on our balance sheet today is not only really good credit performance, but a much stronger mix in terms of credit quality even if we would go into some sort of an economic downturn which is one of the reasons why as we provided updates to you all at investor day that we think are through this cycle losses are just lower.

[John Shrewsberry, Chief Financial Officer]

Gerard, you didn’t ask this, but the rest of the left side of the balance sheet in terms of securities portfolios, trading portfolios, derivatives NPV, etcetera, those are probably more directly impacted by stretched outcomes for a lot of the CCAR banks because of the treatment that they get in CCAR. And I think the direct link to what capital they attract and what return you have to generate would have caused people to manage those risks differently.

[Gerard Cassidy, RBC]

Appreciate all the color. Thank you.

[John Shrewsberry, Chief Financial Officer]

Yes. You bet.

[Tim Sloan, President and Chief Executive Officer]

Thanks, Gerard.

[Operator]

Your next question comes from the line of Nancy Bush with NAB Research, LLC. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Good morning, Nancy.

[Nancy Bush, NAB Research, LLC]

Good morning, guys. How are you?

[Tim Sloan, President and Chief Executive Officer]

Good.

[Nancy Bush, NAB Research, LLC]

Two questions for you. You have mentioned the overcapacity in the mortgage market and we all know that we have multiple headwinds in that business right now. Given that you have – I think you announced what a 600 or so headcount reduction in mortgage, is the mortgage company at this point sized for what you see coming and what might change your minds about that?

[Tim Sloan, President and Chief Executive Officer]

So, Nancy, the way that we think about the mortgage business today is that we have got to be able to improve our results based upon the environment that we are in. Our guess and you probably agree with this given that we’ve both seen a few cycles that over time, it’s probably going to improve, but we are in the midst of an overcapacity period today. So, Michael DeVito and the mortgage team, who I think are doing a great job, are looking at the business and trying to see, how can we originate more mortgages? How can we do that at a more efficient way? Part of the way we do that is by introducing technology like the digital mortgage application. And also, it’s not just about origination. It’s also about the servicing side. And what’s happening on the servicing side of the business is as the portfolio quality continues to improve, the portion of the business that was focused on managing modifications or defaults and so just declines because you have lesser need for that. So, I think what you are going to see is a continued improvement in the efficiency of that business, assuming that we are in overall, but particularly in an environment that we are in right now.

[Nancy Bush, NAB Research, LLC]

So, basically, you are saying you have built in as of right now the mortgage company is right-sized for what you see coming down the road right now?

[Tim Sloan, President and Chief Executive Officer]

Well, it’s right-sized for today, but our expectation not only for mortgage, but for all of our business and this gets back to John’s comments about how we think about efficiency and expenses is what can we do to improve the returns to the business? So, today, is it? Yes, but are we saying to all of our businesses, what can you do to improve it? Absolutely, that’s how you get down to $50 billion to $51 billion over the next couple of years.

[Nancy Bush, NAB Research, LLC]

Okay. Secondly, John, this is probably a question for you, part of your year-over-year decline and expenses was a fairly large decline in operating losses. I think $700 million and something. Now, if my memory serves me right, most of operating losses are fraud losses. Is that still the case? And what’s going on in that decline?

[John Shrewsberry, Chief Financial Officer]

Yes. No. So, I would – we estimate that every year, around $600 million worth of operating losses are the – as you described, fraud and other standard losses, bank robberies, just things that go wrong in banks. The amount above that is really litigation, remediation. It’s things related to the sales practices outcome and some of the other items that have occurred or been uncovered and then fixed over the last couple of years. So, you’ll see some – I don’t want to take too much credit. The company shouldn’t take too much credit for the easy comps we have as a result of having had outsized operating losses in the last year or so. But if anything, back to what I would call baseline regular operating losses, they’re probably continuing to tick up over time as fraud efforts are more persistent and more sophisticated. And maybe, particularly, as we become a bigger credit card bank, we’ll be even a little bit more incrementally exposed to that, but that part of the business, that’s a growth risk for banks like Wells Fargo.

[Nancy Bush, NAB Research, LLC]

Okay. So, basically, you are saying though that this large year-over-year decline is probably going to flatten out?

[John Shrewsberry, Chief Financial Officer]

I think that’s right. And specifically, the third quarter of last year included a $1 billion accrual for the pre-crisis RMBS working group settlement that we ultimately finalized in the last couple of quarters this year. So, that was very idiosyncratic. And that benefit, if you will, wouldn’t be there. Having said that, in the fourth quarter of last year we did take some big litigation reserves, so, in the fourth quarter of this year, given everything that I know, I would expect that same relationship to exist versus fourth quarter of last year.

[Nancy Bush, NAB Research, LLC]

Okay, thank you.

[John Shrewsberry, Chief Financial Officer]

You are welcome.

[Tim Sloan, President and Chief Executive Officer]

Thanks, Nancy.

[Operator]

Our final question will come from the line of Brian Kleinhanzl with KBW. Please go ahead.

[Tim Sloan, President and Chief Executive Officer]

Hey, Brian.

[John Shrewsberry, Chief Financial Officer]

Hey, Brian.

[Brian Kleinhanzl, KBW]

Hi, good morning. One quick question first on the pay downs that you saw in the quarter. I know it’s still a headwind to loan growth overall, but for the pay-downs specifically, was that an acceleration from the previous quarter or did it decelerate and what’s your expectations going forward?

[Tim Sloan, President and Chief Executive Officer]

You’re talking about loan growth or just on loans?

[Brian Kleinhanzl, KBW]

Yes, just the pay-downs on loans.

[John Shrewsberry, Chief Financial Officer]

Commercial real estate.

[Tim Sloan, President and Chief Executive Officer]

In commercial real estate, I would just describe that as being reflective of just the underlying terms and conditions and the duration of the portfolio.

[John Shrewsberry, Chief Financial Officer]

And there were some loans that we acquired from the GE commercial real estate acquisition of a few years ago that came to term and got refinanced out into the capital markets, etcetera. So, that’s probably a little bit idiosyncratic.

[Brian Kleinhanzl, KBW]

Okay. And then the second one, you mentioned that you’re still seeing some good progress with the Propel credit card offering, but you haven’t really put any kind of numbers around that. Is there any way you can quantify what the success has been thus far?

[Tim Sloan, President and Chief Executive Officer]

Well, it’s still early in the process which is why we are being a little bit hesitant in declaring victory. But we are really excited about the performance to date. I think what we are seeing is we are seeing – which is exciting is that about half of the cards are being originated digitally which is good because we’ve made a lot of investments from a digital standpoint to be able to provide that service and convenience to our customers. I think we are seeing our existing customers be very attracted to the card which is great. But overall, the performance has exceeded our expectations. And we are really, really excited about it.

[John Shrewsberry, Chief Financial Officer]

We will probably be more specific after we have a few quarters under our belt to look back and say, here is what it looked like when we were in the first 6 months or 9 months. But I think we mentioned earlier, new accounts in general purpose credit card, including Propel were up 27% linked quarter and 17% year-over-year which is good momentum. Now, that has to translate into spend. It has to translate into balances. Those things are lagging indicators, but the new cards issued were up along the lines of what I mentioned.

[Tim Sloan, President and Chief Executive Officer]

And that’s really, Brian, one of the reasons why we are being somewhat conservative in providing a lot of details because when you think about the business model and returns for that card, you got to see all the additional metrics that John is describing. But the point is so far so good.

[Brian Kleinhanzl, KBW]

Okay, great. Thanks.

[Tim Sloan, President and Chief Executive Officer]

Thank you. Well, thanks, you all for listening today, spending time with us. And I also want to shout out to our 260,000 team members. The progress that we are making in transforming Wells Fargo is a reflection of your hard work and effort. And we are very, very focused on achieving all of the six goals that we have for the company. So, thank you very much.

[Operator]

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