John Campbell:

Good morning, everyone. Thank you for joining our call today, where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo will discuss second quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second quarter earnings materials, including the release, financial supplement, and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo:

Thank you, Charlie, and good morning, everyone. Net income for the second quarter was $4.9 billion, or $1.33 per diluted common share. EPS grew from both the first quarter and a year ago, reflecting the solid performance in our fee-based businesses as we benefited from the market environment and the investments we've been making. We also continue to focus on driving efficiency across the Company. I will also note that our second quarter effective income tax rate reflected the impact of the first quarter adoption of the new accounting standard for renewable energy tax credit investments, which increased our effective tax rate by approximately 3 percentage points versus a year ago. This increase in the effective tax rate had a minimal impact on net income since it had an offsetting increase to non-interest income. Turning to Slide 4. As expected, non-interest income was down - net interest income was down $1.2 billion, or 9% from a year ago. This decline was driven by higher funding costs, including the impact of lower deposit balances and customers migrating to higher-yielding deposit products in our consumer businesses and higher deposit costs in our commercial businesses as well as lower loan balances. This was partially offset by higher yields on earning assets. Net interest income declined $304 million, or 2% from the first quarter. Given the higher rate environment and neat commercial loan demand, loan balances continue to decline as expected. We saw positive trends, including average deposit balances growing from the first quarter with growth in all of our customer-facing businesses, including within our consumer business. Customer migration to higher-yielding alternatives was also lower in the quarter. This slowed the pace of growth in deposit pricing with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter. If the Fed were to start cutting rates later this year, we expect that deposit pricing will begin to decline with the most immediate impact from new promotional rates in our consumer business and standard pricing for commercial deposits where pricing moved faster as rates increased, and we would expect betas to also be higher as rates decline. On Slide 5, we highlight loans and deposits. Average loans were down from both the first quarter and a year ago. Credit card loans continue to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average deposits were relatively stable from a year ago as growth in our commercial businesses and corporate funding offset declines in our consumer businesses, driven by customers migrating to higher-yielding alternatives and continued consumer spending. Average deposits grew $4.9 billion in the first quarter. Commercial deposits have grown for three consecutive quarters as we've successfully attracted clients' operational deposits. After declining for nearly two years, consumer deposit balances grew modestly from the first quarter. We've seen outflows slow as many rate-seeking customers in Wealth and Investment Management have already moved into cash alternative products and we've successfully used promotion and retention-oriented strategies to retain and acquire new balances in consumer small and business banking. These improved deposit trends allowed us to reduce higher-cost market funding. The migration from non-interest-bearing to interest-bearing deposits was similar to last quarter with our percentage of non-interest-bearing deposits declining 26% in the first quarter to 25%. Turning to non-interest income on Slide 6. Non-interest income increased 19% from a year ago with growth across most categories, reflecting both the benefit of the investments we've been making in our businesses as well as the market conditions as Charlie highlighted. This growth more than offset the expected decline in net interest income with revenue increasing from a year ago, the sixth consecutive quarter of year-over-year revenue growth. I will highlight the specific drivers of this growth when discussing our operating segment goals. Turning to expenses on Slide 7. Second quarter non-interest expense increased 2% from a year ago, driven by higher operating losses, an increase in revenue-related compensation, and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower salaries expense and professional and outside services expense. Operating losses increased from a year ago and included higher customer remediation accruals for a small number of historical matters that we're working hard to get behind us. The 7% decline in non-interest expense in the first quarter was primarily driven by seasonally higher personnel expense in the first quarter. Turning to credit quality on Slide 8. Net loan charge-offs increased 7 basis points from the first quarter to 57 basis points of average loans. The increase was driven by higher commercial net loan charge-offs, which were up $127 million in the first quarter to 35 basis points of average loans, primarily reflecting higher losses in our commercial real-estate office portfolio. While losses in the commercial real-estate office portfolio increased in the second quarter after declining last quarter, they were in line with our expectations. As we have previously stated, commercial real estate office losses have been and will continue to be lumpy as we continue to work with clients. We continue to actively work to derisk our office exposure, including a rigorous monitoring process. These efforts help to reduce our office commitment by 13% and loan balances by 9% from a year ago. Consumer net loan charge-offs increased $25 million from the first quarter to 88 basis points of average loans. Auto losses continued to decline, benefiting from the credit-tightening actions we implemented starting in late 2021. The increase in credit card losses was in line with our expectations as older vintages are no longer benefiting from pandemic stimulus as more recent vintages - and as more recent vintages mature. Importantly, the credit performance of our newer vintages has been consistent with our expectations, and we currently expect the credit card charge-off rate to decline in the third quarter. Non-performing assets increased 5% from the first quarter, driven by the higher commercial real estate office non-accruals. Moving to Slide 9. Our allowance for credit losses was down modestly from the first quarter, driven by declines across most asset classes, partially offset by a higher allowance for credit card loans driven by higher balances. Our allowance coverage for total loans has been relatively stable over the past four quarters as credit trends remain generally consistent. Our allowance coverage for our commercial real estate office portfolio has also been relatively stable at approximately 11% for the past several quarters. Turning to capital liquidity on Slide 10. Our capital position remains strong and our CET1 ratio 11% continue to be well above our current 8.9% regulatory minimum plus buffers. We're also above our expected new CET1 regulatory minimum plus buffers of 9.8% starting in the fourth quarter of this year as our stressed capital buffer is expected to increase from 2.9% to 3.8%. We repurchased $6.1 billion of common stock in the second quarter, and while the pace will slow, we have the capacity to continue to repurchase common stock as Charlie highlighted. Also, we expect to increase our common stock dividend in the third quarter by 14%, subject to Board approval. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer, small and business banking revenue declined 5% from a year ago, driven by lower deposit balances and the impact of customers migrating to higher-yielding deposit products. Home lending revenue was down 3% from a year ago due to lower net interest income as loan balances continued to decline. Credit card revenue was stable from a year ago as higher loan balances driven by higher point-of-sale volume and new account growth was offset by lower other fee revenue. Auto revenue declined 25% from last year, driven by lower loan balances and continued loan spread compression. Personal lending revenue was down 4% from a year ago, driven by lower loan balances and loan spread compression. Turning to some key business drivers on Slide 12. Retail mortgage originations declined 31% from a year ago, reflecting our focus on simplifying the home lending business as well as the decline in the mortgage market. Since we announced our new strategy at the start of 2023, we have reduced the headcount in home lending by approximately 45%. Balances in our auto portfolio declined 14% compared with a year ago, driven by lower origination volumes, which were down 23% from a year ago, reflecting previous credit tightening actions. Both debit and credit card spend increased from a year ago. Turning to Commercial Banking results on Slide 13. Middle Market Banking revenue was down 2% from a year ago driven by lower net interest income due to higher deposit costs, partially offset by growth in treasury management fees. Asset-based lending and leasing revenue decreased 17% year-over-year, including lower net interest income, lower lease income, and revenue from equity investments. Average loan balances were down 1% compared with a year ago. Loan demand has remained tepid, reflecting the higher for longer rate environment in a market where competition has been more aggressive on pricing and loan structure. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 3% from a year ago, driven by higher investment banking revenue due to increased activity across all products, partially offset by lower treasury management results driven by the impact of higher interest rates on deposit accounts. Commercial real estate revenue was down 4% from a year ago, reflecting the impact of lower loan balances. Markets revenue grew 16% from a year ago, driven by strong performance in equities, structured products and credit products. Average loans declined 5% from a year ago as growth in markets was more than offset by reductions in commercial real estate, where originations remain muted and we've strategically reduced balances in our office portfolio as well as declines in banking where clients continue to access capital goods funding. On Slide 15, Wealth and Investment Management revenue increased 6% compared with a year ago. Higher asset-based fees driven by an increase in market valuations were partially offset by lower net interest income, reflecting lower deposit balances and higher deposit costs as customers reallocated cash into higher-yielding alternatives. As a reminder, the majority of WIM advisory assets are priced at the beginning in the quarter, so third quarter results will reflect market valuations as of July 1st, which were up from both a year ago and from April 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results from our venture capital investments. Turning to our 2024 outlook for net interest income and non-interest expense on Slide 17. At the beginning of the year, we expected 2024 net interest income to be approximately 7% to 9% lower than full-year 2023. During the first half of this year, the drivers of net interest income largely played out as expected with net interest income down 9% from the same period a year ago. Compared with where we began the year, our current outlook reflects the benefit of fewer rate cuts as well as higher deposit balances in our businesses than what we had assumed in our original expectations, which has helped us reduce market funding. Deposit costs increased during the first half of this year as expected, but the pace of the increase has slowed. However, late in the second quarter, we increased pricing in Wealth and Investment Management on sweep deposits and advisory brokerage accounts. This change was not anticipated in our original guidance, federal lines rates paid-in money market funds and is expected to reduce net interest income by approximately $350 million this year. Our current outlook also reflects lower loan balances. At the beginning of the year, we assumed a slight decline in average loans for the full year, which reflected modest growth in commercial and credit card loans in the second half of the year after a slow start to the year. As we highlighted on our first quarter earnings call, loan balances were weaker than expected and that trend continued into the second quarter. We expect this underperformance to continue into the second half of the year with loan balances declining slightly from second quarter levels. As a result of these factors, we currently expect our full-year 2024 net interest income to be in the upper half of the range we provided in January, or down approximately 89% from full-year 2023. We continue to expect net interest income will trough towards the end of the year. We are only halfway through the year and many of the factors driving net interest income are uncertain, and we will continue to see how each of these assumptions plays out during the remainder of the year. Turning to expenses. At the beginning of this year, we expected our full-year 2024 non-interest expense to be approximately $52.6 billion. We currently expect our full-year 2024 non-interest expense to be approximately $54 billion. There are three primary drivers for this increase. First, the equity markets have outperformed our expectations, driving higher revenue-related compensation expense in Wealth and Investment Management. As a reminder, this is a good thing as these higher expenses are more than offset by higher non-interest income. Second, operating losses and the other customer remediation-related expenses have been higher during the first half of the year than we expected. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses during the remainder of the year. Finally, we did not anticipate the $336 million of expense in the first half of the year for the FDIC special assessment, which is now included in our updated guidance. We'll continue to update you as the year progresses. In summary, our results in the second quarter reflected the progress we're making to transform Wells Fargo and improve our financial performance. Our strong growth in fee-based businesses offset the expected decline in net interest income. We made further progress on our efficiency initiatives. Our capital position remains strong, enabling us to return excess capital to shareholders, and we continue to make progress on our path to a sustainable ROTCE of 15%. We will now take your questions.

Ken Usdin:

Thanks a lot. Good morning. Mike, I wonder if you could provide a little bit more detail on those latter points you made on the changes on the deposit cost side. First of all, I guess relative to the 12 basis points that you saw in terms of interest-bearing cost increase, which was lower than the 17%, how do you just generally expect that to look going forward? And how - and is that sweep pricing also a part of what that number will look like going forward? Thank you.

Ken Usdin:

Great. Thank you. And just a follow-up. The fees were really good and the trading business continues to demonstrate that it's taking market share. I guess how do we understand how to kind of measure that going forward, right, versus what the Group is doing? You guys are definitely, zigging and outperforming there. And where do you think you are in terms of market-share gains, and how sustainable do you think this new kind of run-rate of trading is going forward? Thanks.

Charlie Scharf:

And this is Charlie. Let me just add a couple of things, which is, you know, as we think about the things that we're doing to invest in our banking franchise, both markets and the investment banking side of the franchise, it's not risk-based. It's actually - it's focused on customer flows on the trading side, it's focused on expanding coverage and improving product capabilities on the banking side. So what we look at - and we're also very, very focused on returns overall, as you can imagine, as all the other large financial institutions are. So as we're looking at our progress, we do look at share across all the different categories and would expect to see those to continue to tick up. And so as you look through the volatility that exists in the marketplace, we are looking at a sustained level of growth, recognizing that we don't control the quarter-to-quarter volatility.

Operator:

The next question will come from John Pancari of Evercore ISI. Your line is open, sir.

Mike Santomassimo:

Yes. We won't talk much about 2025, John, but as you sort of look at what's happening, you're seeing this pace of migration on the deposit side flow, as I mentioned earlier. So you're seeing more stability as time goes by there. Once the Fed starts lowering rates, which the market expects to happen later in the year, you'll start to see betas on the way down on the wholesale side of the deposit base. You'll continue to see some gradual sort of repricing on the asset side as you see more securities and more loans sort of roll. And so you got to look exactly calling sort of the trough is which quarter it's going to be. Sometimes can be a little tough, but as you sort of look at all the components of it, we still feel pretty good about being able to see that happen over the coming few quarters.

Charlie Scharf:

Yes, let me take a shot at it, Mike, and then you can add the color on this one. Listen, I think when you look at where we've been running capital, we've been trying to anticipate, as I mentioned in my prepared remarks, the uncertainties that exist around the way we find out about SEB, as well as the uncertainty that exists with where Basel III ultimately comes out. The reality of those two things are we know where the SEB is for this year at this point. We still don't know where Basel III ultimately winds up. So I think as we sit here today, we will continue - we'll be conservative on capital return in the shorter term until we learn more about exactly where Basel III will ultimately wind up, and then we can get more specific about what that means for capital return. So I think we're just trying to be very pragmatic. The reality is we're still generating a significant amount of capital and a reasonably sized dividend that's increased as our earnings power has increased. Given the fact that we have constraints, it is most of what the remainder of our capital generation goes towards capital return, but we want to see where Basel III ultimately winds up.

Operator:

The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir.

Charlie Scharf:

I think where we are plus a little bit, probably not minus a little bit, but plus some is probably the right place to be at this point. Remember, the SEB was higher than we expected, and so that's factoring into our thinking. And so that's really what's driving our thinking in terms of slowing the pace of buybacks at this point. But again, hopefully, we'll get some more clarity on Basel III. We know what you know and then we'll be much clearer about what we think the future looks like there. But again, overall, we still have the capacity to buy back. We just as we've always been, we want to be prudent.

Charlie Scharf:

So let me just take the first part. So just - and I appreciate you asking the question. I think, as far - from where - as we look forward, nothing has changed for us as we think about the opportunity to continue to become more efficient. That story is no different today than it was yesterday or last quarter. As we increased the estimates for the year, it's really reflective of three broad categories. One are the variable expenses that relate to our Wealth and Investment Management business where we have higher revenues that results in higher payout. And as Mike always points out, that's actually a good thing, even though it's embedded in the expense line, which causes that number to head upwards. The second thing are the fact that we've had higher customer remediations and FDIC expenses in the first half of the year, than when we contemplated the expense guidance. On the customer remediations, we've said it's - they're not new items. They're historical items. We're getting closer to the end of finalization in these things. And as that occurs, things like response rates and making sure that we've identified every - the full amount of the population gets all fine-tuned and that's what's flowing through. But that's a - it really rates to historical matters and not something that's embedded in what we see in the business going forward. So what you're left with is the rest of the earnings, I'm sorry, the expense base of the Company and it's playing out as we would have expected. And so as we sit here and look forward, all the statements I've made in the past are still true, which is we're not as efficient as we need to be. We're focused on investing in growing the business. We're focused on spending what's necessary to build the right risk and control infrastructure and we're focused on driving efficiency out of the Company and that lever is as continues to be exactly what it's been.

Mike Santomassimo:

Yes. I assume equity markets are about where they are today, yes, it's still staying pretty elevated.

Operator:

The next question will come from Erika Najarian of UBS. Your line is open.

Mike Santomassimo:

Yes. No, Erika. It's Mike. I appreciate the question. We give you the operating loss line in the supplement so you can see that. And if you - based on what we had said in January, if you assume that the $1.3 billion on a full-year basis was just split evenly across all the quarters, you can see that the operating losses are up about $500 million year-to-date over that run-rate. So that's the way to think about approximately what the impact of that is year-to-date in the first half.

Mike Santomassimo:

Right. And the remainder is roughly the revenue-related expenses in wealth management.

Erika Najarian:

Got it. Okay, that makes sense. And just maybe some comments on how you're thinking about credit quality from here. It looks like you continue to release reserves in the second quarter. Is this a message that you feel like you've captured most of the CRE-related issues, of course, absent of a further deterioration in the economy, and how should we think about the trajectory of the reserves from here relative to your charge-offs?

Erika Najarian:

Great. Thank you, Charlie and Mike.

Matt O'Connor:

Good morning. Can you just elaborate a bit on why you increased the deposit costs for wealth? Was it to keep up with the competition? Was it trying to get ahead of some potential pricing pressures? Or what was kind of the logic there?

Matt O'Connor:

Okay. And how big is that - those deposit balances?

Matt O'Connor:

Okay. And then just a separate topic here. I mean, the credit card growth has been very good. You highlighted rolling out some new products. And the question as always, when you - anybody growth kind of so much in a certain category, you mentioned not growing too quickly, the loss rates have gone up maybe a little more than some peers, not as much as some others, obviously in line with what you were targeting. There was that negative Wall Street Journal article on one of your cards. So just kind of taken together, what kind of checks and balances you have to make sure that a somewhat new initiative for you that you're growing at the right pace? Thank you.

Mike Santomassimo:

Yes. And I would just add one piece. As you look at new account growth, we're not originating anything less than 660. So, as Charlie mentioned, some of the credit tightening with 660 FICO, sorry. So as Charlie mentioned, the credit box has not been brought in really at all. And when you look at some of the bigger products like cashback, like the cashback card, active cash, the new originations are coming in at a higher credit quality than the back-book was. And so at this point, as Charlie said, we go through it at a very, very granular level each quarter and the results are kind of right where we expect. And if we start to see any kind of weakness at all, we're adjusting where needed.

Matt O'Connor:

Okay, that's helpful. And obviously, you talked about card losses going down in 3Q, so that's consistent with everything that you said as well. So thank you for the color.

Operator:

The next question will come from Betsy Graseck of Morgan Stanley. Your line is open.

Charlie Scharf:

Hi, Betsy.

Mike Santomassimo:

Yes. I mean, I - Betsy, I covered that in my script too. So as you look at the advisory assets there, they get price-based on - and most of them get priced in advance for the quarter. So you know what third quarter looks like based on where we are now. And obviously, it's not all equity market. There's some fixed income in there as well. But you should see a little bit of an increase as you go into the third quarter based on where the markets are now and then we'll see what the fourth quarter looks like when we get there.

Charlie Scharf:

Well, let me start. I think - so first of all, relative to where the balance sheet is running, we're not - let me say, we want to - we're careful about how we run the overall balance sheet, right, which is we don't want to operate at the cap on a regular basis because you've got to be prepared both for a customer appetite in terms of lending and deposits when you see it, as well as we lived through COVID where there was an event and all of a sudden there were a bunch of draws and we have to live within that asset gap. So running it with a cushion is a very smart thing we think for us to do, even though you can argue we're giving up some shorter-term profit. So that's just the reality of where we live. And so as we think about the markets business and what that means, yes, in the perfect world, we - you know, we're allowing them to finance some more. There are more opportunities out there for us to be able to do that. But what we are doing is, as we think about inside the Company optimizing the balance sheet and where we get the most returns and where there is more demand and less demand, there has been less demand in other parts of the Company and there's been more demand on the trading side. So our assets are actually up 15%-ish.

Charlie Scharf:

So we're just trying to - so we're reflective of what those opportunities are but we've got to keep capacity for the reasons I mentioned.

Operator:

The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.

Charlie Scharf:

Good morning.

Charlie Scharf:

Sure. Yes. As we - first of all, when we think about AI, we do break it into different categories, right? There is traditional AI and then there is GenAI. We have a huge number of use cases already embedded across the Company with just traditional AI. And that is - it's in - it's in our - it's in marketing. It's in credit decision-ing. It's in information that we provide bankers on both the wholesale on the consumer side about what customers could be willing or might be willing to entertain a discussion about. And so that is - in a lot of respects, that's business-as-usual for us. The new opportunity that exists with GenAI is where AI creates something based upon whether it's public data on our own data in terms of things that haven't existed. We are most focused in the shorter term on things that can drive efficiency, but it also contributes to just quality of the experience for our customers. So great examples of things like that are call centers. We take a lots of phone calls and we've got lots of opportunities through AI to answer those questions before someone gets to a call center rep. But once they get to a call center rep, we put a lot of effort into answering that question correctly, but also making sure that we're capturing that information, understanding root cause across all these calls we get. That means bankers have to go - telephone bankers have to go in, actually enter what the call was about, what they think the root cause is. We then have to aggregate that and so on and so forth. Through GenAI, that can be done automatically. It could be done immediately and the work can be done for us to identify that root cause, so then we can go back, look at it, make sure that's the case and make the change. So ultimately, that results in, fixing defects going forward, but it also takes so much manual effort out of what we do. And so that's - and so any place where something is written, something is analyzed by an individual, we've got the opportunity to automate that. Those things exist on the wholesale side as well as the consumer side. And to the extent that they impact a consumer, we're going to move very slowly to make sure we understand the impact of that. And so the work is a meaningful part of as we think about prioritization in terms of our tech spend.

Mike Santomassimo:

Yes. There really is no rhyme or reason necessarily, Gerard, to exactly how that moves one quarter to the next necessarily. And obviously, if there's like large balance of volatility, you might see more transaction activity. That certainly hasn't been the case necessarily in the equity market in the second quarter. But to some degree, as that line item - over a very long period of time, that line item probably declines more and advisory goes up. And that's actually a really good thing from a productivity and from an ongoing revenue perspective as well.

Operator:

And our final question for today will come from Steven Chubak of Wolfe Research. Your line is open, sir.

Mike Santomassimo:

Yes, Steve. It's Mike. I'd say just a couple of things. One, this is not in reaction to cash sorting. We are seeing cash sorting slow in the Wealth business, just like we're seeing that in the consumer business. So this is not a reaction to that in any way. It's a relatively small portion of the overall deposits that sit within the - in the Wealth business, and it is very specific to this product, which is in an advisory account where there's frictional cash there. So it's not a reaction to competitive forces that we're seeing or us trying to be proactive somewhere to drive growth.

Mike Santomassimo:

Well, let me start on the Wealth side and I'll come back to the I-banking or banking side. So on the Wealth side, what's really going to help us drive a margin expansion in that business over time are really kind of two things. One is continued productivity and growth in the advisory asset side, which you can see happening, and then two, and we've talked about this in other forums. It's doing a much better job penetrating that client base with banking and lending products. When you look at our loans in the Wealth business and you look at the overall asset base or the advisor for us, we're much less penetrated than some of the peers. And so I think those things really help drive us to get to more best-in-class margins, which are higher than where we sit today. And that takes some time on the lending side. In this rate environment, it's a little harder to drive that growth. And as rates start to come down, you'll probably see more demand there. And so there are some cyclical aspects of it that sort of come to from a timing perspective. But those are things that the - you know, Barry Sommers and the whole management team in Wealth are very focused on and making sure we've got the right capabilities, the right sales force, the right support for the sales force and so forth. On the I-banking side, we've been making investments in that business now for the better part of two-plus years, a little longer than that probably. And as we're adding good people, we're also not necessarily - we're also making sure that we've got the right people in the right seats. And so you're not seeing this really huge increase in overall senior headcount, you're actually - we're making sure we have the right people in the right seats, and so you've seen some reductions as you've seen some growth. And so that's helping also moderate the overall investment. And then also, as we brought those people on, you're paying them full freight when you recruit people, right? So what you're seeing is you're getting the benefit of those investments by adding the revenue piece now, but you've already got the expense in the run-rate to some degree. And so I think you'll see that pace of margin expansion moderate over time, but what you're seeing is what you should expect, which is like we made the investments, you're paying the people, now they're becoming productive incrementally each quarter and that's good to see.

Mike Santomassimo:

Yes.

Operator:

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.

John Campbell:

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financials referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo:

Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $4.6 billion or $1.20 per diluted common share. Our first quarter results included $284 million or $0.06 per share for the FDIC special assessment as a result of the regional bank failures last year. Recall, last quarter our results included $1.9 billion for the special assessment and this additional amount reflects recent updates provided by the FDIC, including potential recoveries which were highlighted in their disclosure. The ultimate amount of our special assessment may continue to change as the FDIC determines the actual losses and recoveries to the deposit insurance funds. Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets. First quarter results were largely as expected with loan balances a little lower and deposit balances in the businesses a little higher than our expectations. Our full year net interest income guidance has not changed from last quarter and we still expect 2024 net interest income to be approximately 7% to 9% lower than 2023. We also continue to expect net interest income will trough towards the end of this year. It is still early in the year and ultimately the amount of net interest income we earn will depend on a variety of factors, many of which are uncertain, including deposit balances, mix and pricing, the absolute level of interest rates and the shape of the yield curve and loan demand. On Slide 5, we highlight loans and deposits. Average loans were down from both the fourth quarter and a year ago. Credit card loans continue to grow while most other categories declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 69 basis points from a year ago to over 6%, reflecting the higher interest rate environment. Average deposits declined 1% from a year ago, reflecting lower deposits in our consumer businesses as customers continued spending and reallocating cash into higher yielding alternatives. While growth in average deposits from the fourth quarter was modest, we have grown deposits in our commercial businesses for two consecutive quarters, which reflected our success in attracting clients' operational deposits. Period-end deposits included in the chart on the bottom of the page were up 2% from the fourth quarter, but some of this growth reflected a temporary increase driven by quarter end that was on a payday and a holiday. While the pace of growth slowed, our average deposit costs continued to increase as expected, rising 16 basis points from the fourth quarter to 174 basis points, with higher deposit costs across most operating segments. Our mix of deposits continued to shift with our percentage of non-interest-bearing deposits declining to 26%. Turning to non-interest income on Slide 6. We were pleased with the growth in non-interest income across all of our business segments. Growth in non-interest income more than offset lower net interest income, reflecting a revenue growth from both the fourth quarter and a year ago. Non-interest income was up 17% from a year ago, with strong growth in investment advisory fees and brokerage commissions, deposit and lending fees, related fees, trading and investment banking fees. As Charlie highlighted, we benefited from market conditions as well as the investments we've been making in our businesses. I will highlight the specific drivers of this growth when discussing the segment results. Turning to expenses on Slide 7, first quarter non-interest expense increased 5% from a year ago, driven by higher operating losses, the FDIC special assessment, an increase in revenue related compensation, predominantly due to higher investment advisory fees in our wealth and investment management business and higher technology and equipment expense. These increases were partially offset by the impact of efficiency initiatives, including lower professional and outside services expense, which declined 10% from a year ago. The higher operating losses were driven by customer remediation accruals for a small number of historical matters that we are working hard to get behind us. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement eligible employees and 401(k) matching contributions. Not including expense for the FDIC special assessment in the first quarter, our full year 2024 non-interest expense guidance is unchanged and is still expected to be approximately $52.6 billion. However, we continue to watch a couple of items. Our guidance included $1.3 billion of operating losses for the year, which we still believe is a reasonable estimate even with a higher level of operating losses in the first quarter. However, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses during the remainder of the year. Also, if market valuations remain at current levels or move higher, that would increase investment in advisory fees and revenue related compensation could be higher than we assumed in our expense guidance for this year, which would be a good thing. We'll continue to update you as the year progresses. Turning to credit quality on Slide 8. Net loan charge-offs declined 3 basis points from the fourth quarter to 50 basis points of average loans. Credit performance trends were consistent with what we saw last quarter. The decline reflected lower commercial net loan charge-offs, which were down $131 million from the fourth quarter to 25 basis points of average loans. The reduction was driven by lower losses in our commercial real estate office portfolio. We did not see further deterioration in the performance of our CRE office portfolio versus the fourth quarter and therefore our expectations have not changed. We continue to expect additional losses in the coming quarters. However, the amounts will likely be uneven and episodic. Consumer net loan charge-offs continue to increase as expected and were up $28 million from the fourth quarter to 84 basis points of average loans. While auto losses continue to decline, benefiting from the tightening actions we implemented starting in late 2021, credit card losses increased in line with our expectations. Non-performing assets declined 2% from the fourth quarter, driven by the lower CRE office non-accruals, reflecting the realization of losses and paydowns in the quarter. Moving to Slide 9. Based on the consistent credit trends I noted before, our allowance for credit losses was down modestly, driven by declines for commercial real estate and auto loans, partially offset by higher allowance for credit card loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We didn't increase our allowance for this portfolio in the first quarter and the coverage ratio in our CIB commercial real estate office portfolio of 11% was stable compared with the fourth quarter. Turning to capital and liquidity on Slide 10. Our capital position remains strong and our CET-1 ratio of 11.2% continue to be well above our 8.9% regulatory minimum plus buffers. We repurchased $6.1 billion of common stock in the first quarter. While the amount of stock we repurchased each quarter will vary, we continue to expect to repurchase more common stock this year than we did in 2023. Turning to our operating segment, starting with Consumer Banking and Lending on Slide 11. Consumer, small and business banking revenue declined 4% from a year ago, driven by our lower deposit balances. We continue to invest in talent, technology and branches to improve the customer experience. Our branches are becoming more advice focused with teller transactions declining while banker visits have increased. We are modernizing and optimizing the branch network. The number of branches declined 6% from a year ago, while at the same time, we are accelerating the refurbishment of our branch network. In addition, the enhancements we are making to our mobile app continue to drive momentum in mobile adoption and we surpassed 30 million active mobile customers in the first quarter, up 6% from a year ago. Mobile logins also reached a milestone, surpassing 2 billion logins for the first time in the first quarter, up 18% from a year ago. Home lending revenue was stable from a year ago as higher mortgage banking income was offset by lower net interest income as loan balances continued to decline. Credit card revenue increased 6% from a year ago, driven by the higher loan balances. Payment rates remain relatively stable compared to the fourth quarter and were above pre-pandemic levels. Auto revenue declined 23% from a year ago, driven by continued loan spread compression and lower loan balances. Personal Lending revenue was up 7% from a year ago and included the impact of higher loan balances. Turning to some key business drivers in Slide 12. Retail mortgage originations declined 38% from a year ago, reflecting the progress we made on our strategic objective to simplify the business as well as the decline in the mortgage market. We also made significant progress in reducing the amount of third-party mortgage loans we serviced, down 21% from a year ago. We also continued to reduce the headcount in home lending, which was down 33% from a year ago. Balances in our auto portfolio were down 12% compared to last year. Origination volume declined 18% from a year ago, reflecting credit tightening actions, but increased 24% from a slow fourth quarter. Debit card spend increased 4% from a year ago with growth in most categories except for fuel and travel. Credit card spending remains strong. It was up 14% from a year ago. All categories grew with stronger growth in nondiscretionary spend. New account growth continued to be strong, up 12% from last year. Turning to Commercial Banking results in Slide 13. Middle Market Banking revenue was down 4% from a year ago, driven by lower net interest income due to higher deposit costs partially offset by higher deposit related fees. Asset-based lending and leasing revenue decreased 7% year-over-year and included lower revenue from equity investments. Average loan balances were stable compared to a year ago as growth in asset-based lending and leasing was offset by declines in middle-market banking. Weaker loan demand reflected the impact of clients being cautious given the higher-rate environment and the anticipation of lower rates this year as well as some potential uncertainty in an election year. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 5% from a year ago, driven by higher investment banking revenue due to increased activity across all products. Our results benefited from the areas where we have had strength for some time, such as investment-grade debt capital markets and from the talent we've been attracting into the business. While it’s still early, we are encouraged by the green shoots we are seeing. Commercial real-estate revenue was down 7% from a year-ago and included the impact of lower loan balances. Markets revenue increased 2% from a year-ago, driven by continued strong performance in structured products, credit products, and foreign-exchange. Our trading results continue to benefit from market conditions and the investments we've made in technology and talent to round out the business have enabled us to produce strong results even as market dynamics have changed. Average loans declined 4% from a year ago. Banking clients have taken advantage of strong capital markets to pay-off loans. In addition to weak loan demand in commercial real-estate given market conditions, balances also declined due to credit tightening actions we implemented last year, along with our efforts to actively reduce certain property types in the portfolios. On Slide 15, Wealth and Investment Management revenue increased 2% compared to a year-ago. Lower net interest income driven by lower deposit balances as customers reallocated cash into higher-yielding alternatives was more than offset by higher asset-based fees due to increased market valuations. While cash alternatives as a percentage of total client assets was higher than a year ago, it has declined in the past two quarters as the migration of deposits into cash alternatives has slowed significantly. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so first-quarter results reflected market valuations as of January 1st, which were higher from a year ago. Asset-based fees in the second quarter will reflect market valuations as of April 1st, which were higher from both a year ago and from January 1st. Slide 16 highlights our corporate results. Revenue grew from a year ago due to improved results in our affiliated venture capital business on lower impairments. In summary, our results in the first quarter reflected the progress we're making to improve our financial performance. We grew revenue, driven by strong growth in our fee-based businesses. We continue to make progress on our efficiency initiatives. We increased capital returns to shareholders and maintained our strong capital position. We'll now take your questions.

John McDonald:

Hi, good morning. Guys, I wanted to ask about your profitability targets and kind of how you're seeing the journey to the mid-teens ROTCE goal. Mike, maybe you could talk about that through the lens of 12% return on tangible common equity this quarter. Where do you think you're kind of over-earning, under-earning, and what does that journey to the mid-teens look like over the next couple of years?

Charlie Scharf:

Hey, John, let me -- it’s Charlie. Let me just add a couple of things. Number one is, just as a reminder to everyone, we've tried to be clear as NII was rising and we got to, certainly either at the peak or near the peaks that we were outearning and that we didn't look at those ROEs at those points as sustainable, but that our clear journey was to continue to get there on a sustainable basis. I think second of all, when we look at, obviously it's very hard to draw any conclusion from a specific quarter, right? You've got the FDIC, we've got operating losses, which we've talked about where our expectations are for the full year, which are different than the quarter. So it's very hard to draw a conclusion on a specific quarter. But when we look at what is going to get us there, we are very consistent on what those things are. Number one is improved business performance. And we tried to highlight where we see that and those areas that we don't talk about are areas that we are still bullish on but would like to see some more improvement in the ability to increase our returns in those parts of the company as well as continued capital return as well as the limitations we have because of the asset cap. So again, our thesis hasn't changed, our views haven't changed, and our confidence in getting there hasn't changed.

Charlie Scharf:

I would say it's something that we continue to think through. You know our existing needs today with buffers are at 8.9%. At 8.9%, everyone understands that Basel III Endgame is coming, but likely with significant revisions. So I think as the quarters continue, we'll learn more about where that will come out and we'll be able to be more informed about where we'll wind up. We've always tried to be on the more conservative end, but there's a point at which too much is too much, which is why we bought the amount this quarter that we bought back.

Operator:

The next question will come from Ebrahim Poonawala of Bank of America. Your line is open, sir.

Mike Santomassimo:

Yeah, thanks. It’s Mike, thanks for the question. As you look at the pacing, we're really not going to provide specific guidance on, like, what we'll do quarter to quarter. I think, obviously, as you pointed out, we've got significant excess capital to where we need to be. We'll be able to handle with whatever comes out of Basel III quite easily with where we are today, gives us the ability to be there and invest as we've got opportunities with clients. And so we've got lots of flexibility. And each quarter, we'll go through the same process we go through every quarter, which is thinking about sort of where the capital requirements are going to go, looking at all the different risks that are out there across the spectrum, whether it's rates or other, and then looking at what we're seeing from client activity, and then we'll make a decision on the pacing of it. But as you say, we're still very confident we'll do more than we did last year, but pacing we’ll kind of leave to -- we'll cover that each quarter after we report.

Charlie Scharf:

Yeah, let me start out. I think, first of all, when we talk about the level of investment that's necessary, we're making the investment, and it's embedded in what we're spending. And so, we are funding that through normal course of business. Some of the folks that we're hiring, are replacing other people and others are additions, but that's part of what it is. And so we don't anticipate any kind of step-up in the expense base to fund what we're doing, which we feel great about. We've got the ability to spend along the way and to actually see them paying off for itself. And I said this very consistently, which is we are extremely under-penetrated across almost all segments of the investment banking space. We've been stronger on the debt side. We have not been as strong on the equity side. And by the way, all for reasons that relate to our own willingness to invest over the last decade and a half, not because of the opportunity or because of our business model. It's just the opposite. It's just not something that the senior management team here was supportive of, and we feel very differently than that. And so when we look across coverage in the equity space by industry on the strategic side and how that relates to our existing high quality debt platform that we have, again, we're prioritizing industries based upon where we already have strength in relationship and where there are significant wallets. But we feel really great about our ability to serve a broad set of customers and their desire to do business with us because of both the platform and the talent that we have here. And then when we look at our -- the trading side of our business, a big part of what we do there is to support our efforts within the investment bank, but it also is to leverage the broader institutional relationships that we have, where we do a lot with those institutions, but we haven't necessarily leveraged trading flow as part of that. And so to do that, we're making investments not just in people, but in technology. We are, as I alluded to, we're not doing any of this by rethinking the way we think of our risk tolerances. It really is about getting the right products, the right services, the right people, and calling on our customer base with a different degree of credibility and desire that we've had in the past.

Operator:

The next question comes from Ken Houston of Jefferies. Your line is open, sir.

Mike Santomassimo:

Sure. I'll take that, Ken. As you look at the commercial side, not much has changed. It's pretty competitive. We're not seeing it move one way or the other in a significant way as you sort of look over the last quarter. Good news is we've been able to attract good operating deposits in corporate investment bank. We've seen some growth in commercial bank as well. And so all that's kind of performing as you'd expect. And you wouldn't really expect pricing to move there until the Fed starts to move. And it'll stay pretty competitive at that point. And we still expect betas to be pretty high on the way down as you start to see that eventually happen. On the consumer side, standard pricing is not moving. Really what you're seeing is you're seeing people continue to spend some of the money that's in their checking accounts and/or move some of it into either CDs or higher yielding savings accounts. And so you still see some of that activity happening across the consumer space and the well space where you still have some people moving into higher yielding alternatives. The pace of that migration has slowed, at least for now. And so, we'll see how that progresses through the rest of the year, but it has slowed a bit over the last number of months.

Mike Santomassimo:

Yeah, I think what we're seeing so far is exactly what we expected to see at the beginning of the year. And I know there's people -- different people have different views, back in January. But this is exactly what we expected, which is pretty low demand. Now, as I said in my commentary, it's a little bit lower than what we had modeled, but not substantially at this point. And it really is a demand function. When you look at what we're hearing from clients in the commercial bank or some of the clients in the corporate investment bank, they're being cautious still and saying, okay, I'm not going to build inventories as much as I might in a different environment. They're being thoughtful about the cost of credit and how that impacts investments they're making or the timing and the pacing of that. And so on the commercial side, it really is a demand issue at this point. On the consumer side, you continue to see some growth in card balances. Given the size of the balance sheet, that's not going to move the whole balance sheet very materially given where we start from. And then the mortgage side just continues to decline a little bit given the market that we've got there. And in auto, we're seeing a little bit more decline given some of the changes we made about a year and a half ago, a year, year and a half ago on some of the credit tightening and eventually that will start to turn. So I think those are the dynamics that we're seeing right now.

Operator:

The next question will come from Betsy Graseck of Morgan Stanley. Your line is open.

Charlie Scharf:

Hey, Betsy.

Mike Santomassimo:

Sure. Hey, it's Mike, Betsy. Welcome back. Sure. When you look at the environment, we're not guessing at sort of what's going to happen, right? So, I think as you sort of look at the different variables that are embedded in our baseline forecast is that we would expect somewhere around three rate cuts this year. And that's what's underlying sort of our thinking at this point.

Mike Santomassimo:

No. I mean -- yeah, no, like it's definitely less than what I think was being projected by the market. And that's what we wanted put out on our slide in January. And when you look at the impact of that in isolation, you certainly would see a benefit from less rate cuts. But I do think you have to put that in the context of, okay, now what's going to happen with client behavior and mix shifts as we look for the rest of the year? I mean, it's certainly clear we feel better today than we did in January about our guidance and our forecast there, but I do think we have to let some more time play out to see how people react to what's happening. And I think even you got to be really careful to take what happened over a day or two and extrapolate too far, right? We're seeing a bunch of that be given back today even. And what we've seen over the last couple of years is that every time you have this strong reaction, either up or down in expectation for rates, that reaction tends to moderate a little bit over a pretty short period of time. And so we'll see how that plays out.

Mike Santomassimo:

Yeah. And we've started to do that to some degree in the first quarter where we have been starting to buy some securities, mainly mortgages, given where rates and levels have been. And that's been a good trade, I think, for us so far. And so I think you'll certainly see us continue to deploy more cash into securities, at least at some modest levels as we look forward over the next quarter.

Operator:

The next question will come from Erika Najarian of UBS. Your line is open.

Mike Santomassimo:

Yeah. No, I'll try to -- I'll take an attempt at that, Erika, and you can tell me if I covered it all. But it's certainly -- we're at a point in time, and I said this on a call with media earlier this morning, like, we're at a time where it's difficult to sort of model the different outcomes that you could expect to see with net interest income, just given all the dynamics that are happening there. And as you said, like, I think the fact that rates might be higher than what people expected a week ago, that could change first of all, but let's stipulate. At this point, people are thinking it's going to be higher for a little bit longer. We do have to wait and see how clients are going to react. And I think we do our best to try to come up with a range of outcomes there. And given that -- given what's happening in rates plus what's happening in quantitative tightening, what's happening in sort of the economy overall, it's going to all matter in terms of what happens with deposit levels. And let's see how that plays out. But I think as I come back to what I said earlier, we feel better than we did today than we did in January about where we are, but there's a lot to play out for the rest of the year.

Charlie Scharf:

Okay, there's a lot in there. Let me start, Mike, and then you chime in. So first of all, Mike, you can comment on like investment banking and trading. But again, we're -- I mean, we're not going to answer the question on how you should think about what investment banking and trading will be in the future. What we're focused on are, are we building businesses? Are we taking share in a way which is profitable? And that's exactly what we're starting to do. And there is volatility of the business, but we're focused on building it over a period of time and that's what we're seeing. And so the way we would think about it when we look at our own forecasting is we would expect to see our market shares rise over a period of time, and quarter by quarter, know that it will be subject to volatility that exists.

Charlie Scharf:

And then on your question on expenses, again, it is -- we were in the exact same place that we've been, which is we're not thinking about at all. We're not doing work. We're not thinking about whether there are efficiencies to be gotten out of all the risk and control work that we're doing. In fact, we're still on the other side of that, which is, we still have more open consent orders and we're still committed to do whatever is necessary, including spending whatever is necessary to get that work done properly and build it into the infrastructure of the company. I've said there'll be a point at which when it's built into what we do and there's a high degree of confidence that it is part of the culture and our processes, that we will have an opportunity to figure out how to do some of those things more efficiently. But that's not on our radar screen at all. What is on our radar screen is the fact that there's still a lot of inefficiency left within the company completely away from the money that we're spending on this. And that's where we're focused, and that's why we have the ability to invest in card and invest in investment banking and trading and accelerate the branch refurbishments and hire more bankers in commercial banking and things like that. So I would just still continue to separate the fact that we're committed to get the work done, we're going to do whatever is necessary to spend there, and that's not the area of focus for us when it comes to efficiency.

Operator:

The next question will come from Steven Chubak of Wolfe Research. Your line is open, sir.

Mike Santomassimo:

Yeah. When you look at all the different factors, Steve, there's obviously nothing that's sort of unique to sort of our balance sheet. But when you look at both the asset repricing that's happening in securities, you look at what's happening and you just sort of project forward on sort of the loans and the other parts of the balance sheet, that's obviously a key input as you sort of look forward. And then at some point, you would expect that the migration and deposit mix starts to stabilize as you go forward. And I'm a little intentional, and I'm intentional in the words we use in terms of towards the end of the year. Is it right at this year? Is it early next year? Like, it's going to be -- we're getting closer to that point in terms of when it's going to trough. Calling the exact date with a high degree of certainty is difficult in this environment. But it's all the things that sort of we've talked about over the coming -- over the last few quarters are going to drive that. And it starts with like deposits and deposit mix and deposit pricing and then goes through the rest of where we think the assets sort of net out.

Charlie Scharf:

Sure. And I'm not sure you shouldn't feel, like, [afraid] (ph) you asked the question. You guys always should ask whatever you want. I just try to be as clear as I can on what I think we'll be in a position to answer, and I don't want you guys to get frustrated by the level of consistency of the things that we want to be careful about. But to your question, which is, I think, entirely reasonable, I'd put into a couple of categories. I think first of all, probably the most important thing with the asset cap, quite frankly, is not the pure economics at this point that will come from the lifting of the asset cap. It is still a reputational overhang for us. And while the lifting of the sales practices consent order was extremely important for those that have just read the newspapers, certainly those that follow the stock care a lot about the asset cap and we understand that. And so that is just initially, I think, an important factor in terms of how we'll be viewed as opposed to what we'll actually do. I think when we look at what we have done to proactively manage the company to keep ourselves below the asset cap, there are two -- you've got two categories. You've got places where we have gone and said, please make your business smaller because -- just because of normal deposit flows and consumer business and things like that, we'll have some asset pressure and we need to offset at some place. And then there's the opportunity cost of what we haven't been able to do because we've had the asset cap. And then what does that mean going forward? On the first piece, we have limited our ability certainly within our trading businesses for some very low-risk things such as financing our customers and things like that. So by not allowing them to provide a level of financing, which is very low risk, we have not captured as much trading flow as we otherwise would have seen. In our corporate businesses, we've been very, very careful to encourage our bankers to bring in sizable corporate deposits that weren't clearly operational deposits, and in some cases, been a little more aggressive about asking them actually not to have it here because we wanted to make room for other things that we thought were really important strategically such as not being closed for business on the consumer side, which those folks would not understand, is hopefully just something that's temporary. So those are the places that in the short term would benefit from the asset cap being lifted. I think when you get beyond that, the reality is, when you look at what we've been able to do and the amount of excess capital that we have, we're trying to deploy that by -- through the dividend and through our share buybacks because there's only so much that we should keep around and not return to shareholders. But we still -- as I talked about, we think there are plenty of opportunities when you look around our different businesses to achieve higher returns by reinvesting it inside the business. It's not anything which is -- I would describe it as dramatic. But in terms of the things that we can do when we don't have the constraints, take our -- whether it's our consumer business or our wealth business to build out our banking product set, to be more aggressive about being full spectrum in terms of where we are on the lending side and the deposit side. Across all of our businesses, we've been very, very conservative in what we have asked people to do because we don't want to have an asset cap issue. So again, I would describe it as, it's the -- it would be the ability to grow in the things that we're confident at that we do well, that we have, in some ways, consciously and in some ways, unconsciously restrained the company from doing. But all in all, certainly, without an asset cap, it's not a neutral. It's a positive because of the things that we proactively stopped as well as we're just limited in our ability to take advantage of the franchise that we have. And you've seen others that don't have those constraints but have the quality franchise as well, and you see how they’ve benefited not just versus us but versus the broader banking set.

Charlie Scharf:

Of course.

John Pancari:

Good morning. On the 2024 NII guide, I understand that you feel better about the NII outlook here but you're watching customer behavior. I know you did mention loan growth. Did you lower your loan growth outlook that's baked into that guidance this quarter versus what you had in there last quarter? And either way, are you able to help us with what that expectation is on the loan growth front?

John Pancari:

Okay. And related to that, any deposit growth expectation that you could share?

Charlie Scharf:

Listen, we just -- we want to be really careful in all this, right? We're not -- we're trying to be as transparent as we can be about what we're seeing without getting over our skis and making predictions that none of us have the answers to. And so like when you boil it all down in terms of the customer activity that we're seeing, it's a touch less here, a touch more there. There's not a big change from what we said three months ago in terms of flows on the deposit and the lending side. It really is relatively small relative to the big NII picture and what's going to drive NII at this point. So if we saw big changes there, we might say, let's change guidance. But it's tweaking along the way and we'll see how it continues to pan out. And then what we said is relative to the rate environment, it's just -- again, it's -- this is a full year number and we've had a couple of months go by. It's just too early to mark the whole thing to market based upon that. But again, we also wanted to just provide the context, as Mike has said and I said in my remarks, certainly, what we've seen is helpful relative to just the pure overall rate and curve piece of it.

Mike Santomassimo:

Yeah. No, look, I think what you're seeing on the -- when you talk about commercial real estate, you're really talking about office. And what you saw in the office space is actually, it did not move at all and get worse or not get worse in the quarter. And so you actually saw non-performing assets coming down a little bit in the CRE space as we've charged off some loans, and they weren't replaced by other items. And so that's a positive in the sense that it's not deteriorating at this point. And then everything else is sort of moving around like as you would expect. There's not substantial movements across the rest of the portfolio.

Operator:

The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.

Mike Santomassimo:

Yeah. And really what we're referring to when we mention that is primarily in the wealth management business is where we're focused, given where market levels are. And that business is -- the cost-to-income ratio is pretty stable there in terms of the revenue-related comp. And so it's a little less than 50% in terms of how to think about it. So the operating leverage is good.

Mike Santomassimo:

Yeah. No, look, I think the cost to invest there, as Charlie noted, is in our numbers, right, so that's already there. So we're already anticipating that. And at this point, we don't see that being a big pressure point one way or the other. But obviously, as you know, if revenues like far exceed our expectations in a positive way, that would come with a little bit of comp, too. So that would be a good thing overall.

Operator:

The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.

Mike Santomassimo:

Yeah. Look, I mean, it's a hard thing to say with a whole lot of certainty, Gerard, in terms of exactly where it's going to stabilize. It will stabilize at some point, particularly as you look at the underlying mix of the consumer deposit base, right? A good chunk of our consumer deposits are in accounts less than [2.50] (ph). They are generally operating accounts for a lot of people, and so this thing will stabilize as we go. But as you've seen, we've had some pretty consistent, plus or minus a little bit, each quarter as we've gone through the last number of quarters. But at some point soon, that will start to -- we would expect that to stabilize, but we'll see exactly where it does.

Mike Santomassimo:

Yeah. Once you start seeing more stabilization in the mix, that's when you'll see deposit costs on the consumer side stabilize, right? Because what you're seeing now is people -- as I mentioned earlier, people are spending money in their checking account, low interest cost for us. And then you're seeing growth in CDs and some of the savings accounts, which are higher cost. And that mix shift will stabilize. It's very related to your first question around non-interest-bearing, right? Once -- they're kind of related together, right? Once you get to sort of that core operating balance in people's accounts, then that's when you'll see both of those stabilize.

Mike Santomassimo:

Yeah. Look, I think you got to really dig into the underlying dynamics of what's happening in the portfolio, right? We're in the middle of a refresh of our product set. We're seeing faster growth in new accounts and new balances coming on than maybe other players, just given the investments we've been making now for the better part of three years. And so that -- with that comes some maturation of kind of the new vintages. At some point, that should peak and you'll start to see sort of the normal behavior. But I'd just come back to, we spend a lot of time looking at each of the underlying vintages here. Everything is performing pretty much -- very much on top of what we would have expected or, in a couple of cases, maybe slightly better. And the quality of the new accounts we're putting on are -- the credit quality of them looks very good and continues to be the case. So I would just say that we're in that normal phase of maturation. And as it sort of peaks, we'll sort of let you know when we sort of feel like we're there, but it should be coming over the coming quarters.

Operator:

And the next question will come from Dave Rochester of Compass Point Research. Your line is open, sir.

Mike Santomassimo:

Yeah. I mean, that's hard. I think certainly, it will be a factor that people incorporate into their thinking of how aggressive or not they want to be and investments they're making. But at this point, that would be really hard to kind of prove out with any sort of empirical data. I think at this point, what we're seeing most is related to the overall sort of macroeconomic environment we're in with such high rates and people having some uncertainty just generally around where things go from here. So, but I'm sure that will factor in at least to a small degree at some point as we go through the year.

Mike Santomassimo:

Well, the environment is going to matter a lot. And so we've certainly been helped by some of the volatility that we've seen over the last four, five quarters. And so that could change the outcome quite materially for all of us in the industry and the trading line. So keep that in mind. But as you said, we're continuing to make -- systematically make some investments there, and we feel good about that. And I think we continue to see some good performance from a market share point of view across those places we've been making the investments. But as Charlie also noted, we're somewhat constrained in some of those businesses. But we feel good about the progress that the team has made over the last couple of years.

Operator:

And our final question for today will come from Vivek Juneja of JPMorgan. Your line is open, sir.

Mike Santomassimo:

Yeah, sure. So as you pointed out, over the last -- if you go back a couple of years ago, and you definitely saw some declines that we were seeing in the advisor workforce. But Barry Sommers and team have been working really hard to sort of not only stem some of the attrition but also begin to really ramp up the recruiting again. And I think we're starting to see some of that come through. And so a lot of that -- we're back to like more normal, maybe slightly below normal attrition levels across the business, which is good. And we're feeling very good about our ability to recruit high-quality advisors. And so I think that trend you saw a couple of years ago was definitely different. And we'll continue to stay at it. We're mostly focused on experienced advisors, a little less on, as you mentioned, college recruits and that type of thing.

Vivek Juneja:

Okay, that's helpful. A completely different question. I want to go back to NII, not to beat a dead horse. But given that higher rates -- I mean, sorry, less rate cuts are better for you, if we -- so that should help NII now. But if we see rate cuts and eventually in '25, does that mean that the troughing of NII could get pushed further back?

Vivek Juneja:

Thanks.

Operator:

Thank you, all, for your participation on today's conference call. At this time, all parties may disconnect.

John Campbell:

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo:

Thank you, Charlie, and good morning, everyone. The first couple of slides summarize how we helped our customers and communities last year, some of which Charlie highlighted, so I'm going to start with our fourth quarter financial results on Slide 4. Net income for the fourth quarter was $3.4 billion, or $0.86 per diluted common share. Our fourth quarter results included $1.9 billion or $0.40 per share for the FDIC special assessment, and $1.1 billion of severance expense, including $969 million or $0.20 per share for planned actions. These expenses were partially offset by $621 million or $0.17 per share of discrete tax benefits related to the resolution of prior period tax matters. Turning to capital and liquidity on Slide 5. Our CET1 ratio increased to 11.4% in the fourth quarter, 2.5 percentage points above our regulatory minimum plus buffers. This increase was driven by our earnings and an increase in accumulated other comprehensive income, reflecting lower interest rates and tighter mortgage-backed security spreads. During the fourth quarter, we repurchased $2.4 billion in common stock. We repurchased a total of $12 billion in common stock in 2023, and we currently expect to be able to repurchase more than this amount in 2024. We will continue to consider current market conditions, including interest rate movements, risk-weighted asset levels, stress test results as well as any potential economic uncertainty with respect to the amount and timing of share repurchases over the coming quarters. Turning to credit quality on Slide 7. As expected, net loan charge-offs increased, up 17 basis points from the third quarter to 53 basis points of average loans, driven by commercial real estate office and credit card loans. The increase in commercial net loan charge-offs reflected the higher losses in commercial real estate office, while losses in the rest of our commercial portfolio were stable from the third quarter. As expected, losses started to materialize in our commercial real estate office portfolio as market fundamentals remained weak. The losses were across a number of loans spread across various markets and were driven by borrower performance, lower appraisals were the result of properties or loans being sold at a loss. We substantially built reserves for this portfolio throughout 2023 as criticized and nonperforming assets increased. And while we expect additional losses in the coming quarters given the market fundamentals, and capital markets and liquidity challenges in this sector, the amounts will likely going to be uneven and episodic. Our commercial real estate team has a rigorous monitoring process and continues to derisk and reduce exposure, and we're using this information to evaluate our allowance, which I will discuss later. Consumer net loan charge-offs continued to increase and were up $118 million from the third quarter to 79 basis points of average loans. The increase was driven by the credit card portfolio, which performed as expected with increased losses driven by recent vintages maturing. Nonperforming assets increased 3% from the third quarter as growth in commercial nonaccrual loans more than offset declines in consumer. The increase in commercial real estate non-accrual loans was driven by a $567 million increase in office non-accrual loans. Moving to Slide 8. Our allowance for credit losses increased slightly in the fourth quarter, driven by an increase for credit card and commercial real estate loans, partially offset by a lower allowance for auto loans. The table on the page shows the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. While the charge offs we took in the fourth quarter were contemplated in our allowance, we are still early in the cycle and after going through our quarterly review process, the coverage ratio in our CIB commercial real estate office portfolio remained relatively stable at 11%. On Slide 9, we highlight loans and deposits. Average loans were down from both the third quarter and a year ago. Credit card loans continued to grow, while most other categories declined. I’ll highlight specific drivers when discussing our Operating segment results. Average loan yields increased 122 basis points from a year ago and 12 basis points from the third quarter, reflecting the higher interest rate environment. Average deposits declined 3% from a year ago as growth in corporate and investment banking was more than offset by declines in our other deposit gathering businesses, reflecting continued consumer spending and customers reallocating cash into higher yielding alternatives. Period end deposits included in the chart on the bottom of the page were up $4.2 billion from the third quarter as declines in consumer banking and lending were offset by slightly higher deposits in wealth and investment management for the first time in over a year, as well as higher commercial deposits, which included our efforts to attract clients operational deposits. As expected, our average deposit costs continued to increase up 22 basis points from the third quarter to 158 basis points with higher deposit costs across all Operating segments. The pace of the increase was similar to the third quarter. Our mix of deposits continued to shift with our percentage of non-interest bearing deposits declining to 27%. Turning to net interest income on Slide 10. Fourth quarter net interest income declined $662 million or 5% from a year ago due to lower deposit loan balances partially offset by the impact of higher interest rates. I’ll provide details on our 2024 net interest income expectations later on the call. Turning to expenses on Slide 11. While our fourth quarter non-interest expense included the FDIC special assessment and $1.1 billion of severance expense, including $969 million for planned actions, expenses declined from a year ago driven by lower operating losses. While most of the planned actions should result in lower headcount, some of the actions are related to our workforce location strategy, which should lower occupancy costs and provide other benefits, but may not always reduce headcount. Total expenses increased from the third quarter, driven by the FDIC special assessment and higher severance expense. Personnel expense increased $554 million from the third quarter as higher severance expense was partially offset by lower benefits and incentive compensation expense, including certain year-end adjustments, as well as the impact of efficiency initiatives, including lower headcount. Turning to our Operating segment, starting with consumer banking and lending on Slide 12. Consumer, small and business banking revenue increased 1% from a year ago, driven by higher net interest income, reflecting higher interest rates partially offset by lower deposit balances. We’ve been focusing on controlling expenses and lowering the cost to serve our customers, which includes driving digital adoption, simplifying our product portfolio and using technology to automate our operating environment. As our customers continue to shift to lower cost channels, resulting in fewer teller transactions and handled call volumes, we’ve reduced our total number of branches by over 280 or 6% from a year ago. At the same time, we have been refurbishing our branches as part of an accelerated multiyear effort to transform and refresh our full branch network. I’ll highlight other ways we are investing to improve the customer experience later on the call. Home lending revenue increased 7% from a year ago. Lower gain on sale margins and originations, as well as lower loan balances were more than offset by improved valuations on loans held for sale due to losses in the fourth quarter of 2022. We continued to reduce headcount home lending in the fourth quarter, down 36% from a year ago, reflecting market conditions as well as our new strategy. Credit card revenue declined 1% from a year ago, driven by the impact of introductory promotional rates and higher rewards expense, partially offset by higher loan balances and interchange revenue. Payment rates have been relatively stable over the past year and remained above pre-pandemic levels. New account growth continued to be strong, up 17% from a year ago. Auto revenue declined 19% from a year ago, driven by lower loan balances and continued loan spread compression and personal lending revenue was up 13% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 13. Mortgage originations declined 69% from a year ago and 30% from the third quarter, reflecting the progress we made on our strategic objectives for this business as well as the decline in the mortgage market. As we executed on our strategic objectives, we’ve also made significant progress on reducing the amount of third-party loans serviced, down 18% from a year ago. The size of our auto portfolio has declined for seven consecutive quarters and balances were down 11% at the end of the fourth quarter compared to a year ago. Origination volume declined 34% year-over-year, reflecting credit tightening actions. Debit card spend increased 2% from a year ago, with both discretionary and non-discretionary spend up 2%, with growth in most categories except for home improvement, fuel and travel. Credit card spending continued to be strong was up 15% from a year ago. All categories grew with double digit growth rates in every category except fuel, home improvement and apartment apparel. Turning to commercial banking results on Slide 14. Middle market banking revenue increased 6% from a year ago, driven by the impact of higher interest rates and higher deposit related fees, reflecting lower earnings credit rates. Asset based lending and leasing revenue increased 9% year-over-year due to the impact of higher interest rates and improved results on equity investments. Average loan balances were up 2% from a year ago, driven by growth in asset based lending and leasing. Turning to corporate and investment banking on Slide 15. Banking revenue increased 15% from a year ago, driven by higher lending revenue, higher investment banking revenue due to increased activity across all products, and stronger treasury management results. As Charlie highlighted, we’ve successfully hired experienced bankers, which is helping us deliver for our clients and positioning us well for when markets improve. Commercial real estate revenue grew 2% from a year ago, reflecting the impact of higher interest rates, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago, driven by higher revenue and structured products, equities, credit products and commodities. Average loans were down 3% from a year ago with growth in markets more than offset by declines in banking and commercial real estate. On Slide 16, wealth and investment management revenue declined 1% compared to a year ago, reflecting lower net interest income driven by lower deposit balances as customers continued to reallocate cash into higher yielding alternatives. The decline in net interest income from a year ago was partially offset by higher asset based fees due to increased market valuations. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so fourth quarter results reflected market valuations as of October 1, which were higher from a year ago, asset based fees in the first quarter will reflect valuations as of January 1, which were also higher from a year ago. Average loans were down 3% from a year ago, driven by decline in securities based lending. Slide 17 highlights our corporate results. Revenue declined $345 million from a year ago, reflecting higher deposit crediting rates paid to the Operating segments. This decline was partially offset by improved results in our affiliated venture capital business on lower impairments. Turning to our expectations for 2024 starting on Slide 18. Let me start by highlighting our expectations for net interest income. As we look forward there are a number of factors that could impact our results, including the ultimate path of rates, the shape of the yield curve, quantitative tightening and fiscal deficits, consumer behavior and competitive behavior to name just a few, all of which we have little to no control over. This makes it particularly difficult to estimate net interest income for 2024. There is more uncertainty than usual given the market’s strong view of rate cut timing in the quantum. Looking at our results, while we had strong growth in full year net interest income in 2023 versus 2022, our net interest income came down modestly each quarter last year, driven by the higher deposit pricing and mixed changes. You can see this impact when you analyze our fourth quarter net interest income, which was down approximately 3% from our full year 2023, net interest income of $52.4 billion. Our current expectation is that full year 2024 net interest income could potentially be approximately 7% to 9% lower than our full year 2023. This expectation is anchored on the forward rate curve and a series of business assumptions including; lower rates in the recent forward rate curve, which given our modestly asset sensitive position would be a headwind to net interest income, a slight decline in average loans for the full year, which includes modest growth in commercial and credit card loans in the second half of the year after a slow start to the year, reinvestment of lower yielding securities runoff into higher yielding assets, which would also modestly extend the duration of the investment portfolio, further attrition in consumer banking and lending deposits, as well as continued mix shift from lower yielding products to higher yielding, deposits in our other deposit gathering businesses are expected to be relatively stable and market funding will replace the decline in consumer deposits as needed. We currently expect that net interest income will trough towards the end of this year. As we’ve done in prior years, we are also assuming the asset cap will remain in place throughout the year. Ultimately, the amount of net interest income we earn in 2024 will depend on a variety of factors, which many of which are uncertain, including the absolute level of rates, the shape of the yield curve, deposit balances, mix and pricing and loan demand. Turning to our 2024 expense expectations on Slide 19. We started our focus on efficiency initiatives three years ago and we’ve successfully delivered on our commitment of approximately $10 billion of gross expense saves. Through our efficiency initiatives we have reduced headcount every quarter since third quarter of 2020 and headcount is down 16% since the end of 2020. Looking at our expectations for this year and following the waterfall on the slide from left to right. We reported $55.6 billion of non-interest expense in 2023, which included the $1.9 billion FDIC special assessment. Excluding this item, expenses would have been $53.6 billion, which we believe is a good starting point for discussion of 2024 expenses. Looking at the next bar, we expect severance expense to be approximately $1.3 billion lower, driven by the $969 million expense we took in the fourth quarter for planned actions, we expect expenses to increase by at least $300 million due to higher revenue related expense, driven by wealth and investment management, revenue related expenses will ultimately be a function of activity and market levels, and therefore could be higher or lower than this estimate. At this point, we expect all other expenses to be flat, though there are significant efficiencies and increased investments included in this expectation. We expect approximately $2.7 billion of gross expense reductions in 2024 due to the efficiency initiatives. We highlight in the slide some of the areas where we anticipate additional savings and continue to believe we have more opportunities beyond 2024. Similar to prior years, the resources needed to address our risk and control work are separate from our efficiency initiatives and we will continue to make significant investments in our risk and control infrastructure. While we remain focused on executing on our efficiency initiatives, we’re also continuing to invest and we expect approximately $1.1 billion of incremental technology and equipment expense, reflecting higher costs related to the amortization of investment in prior years, as well as new investments planned for 2024. We also expect merit increases of approximately $700 million, which are primarily awarded to employees with lower salaries. We highlight some of the other areas where we plan to invest on the next slide. Our 2024 expense outlook includes ongoing business related operating losses of approximately $1.3 billion, similar to the level we had in 2023. As previously disclosed, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses. So putting this all together, we expect 2024 non-insurance expense to be approximately $52.6 billion. It’s important to note that while we’ve made substantial progress executing on our efficiency initiatives, as Charlie highlighted, we still have a significant opportunity to get more efficient across the company. Given how critical it is to continue to invest in our business. On Slide 20, we provide some examples of our areas of focus for 2024 let me highlight a few. Building the right risk and control infrastructure remains our top priority and we will continue to invest in this important work. Charlie discussed many of the technology investments we’ve already made to transform how we serve both our consumer and commercial customers, and we plan to continue investing these areas this year throughout our businesses. We are planning to hire more bankers and advisors to grow our Wells Fargo Premier Offering to our affluent clients. We plan to launch a new travel oriented credit card as part of our autograph suite of products, as well as a new small business credit card this year. To better serve our commercial clients, we plan to continue higher within investment banking and commercial banking to support priority sectors and products to help drive growth. Now, let me conclude with Slide 21, where we will discuss return on tangible common equity. When we first discussed our path to improving returns on the fourth quarter 2020 earnings call, we had an 8% ROTCE. Since then, we have taken multiple actions to improve our returns, including executing on our efficiency initiatives, investing in our businesses to help drive growth and returning excess capital to shareholders, including increasing our common stock dividend $0.10 to $0.35 per share and repurchasing $32 billion of common stock. These actions help to improve our ROTCE, our reported ROTCE in the fourth quarter was 9%, but as we highlight in the table, our ROTCE was impacted by a number of notable items. Our 2023 returns also reflected the benefit of rising rates, which helped to drive strong net interest income growth, and as I’ve already highlighted, we expect net interest income to decline this year. We still believe, we have an achievable path to a sustainable 15% ROTCE over the medium term as we continue to make progress on transforming the company. There are several key factors that support our belief. Our ability to return excess capital, we currently have a significant amount of excess capital, 2.5 percentage points above our regulatory minimum buffers for CET1 and as I already highlighted, we expect to increase our share repurchases this year. I highlighted the progress we’ve already made to reposition our Home Lending business, including reducing the amount of third party mortgage loans serviced by 18% from a year ago. As we continue to streamline this business, we expect the profitability to improve. We’ve grown our Credit Card business with balances up 40% since the end of 2021 and new accounts 25% higher than the fourth quarter of 2021. However, the current profitability of this business has been impacted by acquisition costs and allowance build, and we expect profitability to improve as the portfolio matures. Finally, we’ve made significant investments the last few years across our franchise to better serve our customers, and help drive growth. We expect the revenue growth that these investments should generate in businesses like Corporate Investment Banking and Wealth And Investment Management will help fund additional investments. So, we have many drivers to close the gap and improve returns. In summary, our results in 2023 demonstrated our commitment to improving our financial performance. We grew revenue, reduced expenses, increased capital returns to shareholders and maintained our strong capital position. We will now take your questions.

Steven Chubak:

Hi, good morning. Happy New Year. Mike, I was appreciate all the NII detail. Just given all the different puts and takes that you cited, I was hoping you could provide some context as to how you’re thinking about the exit rate for NII in 2024 per the guidance, just given expectations per the street that NII should inflect positively in 2025. Just want to get a sense as to how you’re thinking about where NII could potentially trough or stabilize based on the forward curve?

Steven Chubak:

Very helpful. And then for my follow up just on expenses, the core expense guidance shows another net reduction in 2024. You noted that you’re making investments, but those will be offset by efficiency savings. And just want to get a sense as to how long you can sustain that flattish core expense trajectory, continue to fund investments with future efficiencies.

Steven Chubak:

That’s great. Thanks so much for taking my questions.

John McDonald:

Hi, good morning. Mike, I wanted to ask about the fee income drivers for this year. Charlie mentioned obviously some examples of progress that you’ve gotten leverage on investments and then obviously you’ve got cyclical headwinds and tailwinds. So maybe just could you walk through some of the bigger fee income drivers and give your sense of puts and takes and how you’re feeling this year going into the fee revenue outlook?

John McDonald:

Okay. And just to follow up on the net interest income idea of bottoming towards the end of the year, theoretically, what would be the drivers of that kind of bottoming? Do you have fixed asset reprice that helps? Or is it kind of assumed new asset generation? Maybe you could just wrap that into some thoughts about what would drive that inflection in the context of any update on rate sensitivity as well? Thanks.

John McDonald:

Understood. Thanks.

Ken Houston:

Hi, thanks. I’m sorry if I’m going to stay on theme, but just as you start to the beginning of the year and deposit price continues to flow through and the mix continues to change. As far as the DDAs, I’m wondering if you could just help us understand, how do you expect that trajectory? DDAs definitely still out flowing, which is expected, but in terms of mix and then just how you expect the deposit rate of change or the downside beta to act through the cycle. Can you help us understand that, Mike? Thanks.

Ken Houston:

Okay. So, if I think about that, then would you imply that the first quarter starting point, we see a little bit more of an NII step down and then as you get to that hopeful stabilization in the back half, like just because of how that moves?

Ken Houston:

Right. Okay. I understand. Okay. Thanks, Mike.

Scott Siefers:

Good morning, everyone. Thanks for taking the question. I was hoping you might be able to spend just another moment on the longer-term cost opportunity. I guess, I’m just curious if there’s a point where some of the investment spending pressures ease and there might still be an opportunity for costs to decline more visibly on an underlying basis or by contrast, is this level of investment spending, is that something that’ll just be sort of pretty consistent year in and year out?

Scott Siefers:

Perfect. Thank you. And then maybe just a question on credit. You all have been very proactive in dealing with sort of the office CRE situation. Just curious to hear how your, what your thoughts are on how this cycle, that asset class sort of plays out from here. Does it just remain a long slog? Or is there perhaps a point where your conservatism has sort of gotten ahead of issues and you might actually be able to relieve a bit of that really healthy double-digit reserve?

Scott Siefers:

Okay. Perfect. Thank you very much.

Ebrahim Poonawala:

Hey, good morning. I guess maybe just to the – thanks for all the details on NII expenses and the ROTCE. I guess if you had to [ph] and it’s not lost upon anyone with regards to the investments you’ve made in the franchise. But when you look at the slide, fourth quarter 2020 ROTCE 8%, three years fast forward, it’s gone from 8% to 9%. Assuming there’s no real perfect world to operate a bank, from a shareholder perspective, quickly, do you think we can get from 9% to 15%? You’ve given us the moving pieces. But I’m just wondering maybe Charlie, Mike, how do you think about, is it a two-year slog? Is it longer than that? Love some perspective there.

Charlie Scharf:

And I’ll just add a little bit to it and to be a little bit repetitive. When you look at that slide, again, those are reported numbers. And so, the way we think about it is the earnings power of the company today on an ROTCE basis, you got to make your own assumptions for what’s in and out and what normalized net interest income is because we’ve been clear that we’ve been over earning. But when you look at, when you add back these expenses like FDIC, which relate to the past and this quarter and aren’t going to go forward. Our ROTCE is up 50% from where it was. So that is significant change. On top of that, when we look at the actions, as Mike said, that we’ve taken in the home lending business, when we see the trajectory of growth that we’re seeing in the card business, just as those things mature, let alone being able to deploy the excess capital we have, those are things that are in process. We don’t have to really do anything more other than let them mature and let them play out that is continued movement towards the 15% ROTCE. And then the last thing I’d say is just away from those things. When we got here, these businesses were not on trajectories to grow. The card business wasn’t growing, the corporate investment bank wasn’t growing. You can go through them one by one. And so, as we’ve talked about making investments, offsetting some of these efficiencies that we’ve seen and making determinations on whether or not they’re paying off. Those things that we’re seeing these increases in share, we’re pretty confident that they are going to continue to drive improved results over time. And so, as I said in my remarks, we’re clearly susceptible to market environment both for interest rates and the overall economic environment in the shorter term, but we feel both really good about the progress that we’ve made. We feel really good about what the path we see going forward is recognizing that there’s still a lot more that we have to do.

Mike Santomassimo:

Yes. Yes. I mean, look, as time goes by, we’ve got – we get better and better information around where things are going to play out. But it is still somewhat specific to the asset. And so I wouldn’t try to generalize yet until we see more transactions and more data points. When you look at the broader CRE market at least in our portfolio, we are not seeing the stress spread to other parts of it.

Operator:

The next question will come from Erika Najarian of UBS. Your line is open.

Mike Santomassimo:

It’s Mike. I’ll take a shot at that Erika. And when you look at the – when you look at our full year numbers, we – I tried to highlight in my comments that we do expect that our repurchases will be higher than what we did in 2023, the exact timing and pace, I’m not going to get into, but and then we’ll look at all of as we do every quarter, we look at all of the different risks that could be out there including, thinking about where CCAR or the stress tests will come out. And from a Basel III perspective, we are in really good shape as we said last quarter. We’re already above where we need to be from a, if it was fully implemented as is, and we’re hopeful that that won’t be the case. And so, and we’re going to generate more capital as we go through the year. And so we’ve got as I said, we’ve got plenty of excess capital. We plan to buy back more stock than we did in 2023 and we’ll leave the exact timing and pace to future calls.

Mike Santomassimo:

Well, it is certainly possible, the balance sheet will get smaller throughout the year. I think that’ll just be a function of what we ultimately see on loan growth. How much we end up deploying into securities as we go through the year and where it makes sense. We will let the balance sheet just ebb and flow back down. And I think that’s the way we’re sort of thinking about it now. And I think at this point, there’s not a lot of cost to leaving at the Fed given where the – where IORB is. And so that’ll change as rates start to come down and we’ll calibrate the overall size based on what we think the opportunity is.

Operator:

The next question will come from John Pancari of Evercore ISI. Your line is open, sir.

Mike Santomassimo:

Well, we don’t – we’re not going to try to predict exactly where the NIM is going to go quarter by quarter. But I think as you would guess, right, assuming the balance sheets that are a relatively stable size as NII starts to come down, the NIM will compress, right? And there’ll be tailwinds and headwinds related, as the assets as the securities portfolio reprices, that’ll be a tailwind. As you start to see variable rate loans come down, as rates come down, that’ll be a headwind. And so, I think most of it should be relatively simple to kind of estimate as you sort of plug the assumptions into your model, but there’s no sort of magic to it. But you would expect NIM to continue to come down as the balance sheet stays stable and NII comes down.

Mike Santomassimo:

Yes. And really the allowance I would, allowance coverage ratio I would pay attention to on the slide is our CIB, CRE office portfolio, which is close to 11%. And that’s really the institutional style office buildings where really the stress is coming through. When you look at the charge-offs, it was across a number of properties. It wasn’t one or two. It was pretty geographically dispersed across different cities and across different parts of the country, so there wasn’t an over concentration anywhere. Each of the properties have very specific situations, and so there was a pretty wide range in terms of where the price cleared or where the appraisal came in. A good chunk of these properties are being marked, because we’ve got new appraisals for various reasons. A small amount of it was actually realized, because the note or the property was sold. And so for a good amount of it, we’ll see how it ultimately plays out. There could be recoveries as we go. But it was a pretty, as you would expect, it was a substantial decline in what people thought the value of the properties was just a year or two ago.

Operator:

The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.

Mike Santomassimo:

Yeah, I would, and just like I think John at McDonald asked it earlier, I would look at our interest rate sensitivity, Gerard, and as I said, we’re still modestly asset sensitive. A little bit less at the end of the fourth quarter than the third quarter. And I think it is a pretty linear sort of equation there. And so I would just look at the 100 basis point move that we have in there. It’s around a couple of billion dollars of move when you look at that as of the end of the third quarter, again, it’ll come in slightly from that likely into – at the end of the fourth quarter and just use whatever assumption you want, and it is a pretty linear. Within reason, it’s a pretty linear equation.

Mike Santomassimo:

Well, there’s certainly some portion of that, that will is just the cost of doing business. Now, even on the fraud and BAU operating losses, we, as most people, I would think, are continuing to invest in capabilities to reduce those more and more and that’s we continue to do that as well. And then I think as we continue to put more of the issues, historical issues behind us, hopefully the overall number continues to trend downward.

Operator:

The next question comes from Matt O’Connor of Deutsche Bank. Your line is open.

Mike Santomassimo:

Yes, I won’t give you a specific number, but the way you’re thinking about it is exactly right. I think as you look at the portfolio that we have, which might be a little different than others is, we launched the new product set starting a little over two years ago, but you’ve sort of seen more meaningful new account growth starting about two years ago. And so you’re in that normal maturation curve and seasoning of sort of losses as they come on. And so we would expect that it would continue to trend a little bit higher from where it is.

Mike Santomassimo:

Yes, and maybe I’ll start. And I think as Charlie kind of highlighted in his script, the averages all look fine when you look at liquidity or deposit balances. And certainly even when you look at the cumulative wage growth that you’ve seen over the last few years, in aggregate, you go, it paints a pretty good picture. But when you go below that, and we’ve tried to highlight this a few times over the last year or so, when you go below that, there are certainly cohorts of clients or people that are stressed. And the further you go down in income levels or the further you go down in wealth levels, the cumulative impact of inflation has really taken a toll. And so you’re going to have some percentage of people that are feeling much more stressed than what the aggregate numbers would imply. And in some cases, their liquidity is going to be lower than it was pre-COVID. In some cases, they’ve been having to build bigger credit card balances. And so for us, it’s not a big part of the overall portfolio, but you’re going to continue to see that, which is something we should all have expected and expect to see as you go forward.

Matt O’Connor:

Okay, that’s helpful. And then just lastly, if I can squeeze in, remind me, like the targeted customer, I think it’s like prime plus. But any way to frame that in terms of whether it’s Spico [ph] or wealth metric or homeowner percent or any way just to frame it, it is becoming a bigger part of the company, obviously so. Thanks.

Matt O’Connor:

Okay, thanks for all the color.

Dave Rochester:

Hey, good morning, guys. Sorry for one more question on the NII guide here, but was just curious how much of that decline that you’re expecting for this year is driven by that continued remix of deposits and the lower non-interest bearing deposits you talked about and where are you assuming that DDA mix settles out this year?

Dave Rochester:

Okay. And then on capital, was curious what more buybacks means for capital ratios and that 2.5% buffer you talked about by the end of 2024. All else equal is the thought that you’ll take those ratios and that buffer lower this year.

Dave Rochester:

Great, thanks. Appreciate it.

Manan Gosalia:

Hey, good morning. Two quick ones for me. I know you said your guide includes stable deposits, but a shift towards interest bearing deposits. Would an end to QT stop that share shift, or is it different, given you’re seeing that share shift from the consumer side?

Manan Gosalia:

And can you expand on that a little bit? Why would that be?

Manan Gosalia:

Got it. Okay. And then just on credit, how do falling rates impact your outlook for CRE losses at the margin? Do you feel better about working with borrowers and mitigating losses and NPLs and how long this takes to work out, or have things not changed that meaningfully yet?

Manan Gosalia:

Great. Thank you.

Operator:

Thank you all for your participation on today’s conference call. At this time, all parties may disconnect.

John Campbell:

Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third quarter earnings materials, including the release, financial supplement and presentation deck, are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financials referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Michael Santomassimo:

Thank you, Charlie, and good morning, everyone. Net income for the third quarter was $5.8 billion or $1.48 per diluted common share, both up from the second quarter and a year ago. Our third quarter results included $349 million or $0.09 per share of discrete tax benefits related to the resolution of prior period tax matters. Turning to capital and liquidity on Slide 3. Our CET1 ratio increased to 11% in the third quarter, 2.1 percentage points above our new regulatory minimum plus buffers effective on October 1. This was up from 10.7% in the second quarter as higher earnings, the approximately 14 basis point benefit from the sale of certain private equity investments and lower risk-weighted assets were only partially offset by share repurchases and dividends. During the third quarter, we repurchased $1.5 billion in common stock. Our strong capital levels position us well for the anticipated increases related to the Basel III Endgame proposal released in the third quarter. Based on where we ended the quarter, we estimate that our CET1 ratio would be 50 basis points above the fully phased-in required minimum if the proposed rules were implemented as written after factoring the growth in RWAs and the resulting decline in our stress capital buffer as well as the impact of the new G-SIB buffer calculation changes. Importantly, this is an early estimate, subject to change and is before any actions we may take to mitigate the impact of the new rules. Looking forward, we expect to continue to have capacity to increase our CET1 ratio, while we plan to continue to repurchase shares as we wait for the capital rules to be finalized. Turning to credit quality on Slide 5. As we expected, net loan charge-offs continue to increase, up 4 basis points from the second quarter to 36 basis points of average loans. Commercial net loan charge-offs declined modestly from the second quarter to 13 basis points of average loans as lower losses in our commercial and industrial portfolio were partially offset by $14 million of higher losses in commercial real estate. We had $32.2 billion of office loans, down 3% from the second quarter, which represented 3% of our total loans outstanding. Vacancy rates continue to be high and the office market remains weak. Our CRE teams continue to focus on monitoring and derisking the portfolio, which includes reducing exposures. As we highlighted in the past, each property situation is different and there are many variables that could determine performance, which is why we regularly review this portfolio. As expected, consumer net loan charge-offs continued to increase and were up $98 million from the second quarter to 67 basis points of average loans. Residential mortgage loans continued to have net recoveries, while our other consumer portfolios all had higher losses with the largest increase in our auto portfolio, which was up from the second quarter seasonal lows. Nonperforming assets increased 17% from the second quarter as growth in commercial real estate nonaccrual loans more than offset the decline in commercial and industrial as well as modest declines across all consumer portfolios. The decline in commercial industrial nonaccrual loans was primarily due to payoffs and paydowns, which is a good reminder that the resolution of nonperforming assets doesn't always result in charge-offs. The increase in commercial real estate nonaccrual loans was driven by a $1.3 billion increase in the office nonaccrual loan. Moving to Slide 6. Our allowance for credit losses increased $333 million in the third quarter primarily for commercial real estate office loans as well as for higher credit card loan balances, which was partially offset by a lower allowance for auto loans. Since the composition of our office portfolio is relatively consistent with what we shared with you in the past few quarters, we did not include a separate commercial real estate slide this quarter. However, we did update the table showing the allowance for credit losses coverage ratio for commercial real estate, including the breakdown of the office portfolio. We've not seen significant increases in charge-offs in our commercial real estate office portfolio yet. However, we do expect higher losses over time, and we continue to increase the coverage ratio in our commercial and -- in our CIB commercial real estate office portfolio from 8.8% at the end of the second quarter to 10.8% at the end of the third quarter. On Slide 7, we highlight loans and deposits. Average loans were down modestly from both the second quarter and a year ago. While we continue to have good growth in credit card loans from the second quarter, most other portfolios declined. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 195 basis points from a year ago and 24 basis points from the second quarter due to the higher interest rate environment. Average deposits declined 5% from a year ago predominantly driven by deposit outflows in our consumer and wealth businesses, reflecting continued consumer spending and customers reallocating cash into higher-yielding alternatives. Average deposits also declined in Commercial Banking, while they stabilized in Corporate and Investment Banking. As expected, our average deposit costs continued to increase, up 23 basis points from the second quarter of 236 basis points with higher deposit costs across all operating segments in response to rising interest rates. However, the pace of the increase has slowed, and our percentage of average noninterest-bearing deposits decreased modestly from the second quarter to 29% but remained above prepandemic levels. Turning to net interest income on Slide 8. Third quarter net interest income was $13.1 billion, up 8% from a year ago, as we continued to benefit from the impact of higher rates. The $58 million decline from the second quarter was due to lower average deposit balances, partially offset by 1 additional day in the quarter and the impact of higher interest rates. Last quarter, we increased our expectations for full year 2023 net interest income growth to approximately 14% compared with 2022, which was up from our expectation of 10% growth at the beginning of the year. We now expect full year 2023 net interest income growth to grow by approximately 16% compared with 2022 with the fourth quarter 2023 net interest income expected to be approximately $12.7 billion. The expected decline in interest income in the fourth quarter was primarily driven by our assumptions for additional deposit outflows and migration from noninterest-bearing to interest-bearing deposits as well as continued deposit repricing, including continued competitive pricing on commercial deposits. Turning to expenses on Slide 9. Noninterest expense declined from a year ago driven by lower operating losses and increased 1% from the second quarter driven by higher operating losses, severance expense and revenue-related comp. Last quarter, we updated our expectations for full year 2023 noninterest expense excluding operating losses to approximately $51 billion. We now expect it to be approximately $51.5 billion or approximately $12.6 billion in the fourth quarter. The increase reflects additional severance and other onetime costs, revenue-related compensation and some lags in realizing efficiency saves. We've reduced head count every quarter since the third quarter of 2020, and it was down 3% in the second quarter and 5% from a year ago. We believe we still have additional opportunities to reduce head count and attrition has remained low, which will likely result in additional severance expense for actions in 2024. We are working through our efficiency plans now as part of the budget process. Additionally, if the FDIC deposit special assessment related to the events from earlier in the year was finalized in the fourth quarter, it would increase our expected fourth quarter expenses. And finally, as a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating results. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 10. Consumer, small and business banking revenue increased 7% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. Charlie highlighted the investments we were making in our Chicago branch network, and we're also making investments in refurbishing branches across our existing network. Additionally, we are bringing our digital onboarding experience to our branches, creating a fast and easy experience for our customers. At the same time, we've reduced our total number of branches by 6% from a year ago. Home lending revenue declined 14% from a year ago due to a decline in mortgage banking income driven by lower originations in servicing income, which included the impact of sales of mortgage servicing rights. We continue to reduce head count in home lending in the third quarter, down 37% from a year ago, and we expect staffing levels will continue to decline. Credit card revenue increased 2% from a year ago due to higher loan balances, partially offset by introductory promotional rates and higher credit card rewards expense. Payment rates have been relatively stable over the past year and remained above prepandemic levels. New account growth continued to be strong, up 22% from a year ago, reflecting the continued success of our new products and increased marketing. Importantly, the quality of the new accounts continue to be better than what we were booking historically. While the majority of new cards were to existing Wells Fargo customers, we're increasingly attracting more customers that are new to Wells Fargo. Auto revenue declined 15% from a year ago driven by continued loan spread compression and lower loan balances. Personal lending revenue is up 14% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 70% from a year ago and 18% in the second quarter. We continue to make progress on the strategic plans we announced earlier this year, including focusing on serving Wells Fargo Bank customers as well as borrowers in minority communities. We did not originate or fund any correspondent mortgages in the third quarter. The size of our auto portfolio has declined for 6 consecutive quarters, and balances were down 9% at the end of the third quarter compared to a year ago. Origination volumes declined 24% from a year ago, reflecting credit tightening actions as well as continued price competition. Our origination mix continue to shift towards higher FICO scores, reflecting the credit tightening actions we've taken over the past year. Debit card spend increased 2% from a year ago with growth in most categories offsetting declines in fuel, home improvement and travel. Credit card spending continued to be strong and was up 15% from a year ago. All categories grew from a year ago, including fuel, which rebounded after declining in the second quarter. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue increased 23% from a year ago due to the impact of higher interest rates and higher loan balances. Asset-based lending and leasing revenue increased 3% year-over-year due to higher loan balances as well as higher revenue from renewable energy investments. Loan balances were up 7% in the third quarter compared to a year ago driven by growth in Asset-Based Lending and Leasing. Average loans were down 1% in the second quarter due to declines in Middle Market Banking. After increasing the first half of the year, revolver utilization rates declined in the third quarter to levels similar to a year ago. Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 20% from a year ago driven by higher lending revenue, stronger treasury management results reflecting the impact of higher interest rates, and higher investment banking revenue reflecting increased activity across all products. As Charlie highlighted, we've continued to hire experienced bankers, helping us deliver for our clients and positioning us well when markets improve. Commercial real estate revenue grew 14% from a year ago, reflecting the impact of higher interest rates and higher revenue in our low-income housing business, partially offset by lower loan and deposit balances. Markets revenue increased 33% from a year ago driven by higher revenue in structured products, equities, credit products and foreign exchange. We've had strong trading results for 3 consecutive quarters as we benefited from market volatility and the investments we've made in technology and talent to grow this business. Average loans were down 5% from a year ago driven by banking, reflecting a combination of slower demand payoffs and modestly lower line utilization. Average loan balances were stable with the second quarter. On Slide 14, Wealth and Investment Management revenue increased 1% compared to a year ago driven by higher asset-based fees due to the increased market valuations. Net interest income declined from a year ago driven by lower deposit balances as customers continue to reallocate cash into higher-yielding alternatives as well as lower loan balances. While average deposits were down compared to both the second quarter and a year ago, the pace of the decline slowed in the third quarter. As a reminder, the majority of WIM, Wealth and Investment Management advisory assets were priced at the beginning of the quarter, so third quarter results reflected market valuations as of July 1, which were higher from a year ago. Asset-based fees in the fourth quarter will reflect market valuations as of October 1, which were also higher from a year ago but were lower from the third quarter pricing date. Average loans were down 4% from a year ago primarily due to a decline in securities-based lending. Slide 15 highlights our corporate results. This segment includes venture capital and private equity investments, including the investments and funds that we sold in the third quarter. The sale had a nominal impact on third quarter net income. Revenue declined $345 million from a year ago, reflecting assumption changes related to the valuation of our Visa B common stock exposure as well as lower venture capital revenue. In summary, our results in the third quarter reflect a continued improvement in our financial performance. During the first 9 months of this year, we had strong growth in revenue, pretax provision profit and diluted earnings per share compared to a year ago. As expected, our net charge-offs have continued to slowly increase from historical lows, and we increased our allowance for credit losses by over $1.9 billion this year primarily for CRE office loans and higher credit card loan balances. We are closely monitoring our portfolios and taking credit tightening actions where we believe appropriate. Our capital levels have increased, and we expect to continue to return excess capital to shareholders. We will now take your questions.

John McDonald:

I wanted to ask about the expenses, Mike. Obviously, improving efficiency has been a big goal of yours. You made progress even while investing in regulatory. What are the additional opportunities to improve efficiency from here as you head into 2024? I know you're probably not ready to give guidance for '24 yet, but are you going into the budget planning with a mindset that they should be roughly flattish? Any comments you can give on that would be helpful.

John McDonald:

Okay. Fair enough. And then on the net interest income outlook for the fourth quarter, are you building in assumptions -- you mentioned deposit outflows and mix shift assumptions? Are they assuming that things accelerate from here or similar to what you've seen this quarter? It seems like a pretty big sequential decline. Just kind of wondering what some of the assumptions are there.

Operator:

The next question will come from Steven Chubak of Wolfe Research.

Charles Scharf:

Well, let me just -- I'll start and then I'll hand it over to Mike. We were not trying to -- or I was not trying to give any direction about where we thought the appropriate buffer would be. We're just trying to be very factual about where we are. And once everything is finalized, we'll determine what the right buffers are and we'll communicate those. So please don't try and read any more into what I said other than just that.

Steven Chubak:

And for a follow-up, just on the trading business. It continues to surprise positively versus expectations. You cited some of the investments that you've made, the benefits of volatility. But with revenues running multiples above what we've seen in prior years and that $1 billion-plus bogey being reached for 3 consecutive quarters, I was hoping you could just speak to whether we should be underwriting $1 billion-plus as a new normal or if there were any cyclical benefits or anomalous benefits that maybe we shouldn't be underwriting go forward. Just trying to think about what the normalized level of trading revenue should be given some of the investments you've made scaling of that business.

Operator:

The next question will come from Scott Siefers of Piper Sandler.

Michael Santomassimo:

Sure. When you look at mitigation -- I'll just give you some examples of the types of things we're thinking about. So when you look at securities finance transactions, you have haircut -- collateral haircut floors that get implemented. And I don't want to get too technical on it because -- but there's some technical requirements there that just don't seem to make sense to us. And so -- but if they do get implemented as written, we'll adapt and we'll change the way we -- what collateral we require from clients to do trades or we'll reprice them. And so there'll be a number of things that we can do like on transactions like that, but it gets very, very technical for each of the underlying deals. There will be -- I know others have talked about this, too. We'll have to decide how much tax equity investing we do in renewables. If the risk weights hold there, it's just -- the math just doesn't make sense from a return perspective. And so we'll probably have to do less -- we'll probably do less of those. And so there's a number of things like that as you go through each of the underlying portfolios just don't make sense. And we're going to -- we'll make the adjustments as we need to. Now we're also in a position where we've got plenty of flexibility as we talked about in the prepared remarks, right? Our capital levels today are there with a buffer already. And so we have the flexibility to handle it however we think makes sense to -- for each of the underlying businesses. And what we want to make sure we do is like we're building real businesses and client relationships over a long period of time. So it's not about necessarily walking away from clients. It's about finding ways to serve them in ways that both makes sense for them and from a return perspective for us. But it's going to be a very, very granular conversation. Some of it will be repricing. You got 364-day revolvers that will need to be repriced. You've got -- there's a whole bunch of very technical things like that, that will get done over time once the rule is finalized. Switching to the partnership we have with Centerbridge. Look, it's a -- we have been getting demand from clients for a while now in the middle-market kind of mid-corporate space for solutions to help them in financing that they need where it likely wouldn't make sense for us to put on our balance sheet anyway. And so instead of having telling clients we can't help them or having them go direct to somebody else, we built a partnership with Centerbridge that allows us to remain an adviser to a client and help them solve a problem they may have. And so that's the way we're thinking about it. And we're excited to work with Centerbridge and that team, and they're a very high-quality team, they have done a lot over time. And I think this gives us another arrow in the quiver to help us provide solutions for clients. And so it's early, and it will grow over time, hopefully. And hopefully, clients will see it in the same way.

Michael Santomassimo:

Yes. I mean we'll see. I think we do need to wait until we get towards the end of the year and into January for us to give you a real view on 2024. I mean, I think what the last number of quarters have -- just show over and over and over that there's a lot still to play out here. And to get too far ahead of ourselves on it for next year, I think, would be a mistake at this point. So -- but look, the same -- it's the same drivers we've been talking about for a while, right? It's like what's going to happen with deposits, the mix, the pricing. And then to a lesser degree, right now, it's loan growth, but it still matters over a long period of time as well.

Matthew O’Connor:

Can you just elaborate on the comment of tightening the credit box a bit? And then, I guess, specifically in credit card, thoughts there? I know you've been leaning into it and have had real good growth. And I think it's still only about 5% of your loan book, but wondering your thoughts of, is this really the right time to be leaning into credit card maybe as we're kind of later cycle.

Charles Scharf:

Just on -- and just to be clear, I mean it's -- and it's the very basic stuff. It's just upping the lower FICO boundaries, it's layered risks. And so it's just as you continue to make these changes, you just -- we're just continuing to do the same types of things without just wholesale exits or anything like that. It's just kind of a smart tightening.

Matthew O’Connor:

Okay. That's helpful. And then just a clarification on the severance costs. Can you give us what the absolute amount was this quarter? I think you gave us the change versus a year ago and linked quarter. But what was the absolute level this quarter?

Matthew O’Connor:

Okay. So about $200 million?

Operator:

The next question will come from John Pancari of Evercore ISI.

Michael Santomassimo:

Yes, sure. When you -- the hard part of office right now is that there aren't a lot of trades happening yet, right? There's a few in certain cities, and they're all a little bit different in their complexion. So you still have somewhat limited information in price discovery in a lot of places. And so we're doing -- we do a lot of our own work to try to evaluate each of the underlying properties and what they could be worth in a bunch of different scenarios. And then it's feeling like the appraisal market is starting to kind of catch up, where they're -- we're seeing appraisals that are more realistic and more updated. So that's certainly bringing in different data points as we look at it. And as we looked at the quarter, we sort of look at all those data points and the underlying loans and try to do our best to come up what we think the different range of loss could look like here, and that's what's embedded in the results. Hopefully, we end up being conservative. But nonetheless, it's possible that this plays out this way. And so we haven't really seen any losses of significant yet -- significance yet, but we will. And it just takes some time for it to play out for each of these underlying situations, probably longer than any of us would hope to -- you'd hope that you could bring some of this stuff to resolution maybe faster than it really takes in real life. But it's really looking at all the data points, the limited sales, the new appraisals that are coming through and then our own analysis for each of the underlying properties.

Michael Santomassimo:

Yes. Not a lot. I mean you certainly see certain markets that might appear to have some oversupply in condos in certain places. But it feels like that will work itself out over a period of time. We're not seeing real systematic stress in the portfolio at this point.

Michael Santomassimo:

Yes. No. Look, the only thing I'd say on the risk and reg work is that we're going to spend whatever we need to spend and put the resources we need against it to get it done. And we're going to continue to do that towards...

Operator:

The next question comes from Erika Najarian of UBS.

Charles Scharf:

Yes. Well, let me take a shot at that. I think -- listen, I think the answer is, to your question on share, without getting overly specific, yes. We think when you look at where we stand on our growth in our Corporate Investment Banking share, whether it's on the trading side or whether it's on the fee-related side, our shares have grown. And certainly, on the -- within the fee-based side of the business, we do hope they continue to grow. That's driven by the investments that we're making, and investments meaning people in terms of growing our capabilities. And we've got clear goals and targets by person that we bring on in terms of what we expect, and we're going to be tracking to that. And just a reminder, certainly, when we brought some of the people on, they bring some -- a lot of clients with them, some new transactions in the short term. And we've been beneficiaries of that over the last couple of quarters just as we brought some people on. But these are relationship-based businesses, and transactions don't occur every single quarter. So we would expect our share to continue to grow. And I just -- as a reminder, without taking any additional risk overall because we're taking the risk today relative to the exposures that we have. When we look at where we can see growth coming overall across the entire company, we just go business by business. Absolutely, in our consumer small business -- small and business banking segment because -- we've basically been treading water there as we stabilized that business going back to the issues that we had there, which was an incredibly difficult thing to do, and we did. And we've not been our -- we've not been on our front foot in that business. We're going to do it in a very different way than this company did it historically, but there are opportunities to be on the front foot and actually grow share on an organic basis. And so incredibly excited about that opportunity. Not excited, as I said, about growing share in mortgage. That's not where we're after, and it's -- we've talked about where we're going there. Auto, it's about returns, not growth. So don't look for a lot of growth there unless the dynamics change in the business. Mike spoke about card. We're incredibly energized by the evidence that shows with our brand and our relationships. When you put a great product out there, we get positive selection and real growth. And by the way, look at our spend numbers. I mean, if you want to see like the impact of what it means, just look at the spend that we're seeing, which is much higher than the industry levels. Our wealth business, as you pointed out, no question, also treaded water for a long period of time. We're attracting people and teams. We're rolling out new products. So we feel really good about the opportunities that are there. And in the middle market segment, where it's a little bit more business as usual because it is such a strong franchise for us. Even there we look back at our asset-based lending businesses and the things that we acquired from GE. They ran as stand-alone businesses here for a long period of time, and we didn't bring the entire product set of Wells Fargo to those customer bases. Under Kyle Hranicky, Kristin Lesher and MK DuBose or Mary Katherine DuBose are diligently working through that and bringing the Investment Banking product to that entire Commercial Banking product. So I could go on. I just -- it should be broad-based. Most of it, by the way, I'll point out, in terms of when we see opportunities, it is fee-based growth, not because we've dictated that but just because we focused a lot on NII as a company historically. And we just have a lot of opportunities that we get excited about that will play out over a period of time.

Charles Scharf:

Let me start. And Mike, you either come in at the end or just make your comments along the way as well. So I think, first of all, we think about it as 2 separate exercises that we go through. And we're -- and it's very timely because we're in the middle of going through the exercise for next year as most other companies are, which is this company is not efficient, like period, end of story. And I've described this, even with all of the reductions that we've made, it's not surprising because as you peel the onion back, other things present themselves. And so you go in order of things that are more obvious and things like that. But when we sit around as a management team, we feel great about the progress. And there's no clearer way to see that than in the head count numbers, which ultimately drive the expense of the company. And if I -- if we stood here and told you we were going to drive the head count down that much in this period of time, I'm not sure you'd have believed us. And so when we say we're going to do something, we really do mean it. And so when we sit around as a team, there are many more efficiencies to get, and we're diligently working through those. And then separately from that, it's when we talk about making investments in the place, are we getting the payoff for it. And so whether it's the marketing in the card business, where we're spending more money on marketing than we had in the past, and we feel great about, as Mike pointed out, not just the volumes that we're getting but the underlying quality relative to how we had modeled that. And so we'll do that with each and everything. And ultimately, we need to make a decision as we finalize the process of the budget on just much more of a tactical basis of how those things net out. We're well aware of what shareholders are looking for. We're well aware of that the expense side of this company is an important equation in what investors look at us in terms of where -- unlocking value, and we hear it and we see it. And whatever -- wherever we come out when we talk to you about our guidance for next year, we will explain why we got to where we are. It's going to include efficiencies. It's going to include investments. Whether it -- where that turns out, we'll explain it. And I think so far, we've been as clear and as transparent as we can be. And if it makes sense, you'll like it. And if it doesn't, you won't, you'll tell us. But so far, we've been able to have alignment there. But overall, I would just -- it's a long way of saying it's not lost on us that we have opportunities both to reduce expenses and to invest. But making sure that the overall expense level stays in check at this place is incredibly important to us, and we have to prove that there is revenue growth there supporting investments that we make.

Ebrahim Poonawala:

Just Mike, for you, a follow-up on credit on the C&I side, nonaccrual charge-offs staying relatively flat, I guess, as we look through. Just talk to us in terms of when you look at that C&I book, is the impact of the Fed rate hikes felt by your customers? And how are you seeing that evolve? Is your expectation right now -- you talked about the economy being resilient. Are you seeing any soft spots on the C&I book where you're seeing bankruptcies rise within a vertical or a certain segment?

Ebrahim Poonawala:

Got it. And do you think your customers have felt the hit from higher rates already? Or is that on the comp?

Ebrahim Poonawala:

Got it. And just one separate quick question on the outlook for buybacks. Clearly, big reset lower. When you -- like your excess capital, you probably have visibility on the worst case on Basel Endgame. It's very rare that banks have excess capital when the stocks are actually near lower. You're creating a tangible book. How do you think about outside of CCAR and SCB in terms of near-term pace of buybacks over the next few quarters relative to what we did this quarter?

Operator:

[Operator Instructions]. Our next question comes from Gerard Cassidy of RBC.

Michael Santomassimo:

Yes. Gerard, I think you really have to pick it apart by the different businesses. I think in the wealth business, it moved quite quickly, right, in terms of seeing deposits decline from where they were and that is now moderated. So it's good to see that, that shifting has sort of slowed down quite substantially in the quarter relative to the last couple of quarters. On the consumer side, the majority of the deposits that we've got sit in accounts with less than $250,000. And so to some degree, these are -- to a large degree, these are operational accounts for folks. And so there's some portion of those funds that are never going to move into other places because people need it in the accounts to live and operate every day. And so I think what's -- so I think we'll see, right? And I think we're all in a bit of uncharted territory at this point with rates being where they are and the pace at which they got there, quantitative tightening happening. And so I think we need to be prepared for it to change. Exactly at what pace and over what period of time, we'll see. But we certainly haven't seen deposit pricing move the way we modeled it a year ago, for sure.

Michael Santomassimo:

Yes. We haven't decided exactly what it'll -- what the buffer will look like after Basel III is implemented. But so far, what we've said a number of times is that 100 basis points is about where we've been targeting. Obviously, we've been running above that for a while. But we'll -- as we get a better view of where these rules are going to shake out, we'll probably talk about that more. But I would think that 100 basis points, at least for now is sort of the bottom end of the range.

Charles Scharf:

All righty. Everyone, thank you very much. We look forward to talking to you again next quarter. Take care now.

John Campbell:

Good morning. Thank you, everyone, for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santomassimo, will discuss second quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our second quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo:

Thank you, Charlie. And good morning everyone. Net income for the second quarter was $4.9 billion or $1.25 per diluted common share, both up from a year ago, reflecting the progress we are making on improving our performance, which I’ll highlight throughout the call. Starting with capital and liquidity on Slide 3. Our CET1 ratio was 10.7%, down approximately 10 basis points from the first quarter. During the second quarter, we repurchased $4 billion in common stock and as Charlie highlighted, subject to Board approval, we expect to increase our common stock dividend in the third quarter. Our CET1 ratio was 1.5 percentage points above our current regulatory minimum plus buffers and was 1.8 percentage points above our expected new regulatory minimum plus buffers starting in the fourth quarter of this year. While we expect to repurchase more common stock this year, we believe continuing to maintain significant excess capital is appropriate until there's more clarity on the new capital requirements that Charlie highlighted. Our liquidity position remained strong in the second quarter with our liquidity coverage ratio approximately 23 percentage points above the regulatory minimum. Turning to credit quality on Slide 5. Overall credit quality remained strong, but as expected, net loan charge-offs continued to increase from historically low levels and were 32 basis points of average loans in the second quarter. Commercial net loan charge offs increased $137 million from the first quarter to 15 basis points of average loans. Approximately half of the increase was in commercial banking where the losses were borrower-specific with little signs of systematic weakness across the portfolio. The rest of the increase was driven by higher losses in commercial real estate, primarily in the office portfolio. I'll share some more details on the CRE office exposure on the next slide. Consumer net loan charge-offs increased modestly, up $23 million from the first quarter to 58 basis points of average loans. The increase primarily came from the credit card portfolio as residential mortgage loans continue to have net recoveries and auto losses declined. While consumer credit performance remained solid overall, and we’ve continued to take incremental credit tightening actions across the portfolios, we expect consumer net loan charge-offs will continue to gradually increase. Non-performing assets increased 14% from the first quarter as lower non-accrual loans across the consumer portfolios were more than offset by higher commercial non-accrual loans, primarily in the commercial real estate portfolio. Our allowance for credit losses increased $949 million in the second quarter, primarily from -- for commercial real estate office loans as well as for higher credit card balances. We've updated Slide 6, which highlights our commercial real estate portfolio. We had $154.3 billion of commercial real estate loans outstanding at the end of the second quarter with $33.1 billion of office loans, which were down modestly from the first quarter and represented 3% of our total loans outstanding. The office market continues to be weak and the composition of our office portfolio was relatively consistent with what we shared with you in the first quarter. As Charlie mentioned, our CRE teams are focused on surveillance and de-risking which includes reducing exposures and closely monitoring at-risk loans. This quarter, we added a table to this slide that breaks down our CRE office disclosure in the context of our broader CRE portfolio. As the slide shows, our office loans at the end of the second quarter were primarily in corporate investment banking and that is also where we had the most non-accrual loans and the highest level of allowance for credit losses. Last quarter, we disclosed for the first time the allowance for credit losses coverage ratio for the office portfolio in the corporate investment bank, which increased from 5.7% at the end of the first quarter to 8.8% at the end of the second quarter. This quarter, we are also providing our allowance for credit losses for our total CRE office portfolio which was 6.6% at the end of the second quarter, up from 4.4% at the end of the first quarter. As we highlighted last quarter, we're providing this data to give you more insight into the portfolio, but each property situation is different and there are many variables that can determine performance, which is why we regularly review this portfolio on a loan-by-loan basis. For example, we have properties that are experiencing increased vacancies where borrowers have decided to inject equity and make investments to improve the property even in cities with more difficult fundamentals. We also have properties that are well leased and performing, but borrowers need help refinancing. In those situations, we are working with borrowers to restructure, which in many cases includes some paydown in balance. There are also situations that result in a sale or workout of the asset. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period of time as we actively work with borrowers to help resolve issues that they may be facing. On Slide 7, we highlight loans and deposits. Average loans were relatively stable from the first quarter and were up 2% from a year ago, driven by higher commercial and industrial loans in commercial banking and credit card loans. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 247 basis points from a year ago and 30 basis points from the first quarter due to the higher interest rate environment. Average deposits declined 7% from a year ago, predominantly driven by deposit outflows in our consumer and wealth businesses reflecting continued consumer spending and customers reallocating cash into higher yielding alternatives. While down from a year ago, average commercial deposits were relatively stable in the first quarter and average deposits grew in corporate and investment banking. As expected, our average deposit costs continued to increase, up 30 basis points from the first quarter to 113 basis points with higher deposit costs across all operating segments in response to the rising interest rates. Our mix of non-interest bearing deposits declined from 32% in the first quarter to 30% in the second quarter but remained above pre-pandemic levels. Turning to net interest income on Slide 8. Second quarter net interest income was $13.2 billion, up 29% from a year ago, as we continue to benefit from the impact of higher rates. The $173 million decline from the first quarter was primarily due to lower deposit balances, partially offset by one additional day in the quarter. At the beginning of the year, we expected full year net interest income to grow by approximately 10% compared with 2022. We currently expect full year 2023 net interest income to increase approximately 14% compared with 2022. There are a variety of factors that we've considered in our expectation for the rest of the year. We are assuming modest growth in loans, some additional deposit outflows and migration from non-interest bearing to interest bearing deposits, as well as continued deposit repricing including competitive pricing on commercial deposits. Additionally, we are using the recent rate curve which is shown on the slide. As a reminder, many of the factors driving net interest income are uncertain and we will need to see how each of these assumptions plays out during the remainder of the year. Turning to expenses on Slide 9. Non-interest expense grew $125 million or 1% from a year ago. At the beginning of the year, we expected our full year 2023 non-interest expense, excluding operational losses, to be approximately $50.2 billion. We currently expect our full year 2023 non-interest expense, excluding operating losses, to be approximately $51 billion. The increase includes higher severance expense due to actions we have taken and plan to take in 2023 as attrition has been slower than expected. Of note, we've reduced headcount each quarter since the third quarter of 2020 and headcount declined 1% from the first quarter and 4% from a year ago. As a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 10. Consumer small business banking revenue increased 19% from a year ago as higher net interest income, driven by the impact of higher interest rates was partially offset by lower deposit related fees, driven by the overdraft policy changes we rolled out last year. We continue to reduce the underlying costs around the business as customers migrate to digital, including mobile. We've reduced our number of branches by 4% and branch staffing by 10% from a year ago. Home lending revenue declined 13% from a year ago, driven by lower net interest income due to loan spread compression and lower mortgage originations. We continued to reduce headcount in the second quarter, down 37% from a year ago and we expect staffing levels will further decline during the second half of the year. Credit card revenue increased 1% from a year ago due to the higher loan balances. Payment rates were down from a year ago, but have been stable over the last three quarters, remained above pre-pandemic levels. New account growth remained strong, up 17% from a year ago and importantly, the quality of the new accounts continue to be better than what we were booking historically. Auto revenue declined 13% from a year ago, driven by continued loan spread compression and lower loan balances. Personal lending revenue was up 17% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 77% from a year ago and increased 18% from the first quarter, reflecting seasonality. We funded our last corresponding loan in the second quarter with our current focus being serving our bank customers as well as borrowers in minority communities. The size of our auto portfolio has declined for five consecutive quarters and balances were down 7% at the end of the second quarter compared to a year ago. Origination volume declined 11% from a year ago reflecting credit tightening actions as well as continued price competition. As Charlie highlighted, debit card spend was flat in the second quarter compared to a year ago, spending on fuel due to the lower gas prices, home improvement and travel are the largest declines compared to last year. Credit card spending continued to be strong and was up 13% from a year ago. Growth rates were stable throughout the second quarter with fuel the only category down year-over-year. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue increased 51% from a year ago due to the impact of higher interest rates and higher loan balances. Asset-based lending and leasing revenue increased 13% year-over-year, primarily due to higher loan balances. Average loan balances were up 12% in second quarter compared to a year ago, driven by new customer growth and higher line utilization. Average loan balances have grown for eight consecutive quarters thought the pace of growth has slowed. Average loans were up 1% from the first quarter with loan growth in asset-based lending and leasing driven by seasonally higher inventory levels while middle market banking loans were flat. Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 37% from a year ago, driven by stronger treasury management results, reflecting the impact of higher interest rates and higher lending revenue. The growth in investment banking fees from a year ago reflected write-downs taken in the second quarter of 2022 on unfunded leveraged finance commitments. Commercial real estate revenue grew 26% from a year ago, driven by the impact of higher interest rates and higher loan balances. Markets revenue increased 29% from a year ago, driven by the higher trading results across most asset classes. Our strong trading results during the first half of the year were driven by underlying market conditions and also reflected the benefit of our investments in technology and talent, which have allowed us to broaden our franchise and generate more trading flows. Average loans were down 2% from a year ago and 1% from the first quarter. The decline from the quarter was driven by banking, reflecting the combination of slow demand and modestly lower loan utilization. On Slide 14, Wealth and Investment Management revenue was down 2% compared to a year ago, driven by a decline in asset-based fees due to lower market valuations. Growth in net interest income from a year ago was driven by the impact of higher rates, partially offset by lower deposit balances as customers continue to reallocate cash into higher yielding alternatives. However, outflows into cash alternatives slowed in the second quarter. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter. So second quarter results reflected the market valuations as of April 1, which were down from a year ago. Asset-based fees in the third quarter will reflect higher market valuations as of July 1. Average loans were down 3% from a year ago, primarily due to decline in securities-based lending. Slide 15 highlights our Corporate results. Revenue increased $751 million from a year ago, driven by the impact of higher interest rates and lower impairments of equity securities in our affiliated venture capital and private equity businesses. In summary, our results in the second quarter reflect a continued improvement in our earnings capacity. We grew revenue and had strong growth in pre-tax provision profit. As expected, our net charge-offs continue to slowly increase from historical lows and our allowance for credit losses increased. We are closely monitoring our portfolios and taking credit-tightening actions where we believe appropriate. Our capital levels remain strong and we continue to repurchase common stock. We will now take your questions.

Charlie Scharf:

Why don’t we take another one and then we'll come back to Ken.

Scott Siefers:

Good morning, everyone. Thank you for taking the question. It was great to see the higher NII guide and performance this quarter. That said it seems likely that dollars of NII will come down from here. I guess just broadly speaking, are you able to chat about what factors might be most important in sort of your ability to arrest a downward move in NII. In other words, kind of, when and why would it end up flattening out if we're ideally getting close to the end of a Fed tightening cycle?

Scott Siefers:

Okay. Perfect. And maybe if we could drill down into one of those in particular, just the migration from non-interest bearing to interest bearing. They've come down but are still above pre-pandemic levels, I believe. Do you have a sense for where and why those would start to settle out?

Scott Siefers:

Yeah. Okay. All right. Thank you very much, Mike.

Ebrahim Poonawala:

Hey, good morning. So, Mike, thanks for the details on the CRE book. I think Charlie mentioned that you've gone through loan by loan in identifying and I appreciate the idiosyncratic nature of every sort of CRE loan. But given the reserve you've taken this quarter, give us a sense of your visibility around how well reserved the bank is today, knowing what we know in terms of the macro-outlook? And also if you can comment on just the rest of the CRE book, particularly as it relates to San Francisco or California and your level of comfort around just apartments et cetera within that market? Thank you.

Ebrahim Poonawala:

Got it. And I guess just a separate question. You obviously have ample capital. Just Charlie, from your standpoint, how impactful is the asset cap today given the squeeze on the rest of the industry, I would think Wells would actually be gaining market share. But is the asset cap and all the regulatory issues, I'm not going to ask you to give us a timeline, but is that still a meaningful challenge in terms of your ability to take market share?

Mike Santomassimo:

That’s the asset cap.

Mike Santomassimo:

And maybe I'll just add one thing. When you look at some of growth opportunities we have, Charlie highlighted some of the investment banking hires we're making. In large part, we already have exposure out to the client base there. So now it's about making sure we got the right people to go after the fee opportunity, not necessarily extending a lot more balance sheet. The wealth management, the growth opportunity there, same theme. End even in the card space as we look at, the refresh product line is doing really well. We've got more to come there. And I think we've got plenty of room to continue to support many of the growth opportunities we have even if we didn't put out more -- have more exposure to support it.

Operator:

Thank you. The next question will come from Steven Chubak of Wolfe Research. Your line is open, sir.

Charlie Scharf:

Good morning.

Mike Santomassimo:

Yeah. Well, I think we're seeing -- we're certainly seeing growth in card. So I think we would expect that to continue. And then in the rest of the portfolios, we see a little bit of growth in the asset-based lending and leasing business in the commercial bank. Middle market is kind of flat, but at least this quarter, and then you can see the consumer items. So I think -- we're hopeful that we'll see some growth as we go into the second quarter. But as always, Steve, what we try to do with guidance is give you guidance that it doesn't necessarily require every assumption to go in our favor. So the bigger drivers of uncertainty around NII for the rest of the year continue to be the same ones we've been talking about now for the last couple of quarters. It's really going to be deposits and deposit pricing. The loan story will matter, but not anywhere near to the same degree.

Mike Santomassimo:

Yeah, I think our focus on expenses really hasn't changed over the last quarter or two. As we've talked about now for a while, we're going to continue to be very disciplined around the expense base. I think we're very much focused on making sure we execute and achieve the efficiencies that we've talked about. And as we get to year end, we'll sort of look at -- and after we do our work around the budget for next year, we'll go back through all the ups and downs like we normally do and give you some perspective there. But really the thinking around it hasn't changed.

Steven Chubak:

Helpful color. Thanks so much for taking my questions.

John Pancari:

Good morning. I wanted to see if we can get some of your updated thoughts on buybacks here. CET1 10.7% and you indicated the $4 billion buyback in 2Q when you expect to continue to buyback from here. But obviously Basel III Endgame is a factor and I heard you on -- that you're contemplating buybacks as you look out from here. So could you maybe help frame that for us? What that could mean in terms of the pace of repurchases? Thanks.

John Pancari:

Okay, thank you. That's helpful. And then separately on the NII side, again, appreciate the updated guide for ‘23 of the 14%. Maybe can you talk about -- when you look at the forward curve, what could be the forward curve implications for NII as you look further out into 2024, if we do reach a Fed fund of around 4% implied by the forward curve, how much of a headwind to NII could that be for you? And maybe also if you could just talk about the near-term deposit trajectory. I know you mentioned still continued decline, kind of if you can help frame that, size it up? Thanks.

Charlie Scharf:

And can I just add?

Charlie Scharf:

Just even just more broadly, just to be clear about, we don't -- we're not looking specifically at giving guidance in terms of 2024 yet. But at the same time, just more broadly speaking, we are and have been out-earning in NII. And we've been very clear about that as we talk about getting towards our 15% ROTCE targets. It's in a more normalized environment. But at the same time, there are a series of things that we expect to be able to do as we look forward. A big part of it is growing the fees in the business as Mike spoke about. We're not constrained by the asset capital in our existing businesses. And a lot of the things that we're doing, whether it's in our wealth business, whether it's in the card business, whether it's in the corporate investment bank or middle market as well, we do expect to see the fruits of that labor. At the same time, we continue to stay very focused on expenses. And then the other thing I would just remind everyone is there's lots of conversations around charge-offs and things like that. But remember, we are all required when we think about CECL to be as forward-looking as we possibly can. You all know how we come up with the different scenarios. And so the level of reserving that's been running through our P&L, I think this is the fifth consecutive quarter we've added to reserves, which is what's impacting the EPS of the company, has been based upon an environment which at some point will be very different than what the expectation is sitting here. So I think, you add all those things together, and I just think it's important you think about all those things as opposed to just NII itself. Next question, operator.

Betsy Graseck:

Hi, good morning.

Betsy Graseck:

Just two follow ups. One on the reserve build in commercial real estate, and I know you discussed a bit already. I just wanted to understand how much of that was coming from really California, we all know there was a property that traded on California Street that sold at discount. So I'm just wondering how much of it is California office versus anything more broader based beyond that? Thanks.

Charlie Scharf:

Yeah, and I just want to reemphasize what Mike is saying and we talked about this in the prepared remarks, which is we have all spent a bunch of time going through a very detailed review of the office portfolio. Just the other day, we went through just a whole series of things that we're seeing. And I just really want to make the point, which I said in my script, it's not -- it's a very big mistake to think about loss content by looking at just where the property is. Again, we have examples in cities that are struggling where the structure of our loan is quite good. The underlying property has very high lease rates for an extended period of time. And then we can have a loan in a market which is doing well. But for whatever reason, that property -- the specific issue in that property, there are a bunch of potential termination dates in the shorter term. And so that's the level of detail that we've used look at to come up with what we think the appropriate level of reserving is. And I think we've tried to be as diligent as we can in stressing the scenarios that we see play itself out. So that when we look at ourselves and we understand what CECL reserving requires us to do, that's what we're trying to accomplish.

Charlie Scharf:

Yeah, Mike, I’ll start and then either chime in or give your opinion. We have tried to take into account all of the risks including refinance risk that exists in the portfolios looking at the current rate environment, cap rate expectations and things like that. Is it possible that we have to add something in the future because we learn more as time goes on? We would never say no. But again, what we're trying to do is be holistic in the review of the portfolio based upon everything that we know. And just as you can imagine, when we sit in the room with the people that run the real estate business and all the risk people, there's a range of opinion. There are people in there that say, we just -- it's hard to see losing this amount of money based upon what that individual thinks all of the underlying assumptions will play themselves out as. And then there are others where we say we actually want to stress the scenario because it is possible and we have to give weighting to that. And so that's how we come up with what this is. But again, we're trying to, again, I don't know, just -- we're trying to be forward-looking, we're trying to be holistic in all the risks that exist. And part of the reason to show you those -- that additional disclosure we made is so you can see exactly where the issues are relative to the rest of the office portfolio and the rest of CRE and isolate just the level of reserving that exists, which is, at this point is substantial.

Operator:

Thank you. The next question will come from Gerard Cassidy of RBC Capital Markets. Your line is open.

Mike Santomassimo:

Yeah, George. Sure. It's not that different, right? On the margin, you may be making decisions to add a little duration here or there, but I'd say it's marginal at this point and we really haven't changed substantially how the balance sheet is positioned.

Mike Santomassimo:

Yeah, I mean, sure. There's plenty of little structural enhancements you can make to feel better about it. And then there are also, in a lot of cases, getting some partial paydowns. And then you look at and you're trading those for refinancing term, And I think you give people a bit more time to work through these sets of issues. I think we try really hard not punt issues down the road. And so if there are real issues that we need to deal with, we try to deal with them in the moment. But there are a number of structural enhancements that we sort of work on with borrowers to get ourselves comfortable that we're setting the loan up for success.

Operator:

Thank you. The next question will come from Erika Najarian of UBS. Your line is open.

Mike Santomassimo:

Yeah, it's Mike. I'll take that. TDR doesn't exist anymore, but the -- that classification, but the guidance is very similar to what was issued originally back, I think, in 2009. Hasn't really changed much. And doesn't really change the way we've been interacting with our borrowers already in terms of really being proactive to work with them to find solutions to help them work through what could be difficult circumstances in some cases. So -- and it doesn't give you any leeway for how you classify criticized loans or other classification. So the intent is really to just be clear that people should continue to work with borrowers to find solutions, which is what we do all the time anyway.

Mike Santomassimo:

Yeah, I don't think that's something we give and there is a wide range. Average sometimes are very misleading. And so there's a wide range. And what really matters is not the loan size, it really matters -- what really matters is all the variables Charlie talked about earlier in terms of what's happening with that property. So I think that would be -- I think I would focus there.

Mike Santomassimo:

We didn't give an exact number, but that is by far the single largest piece of it, that's part of it. And there's some other exit costs for properties as we to exit some lease space and other things. But that is -- the severance is by far the largest piece.

Charlie Scharf:

Thank you.

Matt O’Connor:

Good morning. I want to follow-up Charlie on some of your prepared remarks. You talked about there's still some things that you're implementing to address regulatory issues and wondering if you can give a couple of examples of what still needs to be done in terms of implementation and when you expect that to be completed?

Matt O’Connor:

And I understand that you can't speak for them signing off on what you've done, but in terms of you accomplishing what you want to accomplish, where are you on that kind of process, like whether you want to frame it from an innings perspective or percent basis? Anyway to frame that, acknowledging there's a lot to do and that you've done a lot. But how far along are you in terms of what you can control on implementing these things?

Matt O’Connor:

Understood and fair enough. Thank you.

Vivek Juneja:

Hi, thanks. A quick one. Mike or Charlie, can you give us the maturity schedule? What percentage or amount of your office CRE loans are maturing in the second half and into 2024?

Vivek Juneja:

Okay. And you haven't really been originating much in the last couple of years. So I guess we could go back to looking at, when did you slowdown the origination of new office CRE, Mike? Was it two years ago? Was it three? Any color on that?

Vivek Juneja:

Okay. And how about multifamily? What's the average life of those loans and maturities there? I recognize your -- I heard your comments that those are in much better position given all the factors you already cited.

Vivek Juneja:

Okay, all right. Thank you.

Charles Peabody:

Good morning. Most of my questions were already asked and answered, but just I want to follow-up on the consent order issues. If I call correctly and please correct me if I'm wrong, there's six consent orders remaining and three of them, if I remember, deals somewhat with the mortgage banking operation. And I know starting last fall, you started the planning effort to simplify and downsize that and you've been executing on that this year. Can you give us a sense of what it is you need to do in mortgage banking related to those consent orders?

Charles Peabody:

Follow-up, and do you talk to the regulators about the progress you're making in mortgage banking on a monthly basis, quarterly basis, semi-annual or do you present something at the end? How does the interaction with the regulators go?

Charlie Scharf:

But the only thing I would add to that is, but again, they're here, they're on-site, we talk to them literally all the time.

Charlie Scharf:

Just give me a second. We talk to them about everything. And given the importance of the consent orders, you can assume it's about the work that's going on in the underlying consent order. But having said all of that, what matters is the work that they do at the end of the consent order after we submit it to them. And so they can be up to speed on what we're doing. They can know how we feel about the progress that we're making. But when we submit a consent order to them, they come in and do their holistic review. And so that's really where their determination is made about whether or not it's done to their satisfaction. So again, that just gets to the reason why I want to be very careful about not drawing any conclusions from our view on our work or any interim comments we might get from them. What really matters is the holistic review that they do and the process that they go through internally in the regulatory organizations.

Charlie Scharf:

We're not going to talk about that. I said that over and over and over again.

Charlie Scharf:

Thank you very much everyone. We appreciate the time and we'll talk to you all soon.

John Campbell:

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo:

Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $5 billion or $1.23 per diluted common share. While there was a lot going on in the banking industry around us, we continue to focus on our priorities and our results reflected the progress we are making, which I'll highlight throughout the call. Starting with capital and liquidity on Slide 3. Our CET1 ratio was 10.8%, up approximately 20 basis points from the fourth quarter, reflecting our earnings in the quarter and lower risk-weighted assets. After pausing share repurchases for the prior three quarters, we repurchased $4 million of common stock in the first quarter. Our CET1 ratio remained well above our required regulatory minimum plus buffers, and we expect to continue to prudently return excess capital to shareholders in the coming quarters. In the first quarter, our liquidity coverage ratio was approximately 22 percentage points above the regulatory minimum. We continue to benefit from a diversified deposit base with over 60% of our deposits in our Consumer Banking and Lending segment as of the first quarter, which is a higher percentage than before the pandemic. Turning to credit quality on Slide 5. Net loan charge-offs continue to slowly increase to 26 basis points in the first quarter but were still below pre-pandemic levels. Commercial net loan charge-offs decreased $16 million from the fourth quarter to 5 basis points. However, while losses improved, we continue to see some gradual weakening in underlying credit performance, including higher nonperforming assets. We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase. Total consumer net loan charge-offs increased $60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago, and we've continued to take credit taking actions to position the portfolio for a slowing economy. Nonperforming assets increased 7% from the fourth quarter, driven by higher commercial real estate nonaccrual loans over down 12% from a year ago due to lower residential mortgage nonaccrual loans. Of note, 87% of the nonaccrual loans in our commercial real estate portfolio were current on interest and 75% recurring on both principal and interest as of the end of the first quarter. Our allowance for credit losses increased $643 million in the first quarter, reflecting an increase for commercial real estate loans, primarily office loans as well as an increase for credit card model loans. Given the increased focus on commercial real estate loans, especially office, we provided more details on our portfolio on Slide 6. We have $154.7 billion of commercial real estate loans outstanding at the end of the first quarter with 35.7% of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs and challenging capital market conditions. While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been derisking the office portfolio, which resulted in commitments declining 5% from a year ago, and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted. As you can see in the slide, we've provided some additional data on the office portfolio, including approximately 12% is owner occupied. Therefore, the loan performance is mostly tied to the cash flow of the owner's operating business rather than rents paid by tenants. Nearly one third had recourse to a guarantor typically through a repayment guarantee. The portfolio is geographically diverse, and as you'd expect, the largest concentrations are in California and New York. Over two third of our office loans are in the corporate investment banking business, and the vast majority of this portfolio is institutional quality real estate with high-caliber sponsors. While approximately 80% of its cost, keep in mind that this is a single measure that is hard to evaluate in isolation. For example, newer or refurbished properties may perform better regardless of whether they are at A or B. We are providing this data to give you more insight into the portfolio, but as is usually the case in commercial real estate, each property situation is different and a myriad of other variables, such as leasing rates, loan-to-value and debt yields can determine performance, which is why we regularly review the portfolio on a loan-by-loan basis. As a result of market conditions and the recent increases in criticized assets and nonaccrual loans, we've increased our allowance for credit losses for office loans for the past four quarters. The allowance for credit losses coverage ratio at the end of the first quarter for the office portfolio in the corporate investment bank was 5.7%. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period of time as we actively work with borrowers to help it solve issues they may be facing. On Slide 7, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the fourth quarter, while period-end loans declined 1% from the fourth quarter with lower balances across our consumer and commercial portfolios. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 244 basis points from a year ago and 56 basis points from the fourth quarter, reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% for the fourth quarter due to the consumer deposit outflows as customers continue to reallocate cash into higher-yielding alternatives and continued spending. During the market stress last month, we experienced a brief increase in deposit inflows that has since abated and while our period-end deposit balances were slightly higher than we expected at the beginning of the quarter, they're still down 2% from the fourth quarter. As expected, our average deposit cost increased 37 basis points from the fourth quarter to 83 basis points with higher deposit costs across all operating segments in response to rising interest rates. Our mix of noninterest-bearing deposits declined from 35% in the fourth quarter to 32% in the first quarter but remained above pre-pandemic levels. Turning to net interest income on Slide 8. First quarter net interest income was $13.3 billion, which was 45% higher than a year ago as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days. Our full year net interest income guidance has not changed from last quarter as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. And Ultimately, the amount of net interest income we earned this year will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix and repricing and loan demand. Turning to expenses on Slide 9. Noninterest expense declined 1% from a year ago, driven by lower operating losses and the impact of visions. The increase in personnel expense from the fourth quarter was driven by approximately $650 million seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement eligible employees and 401(k) matching contributions. Our full year 2023 noninterest expense, excluding operating losses, is still expected to be approximately $5.2 billion, unchanged from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory and customer remediation matters that could impact operating losses. Turning to our operating segments, starting with Consumer Banking and lending on Slide 10. Consumer and Small Business Banking revenue increased 28% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit-related fees driven by the overdraft policy changes we rolled out last year. We are continuing to make investments in this business. We're beginning to increase marketing spend. We're accelerating the efforts to renovate and refurbish our branches, for our bankers, we're investing in new tools and capabilities to provide better and more personalized advice to customers. We're continuing to enhance our mobile app and mobile active users were up 4% year-over-year and we're also seeing increased activity and positive initial indicators after our rollout of Wells Fargo premium last year. It's early on for all of these initiatives, but we're starting to see some green shoots. At the same time, we continue to execute on our efficiency initiatives. Teller transactions continue to decline with reduced head count. We reduced headcount by 9% and total branches were down 4% from a year ago. In home lending, mortgage rates remained elevated and the mortgage market continued to decline. Our home lending revenue declined 42% from a year ago, driven by lower mortgage originations and including a significant decline from the correspondent channel and lower revenue from the resecuritization of loans purchased from securitization pools. We continue to reduce headcount in the first quarter, and we expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the correspondent channel as announced in January and begin to reduce the complexity and the size of the servicing book. During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances driven by higher point-of-sale volume. Auto revenue declined 12% from a year ago, driven by lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due to rising interest rates. Personal lending revenue was up 9% from a year ago due to higher loan balances. Turning to some key business drivers on Slide 11. Mortgage originations declined 83% from a year ago and 55% from the fourth quarter with declines in both correspondent and retail originations. As I mentioned, we stopped accepting correspondent applications in January. So, going forward, our originations will be focused on serving Wells Fargo customers and underserved communities. The size of our auto portfolio has declined for four consecutive quarters and the balances were down 80% at the end of the first quarter compared to a year ago. Origination volume declined 32% from a year ago, reflecting credit tightening actions and continued price competition. Debit card spending increased 2% in the first quarter compared to a year ago, an increase from the 1% year-over-year growth in the fourth quarter. Discretionary spending drove the growth with nondiscretionary spending stable from the fourth quarter levels. Credit card spending increased 16% from a year ago, in line with the year-over-year growth in the fourth quarter with sustained growth in both discretionary and nondiscretionary spending. Spending growth slowed throughout the quarter but was still at double-digit levels in March. We continue to see some slight moderation in payment rates in the first quarter, but they were still well above pre-pandemic levels. Turning to Commercial Banking results on Slide 12. Middle Market Banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances while deposit-related fees were lower, reflecting higher earnings credit rate on noninterest-bearing deposits. Asset-based lending and leasing revenue increased 7% year-over-year, driven by loan growth which was partially offset by lower net gains from equity securities. Average loan balances were up 15% in the first quarter compared to a year ago, driven by new customer growth and higher line utilization. After being stable in second half of last year, volume utilization increased slightly in the first quarter. Average loan balances have grown for seven consecutive quarters and were up 2% from the fourth quarter with the growth in asset-based lending and leasing driven by continued growth in client inventory. Growth in middle market banking was once again driven by larger clients, including both new and existing relationships, which more than offset declines from our smaller clients. Turning to Corporate Investment Banking on Slide 13. Banking revenue increased 37% from a year ago driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment management investment banking fees declined from a year ago, reflecting lower market activity with clients across all major products in nearly all industries. While commercial real estate market transactions are down across the industry, our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates and higher loan balances. Markets revenue increased 53% from a year ago driven by higher trading results across all asset classes. Average loans grew 4% from a year ago, but were down from the fourth quarter. Lower balances in banking reflected a combination of slow demand increased payoffs and relatively stable line utilization. The decline in commercial real estate balances were driven by the higher rate environment and lower commercial real estate sales volumes. On Slide 14, Wealth and Investment Management revenue was down 2% compared to a year ago, driven by lower asset-based fees due to lower market valuations. Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives. At the end of the first quarter, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Expenses decreased 4% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Average loans were down 1% from a year ago, primarily due to a decline in securities-based lending. Slide 15 highlights our corporate results. Revenue declined $103 million or 83% from a year ago as higher net interest income was more than offset by lower results in our affiliated venture capital and private equity businesses. Results in the first quarter included $342 million of net losses on equity securities or $223 million pretax and net of noncontrolling interests. In summary, our results in the first quarter reflected an improvement in our earnings capacity. We grew revenue and reduced expenses and had strong growth in pretax free provision profits. As expected, our net charge-offs have continued to slightly increase from historical lows, and we are closely monitoring our portfolios and taking credit tightening actions where appropriate. Our capital levels grew even as we resume stock common stock repurchases, and we expect repurchases to continue. In the guidance we provided last quarter for full year 2023, net interest income and expenses, excluding operating losses, has not changed. We will now take your questions.

Scott Siefers:

Thank you for taking the question. Mike, I was hoping to just start out on the deposit side. So, when you talk about the influx of deposits from some of the sort of special situations having abated, does that money actually leave the bank? Or is it just sort of the inflows that have stopped?

Scott Siefers:

Okay. Perfect. And then I guess maybe to switch gears just a bit. I think in your prepared remarks, you had discussed plans to sort of prudently return excess capital in coming quarters. I was very glad to see the resumption in repurchase in the first quarter. But just given all the kind of cross currents that we've got, whether it's uncertainty on the regulatory environment or uncertainty on the economy kind of countered against your very strong capital levels. Just curious for maybe a little more color on how you would be thinking about share repurchase in -- through the remainder of the year.

Scott Siefers:

Wonderful. Okay. I have a bunch of more questions, but I have a feeling they'll be asked going forward as well. So, Charlie, Mike, thank you guys very much. Really appreciate it.

Steven Chubak:

Hey, good morning. So, I wanted to get a little bit more granular on some of the expense trends that we're seeing. We've gone through the exercise of benchmarking your segment efficiency ratios versus peers. Clearly, you've made significant strides improving profitability across virtually every segment, commercial CIB and wealth, the PPNR margins are running really in line with the peer group. It's still the consumer efficiency ratio in the mid-60s, which is running well above peers. And I was hoping you could just speak to the opportunity on the expense side within consumer. How much of a benefit should you see from the retrenchment in mortgage? And maybe what do you see as a normalized efficiency target for the segment just given your current mix of business?

Charlie Scharf:

And I would just add, when you look at our -- that segment, we obviously mix versus other people is an issue. Our home lending business is today extremely inefficient, which is part of the reason why we made the decision that we made. So, we've got a lot of wood to chop there, which will play out over a period of time to make that business more efficient. And as we've talked about on the consumer banking side, we've done, I think, for many, many years after Mary got her job in the consumer banking operation, our focus was dealing with the cleanup, which they've done an exceptional job in the consumer and small business bank about and then turned our attention to becoming more efficient, which she has worked really hard on. And that's a combination of looking at our branch footprint, staffing within the branches, migrating people to digital, and we're behind on that. But there has been a lot of progress made over the last 1.5 years to 2 years. And so there's still a tremendous amount of opportunity there, but it's in flight.

Mike Santomassimo:

Yes, I'll take that. And when you look at the sequential change in NII, it's really the two fewer days in the quarter that drove it. Otherwise, it's pretty flat to the fourth quarter as we thought it would be when we talked in January. When you think about wealth, it's been pretty stable, the trend. It's not accelerating. It's not decelerating at any significant clip at this point. And what we see there is we're capturing that cash that -- those cash alternatives that people are buying in the wealth business. And so, I think that trend will continue for a while. And the good news is we're capturing that in other ways, but the trend has been pretty stable, and that's probably going to be the case for a little longer.

John McDonald:

Mike, I was wondering what your outlook is for the second quarter NII. If you could talk a little bit about the puts and takes to that and what you're thinking for second quarter? Thanks.

John McDonald:

Yes. Okay. And the outlook for the full year obviously embeds a pretty big step down from the first quarter starting point. Can you give us any more color about the types of assumptions you have embedded into the full year outlook on deposit flows, mix shift and reprice data?

Operator:

The next question comes from Ken Usdin of Jefferies.

Mike Santomassimo:

Yes. Ken, let me try to clarify a little bit of that. So, I think when you look at what we've we talked about last quarter in terms of getting to a 15% ROTCE in the medium term, that didn't assume that we would have to take out a significant amount of the cost related to the risk and regulatory build-outs that we're doing. And that efficiency on those expenses will be out a little while. It could be years in terms of -- before we really get at some of that. So -- but I think our focus is to get the return to a sustainable 15% in the medium term by not having to rely on that. It really goes back to what we talked about really making sure capital gets optimized, not just in terms of shareholder return, but also across the balance sheet requires us to continue to execute on the efficiency initiatives outside of the risk and regulatory work, and then we'll start to get the benefit of some of the investments that we've been making now for the last couple of years.

Ken Usdin:

Yes. And thanks for those clarifications. One, just a question on the fee side. I know watching your trading results are a lot different than watching some of the bigger peers. But just looking at that $1.3 billion on the face of the income statement this quarter, in the context of the environment, can you help us put that into context? Was that just an exceptional result this quarter? Did it have anything we should be mindful of as we think forward and just your general outlook there? Thank you.

Operator:

The next question will come from Ebrahim Poonawala of Bank of America.

Mike Santomassimo:

Yes, sure. Thanks. I think the simple answer to your first question is no. We don't expect that to continue to keep drifting up. Certainly, we'll find out the results of CCAR with everybody else in June. And then, we've got Basel IV, which is a little bit longer time line than that. And -- but we're 160 basis points above the regulatory minimum buffers. We've got plenty of capital to deal with whatever comes out of that. And as we said, over time, we'll get closer to 100 basis points or so above those -- above the 9.2%. And so, I think there's plenty of capacity to deal with whatever comes and continue to return share -- money back to shareholders, as Charlie said. The…

Mike Santomassimo:

Yes. And then just to give you a couple like examples to help illustrate the capital optimization. The mortgage business is one of them. If we want mortgage exposure, we can buy securities. You don't have to always hold the mortgage. If you're buying securities, you don't have to buy UMBS, you could buy Ginnies. And so there's plenty -- and then you can look at each of the underlying portfolios and make sure we're getting the return from a relationship point of view that we think, whether that's in the commercial bank or the corporate investment bank. And so, I think there's plenty of areas that we can either reallocate capital to clients that we think will get better returns for or optimize some of the underlying portfolios.

Charlie Scharf:

Yes. Listen, I would refer you back to my shareholder letter where I wrote about it extensively. And I think we still continue to feel exactly the way we felt when we wrote that letter. It wasn't that long ago, which is we have continued work to do. We feel very confident in our ability to get the work done and that we're making progress. And so, we live in an environment where things can come up. That's always the case. So, we don't want to pretend like there are no risks of other things out there. But if there was anything specific, we would do our best to let you know. And we feel good about the progress that we're making and are extremely focused on making sure that we've got all the attention decked against it. But we're confident that the things that we're doing will close the gaps that existed at the Company when we got here.

John Pancari:

On the -- back to the NII drivers, can you maybe give us an updated expectation on how you're thinking about loan growth here as you look through 2023. I know you cited some of the pressures on the consumer side, but some of the favorable trends still in commercial. And then separately, on the deposit side, do you have an updated expectation regarding your total deposit beta as you see pricing pressure continue?

John Pancari:

Yes, it was around the update…

John Pancari:

Yes.

John Pancari:

Got it. Okay. Thanks, Mike. And then separately on the commercial real estate front, maybe if you could just elaborate a little bit on the stress that you're seeing. I know you discussed office. Maybe can you talk about your LTVs in office maybe on a refreshed basis, if you happen to have that and maybe in other portfolios as well because clearly the change between origination LTVs versus where we're seeing refreshed levels come in are clearly what is motivating some of the impact around reserve behavior. So, if you can give us a little color there, that would be helpful.

Operator:

The next question comes from Betsy Graseck of Morgan Stanley.

Mike Santomassimo:

Yes. There really isn't any story there, Betsy. I mean we get recoveries every quarter, and there really isn't a significant trend change one way or the other. And again, it's going to come back down to individual underlying issues or situations that drive it quarter-to-quarter. But I wouldn't read too much into the trend.

Mike Santomassimo:

Yes. I mean, what we gave you in my commentary was just cash as a percentage of assets. And it's quite a bit higher than it was before, about 12% now versus 4%. And obviously, deposits is going to be a subcomponent of that. And there are other drivers, right, of how much cash people are going to hold as a percentage of assets. And right now, you're seeing a lot of what is going into cash alts, it's coming out of other asset classes. So it's not -- so it's a little harder to give you a specific number of like deposits as a percentage of assets because you're seeing people sell equities and other asset classes and drive up those cash balances.

Mike Santomassimo:

Absolutely, yes. And so, I would just take the current balance that you see in the wealth space and the deposit side and assume it continues to come down at a pretty -- at a stable pace for a little bit.

Mike Santomassimo:

Yes. Look, I mean it will be different, obviously. And part of what's going to drive that is how long rates stay higher. And I think that will -- we'll find that out over a period of time. But as you can tell, where betas have performed so far, they've performed pretty well when you look at it relative to the last cycle, particularly given how far rates have moved up in excess of what happened last time. And so -- and they're behaving exactly as you might think, right? And if you go portfolio by portfolio, the betas are pretty high on the large corporate side. That's been the case now for a couple of quarters. They're a little bit lower in the commercial bank given the nature of that client base. And in the consumer side, they're relatively low given the amount of rate rises that we've seen so far. And so, I think on the large corporate side, you'll see those be pretty consistent from here and the consumer side will be a function of all the things we talked about earlier.

Matt O’Connor:

I was hoping you guys could elaborate on the slowing consumer spending towards the end of the month? Any more color there and any thoughts on what's driving that?

Matt O’Connor:

Okay. And then separately, I know I always kind of harp on some of these reg issues. And I appreciate the New York Post article yesterday, you can't comment specifically on. But it did allude to some concerns in your trading business? And obviously, it performed extremely well. You've been growing it, although I don't think you're growing it super aggressively. But there's been some political comments, maybe it was, I don't know, six months ago or so, that you shouldn't be growing your capital markets business, while you're investing in these other areas. So I guess maybe you could just address the trading businesses overall in terms of how you're growing them in a responsible way and how you're making sure the oversight of risk management is fine. I mean because, again, externally, it seems like everything is going really well, but there is -- it's hard to tell. Thank you.

Operator:

The next question comes from Gerard Cassidy of RBC Capital Markets.

Mike Santomassimo:

Not in any meaningful way. There's always an anecdotal story, I'm sure, out there, but I wouldn't say it's meaningful.

Mike Santomassimo:

Hey Gerard, we lost you there for a second. Can you just repeat the whole second part?

Mike Santomassimo:

Well, I think certainly, the market expectations are implying that there will be a decrease in the late part of the year. And so, I think that's certainly being priced in at the moment. But I do think that you need to be prepared that that's not going to happen. And I think it's possible it doesn't. So, I think as we get a little closer, you'll -- we'll all know. And what we try to do in our guidance is use what the market is telling us, right? So, if that doesn't happen, there's -- and rates are higher than what the market is implying, then there will be a little upside there.

Gerard Cassidy:

No, I appreciate the further insights. That's very helpful. Thank you.

Operator:

The next question comes from David Long of Raymond James.

Mike Santomassimo:

Well, I wouldn't try to predict it exactly over the next couple of quarters. But I think if you look at -- we're about 32% in the quarter. And if you go back a number of years, pre-pandemic, that was in the mid-20s. And so -- so it could -- and we've said this in other forums that you could see it start to trend towards there. Will it get down there? Unknown, but I think you'll see it trend down a little bit more.

Mike Santomassimo:

I think that's almost impossible to predict.

Chris Kotowski:

I guess, I wonder, how do you anticipate managing the duration of your investment securities portfolio from here? I mean, obviously, it must have extended out quite a bit last year. And we saw the mark-to-mark on it increase across the industry. But I noted kind of the HTM portfolio is down about 7% during the quarter. And I mean, do you anticipate running that down? And if so, how quickly does it run down if you do nothing?

Chris Kotowski:

Okay. So, you anticipate keeping it roughly the size, all things being equal, or does it run down?

Charlie Scharf:

Alrighty. Everyone, thanks so much. We appreciate it. And we'll talk to you soon. Take care.

John Campbell:

Thank you. Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I'd also like to come that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause the actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP final measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo :

Thank you, Charlie. And good morning, everyone. Slides 2 and 3 summarize how we helped our customers, communities and employees last year, some of which Charlie covered. So, I'm going to start with our fourth-quarter financial results on Slide 4. Net income for the fourth quarter was 2.9 billion, or $0.67, per diluted common share. Our fourth-quarter results included 3.3 billion, or $0.70, per share of operating losses primarily related to a variety of previously disclosed historical matters, including litigation, regulatory, and customer remediation. $1 billion of impairment of equity securities, or 749 million after noncontrolling interest, predominantly in our affiliated venture capital business, primarily driven by portfolio companies in the enterprise software sector. Both, slowing revenue growth rates and lower public market valuations of enterprise software companies impact the valuations. It's important to note that even after recognizing this impairment, the current value of these investments at the end of 2022 remained above the amount of the initial investment. $353 million of severance expense, primarily in Home Lending. While we've reduced headcount in this business throughout 2022, this charge includes the actions we plan to take in 2023 related to the mortgage announcement we made earlier this week. These reductions were partially offset by 510 million of discrete tax benefits related to interest and overpayments in prior years. We highlight capital on Slide 5. Our CET1 ratio was 10.6%, up approximately 30 basis points from the third quarter, reflecting the benefit from our fourth-quarter earnings, the annual share issuance for our 401(k) plan matching contribution, and an increase from AOCI. Our CET1 ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to 9.2% at the start of the fourth quarter as our new stress capital buffer took effect. As a reminder, our G-SIB surcharge will not increase in 2023. While we have not repurchased any common stock since the first quarter of 2022, we currently expect to resume share repurchases in the first quarter of this year. Turning to credit quality on Slide 7. Credit performance remained strong with 23 basis points of net charge-offs in the fourth quarter. However, as expected, losses are slowly increasing from historical lows, and we expect them to continue to return toward pre-pandemic levels over time as the federal needs to take actions to combat high inflation. Credit performance remains strong across our commercial businesses with only 6 basis points of net charge-offs in the fourth quarter. Total consumer net charge-offs increased 88 million from the third quarter to 48 basis points of average loans, driven by an increase in net charge-offs in the Credit Card portfolio but remained slightly below consumer net charge-off levels in the fourth quarter of 2019. Nonperforming assets increased 1% from the third quarter as lower residential mortgage nonaccrual loans were more than offset by higher commercial real estate nonaccrual loans. Our allowance for credit losses increased 397 million in the fourth quarter, primarily reflecting loan growth, as well as a less favorable economic environment. We are closely monitoring our portfolio for potential risk and are continuing to take some targeted actions to further tighten underwriting standards. Let me highlight trends in two of our portfolios. The size of our Auto portfolios declined for three consecutive quarters, and balances were down 5% at the end of 2022 compared to year-end 2021. Meanwhile, originations were down 47% in the fourth quarter compared to a year ago which reflected credit tightening actions and continued price competition due to rising interest rates. Of note, our new vehicle originations surpassed used vehicles in the fourth quarter, reflecting a combination of credit tightening actions that we've implemented and the industry dynamic of higher new vehicle sales growth. Turning to the commercial real estate office portfolio. The office market is showing signs of weakness due to weak demand, driving higher vacancy rates and deteriorating operating performance, as well as challenging economic and capital market conditions. While we haven't seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure and being disciplined in our underwriting standards with both, outstanding balances and credits down compared to a year ago. On Slide 8, we highlight loans and deposits. Average loans grew 8% from a year ago and 3.1 billion from the third quarter. Period-end loans increased for the sixth consecutive quarter with growth across our commercial portfolios and higher consumer loans driven by credit card and residential loans, partially offset by continued declines in our Auto portfolio. I'll highlight the specific growth drivers when discussing our operating segment results. Average loan yields increased 181 basis points from a year ago and 85 basis points from the third quarter, reflecting the higher rate environment. Average deposits declined 6% from a year ago and 2% from the third quarter. Compared with the third quarter, we saw declines in each of our business. Lower consumer balances reflected customers continuing to reallocate cash in higher-yielding alternatives, particularly in Wealth and Investment Management and continued consumer spending. As expected, our average deposit cost increased 32 basis points from the third quarter to 46 basis points, driven by higher deposit costs across all operating segments in response to rising interest rates. Average deposit costs are up 44 basis points since the fourth quarter of 2021, while market rates have increased substantially more during that same time. As rates continue to rise, we would expect deposit betas to continue to increase in customer migration from lower yielding to higher yielding deposit products to continue. Turning to net interest income on Slide 9. Fourth-quarter net interest income was 13.4 billion, which was 45% higher than a year ago, as we continue to benefit from the impact of higher rates. I'll provide details on our 2023 expectations later on the call. Turning to expenses on Slide 10. The increase in noninterest expense from both, a year ago and from the third quarter was driven by higher operating losses. Excluding operating losses, other noninterest expense was flat from a year ago as higher severance expense was offset by lower revenue-related compensation and continued progress on our efficiency initiatives. Our operating losses in the fourth quarter included accruals related to the December 2022 CFPB consent order. As part of that settlement, we agreed to one incremental remediation and one new remediation related to overdraft fees. The accrual related to these two remediations was approximately 350 million. Our operating losses in the fourth quarter also included accruals for other legal actions. And reflecting these accruals, our current estimate of the high end of the range of reasonably possible losses and accessible for legal actions as of December 31, 2022, is approximately 1.4 billion. This is down approximately 2.3 billion from September 30, 2022. While we still have outstanding litigation resolved, this estimate would be the lowest level since the second quarter of 2016, though, of course, new matters will arise and existing matters will develop over time. The estimate for December 31, 2022, will be updated at the time of our 10-K filing in February and may change. While we acknowledge the elevated level of operating losses, the past two quarters has been significant. They are important steps in putting historical issues behind us as we've been able to absorb the cost while increasing our CET1 ratio as I highlighted earlier. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer and Small Business Banking revenue increased 36% from a year ago, driven by the impact of higher interest rates. Deposit-related fees continued to decline as we completed the rollout of the overdraft fee reductions and new product enhancements that we announced early last year to help customers avoid overdraft fees. The majority of the revenue impact of these changes was reflected in the fourth-quarter run rate. We continue to focus on branch rationalization as digital adoption and usage among our customers have steadily increased. In 2022, we reduced branches by 179 and branch staffing levels by 10%, and we expect to continue to optimize our branches and staffing levels in response to changing customer needs. While industry mortgage rates declined in the fourth quarter, they were still up over 330 basis points since the beginning of the year, and weekly mortgage applications as measured by the Mortgage Bankers Association were at a 26-year low at quarter end. The economic incentive to refinance is extremely limited. And refinance applications for the industry were down 87% in December compared to a year ago. Reflecting these market conditions, our Home Lending revenue declined 57% from a year ago, driven by lower mortgage originations and gain-on sale margins, as well as lower revenue from the resecuritization of loans purchased from securitization pools. We expect the mortgage origination market will continue to be challenging and gain-on sale margin or remain under pressure until excess capacity industry has been removed. As we announced this week, we will be exiting our correspondent business, which we expect to be substantially complete by the end of the first quarter. We don't expect this action to have a significant impact on our 2023 financial results. Credit Card revenue was up 6% from a year ago due to higher loan balances driven by higher point of sale volume and new product launches. Auto revenue declined 12% from the year ago driven by continued loan spread compression from rising rates and credit tightening actions in certain areas, as well as lower loan balances. Personal Lending was up 9% from a year ago due to higher loan balances, partially offset by lower spread compression. While originations grew 19% from the year ago driven by strong consumer demand in investments and the business, we have remained disciplined in our underwriting. Turning to key business drivers on Slide 12. Mortgage originations declined 70% from a year ago and 32% from the third quarter, with both declines in correspondent and retail and originations. Refinances as a percentage of total originations were over half of our volume a year ago to -- declined to 13% in the fourth quarter of 2022. I already highlighted the drivers of the decline in Auto originations. So, turning to debit card. Spending was up 1% compared to a year ago. Holiday spend for debit card was flat compared to the 2021 season with lower transaction volume, offset by higher average ticket size. Entertainment was the only category with double-digit spending while growth -- while categories such as home improvement, general retail goods, and fuel were all down compared to 2021. Credit Card spending increased 17% from a year ago, and while the year-over-year growth rate slowed from the third quarter. Almost all categories continue to have double-digit growth. Average balances were up 22% from a year ago. Payment rates have started to moderate, but we're still well above pre-pandemic levels. Turning to Commercial Banking results on Slide 13. Middle market banking revenue increased 78% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances. Asset-based lending and leasing revenue declined 4% from a year ago, driven by lower net gains from equity securities, partially offset by loan growth. Average loan balances were up 18% in the fourth quarter compared to a year ago, while growth in the first half of 2022 was driven by higher realization. Utilization rates stabilized in the second half of the year. Average loan balances have grown for six consecutive quarters and were up 5% in the third quarter, with growth in asset-based lending and leasing driven by continued growth in client inventory, which are still below pre-pandemic levels. Growth in middle market banking was driven by larger clients, including both, new and existing relationships, which more than offset declines from our smaller customers. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 22% from a year ago driven by stronger treasury management results due to the impact of higher interest rates, as well as improved lending results. Investment banking fees declined from a year ago, reflecting lower market activity with declines across all products and industries. Commercial real estate revenue grew 16% from a year ago driven by stronger lending results to a higher loan balances and the impact of higher interest rates. Markets revenues increased 17% from a year ago, driven by higher trading revenue in equities, rates and commodities, foreign exchange, and municipal products. Average loans grew 10% from a year ago after growing for seventh consecutive quarter, average loans declined from the third quarter as utilization rates stabilized across most portfolios. On Slide 15, Wealth and Investment Management revenue was up 1% compared to a year ago, as the increase in net interest income driven by the impact of higher rates was partially offset by lower asset-based fees due to the decrease in market valuations. The majority of win in advisory assets are priced at the beginning of the quarter, so asset-based increased slightly in the first quarter, reflecting the higher market valuations at the end of the year. Expenses decreased 6% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Even as loan growth in securities-based lending moderated due to demand caused by market volatility in the interest rate environment, average loans grew 1% from a year ago. Slide 16 highlights our corporate results. Both revenue and expenses were impacted by the divestitures last year of our Corporate Trust business in Wells Fargo Asset Management. We sold these businesses in the fourth quarter of 2021, which resulted in a net gain of 943 million. Revenue also declined from a year ago due to lower results in our affiliated venture capital and private equity businesses, including the impairments in equity securities I highlighted earlier. The increase in expenses from a year ago was driven by higher operating losses. Turning to our expectations for '23, starting with Slide 17. Let me start by highlighting our expectations for net interest income. We are assuming that -- we are assuming the asset cap will remain in place throughout the year. Moving from left to right on the waterfall, based on the current forward rate curve, we expect our net interest income will continue to benefit from the impact of higher rates, even with deposits repricing faster than they did in 2022. However, this benefit is expected to be partially offset by continued deposit runoff and mix shift to higher-yielding products with these declines, partially offset by modest loan growth. We also expect a headwind for lower CIB Markets net interest income due to higher funding costs. This reduction is expected to be partially offset by an increase in trading gains and noninterest income, so the impact to revenue is currently expected to be small. Putting this all together, we currently expect net interest income to grow by approximately 10% in 2023 versus 2022. Ultimately, the amount of net interest income we earned in 2023 will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix, and pricing in the loan demand. Turning to our 2023 expense outlook on Slide 18. Following the waterfall from left to right, we reported 57.3 billion in noninterest expense in 2022, which included 7 billion of operating losses. Excluding operating losses, expenses would have been 50.3 billion, which is -- which was in line with the guidance we provided at the beginning of last year. If you also exclude operating losses from the guidance, our 2022 expenses were impacted by inflation and higher severance expense. However, revenue-related expenses were lower than expected by market conditions. So, we believe a good starting point for discussion of 2023 expenses was 50.3 billion, which excludes operating losses. We expect expenses in 2023 to increase by approximately $1 billion due to both, merit increases, including inflationary pressures and an approximately $250 million increase in FDIC expense related to the previously announced surcharge. These increases are expected to be partially offset by approximately 100 million of lower revenue-related expense, primarily driven by decreases in loan lending. Based on current market levels, we expect revenue-related expense in Wealth and Investment Management for 2023 to be similar to 2022. We've successfully delivered on our commitment of approximately 7.5 billion of gross expense saves over the past two years. And through our efficiency initiatives, we expect to realize an additional 3.2 billion of gross expense reductions in 2023. A piece of this is related to the announcement we made earlier this week to create a more focused Home Lending business, but expense savings from reducing our servicing business will take more time to be realized. We highlighted on this slide the largest opportunities for additional savings this year, and we believe we'll have more opportunities beyond 2023. Similar to prior years, the resources needed to address our risk and control work separate from our efficiency initiatives. And we will continue to add resources as necessary to complete this important work. And while we continue to focus on executing our efficiency initiatives, we're also continuing to invest and expect approximately 1.7 billion of incremental investments in our businesses in 2023. As Charlie discussed, investing in our businesses is critical to our growth across the company and better serve our customers, but we'll also continue to be thoughtful and evaluate the level of investments throughout the year. So, putting this all together, expenses, excluding operating losses, are expected to be relatively flat in 2023 compared with 2022, even with inflationary pressures, a higher FDI surcharge, and increase incremental investments in our businesses. As 2022 demonstrated, operating losses can be significant and hard to predict, and therefore, we have not included them in our expense outlook for 2023. However, we currently anticipate ongoing business-related operating losses, such as fraud, theft, and other business-as-usual losses to be approximately 1.3 billion this year, which is the same assumption we provided last year. As previously disclosed, we had an outstanding litigation -- have outstanding litigation, regulatory, and customer remediation matters that could impact the amount of operating losses. It's important to note that while we made substantial progress executing on our efficiency initiatives, we still have a significant opportunity to get more efficient across the company. This remains a multiyear process with the goal of achieving an efficiency ratio along with our peers based on our business mix. Given how critical continuing to invest to our -- continue to invest in our story, on Slide 19, we provide details on our primary areas of focus for 2023. As we've highlighted, continuing to build the right risk and control of infrastructure remains our top priority, and we will continue to invest in this important work. Charlie discussed many of the investments we started to make in digital payments, and we plan to continue to invest in these areas this year to make improvements for both our consumer and commercial customers. We also plan to continue to invest to expand our client coverage and investment banking, Commercial Banking, and Wealth and Investment Management and to continue to transform our technology platforms, including moving more applications to cloud, consolidating our data centers, and increasing investments in cyber. Finally, by investing in our operations and branches, we expect not only to improve the customer experience, but also improve efficiency, reduce operational risk, and drive and account growth. As we show on Slide 20, in the fourth quarter, we reported an 8% ROTCE. But as I highlighted at the start of the call, our fourth-quarter results were impacted by several notable items, including higher operating losses, elevated impairments of equity securities, severance, and discrete tax benefits. As we show on this slide, you will -- if you exclude these notable items, our fourth-quarter ROTCE would have been approximately 16%. However, we don't believe this accurately reflects our longer-term expectations for the following reasons. Net interest income was higher than our long-term expectations due to interest rates, funding, penalties, mix, and pricing, Also, net loan charge-offs were at historically low levels. If rates, funding balances, mix, and pricing were closer to our long-term expectations and charge-offs were higher, our ROTCE would be lower. Depending on what adjustments you make here, we may all get to a slightly different answer. So, to be clear, because the interest rates are higher and freight costs are lower than our longer-term expectations, we believe we have more work to do to improve our returns. On Slide 21, we highlight our path to higher returns. Since we first discussed our ROTCE goal in the earnings call for the fourth quarter of 2020, we have executed on a number of important items. We executed a $20 billion of gross common stock repurchases, 16 billion in net issuances, including our 401(k) plan. We increased our common stock dividend from $0.10 to $0.30 per share. We delivered approximately 7.5 billion of gross expense saves and reduced headcount by 11% since the end of 2020. So, we've made good progress over the past two years on things that we can control, and we believe we have a clear line of sight to a sustainable ROTCE of approximately 15% in the medium term. In order to achieve that, we need to continue to optimize our capital, including returning capital to shareholders and redeploying capital to higher-returning products and businesses. Adding more focus on our Home Lending business should also be a positive contributor to higher returns. We also have additional opportunities to execute on efficiency initiatives. Additionally, we expect to benefit from the investments we are planning in our businesses, which I highlighted earlier. While some of these investments will be dependent on the market environment, we expect them to increase ROTCE. At the same time, we will continue to prioritize building our risk and control infrastructure. In the longer term, we believe that running a company in a more controlled and disciplined manner will continue to benefit returns. And our goal is for our four operating segments to produce returns comparable to our best peers. In summary, although the high level of operating losses we had in the fourth quarter significantly impacted our results, the underlying results in the quarter continue to reflect an improvement in our earnings capacity. As we look forward, we expect to continue to grow net interest income. And our expenses, excluding operating losses, are expected to be relatively flat even after inflation and incremental investments in our businesses to drive growth. Both our credit performance and capital levels remained strong in the fourth quarter. And we expect to resume share repurchases in the first quarter. We will now take your questions.

Kenneth Usdin :

Hi. Good morning. Good afternoon, I should say. Mike, just a follow-up on the NII outlook for the year. So, you obviously had a good high end to the year at 13.5% FTE. And just looking at what the guide implies a step down -- a little bit of a step down from thereafter, can you just kind of walk us through just how you expect the betas to move through and then like what doesn't necessarily follow through from here in terms of some of the moving parts? Thanks.

Kenneth Usdin :

Okay. Got it. And so, second question, I heard your commentary about the 1.3 billion of op losses and the fact that the RPO is down to way down to 1.4 billion. Just how do you kind of help us understand your range of confidence? Obviously, last year, op losses ended at 7 billion as you made progress. So, how wide the range of expectations around your confidence on that level of op loss for the year?

Operator:

Thank you. The next question will come from Scott Siefers of Piper Sandler. Your line is open.

Charles Scharf:

Yes. Well, let me just -- so, listen, we still have a series of consent orders, of which, and I always point this out, the asset cap is a piece of one of them. So, all roads don't lead to the asset cap. The roads in this respect lead to us building the proper control environment, which will satisfy ultimately all the consent orders. And I've tried to be clear that we are making progress on that work. It is a lot to do. And our tone hasn't changed relative to the confidence in the progress that we're making there. So, we're going to continue doing it. And hopefully, it's done to the satisfaction of the regulators, but they'll have to decide that. And as we continue to tick off the to-dos on that work, the control environment gets better and better. And we become a better run company that doesn't have those kinds of operating losses that you've both seen in the past.

Mike Santomassimo :

Well, I would start with where our CET1 ratio is at the end of the year at 10.6%. So, we're well above our current regulatory minimum and the buffers that are included there. So, we have plenty of flexibility regardless of any outcome that comes out of the new rules that will be proposed. And keep in mind, that will take some time to come out and get implemented and phase in. And so, there's -- it's not going to happen in a day. And I think we'll go back to what we've been saying the last number of quarters as we think about the buffer that we'll put on the reg minimum, buffers of 9.2%, we'll be managing somewhere in the 100, plus or minus, a little basis point range. And depending on what happens with loan growth and RWA growth that we see in the quarter, that will help guide the share repurchases.

John McDonald :

Hey, Mike, I wanted to clarify your answer to Ken, about the first quarter NII. I think you said you do not expect a big step down in the first quarter. Maybe you could just frame first quarter NII a little bit for us relative to the 13.4. What are some of the headwinds, tailwinds? And what might you expect at this point?

John McDonald :

Stable minus including the day count or…

John McDonald :

And then stable.

John McDonald :

Okay. Got it. And then, Charlie, maybe a bigger question, just kind of where are you on the efficiency journey when we think about 50 billion of core expense for this year. And the timeframe for ROTCE, what will it take? Is there an efficiency ratio we should keep in mind? Or is that too hard to forecast? Maybe a little bit on that would be helpful.

Operator:

Thank you. The next question comes from Steven Chubak of Wolfe Research. Your line is open.

Charles Scharf:

Yes. Listen, I think -- I mean, I think that your point on headcount versus peers is one that we've made. And so, yes, we are all different in terms of the businesses that we're in and what we do. But we do -- and some insource and some outsourcing things. But when you look at it, we still have higher headcount and higher expenses than people who are more complex than us. You know, some of that is explained by the work that we're doing and the expenses and heads that are building out the control infrastructure, but there's a lot more beyond that. That's the work that we're doing to peel that back piece by piece by piece. We still have a huge amount of manual processes inside the company. We have duplicate systems, and that is -- that's the work that we're on. So, when I say that we still have gross expenses to be reduced in the company, we -- there's -- that's exactly what we're talking about. On the -- the question is when we get to a net basis, where does that come out? As I said before, I think that's a decision that we want to be able to make at each and every point in time when we look at what the overall performance of the company is. So, again, I just want to repeat what I said. We're not going to spend under any environment at all costs. That's not the way we're thinking about it. If we don't see net improvements in performance of the company, we've got the ability to ration back the discretionary spend so that we do continue to see improved performance of the company. What we'd like to see is that these things are paying off. We're seeing real sustainable revenue growth based upon these things and the ability to invest. And so, that's just kind of how -- that's the framework that we're using to make the decisions. And as we get to each point in time, and it's not even just an annual decision. I mean, Mike and I and the operating committee are going to have these discussions regularly about how are things panning out, what does it look like, and how do we feel about our willingness to continue to invest in these things? And have it -- it's got to be living and breathing.

Charles Scharf:

Well, so just -- it sounds like you're drawing conclusions to the pace at which we said we're going to buy stock back, which I don't think we have actually said. What we've said is that we haven't been buying stock back. We're absolutely -- we anticipate we're going to begin buying it back. As we think about how much we have available in that capacity, what Mike said was our CET1 went up to 10.6%. Our required minimum buffers are at 9.2%. And we -- it said that we'll manage 100 basis points above the 9.2% plus or minus. So, we do have substantial capacity but the ongoing earnings capacity of the company. And so, that is -- that's -- our framework is to target a reasonable CET1 ratio. If in the future to raise the levels of capital because of Basel III in-game or whatnot, we've got earnings capacity to be able to do that. But we do have the flexibility. And now that we've got resolution with CFPB and things like that, to be able to go buy stock back. And we'll be making that decision based upon our views on the value of the stock and liquidity in the market and things like that. But as we said, we do anticipate we'll be back in -- as opposed to where we've been.

Charles Scharf:

Sure.

John Pancari :

Good afternoon. I wanted to see if you could just give a little bit more color on the net interest income side. Maybe if you can talk a little bit more about the noninterest-bearing deposit mix shift that you think could continue here. It looks like that could be a pretty material offset to your interest rate benefits. So, I just wanted to see if you can perhaps talk about that and then maybe also help quantify the runoff that you expect to continue on the deposit side in terms of balances overall. Thanks.

John Pancari :

Okay, Mike. Thank you. That's helpful. And then separately, you gave some pretty good color obviously, around NII expectations now. And then also on expenses. On the fee side, can you perhaps give us your expectation there around overall growth that you expect in noninterest income and maybe some of the major drivers of where you see growth and if you could possibly size it up perhaps around the investment banking area, etc.? That would help. Thanks.

Charles Scharf:

A smaller piece today than it was historically.

Operator:

The next question comes from Ebrahim Poonawala of Bank of America. Your line is open.

Charles Scharf:

Sure. What I was trying to say in those remarks was the impact on rising rates is continuing to impact customers on a period-over-period basis, and we would expect that to continue, but it's not accelerating. It's much more linear than exponential. And the fact that it's much more linear is actually a very helpful thing because that gives people -- that's just -- that's a more orderly transition to a slower growth economy and gives consumers a chance. It shows that they're adjusting their spending patterns and saving patterns and borrowing patterns to adjust for the reality of higher rates. And on your second question, we would anticipate that we would continue to see deterioration in those metrics continue after the Fed stops raising rates, for a period just because of the amount of time that it takes those things to filter through the economy more broadly. So, hopefully, that was helpful.

Mike Santomassimo :

It's Mike. I'll try to take that and Charlie can add if he needs. When you look at the -- and you're really getting at the office, I think, space more than anything there. There's certainly more stress in the office space than there was a quarter or two or three quarters ago. And I think you're seeing that. Now, it hasn't translated into lost content at this point. And so, we're keeping a careful eye on it. And I think it is -- as you look at where you see it most, it is in older, lower-class properties. And over 80% of our portfolio is in Class A space. And so, we feel like the quality of it's pretty good, but we will see some stress as we go through here. So far, it's been pretty idiosyncratic in terms of individual buildings and individual places. But we are very watchful on cities like San Francisco, like Los Angeles, like Washington, D.C., where you're seeing lease rates overall be much lower than other cities across the country. And so, certainly, those are markets that we're keeping a pretty close eye on and making sure we're being proactive with our borrowers to make sure we're thinking way ahead of any maturities or extensions, options that need to get put in place to help manage through it.

Erika Najarian :

Hi. Good afternoon. Just one more clarification question, if I may, on net interest income. You know, Mike, your underlying assumptions to your NII outlook in terms of low to mid-single-digit loan growth, moderate declines in deposit balances in the first half and stabilizing, it doesn't feel very different from what consensus had been assuming to get to 51.5 billion for '23, which is clearly higher than what's implied by your outlook. So, I'm wondering if I could reask Ken's question, what deposit betas, what terminal deposit betas, what range of expectations are you baking into that 49.5 billion forecast? And did you make a significant amount of conservatism as you think about your NII outlook? And I'm asking that question because one of your peer CEOs said their 74 billion outlook was not conservative. So, I think that given the outlook versus consensus expectations, I did have to reask that question here.

Charles Scharf:

Can I just ask to start before Mike actually goes to the facts? Again, I think one of the things that you're hearing from all of us that were all very consistent on, which I know you appreciate, but I just want to say it anyway, is we don't know what the rate path is going to look like from here over the next 11.5 months, which is exactly what you're asking and exactly what the competitive environment is going to be month by month versus all of the people we compete with. So, you're looking at -- we don't know what the alternative is going to be in nonbank deposits, and we don't know what the alternatives are going to be in bank deposits, but we're trying to make those predictions. So, I think when we go through all of this, we're all just trying to, in our own way, make sure that there's clarity that we're -- and I'll speak to myself now. We're trying to give you what we think is achievable. And in our case, based upon the rate curve that we've laid out in the document, and it might or might not turn out that way. We're also assuming, and I talked about this at a conference in December that we are going to continue to raise rates in which we pay our consumers because we're thinking about this not in terms of maximizing short-term NII, but thinking about it in terms of the value of the relationship and making sure that we pay properly for that, so that we're continuing to recognize how expensive it is to get a new relationship and how profitable it can be to keep an existing relationship. And so if your views are different toward the end of the year as to what the rent scenario could be, that's fine. Specifically, what we've tried to do, as we've gotten closer to the periods with which we see is give you some clarity as Mike did on what we're -- the first quarter is a little clearer to us. But beyond that, is pretty difficult, and we're not going to go through every last beta that we're assuming in terms of what those forecasts are.

Operator:

Thank you. The next question is from Betsy Graseck of Morgan Stanley. Your line is open.

Charles Scharf:

Yes. So, maybe I'll start on the second, and then Mike will circle around to the first. So, we are not assuming that we will balance sheet every loan that we underwrite in the future. Again, what we're just -- what we're trying to do in the path that we've laid forward is just to make very clear that we're not interested in running and having a business which is focused on a stand-alone mortgage product. We very much appreciate the importance of mortgage to the consumer base. And we're going to continue to stay in the business. But we're going to view it as part of the importance in the broader relationship. So, that means we'll be originating both, conforming and nonconforming mortgages. And we'll continue to make the decision as to what goes on our balance sheet as we have done in the past. The fact that we'll be originating a lot less will certainly mean that over time, the MSR and the overall servicing book will come down very naturally based upon that, over a fairly long period of time. But we'll also look for intelligent and economic ways to reduce the complexity and the size of our servicing book between now and then. And if those present themselves, we'll certainly be interested in doing that. And I know Mike will talk a little bit about this, but I think one of the things we were just trying to say when we think about the size of the impact of exiting the correspondent business immediately is given the fact that mortgage volumes are so low, and revenues are so low. The revenue impact of exiting the correspondent business in the short term is not meaningful. It's a very small number of people. So, that's not all that meaningful in the short term. The real benefit comes over time as we reduce the size of the servicing business, which, as we've tried to make the point is, it's not just reducing expenses, but it's not profitable for us today in a whole bunch of these segments where we continue to have the servicing. And so, it becomes a positive over time. And it's just -- but that is not a short-term benefit for us but certainly a medium- to longer-term one.

Betsy Graseck :

The servicing cost is low tens of millions?

Betsy Graseck :

The low tens of millions is the gain on sale?

Betsy Graseck :

Okay.

Charles Scharf:

Part of the broader servicing dialogue.

Charles Scharf:

Correspondent?

Charles Scharf:

No, it's not even close. I mean, the amount that we're originating today relative to the scale we have in the business is -- it's immaterial. And we'll -- and even as we downsize the portfolio on the servicing side, the whole point -- our servicing portfolio can be substantially, substantially lower, and we'll still have scale to be able to originate the product and we would say in a more profitable way than we're doing it today.

Charles Scharf:

Yes.

Charles Scharf:

Yes. That's correct.

Vivek Juneja :

Thanks. Thanks for taking my questions. A question for you. With the CFPB settlement, there was a comment by the head of CFPB about growth initiatives slowing your progress. So, Charlie, as a question to you is what are you planning to do in regards to that comment in terms of the growth initiatives? Are you trying to slow anything? Any color on that?

Vivek Juneja :

Thanks. A completely different question. On -- in the past, you've given some color on deposits and among different tiers of customers. Any color, any update on where those stand currently and your outlook on that?

Vivek Juneja :

Thanks.

Gerard Cassidy :

Thank you. Good afternoon. Charlie, kind of to -- excuse me -- flip this question from your answers to the servicing and the residential mortgage business, are there any lines of businesses that -- I know you can't go out and make an acquisition, of course, but any lines of businesses you're looking to grow and enhance and beef up maybe through hiring groups of people to do that, you know, strategic increase?

Gerard Cassidy :

Great. And then just as a quick follow-up. Mike, you guys mentioned that there was a private equity or equity write-down in the quarter. Can you share with us how big that was? And then just -- I know over the years, you guys have done very well in this area. But -- and then second, how big is the portfolio? What's the remaining there?

Charles Scharf:

Just to be clear, we're holding it at something like still…

Charles Scharf:

Yes. I would say 10 times what we invested in it.

Charles Scharf:

But like all of -- all enterprise software companies, it's the company -- it's just -- it's the rate of growth over the next year or so has come down substantially, but it's still a very high-quality company.

Operator:

And that was our final question.

Operator:

Thank you all for your participation on today's conference call. At this time, all parties may disconnect.

John Campbell:

Good morning. Thank you for joining our call today where our CEO, Charlie Scharf and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our third quarter earnings materials, including the release, financial supplement and presentation deck, are available on our website at wellsfargo.com. I’d also like to caution you that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings materials. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Mike Santomassimo:

Thank you, Charlie and good morning everyone. Net income for the quarter was $3.5 billion or $0.85 per diluted common share. As Charlie highlighted, our results included $2 billion or $0.45 per share of accruals primarily related to a variety of historical matters. These accruals drove our total expenses higher. However, if you exclude operating losses, our expenses would have declined as we continue to execute on our efficiency initiatives. Revenue grew in the third quarter, driven by higher net interest income, while non-interest income also increased from the second quarter. Our effective income tax rate for the third quarter was 20.2%. We highlight capital on Slide 3. Our CET1 ratio is 10.3%, down 6 basis points from the second quarter as the 21 basis point decline from AOCI as well as the impact from dividend payments was nearly offset by our third quarter earnings. Our CET1 ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to 9.2% at the start of the fourth quarter as our new stress capital buffer took effect. As a reminder, our GSIB surcharge will not increase in 2023. We did not buyback any common stock in the second or third quarters and we will continue to be prudent regarding the amount and timing of any share repurchases. Turning to credit quality on Slide 5, credit performance remained strong, with only 17 basis points of net charge-offs in the third quarter. However, as expected, losses are slowly increasing from historical lows and we expect them to continue to normalize towards pre-pandemic levels over time as the Federal Reserve continues to take actions to combat inflation. We are closely monitoring our portfolio for potential risks and are continuing to take some targeted actions to further tighten underwriting standards. Commercial credit performance remained strong across our commercial businesses, with only $6 million of net charge-offs and net recoveries in our commercial real estate portfolio for the third consecutive quarter. We also had net recoveries in our consumer real estate portfolios. However, total consumer net charge-offs increased $72 million from the second quarter to 40 basis points on average loans driven by an increase in net charge-offs in the auto portfolio. Higher loss rates on certain auto loans originated primarily in the latter part of 2021 contributed to the linked quarter increase in charge-offs and delinquent loans in the auto portfolio. Lower loan balances also impacted the loss rate, which started – we started taking credit tightening actions earlier this year, which have improved the quality of 2022 originations. As a result of these actions, increased pricing competition and continued industry supply chain constraints, the third quarter origination volumes were down over 40% compared to a year ago. Non-performing assets declined again in the third quarter and were down $411 million or 7% from the second quarter and down 20% from a year ago. While commercial non-accruals continued to decline, lower levels of consumer non-accruals were the primary driver of lower non-performing assets due to a decrease in residential mortgage non-accrual loans from the impact of customers’ sustained payment performance after exiting COVID-related accommodation programs. Our allowance for credit losses increased $385 million in the third quarter, primarily reflecting loan growth and a less favorable economic environment. On Slide 6, we highlight loans and deposits. Average loans grew 11% from a year ago and 2% from the second quarter. Period-end loans increased for the fifth consecutive quarter, but growth slowed as expected, with commercial loan balances holding relatively stable from the second quarter while consumer loans grew driven by credit card and first lien residential mortgage loans, partially offset by continued declines in our auto portfolio. I will highlight the specific growth drivers when discussing our operating segment results. Average loan yields increased nearly 100 basis points from a year ago and 76 basis points from the second quarter, reflecting the higher rate environment. Average deposits declined 3% from both the year ago and the second quarter, with declines across our deposit-gathering businesses. Compared with the second quarter, Wealth and Investment Management had the largest decline by dollar amount as clients looked for higher yielding alternatives. Declines in our commercial businesses were driven mostly by outflows of non-operational deposits, which can be more price sensitive and are a less stable source of funding. Outflows in Consumer and Small Business Banking were driven by continued customer spending and increased outflows from customers seeking higher yielding products. Our average deposit cost increased 10 basis points from the second quarter to 14 basis points. Pricing has been consistent with our expectations, with deposit costs holding relatively stable in consumer banking and lending, while trending higher across other businesses. As rates continue to rise, we would expect deposit betas to continue to increase in customer migration from lower yielding to higher yielding deposit products to also increase. Turning to net interest income on Slide 7. Third quarter net interest income increased $3.2 billion or 36% from a year ago and $1.9 billion or 19% from the second quarter. The growth from the second quarter was primarily driven by the impact of higher rates, which increased earning asset yields and reduced premium amortization from mortgage-backed securities. We also benefit from higher loan balances and 1 additional day in the quarter. These benefits were partially offset by higher funding costs. In the first 9 months of this year, net interest income was up 19% compared with a year ago. We currently expect full year 2022 net interest income to be approximately 24% higher than a year ago, with fourth quarter 2022 net interest income expected to be approximately $12.9 billion. Turning to expenses on Slide 8, the increase in non-interest expense from both a year ago and from the second quarter was due to the higher operating losses that I highlighted earlier. Excluding operating losses, other non-interest expense was down 5% from a year ago as we had lower revenue-related compensation, expenses related to divestitures came out of the run-rate and we continue to make progress on our efficiency initiatives. Excluding operating losses, our expenses would have been down on a year-over-year basis for six consecutive quarters. Another way you can see the impact of our efficiency initiatives is through lower headcount, which has declined for nine consecutive quarters and was down 6% from a year ago. We have also reduced professional and outside services expense by 10% and occupancy expense by 4% during the first 9 months this year. The higher level of operating losses in the third quarter will cause us to exceed our $51.5 billion expense outlook for 2022, which included $1.3 billion of operating losses for the full year. We currently expect our fourth quarter other expenses, excluding operating losses, to be approximately $12.3 billion. As Charlie highlighted, outstanding litigation, customer remediation and regulatory matters still remain – that will still remain and will likely result in additional expense in the coming quarters, which could be significant. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 9. Consumer and Small Business Banking revenue increased 29% from a year ago driven by the impact of higher interest rates and higher deposit balances. Deposit-related fees were impacted by the overdraft policy changes we rolled out earlier this year, which eliminated non-sufficient funds and some other fees. The extra day grace period launched in the beginning of August and early payday begin in select states in mid-September, so we would expect our deposit-related fees to decline further in the fourth quarter. Industry mortgage rates have increased over 300 basis points since the beginning of the year and ended the quarter at the highest level since 2007, driving weekly mortgage applications as measured by the Mortgage Bankers Association to a 25-year low at quarter end. As a result, our home lending revenue declined 52% from a year ago, driven by lower mortgage originations and gain on sale margins as well as lower revenue from the resecuritization of loans purchased from securitization pools. While the mortgage market adjusts to lower volumes, we expect it to remain challenging in the near-term and it’s possible that we have a further decline in the mortgage banking revenue in the fourth quarter when originations are seasonally slower. We continue to remove excess capacity to align with the reduced demand and expect these adjustments will continue over the next couple of quarters. Credit card revenue was up 8% from a year ago due to higher loan balances, which benefited from higher point-of-sale volume and new product launches. Auto revenue declined 5% from a year ago driven by loan spread compression and partially offset by higher loan balances. And Personal Lending was 9% from a year ago due to higher loan balances driven by growth in origination volumes. Turning to some key business drivers on Slide 10. Mortgage originations declined 59% from a year ago and 37% in the second quarter, with declines in both correspondent and retail originations. Refinances as a percentage of total originations declined to 16% in the third quarter. Average home lending loan balances grew 2% from the second quarter, driven by growth in our non-conforming portfolio. I already highlighted the drivers of the decline in auto originations. So turning to debit card, while debit card spend increased 3% from a year ago, spending declined 2% from the second quarter. As Charlie highlighted, credit card point-of-sale purchase volumes were up 25% from a year ago, with the largest percentage increases in fuel and travel. Average balances were up 21% from a year ago, reflecting the strong point of sale volume which also benefited from the launch of new products, with new accounts up 11%. We will continue to remain disciplined in our underwriting of new credit card accounts. Turning to Commercial Banking results on Slide 11. Middle Market Banking revenue increased 54% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances. Asset-Based Lending and Leasing revenue increased 27% from a year ago, driven by higher net gains from equity securities, higher loan balances and higher revenue from renewable energy investments. Non-interest expense increased 9% from a year ago, primarily driven by higher operating costs and higher operating losses. Average loan balances have grown for five consecutive quarters, and were up 17% from a year ago. Line utilization rates were fairly stable relative to the second quarter, inflation and our customers’ continued efforts to rebuild inventory as supply chain challenges remain drove the growth in Asset-Based Lending and Leasing. Loan growth in the Middle Market Banking continued to come from larger clients, which more than offset declines from smaller clients. Turning to Corporate and Investment Banking on Slide 12. Banking revenue increased 28% from a year ago driven by stronger treasury management results, reflecting the impact of higher interest rates as well as higher loan balances. Investment banking fees declined from a year ago, reflecting lower market activity. Compared with the second quarter, the increase in investment banking fees was due to the write-down of unfunded leveraged finance commitments last quarter. Commercial real estate revenue grew 29% from a year ago, driven by higher loan balances, the impact of higher interest rates as well as improved commercial mortgage bank-backed securities gain on sale margins. Markets revenue increased 6% from a year ago, reflecting volatility and strong client-demanded equities, rates and commodities and foreign exchange trading. Average loans grew 19% from a year ago, with broad-based growth across our businesses to fund clients’ working capital needs, but the pace of growth slowed in the third quarter with average balances up 3% and period-end loans down 3% from the second quarter. On Slide 13, Wealth and Investment Management revenue grew 1% from a year ago as the increase in net interest income driven by the impact of higher rates offset the decline in asset-based fees driven by lower market valuations. As a reminder, the majority of WIM advisory assets are priced at the beginning of the quarter, so third quarter results reflected the lower market valuations as of July 1. And while the S&P 500 and fixed income indices declined again in the third quarter, the decrease was not as steep as the second quarter decline. So while there will be another step down in asset-based fees in the fourth quarter it will be less significant than the third quarter decline. Expenses decreased 4% from a year ago due to lower revenue-related compensation. Average loans increased 3% from a year ago driven by continued momentum in securities-based lending. Slide 14 highlights our corporate results. Both revenue and expenses were impacted by the divestitures last year of our Corporate Trust services business and Wells Fargo Asset Management. These businesses contributed $459 million of revenue and accounted for approximately $305 million of expense in the third quarter of 2021. Revenue also declined from a year ago due to lower equity gains in our affiliated venture capital and private equity businesses, and given current market conditions, we don’t expect equity gains to improve in the fourth quarter. Expenses increased from a year ago due to higher operating losses. In summary, although the high level of operating losses we had in the quarter significantly impacted our results, the underlying results in the quarter continue to reflect our improving earnings capacity. We had strong net interest income growth from rising rates, and if you exclude operating losses, our expenses would have declined as we continue to execute on our efficiency initiatives. Both our credit performance and capital levels remain strong. We will now take your questions.

John McDonald:

Thank you. Good morning, guys. Mike, I wanted to ask on the expenses. The first – in terms of the operating losses, I know it’s tough to answer, but should we think of the op loss accrual this quarter as you reassessing what you might have to pay in the future, or you got hit with some stuff that you didn’t expect and you’ve already paid up? Is there some combination of those? How should we think about what happened this quarter with the op loss accrual?

John McDonald:

Okay. And then maybe, Mike, I could follow-up on the non-op expense outlook for $12.3 million in the fourth quarter applies up from the $12.1 million this quarter. Maybe just some context of what’s driving that? Is it seasonality? And then can we think of that jumping off point of the fourth quarter as the beginning of annualizing that for next year? And what would be the – roughly the puts and takes for thinking about next year from the fourth quarter? Thanks.

John McDonald:

Okay. Maybe a broader comment just on efficiency and where you are relative to your longer-term targets?

Charlie Scharf:

And John, the only thing I would add, because I know it’s on a lot of people’s minds, is that – I mean, from our standpoint, there is nothing new in our thinking from what we’ve talked about last quarter, both in terms of where the opportunities are and how we’re thinking about the future. And we just do think that it makes sense when we get to the end of next quarter, when we talk about our path to a 15% sustainable through different cycles, ROTCE, that’s also an opportunity to talk more specifically about expenses and how that fits in, including what it looks like for next year. And so by that point, we will have finished our budget process. We will understand all the puts and takes, and be in a really good position to talk about it.

Operator:

Thank you. The next question will come from Scott Siefers of Piper Sandler. Your line is open.

Mike Santomassimo:

Well, Scott, I think there is a lot that needs to play out for us to answer that with any degree of accuracy, right, in terms of what we’re seeing in the economy, loan growth, what’s happening with deposits and so forth. But the only thing I would point out that you do need to keep in mind as you think about it is there will be a lag on deposit pricing, and that happens in every cycle. It happened in the last cycle and will happen again here. Once the Fed stops raising rates, you will see a lag before deposit pricing stops going up, and that’s just normal and to be expected. As it relates to overall NII at that point, I think there is a lot of what-ifs that need to go into that scenario. And as we all have seen, even over the last few days, some of those expectations continue to evolve. So – but I would keep in mind as you think about that, the deposit pricing lag.

Charlie Scharf:

Yes. Scott, this is Charlie. I’ll take a shot at it, and Mike, feel free to pipe in. Listen, I think, again, if you go through things that we’ve said in the past and go through our disclosures, we still have open regulatory matters that do relate to the past. We do have litigation that relates to a series of those things, which we do cover a lot of it in our disclosures. And the other thing which I just – as we continue to make progress and move forward and build the control environment, we do find things ourselves that do relate to the environment that we’ve had in the past, and those things have to be remediated. So as I said earlier, we would like to get both – just both operationally and financially, things done as quickly as we can. The accounting rules dictate on when you – whether it’s appropriate to take the charges, and we just, again, want to try and be as clear as we can. We are not surprised. I mean, when I say not surprised, we don’t like the charge for sure. But it is just the reality of the position that we’re in to get these things behind us, and try to be clear in the remarks that this isn’t the end of it. But we would like to move as quickly as we can on everything that’s remaining to get behind us.

Mike Santomassimo:

Yes. And one thing overall. And I think even with these costs and the charges, we’re continuing to make sure that we invest in the underlying businesses, too. I think Charlie highlighted a little bit of that in his remarks, but we’ve got to keep making sure that we’re adding people where we need to, we’re building out the capabilities where we need to. And we’ve talked some – about some of those opportunities in the past, but we are also doing that as well as executing on the efficiency agenda to make sure the earnings capacity of the company continues to get better.

Operator:

The next question will come from Ken Usdin of Jefferies. Your line is open, sir.

Mike Santomassimo:

Maybe I’ll start, Ken, and then Charlie can add anything. I think our thinking hasn’t changed much since last quarter. We don’t feel like we need to build from here. As you know, we’ve got about 110 basis points of cushion over our reg minimum and buffers together. And I think as you sort of look at the environment we’re in, we just – we want to be – continue to be prudent about how and when do we do buybacks. I think even if you think about the third quarter and look at the rate volatility we saw in the last 3 weeks of the quarter, and even in the last number of days of the fourth quarter now in the beginning, we’ve seen quite a bit of volatility happening. And so it’s just all of those things that go into the calculus we do every quarter to look at where the risks and opportunities are, and make sure that we’re just being smart about managing it.

Ken Usdin:

Got it. And a follow-up just in terms of other uses of that capital, just in question. You did build the reserve a little bit this quarter and alluded to the potential for a greater uncertainty. Just – can you help us understand just where you live now in a scenario weightings in terms of your reserve? And Charlie, your point in your prepared remarks is just things might turn, but it’s just unclear to say how. So how do you contemplate, how do we get a better sense of what that might mean for reserves, and how your view on potential losses has changed?

Mike Santomassimo:

And maybe I’ll just add, we’ve said this now for the last couple of quarters, we’ve had a pretty significant weighting on the downside scenarios for a while and haven’t changed that. I think you – if you look at what we’ve built over the – during COVID, I guess, a couple of years ago now. Relative to where we are today, we haven’t released all of that build that happened. And so all of what Charlie talked about goes into the conversation. And so at this point, we still feel very comfortable with where we are.

Charlie Scharf:

Yes. The only thing I want to just be clear about that is, again, we try and be – and you have to be forward-looking, and so we’re trying to be very realistic about what potential outcomes are. But at the same time, if our view deteriorates on the level of risk out there, that could change. And so getting back to the capital comment, I do think it’s kind of weird that this all runs through the income statement. And for that level, it’s hard to predict. From our perspective, we do have to – the way we think about reserving and the way we think about capital are very much the same.

Operator:

Thank you. The next question comes from Ebrahim Poonawala of Bank of America. Your line is open.

Mike Santomassimo:

Sure. Maybe I’ll think I’ll start on the last piece. I think you’re referring to leverage finance bridge, the bridge book? It’s very immaterial in terms of any impact this quarter, so nothing – no story there in terms of anything significant in the quarter. As it relates a little bit more broadly on credit, for the most part, the portfolios are performing really well, right? And if you go look in the commercial bank, customers are still in really good shape on average, same thing in the corporate investment bank. On the consumer side, Charlie pointed out a lot of health indicators still look really good. We’re not seeing systematic stress. You’re certainly seeing a little bit more stress on the lower end, wealth spectrum, which is in a big part of the portfolio for us. And so overall, so far, so good in terms of the performance to date.

Ebrahim Poonawala:

Got it. And just a quick follow-up, Mike, what I was referring to on the C&I book is the disclosures around exposure to financials, except ex-banks. And so when I am thinking about like asset management, real estate finance, anything there that we should worry about in a world where there is some uncertainty around how private equity holds up in this environment of higher rates? That’s what I was sort of getting at.

Ebrahim Poonawala:

Got it. Thank you.

John Pancari:

Good morning. On – I know you mentioned that you still see substantial opportunity on the efficiency side for improvement. And on that end, can you talk about the gross cost saves? I know you have increased the target from $8 billion to $10 billion this year, early this year in January. Can you talk about the potential that could that number move higher yet again as your – as you look at all the opportunities in front of you?

John Pancari:

Okay, Mike. Thanks. And then in terms of the mortgage expectation, I think you indicated that you could see some incremental downside pressure there. Can you maybe help us size up the magnitude that you could see in the fourth quarter in terms of an incremental decline?

John Pancari:

Got it. Okay. And then just one more follow-up on the balance sheet, and I am sorry if you had pointed to this already. But in terms of the pressure on the positive balances, can you talk about maybe how we should think about potential incremental declines in deposits as we see the impacts of the rate hikes continue to take hold?

John Pancari:

Got it. Okay. Thanks Mike. Appreciate the color.

Erika Najarian:

Hi. Good morning. Just another question on expenses, if I may. I guess the market – what the market is telling us today is that so long as the core expenses are as expected, the market seems to be looking through higher op losses. And as we look forward, Charlie and Mike, as you think about the budgeting process for next year, I think the Street expects operating losses to be improving to be a strong contributor to expense improvements going forward, even off of that original $1.3 billion expectation. I am just wondering, as you think about the budgeting, do you continue to contemplate adjustments on the core? Meaning, cutting core...

Erika Najarian:

I meant expenses, excluding operating losses. I think your investors are expecting op losses to be down meaningfully even from that $1.3 billion original number. I am wondering if you are continuing to contemplate on the core?

Erika Najarian:

No, I think that makes sense. And I think the conversation with investors, Charlie, is sort of the next step for Wells Fargo in terms of accelerated investment spend, right? Efficiencies, obviously, a ratio, so that makes sense. And my follow-up question maybe is for you, Mike. So, I am squeezing two parts to my second question. The first is, could you tell us what unemployment ratio, your ACL ratio today contemplates? And second, if you could just give a comment on where you see deposit betas trending relative to your previous expectation now that we have added 100 basis points onto the expectation for Fed funds since we have talked to you last in the quarterly earnings setting?

Erika Najarian:

Deposit betas, has your thinking on cumulative [ph] deposit betas changed as we contemplated 2023, given that we added 100 basis points of the Fed’s funds outlook since we spoke to you last in this quarterly earnings setting?

Erika Najarian:

Thank you.

Matt O’Connor:

Good morning. Can you give us an update on your rate positioning, and thoughts on whether you want to lock it in the kind of rate level that we are at here, what’s expected, or how you are thinking about protecting yourselves from potentially lower rates, or what your perspective is on that? Thanks.

Matt O’Connor:

Okay. Thank you.