富國銀行 (WFC) 2010 Q3 法說會逐字稿

Good morning.

My name is Celeste and I will be your conference operator today.

At this time I would like to welcome everyone to the Wells Fargo third-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

I would now like to turn today's call over to Mr.

Jim Rowe, Director of Investor Relations.

Please go ahead, sir.

Thank you and good morning, everyone.

Thank you for joining our call today, during which our Chairman and CEO John Stumpf and CFO Howard Atkins will review third-quarter 2010 results and answer your questions.

Before we get started I would like to remind you that our third-quarter earnings release and quarterly supplement are available on our website.

I would also like to caution you that we may make forward-looking statements during today's call and that those forward-looking statements 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 and the earnings release and quarterly supplement included as exhibits.

In addition, some of the discussion today about the Company's performance will include references to non-GAAP financial measures.

Information about those measures including a reconciliation of those measures to GAAP measures can be found in our SEC filings and in the earnings release and quarterly supplement available on our website at WellsFargo.com.

I will now turn the call over to Chairman and CEO John Stumpf.

Thanks, Jim, and thanks to all of you for joining our call and for your interest in our Company.

The third quarter was the best quarter in our Company's history, with record earnings of $3.3 billion, up 9% from last quarter.

The strength of our diversified business model and the power of the Wells Fargo and Wachovia merger are clearly reflected in these results.

The Wachovia merger is exceeding all of our expectations, helping us generate more than $21 billion in earnings since the merger.

In the third quarter we completed the integration of Wachovia's stores in our overlapping states and began the integration in our eastern states, successfully converting 170 banking stores in Alabama, Mississippi, and Tennessee.

This success paves the way for the rest of the eastern market conversions which we will complete next year, giving millions of customers access to more products and the largest banking store network in the United States.

In addition to the banking stores, we have also converted many other businesses and systems including mortgage, credit card, trust, and mutual funds.

Howard will provide some examples of the revenue synergies we are already realizing from the merger, but let me just say I am particularly pleased with the positive results we have had in retaining and attracting deposits, which are an important contributor to our results.

Checking account growth remains strong throughout our Company, up a net 7.3%, with very strong growth across the East, including 9% growth in Florida and 11.2% growth in New Jersey, as examples.

Now, I know we have all been hearing in recent months about business practices within our industry.

I am proud of Wells Fargo's adherence to a culture of doing what is right for customers, which not incidentally benefits our team members, our communities, and our shareholders in the long run.

For us, this means doing the hard work early and building processes that adhere to our standards as a Company.

This is as true in our approach to merger integration as it is to our day-to-day business operations.

Let me quickly give you my views on the latest topic, related to mortgage foreclosures and repurchases.

Howard will address this topic in more detail later on the call, but there are a couple of important points I want to make up front.

First, foreclosure is always a last resort, and we work hard to find other solutions for our customers.

Since January 2009 we have completed over 556,000 modifications, more than twice the number of foreclosure sales completed during this period.

We have forgiven $3.5 billion of principal to help customers stay in their homes.

Second, we are confident that our practices, procedures, and documentation for both foreclosures and mortgage securitizations are sound and accurate.

Third, we did not and do not plan to initiate a foreclosure moratorium.

As it relates to regulatory reform, we continue to work internally with our regulators to better understand how reform measures may affect our businesses and our customers.

The services we offer our customers including financial security, convenience, and advice obviously have a cost, and we need to be compensated for these benefits we provide our customers and for the capital we use to support these businesses.

This is not new.

Over the years, there have been numerous environmental and regulatory issues in our industry, and the breadth of our diversified model and the strength of our underlying customer relationships have enabled us to succeed in the aggregate and relative to our peers.

This environment is no different.

In the same way that helping our customers avoid foreclosure is the right thing to do for them and our shareholders, we will work to make sure that any changes we make in response to regulatory reform are in the best long-term interest of our customers, our team members, and of course our shareholders.

Our customer-centric approach has given us what I believe to be the best and most valuable franchise in the industry, and our actions will be consistent with the principles that have driven our actions over the years.

Now let me turn it over to Howard.

Thank you, John.

My remarks this morning will follow the slide presentation included in the quarterly supplement, which is available on the Wells Fargo investor relations website.

I've got lots of ground to cover this morning but there are six key themes that I would like you to remember in my remarks.

First, as John indicated, we had record results in the quarter, best quarter ever, $3.3 billion in profit, with earnings per share of $0.60, or up 7% year over year.

Second, the way we grew earnings in the third quarter is the same as we have done to produce strong earnings every quarter since the merger.

Revenue growth in most of our businesses, with expenses down.

Third, the Wachovia merger is already a big financial success for us with better-than-expected credit experience, expense savings on track, and abundant revenue synergies.

Fourth, we had continued improvement during the quarter in credit quality.

Our chargeoffs are now some 24% below the peak last year and 9% down from the second to the third quarter.

Fifth, our balance sheet is stronger than ever.

We have been growing Tier 1 Common at a rate of about 40 to 50 basis points per quarter organically.

Tier 1 Common hit 8% during the quarter.

And while the new Basel rules are still in process, we expect to be above 7% Tier 1 Common on the proposed Basel III rules, as we understand them, within the next few quarters.

Then finally, we are confident in our foreclosure and mortgage securitization policies, practices, and controls and the adequacy of our repurchase reserve.

And I will get to that later on in this presentation.

If you look at slide 4, which is our earnings trend, as indicated we earned a record profit of $3.34 billion in the third quarter.

This is not a new development.

Quarterly profits, as you know, have been consistently strong since the merger two years ago.

Nor is the strength of our earnings in the quarter due to any one factor.

Our results were relatively broad-based across many business segments and products.

I would like to point out a number of special items that in the aggregate reduced revenue and earnings on a linked-quarter basis.

This would include for the first time now the impact of Reg.

E, which cost us $380 million during the quarter in revenue.

Second, while we continue to have commercial loan resolutions in the PCI portfolio, $202 million in the quarter, that is down $304 million from the second-quarter PCI loan resolution income.

And thirdly, we only had $17 million in bond and equity gains.

That is down $300 million from the second quarter.

When you add those items up, it's almost $1 billion worth of less revenue from the second to the third quarter, which means that all of our other business operations -- basically our core operations combined -- grew revenue by some $465 million in the quarter.

We had double-digit annualized linked-quarter revenue growth in a number of businesses including asset-backed finance, asset management, auto dealer services, brokerage, commercial banking, commercial mortgage servicing, commercial real estate, debit card, mortgage banking, private student lending, real estate investment banking, and retirement services.

When you add up all of those businesses in which we had double-digit revenue growth, that amounts to some -- just under half of the total revenue of the Company in the quarter.

The third-quarter results, continuing with the special items, also included $476 million in merger integration expenses.

Our operating losses were down close to $400 million from the second to the third quarter, largely reflecting the higher level of legal accruals we had in the second quarter.

And in the third quarter we released $650 million from the allowance, reflecting the improved loan portfolio performance at Wells Fargo; and we expect additional releases in the coming quarters, absent significant deterioration in the economy.

Slide 5 shows you our returns and operating margins, which were strong and generally up in the quarter.

Return on assets was increased to 1.1%.

Return on tangible common, 15%.

Both among the highest of the large bank peers.

Net interest margin did decline by about 13 basis points from the second quarter, but that was largely driven by lower PCI loan resolution income, as I mentioned earlier.

As you know, lots of factors impact the margin, some positively, some negatively.

The decline that we have seen in the nonstrategic loan portfolio that we are running off does reduce the margin to a certain extent.

On the other hand, we have had continued and significant growth in checking and savings deposits, which helps the margin.

As I mentioned before, our earnings continue to be very broad-based.

As has been the case for many quarters, all of our business segments continue to contribute to the Company's earnings, with Community Banking growing earnings in the quarter by 13%; our Wholesale Banking group growing earnings by 2%; while the Wealth, Brokerage and Retirement group had essentially flat NIAT in the quarter, earnings in this business were almost double -- a little bit more than double from a year ago.

Let me take you through a little each of the main business segments.

On slide 7, our Wholesale Banking group, you can see the trend in revenue and earnings there.

Revenue in this group was down somewhat in the quarter due to the lower PCI loan resolution income and seasonal decline in insurance revenue.

But many businesses in this group including customer flow trading, commercial real estate, commercial mortgage servicing, and asset-backed finance had double-digit annualized linked-quarter revenue growth.

Like our retail business, in the Wholesale business revenue to a very large extent is driven by cross-sell.

As I mentioned we had many businesses that contributed to the result and to the growth in our cross-sell in this business.

We did see signs of lending activity increasing already in the second quarter in this business segment.

But lending activity actually picked up in the third quarter with period-end loans up during the quarter in commercial, commercial real estate, asset-backed finance, and capital finance.

And as another example of increased activity, new commercial real estate loan commitments in this business segment up 44% linked-quarter.

Credit quality in Wholesale improved once again during the third quarter, with chargeoffs down 29% and a continued drop in the number of problematic loans and transfers to work out.

In our Community Banking segment, Community Banking had a very strong sales quarter with sales up 14% and small-business sales actually up 25%.

We also had very solid checking account growth once again in this business.

Lending activity picked up somewhat in Community Banking with loan growth during the quarter in core autos, private student lending, and SBA lending.

We have been very active for several quarters now, including the third quarter, in providing credit to small businesses across the country.

On slide 9 you can see our cross-sell statistics, which are one of the key sources of revenue growth in the Company.

The consumer cross-sell is still increasing at legacy Wells Fargo as it has been consistently for many years.

And now with Wachovia we have also had success in increasing cross-sell in the Wachovia footprint.

We are experiencing very broad-based growth in checking accounts.

This is really a very important message, very important to understand in terms of the way we are building our franchise.

The growth in checking accounts at our Company has been very strong, very broad-based.

It is a very important driver of our Company's strong operating and financial results.

What this growth in accounts indicates is that more and more households and small businesses are banking with Wells Fargo, and this generally leads to more business and higher cross-sell over time.

Slide 14 (sic - see slide 10) talks about our mortgage banking business.

Mortgage banking had a great quarter in terms of originations and applications.

Originations during the third quarter were up 25% linked-quarter.

Applications were up -- were $194 billion, roughly 80% driven by refis and our second-highest quarter ever.

The chart here shows you the relationship between the average note rate on our servicing portfolio and the current 30-year mortgage rate.

We think we are in a very unique period here with a unique combination of historically low absolute levels of new mortgage rates and, in combination with that, the widest-ever spread between new mortgage rates and rates on outstanding mortgages.

So as you can see, the average note rate on our servicing portfolio in the third quarter was 5.46%, compared with new money rates of 4.35%.

What this means obviously is that the incentive to refi right now is huge.

And by the way, the wealth effect for homeowners who are refi-ing is also very huge.

So given this unique combination of low mortgage rates and the wide spread to the servicing portfolio, the potential is very high for every homeowner in the United States that can refi to do so.

And this could take several quarters to play out if rates remain as low as they are right now.

We have already had our second-highest mortgage application ever in the third quarter, just under $200 billion in applications.

And so far in October, applications remain strong.

On slide 11, in our Wealth and Brokerage, Retirement business, revenue grew 2% from the second quarter.

Earnings, as I said before, were relatively flat, although more than double from a year ago.

Client assets were up 5%.

Managed account assets in the Retail Brokerage group were up 10% from the second quarter.

And despite many retail investors being on the sidelines for the last couple of quarters, as I said client assets were up 5% linked-quarter and we are growing share.

This business closed $1.7 billion in loans during the quarter, double from a year ago.

And for the first time since the merger, loans in this business were flat linked-quarter and were up slightly from August to September.

Cross-sell continues to grow in this business, as it has every month and every quarter since the merger, and now stands at 9.76 products relative to 9.45 products a year ago.

Deposits have been a great success in this business.

Deposits in our Wealth and Brokerage business now stand at $127 billion.

Essentially this business has brought back all the deposits it lost during the dark days in 2008 and has had incremental growth on top of that -- a terrific success story.

We now have 888 dedicated standalone brokerage offices across the country in basically all the markets where there is wealth that can be serviced.

The terms of our lending in the third quarter -- we continue to supply credit to both US consumers and businesses as we have for many quarters now.

Since the merger we have supplied over $1 trillion in credit to US consumers and businesses, including $176 billion in the third quarter, up 17% from the second quarter.

This is not just the mortgage originations that I mentioned before.

We've had good activity in home equity, credit card, C&I loans, and commercial real estate.

In terms of loans outstanding on slide 13, here is essentially a Tale of Two Cities, if you will.

We have been continuing to reduce our nonstrategic portfolio.

This is a portfolio comprised of about $119 billion in loans where we exited or no longer write new business, including Pick-a-Pay, indirect home equity, legacy Wells Fargo Financial, indirect auto, Wells Fargo Financial debt consolidation, and commercial and CRE PCI loans.

As I said, we have continued to work down these higher-risk portfolios, which have now declined over $30 billion since the second quarter of 2009.

The $616 billion in the so-called continuing portfolios are down less than 1% from the second quarter.

So we clearly seem to have had a flattening out in our loan portfolio.

As you can see on the chart, many of our individual loan portfolios grew in the quarter.

We had growth in auto dealer services, Wealth and Brokerage Retirement consumer loans, wholesale commercial real estate, Capital Finance, asset-backed finance, wholesale commercial banking, private student lending, and SBA.

This reflects in our view -- on the commercial side at least -- some inventory and CapEx financing, plus in both of our consumer and commercial businesses what we believe is market-share gains.

We continue to experience exceptionally strong core deposit growth, as you see on slide 14, particularly in checking and savings.

Over 90% of our total funding right now is coming from core deposits; and about 90% of our core deposits are in the form of checking and savings accounts.

Growth in deposits actually accelerated at Wells in the third quarter and continue to be broad-based, with growth in consumer and business checking accounts and deposits up in both wholesale and wealth, and growth in deposit and checking accounts in basically all parts of the country.

Now shift to our expenses on slide 15.

Non-interest expense declined $500 million roughly or 4% from the second quarter.

To be fair, most of this was in the operating losses, where we had higher legal accruals in the second quarter as well as in the second quarter having restructuring costs booked for the Wells Fargo Financial restructuring that we undertook in the second quarter.

We have continued to invest in our businesses throughout our footprint, including increasing Regional Banking platform banker FTEs in the East by some 1,250 FTEs this year so far.

This investment in bankers is one of the key drivers of the improvement in cross-sell we are already realizing in the eastern footprint.

We had $476 million of merger expenses in the third quarter as we converted 363 Wachovia stores in Texas, Kansas, Alabama, Mississippi, and Tennessee.

We have also converted many of our operating systems now, and in the third quarter our mutual fund business.

The merger is on track for the $5 billion of expense savings that we have consistently articulated.

I would like to mention here one of our highest expense items in the last year or two is obviously for problem asset management.

In the third quarter we had over 24,000 people in some fashion or another working on loan modification and loss mitigation throughout Wells Fargo, and that amounts to roughly $750 million of personnel and foreclosed asset expense during the quarter.

Obviously this will in the end not entirely go away, but over time we do expect this very high level of expenses to decline as problem assets and chargeoffs continue to decline.

I would like to talk briefly about the Wachovia merger.

As I mentioned earlier, this is already a big success from a financial perspective.

Since the closing of the Wachovia acquisition at the end of 2008, we have now earned $21 billion in seven quarters.

We have significantly reduced higher risk assets.

On the credit side, we are seeing better-than-expected credit quality and credit experience.

For example, the life -of-loan losses that we now expect in the Wachovia loan portfolio will be less than the $40.9 billion write-down that we initially took.

We still have remaining PCI loans on our books written down to roughly 64% of the remaining unpaid principal balance, even after using almost $23 billion of the nonaccretable difference.

On the expense side, as I mentioned we are realizing the expense saves from the merger.

About 85% of the targeted $5 billion of consolidation savings has been realized.

Then on the revenue side, we are seeing multiple revenue synergies in every one of our businesses.

To give you a couple of examples, as I mentioned earlier Wachovia's cross-sell ratio is growing nicely.

We have grown auto dealer market share from 4.75% in the first quarter of 2009 to 6.84% in the third quarter of this year.

The auto dealer business is an excellent business that we acquired with Wachovia that has benefited from the strength of the Wells Fargo brand and the strength of our balance sheet.

Within Wholesale Banking, the amount of investment banking revenue coming from our own commercial customers is up 21% this year, again benefiting from more legacy Wells Fargo commercial and corporate customers using Wells Fargo securities to underwrite their bond and equity financings.

In the Wealth business, cross-sell as I mentioned before is up to 9.76%, demonstrating the success this business is having at growing deposits, loans, and managed assets.

Loan originations by financial advisors in this business were up 33% year-to-date compared with a year ago.

Let me now turn to credit quality, which continued to improve in the third quarter.

To quickly summarize, net chargeoffs continued to decline, down 9% linked-quarter.

The early credit quality indicators in most of the consumer and commercial portfolios were either stable or continued to improve.

Our PCI portfolio continued to perform better than originally expected.

In the third quarter, $639 million of nonaccretable difference was reclassified to accretable yield, which will accrete to future income over the remaining life of the underlying loans.

In addition, $202 million of nonaccretable difference was released into income for commercial loans that were paid off or sold.

At the end of the quarter we had $24.4 billion in allowance for credit losses; and in addition we had $14.5 billion in remaining nonaccretable difference.

Because of the improved portfolio performance we released $650 million in reserves in the third quarter, and we currently expect additional releases absent significant deterioration in the economy.

Slide 18 shows you the trend in our chargeoffs, which as I have indicated a couple of times are now down both linked-quarter and substantially lower than the peak last year.

Almost all loan categories -- other than a seasonal increase in auto -- showed a decline in chargeoffs during the quarter.

So this is a very broad-based reduction in credit costs.

Slide 19 takes you through the early indicators in the large consumer loan portfolios, which as you can see have been stable to improving for a number of quarters now, including improvements in Pick-a-Pay, credit card, home equity, and personal credit management.

Non-accrual loans in total stabilized in the third quarter, with the exception of a relatively small number of new large corporate non-accruals and a modest increase in first -- in the mortgage portfolio.

Non-accrual balances in all other loan portfolios were flat to down in the third quarter, including large declines in non-accruals in wholesale commercial real estate division, auto dealer services, Pick-a-Pay, and Wells Fargo Home Mortgage.

Foreclosed assets and OREO increased from the second quarter, but approximately half of the increase was a shift from PCI loans to real estate owned and a $148 million increase in fully-insured Ginnie Mae loans.

Keep in mind most of our loans and therefore most of our problem assets are in secured portfolios, and so the majority of the projected loss content of these assets has already been written down or is government insured.

As I mentioned, we released $650 million in the third quarter as you can see from our allowance trends on slide 22.

And absent significant deterioration in the economy, as I mentioned a couple of times, we expect future reductions in the allowance, given the improvement we are likely to see in the portfolio.

Our appendix to this presentation includes a lot of detail on the Pick-a-Pay and other loan portfolios.

I'd just like to mention here on slide 23, since this is a large portfolio, that the Pick-a-Pay portfolio continues to perform better than originally expected.

We have had great success in modifying loans in this portfolio, completing over 73,000 full-term modifications.

And we have forgiven about $3.5 billion in principal since the acquisition a year and three-quarters ago.

Because the modifications we have completed eliminate the payment option feature, at the end of the third quarter only 62% of the Pick-a-Pay portfolio still had payment options, down from 86% at the time of the merger.

In the non-PCI Pick-a-Pay portfolio, net charge-offs continued to decline and nonperforming loans declined for the first time now since the merger.

85% of the non-PCI portfolio is current; and 60% of the PCI portfolio is current, up 2% from the second quarter.

Let me now shift to our capital position, on slide 24.

Tier 1 Common reached 8% in the third quarter.

Through retained earnings and other internally generated sources we have been increasing Tier 1 Common by about 40 to 50 basis points per quarter now for many quarters.

We have always maintained very strong capital in our Company.

Today's ratios, including the 8% Tier 1 Common, 9% Tier 1 leverage, and 10.9% Tier 1 Capital, are higher than they have ever been.

We have now purchased about $544 million in the Treasury TARP warrants year-to-date.

So far that has had about a 5 basis point impact on Tier 1 Common, but is accretive to earnings per share.

And we will continue to buy the warrants opportunistically.

A couple of points about Basel on slide 26.

As you know, Basel III is still in proposed form and is subject to interpretation in many cases.

But under our current interpretation of Basel III, our adjusted Tier 1 Common ratio under the new guidelines would have been about 6.9% at September 30, about 110 basis points below our reported 8% Tier 1 Common ratio.

When you look at the adjustments, the pro forma deductions from Tier 1 Common for mortgage servicing rights, deferred tax assets, investments in financial affiliates, and other smaller adjustments to Tier 1 Common amount to about $5 billion less Tier 1 Common as of September 30 or about 50 basis points on our reported Tier 1 Common ratio.

In terms of the increase in risk-weighted assets that would be associated with now capturing market risk, counterparty risk, operating risk, and other Basel II and Basel III risk elements would also be the equivalent of about 60 basis points or adding about $85 billion of risk-weighted assets to the ratio calculation.

We think one of the good things about Basel, in fact, is that it does better reflect relative risks taken by the different financial institutions.

And we believe, given the fact that we don't have big concentrations of market risk, counterparty risk, and so on, that we will be affected substantially less than our peers.

Our MSR asset is comparable to some of the other large mortgage banks; but we have less deferred tax assets, equity and financial affiliates, trading assets, counterparty risk.

And we also have less disqualified TruP securities than most of the other large bank peers.

With that, let me shift to give you an overview of the foreclosure and mortgage securitization issues.

These are issues obviously that are very important to consumers, mortgage investors, and shareholders.

But we believe that these issues have been somewhat overstated and, to a certain extent, misrepresented in the marketplace.

I would like to be clear here on how they impact Wells Fargo specifically.

So starting on slide 26 first, as John already mentioned, foreclosure at Wells Fargo is a last resort, not a first resort.

We work very early on with customers who are beginning to experience problems paying their mortgages and continue to do so for the length of time that the problems are being experienced.

80% of customers who are 60 days or more delinquent work with us, and when they do we are successful in helping seven out of every 10 avoid foreclosure.

We attempt to contact customers on average over 75 times by phone and nearly 50 times by letter during the roughly 16 months that it takes for foreclosures to be completed once a borrower becomes delinquent.

Second, our foreclosure and securitization policies, practices, and controls in our view, are sound.

To help ensure accuracy over the years, Wells Fargo has built controlled processes that link customer information with foreclosure procedures and documentation requirements.

Our process specifies that affidavit signers and reviewers are the same team member, not different people, and affidavits are properly notarized.

Not all banks in our understanding do it this way.

If we find errors, we fix them; and we fix them as promptly as we can.

We ensure loans in foreclosure are assigned to the appropriate party as necessary to comply with local laws and investor requirements, and legal documents related to securitizations are sound, and appropriate transfers of ownership were made.

Finally, we believe our repurchase exposure is very manageable and our experience continue to be different than some of our peers in that our unresolved repurchase demands outstanding were actually down at the end of the third quarter compared with second quarter, both in terms of number of outstanding demands and in total dollar balances.

On slide 27, the key point here really comes back to the quality of our servicing portfolio.

One of the reasons we are so confident in terms of our risk exposure is we have a very high-quality servicing portfolio.

As shown on slide 27, 92% of our portfolio is current and only 2% is subprime.

Roughly two-thirds of our servicing portfolio is comprised of loans sold to GSEs.

20% of the portfolio are loans that we retained or acquired and hold on our own balance sheet.

And of course the loss exposure -- to the extent any exists -- on these retained loans would be reflected in our own loan-loss reserves and PCI nonaccretable difference.

6% of our servicing portfolio is non-agency acquired servicing and private whole loan sales.

The majority here is acquired servicing where Wells Fargo did not underwrite and securitize; and therefore we have no repurchase obligation.

Then the remaining 8% of our servicing portfolio is private securitizations.

Wells Fargo originated the loan and therefore may have some repurchase risk.

But importantly, 55% of these loans are from 2005 or earlier vintages; and 83% of this remaining 8% are prime loans.

We had only $69 million of repurchases related to private securitizations in the third quarter.

As shown on slide 28, the quality of our servicing portfolio is clearly reflected in our relatively low delinquency and foreclosure rates.

As of the end of the second quarter, the most recently publicly available data, we had the lowest delinquency and foreclosure rates among large bank peers.

Ours being 8.15%, some 335 basis points better than the industry average of 11.5%.

And at the end of the third quarter our delinquency and foreclosure rate actually improved a basis point to 8.14%.

Most of the repurchase risk we have is with agencies and is essentially concentrated in the 2006 through early 2008 vintages, which for the industry contained a higher concentration of low or no doc and stated income mortgages.

As shown on slide 29, our repurchase demands from GSEs for these vintages declined now for the second straight quarter, and we don't expect large losses on the pre-2006 or post-2008 vintages.

The balance of the loans outstanding in the 2006, 2008 vintages as I mentioned continue to decline.

And the percentage of loans 120 days delinquent has also continued to decline.

Now delinquency, as you know, is an important measure of demands and are generally correlated to defaults.

However, it is important to note that not all loans that become delinquent eventually are problematic, but are probably underwritten applicable contract terms, eventually may not actually result in a repurchase.

At the end of the third quarter, as I mentioned before, repurchase demand both in number of loans and loan balances was down, as you can see on slice 30.

Another fact that I think is sometimes missed is that repurchase demand does not directly result in loss.

Repurchase demands simply represent an initial request for information and loans being assessed for repurchase.

Of the repurchase demands we receive, only half roughly end up actually being repurchased, with half being cured by providing additional documentation that demonstrates a contractually required repurchase event did not occur.

Of the loans that we do repurchase, roughly 20% to 25% of the borrowers we are able to make current through modification.

On loans that we repurchase and are not able to modify, the average loss severity is about 50%.

So just to take you through the math to recap that, as an example, for every $100 million in demands we repurchase on average about $50 million.

Of the $50 million we repurchase, $12.5 million gets modified.

And on the loans we don't modify we would on average realize a loss of about $18.75 million.

So if you do the math on the $3.8 billion of demand, if you will, in the third quarter you can see that our repurchase liability as of September 30 of $1.3 billion we believe to be adequate to cover these potential losses.

With that, I would like to now open up the call for any questions.

(Operator Instructions) Matt O'Connor, Deutsche Bank.

Hi, guys.

I guess I will start with this whole mortgage repurchase for a change.

I guess the first question is, why are you excluding the 2005 vintage?

Do you think that is not going to be a material issue or has not been so far?

I think most people are looking at '05 through '07 vintages, and you show '06 to '07.

So just wondering what your thoughts on '05 are.

Yes, as far as we can tell, to the extent there will be problems we see it in the 2006, 2007, through midyear 2008 vintages.

So we don't expect any material problems prior to that.

Okay.

Then separately, the 83% of private securitizations that are prime -- I assume those are jumbo.

Yes, mostly, yes.

Okay, do you have any average statistics on the LTVs and FICOs there?

We will get back to you on that.

I don't have those at the top of my head.

Okay.

Then just separately, when I step back and we are reading all of these headlines that are impacting the mortgage business in one way or another, I guess the thing that jumps out to me is the servicing business really hasn't been priced for what we are seeing right now.

Maybe the cost to you on the repurchase is a little bit less; but for some other competitors it seems like it is going to be a pretty high cost.

So how do you think about just pricing I guess on the origination side as well as on the servicing side for your current production and going forward?

Matt, we're always looking at -- as we are looking at this business, first of all there is great scale here.

You're right with your comments that when you have problem portfolios it costs more money.

But if you look at -- I can't remember which slide it was; I think it was 28 -- that tells a pretty big story there about the quality of our portfolio.

And that has -- is reflective of the success we are having in that portfolio and the profitability of that portfolio.

Okay.

I guess what I'm getting at is the servicing fees that you get as an industry I think are relatively modest to probably what some of the costs are either to modify some of these loans -- obviously the foreclosure process.

So it just feels that that is going to be a much bigger burden for the business going forward, and it might make sense to start repricing some of that business right now.

The industry might do that, and of course we look at that.

But clearly for the 8% that is past due, that is expensive.

There is no question about that.

But you got to look at a whole, at a portfolio -- from a portfolio perspective.

The industry will react to it.

If this is a prolonged issue, I am sure new servicing will -- might be considered differently.

Okay.

Thank you very much.

John McDonald, Sanford Bernstein.

Hi, good morning.

Question for Howard.

On the net interest margin, obviously lots of puts and takes go into net interest income and the margin.

Could you talk about some of the offsets that you might have to run off of higher-yielding assets if the low rate environment persists, Howard?

Well, one of the offsets is that our security portfolio is a pretty long-duration portfolio, so keep that in mind.

The main one would be, as I mentioned before, the growth in checking accounts.

I mean we are growing checking accounts and our Company had a very high rate of growth, reflecting again more and more customers doing business with us.

And that's zero-cost money.

So the more rapidly we can grow checking accounts, apart from all of the other franchise benefits of doing that, is that the margin, that does help the net interest margin.

While you do have some high-yielding securities, it also seems like you have some liquidity in very low-yielding stuff in terms of dry powder for the future.

Is that still true?

That is very much true.

You know, depending upon how you define liquidity we have as much as $100 billion of potential investment power on the balance sheet.

Now, of course we would hope that that gets used by loan demand picking up, and we have already seen some activity both in the second quarter, now in the third quarter as well.

So that would be our wish that that is how the liquidity gets used up, so we can serve our customers that way.

But if rates tick up at some point, we have a significant capacity to build the balance sheet.

But, John, I would also add to that -- here comes into play the beauty of this operating model.

We have a diversity of geography, diversity of businesses, diversity of revenue stream.

About half of our revenue comes from fee for services; the other half from the margin.

When one horse has a headwind, the other one has a tailwind and pulls a little harder.

And while these are not perfect offsets, if we continue to serve customers and customers like doing business with us, it is a privilege to serve them, and in these markets we are outgrowing.

Like Howard said on the checking account side, we are outgrowing -- there is not 11% growth in checking accounts in New Jersey.

We are taking share.

No question there are some headwinds if rates stay low.

But that is why you hear a lot of -- everybody in the industry now is talking about cross-sell.

We have been talking about it for 20 years.

Okay.

Is the spread on the warehouse comparable to overall margin on the Company, Howard, currently?

Well, the warehouse loans, to the extent we are writing mortgages at 4.5%-plus, the yield we are getting is higher than the margin.

Okay.

Just a question on the mortgage applications -- very high this quarter.

Is that typically a pretty good pullthrough to next quarter's originations, give or take?

Yes, I think you can assume that.

The pipeline was up substantially during the third quarter, which does bode well for fourth-quarter originations.

Then in addition as I mentioned earlier, so far in the fourth quarter we have continued to see very strong application volumes.

The final thing was just two more questions on the mortgage.

The origination gains were very high this quarter, what looks like the gain on sale margin.

Can you just talk about origination margins and also just a little detail on servicing and why the hedge income was down, and if you have changed your strategy there?

You know, origination margins in the industry remain relatively wide, which is what you would expect given the demand for mortgages being as substantial as it is.

On the servicing side, the main, subtle difference in terms of the hedge between the third quarter and prior quarters, as you would expect as mortgage rates continue to come down a lot, the natural business hedge if you will, the origination side of the business acts a little bit better as a natural hedge to the overall Mortgage company.

So the size of the hedge, the financial hedge if you will, in relationship to the overall servicing and overall business was a little bit less in the third quarter than it would have been in prior quarters.

And that is one of the reasons why the hedge result was down.

Okay, thank you.

Betsy Graseck, Morgan Stanley.

Hi, thanks.

Good morning.

So just to make sure I understood.

The size of your hedge comes down, so you have less earnings there; but your gain on sale is higher.

So it is kind of a wash, at least.

Well, that's why we have always said we have a balanced mortgage business, so good example.

Right.

A couple of other questions.

One is on the Basel III; and you laid out where you would be point in time 3Q based on what you know today.

I am wondering if you are thinking about any kind of mitigation as you move forward.

Or should we just take that effective RWA and keep that constant in the model?

You know, there may be small things we do, but we have a much better situation here, as I mentioned, than the other big banks, which is why we don't really have to do a lot of mitigation.

Some of the other banks are going to be onboarding hundreds of millions -- hundreds of billions of dollars worth of RWA.

As I say, we are just not in many of those businesses or as exposed to many of those businesses as some of the others.

Frankly, it's a good thing that we don't have to make adjustments here because to the extent, in my view, you have to make adjustments or take mitigating action, that winds up in the end with less earnings for those companies that have to take mitigating action.

So we think we are in good shape here.

As I said, we are at roughly 6.9% as of the third quarter.

I don't want to make a prediction.

I sort of gave a general statement about being over 7% in the, quote unquote, next couple of quarters.

You can see how rapidly our capital has been growing per quarter -- 30, 40, 50 basis points.

So it wouldn't take that many quarters to get over 7% if are already at 6.9%.

But again we don't know how these final rules are going to shake out and what the ultimate interpretations will be on some of these things.

Then some people have been asking about the MSR.

I think as a percentage of total it is above the current standard.

But are you thinking of it in terms of how it factors into Basel III over time, starting 2014 with a 20% (multiple speakers)?

You know we -- the MSR valuation is at a cyclical low point right now.

And yes, there may be things down the road on the MSR that we can think about doing that would mitigate some of the volatility, if you will, that gets created in the capital ratios just from that asset.

But that is something that the industry is going to be taking a look at, because as you know we all have an MSR asset.

What I can tell you is right now that is not a big deal for us.

Right, no, I realize that.

But in mitigating you are talking about different ways of accounting for it, or --?

You know, there's different elections you can have on accounting.

There are -- the institutional arrangements in the marketplace may get modified.

So we will have to see how this shakes out.

Okay.

Then lastly on the dividends, how are you thinking about payout ratio?

Well, first of all, Betsy, we are eager to return more of our capital back to our shareholders.

They have been very patient.

We had historically paid in that 35% to 40% range, give or take.

We will have to see how we pace into that.

Obviously, it would be in consultation with our regulator.

But we are just eager to get back to a more appropriate level.

Okay, yes, because it looks like your earnings have been improving and consistently improving.

So I'm just wondering what the trigger point is.

Is it the systemic risk buffer getting decided?

Well, things are becoming clearer.

There is more clarity this quarter than there was last quarter, so we are getting closer to that point.

But I can't -- I don't know if I can add anything to it other than we want to get there as soon as all parties line up.

Thanks very much.

Joe Morford, RBC Capital Markets.

Thanks, good morning, everyone.

Just a couple things.

I guess first, you talked about the commitments for commercial real estate lending in the Wholesale business up 44% sequentially.

I just wondered if you could talk a bit more about the opportunities you are seeing there and the appetite for growing that portfolio, and just some of the risk-adjusted returns in that business.

Well, you know, we have had a long history in that business.

We like that business.

If you look at legacy Wells, we have had people that have done that business for a long period of time very successfully -- and, frankly, quite successfully during this downturn.

Secondly, we are putting more feet on the street not only in the commercial area but in our Business Banking area.

So we are making lots of investments in relationships with companies.

So, as others, smaller players and other players, are internally focused, looking at managing their balance sheet or managing problem assets, we are finding lots of opportunity to engage with existing customers and new clients about that business and business in general.

So that is not new to us.

This business is not new to us.

I should also tell you, Joe, and I think you know this about our business, some of our strongest cross-sell is actually in the Wholesale side of the business.

So this is not just about capturing a loan.

This is about winning a new relationship or further developing an existing relationship.

So the loan isn't the end-all.

It's relationship.

So when you think of profitability, you have got to think of it in more holistically.

Okay, that makes sense.

Then, Howard, I guess you touched on this a little bit, but I guess if you could update us a bit on the trends in the C&I and middle market lending portfolios, just in terms of customer demand or line utilization levels, and also what kind of competitive dynamics you see now in terms of pricing pressures and maybe terms.

As I mentioned, we have been very aggressive on the commitment side.

So lines on commitments have been growing.

But to be fair, the actual line utilization remains low.

It hasn't gotten much lower, but it is sort of relatively flat the last quarter or two, but still is at relatively low levels.

We like this business.

This is bread-and-butter business for us.

We did see some pickup in activity in the quarter.

I guess the other thing I would mention, and we have talked about this in the past, when demand generally does comes back in C&I we should be the primary beneficiary of that, because we have all the other business with many of these clients in terms of their cash management and all the other products and services.

This is very similar to the experience had back in 2002.

When loan demand came back we gained a fairly significant amount of market share during that period.

But we're not at that point yet.

Pricing is still appropriate as far as we can tell for the risks.

We are not doing anything on terms to give away the business.

So we would like to see more business there, but at our terms and pricing

Okay.

That's very helpful.

Thanks so much.

Mike Mayo, Calyon.

Hi, CLSA.

Good morning.

Just a follow-up.

So what is the percentage of the loan utilization?

I just use that as a measure for how much loan demand there is.

What is your feeling about loan demand?

You know, on balance, Mike -- and again you're talking about composition of portfolios.

But roughly in the low 30s on commercial line utilization, and that has been relatively consistent for a couple of quarters now.

Again as we say, we are seeing somewhat increased activity, but it is not as robust as we would like to see it be.

As I said, we think we are picking up market share because we have got so many relationships and all the other cross-sell.

So we'll just have to see when demand comes back.

Mike, I think one of the things, one of the keys, is our increase in commitments is much greater than what is happening in the portfolio, the outstandings.

So we are making investments today, spending money today, to win new clients, service existing clients, that we're not seeing the benefit of yet.

So when this thing does turn around, we will get a boost.

It will be like a springboard.

And we're willing to make those investments because those are good long-term relationships or new customers who really value a company who is going to stick by them.

And, of course, we get the fee income on the commitments.

Sure.

That is one reason our loan fees have been so strong is that we have been, as I said, very successful in growing commitments.

Then on slide 20 you showed non-accrual loans stabilizing.

But there was an uptick in both consumer and commercial non-accruals in terms of the inflows from the second to the third quarter.

Not much, but it's a little bit of an uptick.

Is that just timing?

Or is that just the economy slowing down a little bit?

Neither.

You know, we had one -- as I mentioned earlier, the first mortgages on the consumer side, which could be more seasonal just one quarter to the next.

All other consumer portfolios were flat to down.

Then on the commercial side it was largely a relatively small number of large corporate loans that went non-accrual.

And most of the other commercial portfolios actually saw declines in inflows and down.

Both questions are really just trying to get to -- from your perspective, since you are across the country now, is the economy getting worse?

A lot worse?

Do we need QE2?

What is your read from the bottom-up perspective?

Well you know, Mike, I travel, like probably a lot of others, a lot; and I am in a lot of different geographies.

And I think it depends a bit on the type of business you are in.

But as a general statement, many businesses are doing quite well.

I mean I don't know what the last number is, but there is more than $1 trillion of liquidity that is on corporate balance sheets -- small business, medium-sized business, large business -- that is sitting in our banks and other banks.

I don't know that I have a view on QE2 or whatever or other stimuli and so forth.

But I think that the primary factor when you talk to businesses -- when they talk about their issues -- it is not that they can't get a loan.

That is a bit of an urban myth.

In fact we have our teams marching double-time looking for lending opportunities.

In more cases than not, it is a bunch of factors.

Consumers are deleveraging, being more selective in what they spend.

All these different reform measures and so forth cause uncertainty.

So there is just a variety of things, and I don't know that one part of the country is favored versus another.

Some states have more foreclosure issues and higher unemployment, so we deal with unemployment as low as in the high 4%s, low 5%s in the middle part of the country to over 12% here in California.

So we see a lot of different situations.

I don't think there is any way of categorizing one versus the other.

All right, thank you.

Nancy Bush, NAB Research.

A couple of things here.

Howard, you have got more unrealized bond gains than I guess just about anybody in the industry.

Would you give us your thoughts about harvesting some of these as we go down the road possibly toward higher rates someday?

How do you think about that?

And what makes that determination?

A couple things, Nancy.

Yes, we do have a substantial amount of unrealized bond gains and it actually went up in the third quarter.

The framework there is not so much to take a gain for the sake of taking a gain; but if we do come to the point where we believe that rates are likely to go up, one of the things we can consider doing to manage against that would be to sell assets.

If you remember back in 2003, 2004, that is exactly what we did.

But the way we did it back then was to sell our lowest yielding assets, not our highest yielding assets.

So again the framework here is not pick; not take the gain for the sake of taking the gain or look to maximize the upfront gain, but to clear the way, if you will, for repositioning the portfolio when rates go up and do so by selling the lowest yielders.

There may even be other assets on the balance sheet that we can consider doing so other than the securities portfolio.

But the good news is when we come to that point, likelihood is we don't have anything in the portfolio that is at a loss right now to speak of.

If we take that action it would result in a gain.

Secondly, just you mentioned about on the 13 basis point impact on NIM sequentially.

I think you mentioned the shedding of some strategic runoff portfolios, etc.

Would you just speak to whether you are beginning to see substantial runoff from Wells Fargo Financial and the discontinued lines there, and how you see that impacting margin over the next year or so?

Well, that is a portfolio.

The debt consolidation portfolio for Financial is included now in the so-called nonstrategic grouping.

Again my general comment is as those loans continue to -- we continue to grind down that portfolio and the other portfolios, we know we are giving up some margin by doing so.

But of course we're also paving the way for less risk and lower potential chargeoffs down the road.

So net-net it is a benefit to either risk or earnings or both, even though it may not be a benefit to the margin.

John, I have just got one question for you.

I know you went through your thoughts about foreclosure and the fact that you have been very careful, etc.

etc.

But there have been a couple of instances detailed in the press of Wells Fargo robo-signing etc.

And there is a great deal of speculation that at some point you guys are going to cave and we are going to find out all this bad stuff about your foreclosure procedures.

Could you just comment on that?

Was this robo-signing incident an isolated one?

Or could you just talk about that?

Yes, you might be talking about the one that was in the press regarding Washington State.

In that case the judge actually found in our favor and that we had done things properly.

I think the key issue is what Howard covered on page 26.

I don't know if I could say it any better than that.

I don't know how other companies do it, but in our Company our process has -- the affidavit signer and reviewer are the same team member.

And we believe these issues -- they are properly notarized.

And if we find an error we will fix it.

I mean that is just -- humans do make errors, but that is what our process is.

One reviewer, one signer, same person.

Okay.

Thank you very much.

Chris Mutascio, Stifel Nicolaus.

Morning, all.

Howard, I'm going to follow-up on Nancy's question, she actually stole it from me, if you will.

What is the actual gains in the third quarter in the unrealized gains in the securities portfolio?

$9 billion pretax.

Okay.

A follow-up, unrelated follow-up.

Can you remind me, when do we see the $0.5 billion of M&A expense that is related to the merger-related charges of Wachovia?

When does that start to wane on a quarterly basis?

Good question.

We are obviously coming up on two-thirds done with the integration process.

Many of the non-branch related systems have now been converted.

We have done the overlapping states on the branch side.

But we are really now coming up to the big crunch, if you will, from an expense point of view and a process point of view, in converting all of the non-overlapping states on the East Coast up into the Northeast.

So it is going to be another couple of quarters.

In fact, we may actually have higher merger integration expenses in the fourth quarter and the first couple quarters of 2011 before this trails off during the course of 2011.

But Chris, we are still looking at finishing this -- substantially be finished by the end of 2011.

All right.

Great.

Thank you for your color.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

You've talked a fair amount about the checking account growth.

Could you describe the process, like what you are selling against and whether you are seeing competitors make changes in order to offset the lost overdraft fee revenues?

Well, first of all, customers like doing business with us, and it's our privilege to serve them.

We have taken the tack for many years now that we are going to be -- we are going to serve customers when, where, and how they want to be served.

We are not going to steer them somehow to an ATM because it might be cheaper to serve a customer there.

We don't think in those terms.

We think in terms of the customer is at the center of what we do.

We invest in stores.

We think we have the best store network, and stores matter.

We think we have the best online offering.

Our ATM innovation and the services we provide there to customers are industry-leading.

And our phones, we have ways of serving customers there, especially the high-value customers, in a very distinguished and differentiated way.

So when you think of those four channels and mobile, and they behave like a distribution community, you win more business.

I have said this many times to many people.

I get in the office about 5.30, by a quarter to 6 I read the deposit report from the day before.

And checking is such a big part of that.

You know that we sell about three-fourths of our -- more than two-thirds of our checking accounts through a package.

And these are well-thought-out package products to help customers succeed.

So as we move forward now -- and as I mentioned in my comments, regulatory reform will change the way we get paid for -- some way we get paid for our business.

And this will be a balancing process.

We are going to tighten our belts.

We will get paid differently in some cases for the products and services.

But at the end of the day our goal is right where our vision of values is -- helping customers succeed financially and satisfying all their needs.

And that strategy is winning in the marketplace because we are outgrowing the natural growth in those places and we are taking share from others.

Okay.

A separate question.

A bunch of people asked about MSRs.

Could you talk about the outlook for the valuation of MSRs given that you're going to be in this low rate environment, but it is not clear whether the pace of refi is going to increase?

How do you think the MSR valuation, already at a pretty low level, tracks as we go forward?

Well, we are carrying it now at really historically low levels, and it remains to be seen.

I don't know whether the pace of refis picks up or not.

But net-net in terms of economics this kind of refi market helps earnings, not hurts earnings, with rates being down at this level, even with accelerated refis in the marketplace.

Secondly, as you may remember, we tend to pick up market share during big refi waves.

So this is good for us both in terms of just the economics of what happens during refis as well as our market position.

Great, thanks.

Jason Goldberg, Barclays Capital.

Thank you.

Just looking at the average balance sheet, it looks like yields on residential commercial MBS, I guess that is non-agency stuff, went from -- increased almost 300 basis points linked-quarter; but the balance is unchanged.

I am not sure if that is tied to changes in accretable yields.

Could you maybe just flesh that out?

Yes, we had in the quarter some payoffs of previously impaired CMBSes, so this is stuff that we would have written down that actually improved.

And that got reflected in the yield in the quarter.

Okay, I guess there are a lot of moving pieces here.

I guess how would you view I guess the net interest margin without changes and without the accretable yield impact, either the absolute or the linked-quarter changes?

Maybe talk to your outlook on a core basis, and then maybe talk to how you see the whole accretable yield thing playing out go forward.

Well, again, we're not going to give guidance on that.

There are so many factors, as you know, that impact the margin.

But the point I made before is that the bulk of the 13 basis point drop was due to the change in loan resolution income that went through the quarter, right?

So we continue to have loan resolution income; it is just that it was down a couple hundred million dollars in the quarter.

And that really was the main change.

Interestingly, if you take that away, as I say, even though we had decline in earning assets and loans, our net interest income -- if you again put aside the loan resolution part of it -- was not really down in the quarter.

Again, that comes back to the fact that we are growing deposits.

We may not at the margin right now be earning 4% on our -- on every single checking account that we get.

But every single checking account that we grow in this Company is earning something, and it is showing up on the margin.

You know, another way of saying that, Jason, is the margin is a result of what we do, not the reason of what we do things.

We run the business the way we think is best for our constituents, and it results in a margin.

We don't wake up in the morning saying we have to have a margin of 4.25% or 4.50% or 4% or incremental business to be done at that.

We think it is really the result of.

Got you.

That's helpful.

Then unrelated I guess credit card fees are actually up linked-quarter despite I guess a lot of things being down due to the CARD Act.

I guess anything in particular going on there?

Activity and building the business we get.

As we penetrate our customer base with more cards --

Especially on the Wachovia side.

On the Wachovia side in particular, and as activity grows in the Company you get more fees for it.

So that is a good story, because that did offset -- the growth in that business actually offset the impact of the CARD Act in the quarter.

More than offset it.

Great, thank you.

[Ron Mandle], GIC.

Hi, thanks.

In regard to fees, deposit fees were down $300 million in the quarter.

I am wondering how much of the Reg.

E effect has been felt at this point.

I'm sorry.

I'm missed the end of your question, Ron.

How much of the Reg.

E effect has been felt?

So in other words, where -- how far down -- how much further down do we have to go in deposit service charges?

Well, we quantify the Reg.

E impact as $380 million in the quarter.

So $380 million down from Reg.

E and only $300 million down in total.

So we actually did have some growth in service charges.

Right, but what percent of the Reg.

E effect has been felt now, was really my question.

We're assuming roughly the same kind of number, maybe a little bit higher in the fourth quarter.

I'm sorry, same effect or same level of deposit base?

It could be a bit more because some of this went into place -- it was staggered in during the quarter.

Now, again, keep in mind, Ron, that this is before any actions that we may take to offset this in coming quarters in terms of pricing, product changes, and so on and so forth.

So that is sort of the gross impact.

So, in other words, we could -- I just want to be 100% clear.

We could see the same dollar drop in the fourth quarter from Reg.

E?

See the same dollar impact, right?

So we already had $380 million off in the third quarter.

That might go up a tad in the fourth quarter.

Again I don't know exactly yet what the number will be because it will depend a lot on customer experience.

But it won't go down by another $380 million in the fourth quarter, right?

We have already had $380 million.

I'm sorry, I am really slow on this.

But so are -- is it the drop that will be the same or the current level that will be the same in the fourth quarter?

Of the $1.1 billion.

There may be some additional drop in service charges in the fourth quarter from the third quarter, depending upon what customer experience looks like.

But it won't be another $380 million because from the second quarter to the third quarter we had -- this was the first -- third quarter was the first quarter we had the impact.

Right.

Then in the fourth quarter, by the end of the fourth quarter, you should have felt 100% of the impact.

Correct.

Good.

Thanks.

Then I had a question about Tier I Common.

On the slide on page 25, the reported Tier 1 Common ratio was up 40 bps, but the pro forma was up 70.

I am wondering if there is anything special in (multiple speakers).

Yes, I am glad you asked that question, because on the -- given the way Basel III works, again you have the deferred tax assets and other items there.

Our deferred tax asset position is being realized very quickly because we are charging off the PCI loan.

So the way PCI works is we already reserved for it two years ago; but as we actually charge off the loans, there is no accounting impact on earnings, but we get the tax benefit realized right away.

So you should expect to see our Tier 1 Common on the Basel III basis rise more quickly than our retained earnings would be in the Tier 1 Common as reported.

Okay, thanks.

That was my question.

Then one last question.

You mentioned, Howard, that the rise in commercial non-performers reflected a few large corporate credits.

I guess I was a little surprised at that, because Moody's and so on are reporting much lower corporate defaults and everything.

So I was wondering if you could elaborate on that point.

You know, we have a large corporate portfolio now, and from one quarter to the next it goes up, it goes down.

It's lumpy.

Was there any concentrations?

No.

In that?

Okay.

Thanks very much.

Fred Cannon, KBW.

Thanks.

Just a quick follow-up on the deposit fee issues.

I believe you guys lost a federal case on high to low regarding debit fees.

I didn't know if, A, that had been -- you had been able to get a stay on that issue; and, B, if that does hold -- and I think it requires you to stop high to low on debit on November 30 -- would that affect -- how much of that might affect your deposit fee income.

We are appealing that and I don't know if there is anything more to say about that right now.

It is on appeal.

Okay, thanks, John.

Then just curious on -- regarding the Basel numbers, Howard, and maybe I missed it.

You are only 10 basis points away on the Tier 1 Common according to the best guess at the calculations; I know it is preliminary at this point in time.

Any guidance where the total Tier 1, which was the 8.5% requirement, would be under Basel?

You know, again you can roughly add the spread on our reported ratios between the two.

So you've got some 200 basis points -- 200 to 250 basis points spread between Tier 1 Common and Tier 1 regulatory and our case.

Now there is some disallowance for TruPs.

But in the case of our TruPS, of the $19 billion or so of TruPS that count against Tier 1 but not Tier 1 Common, about $7 billion of the $19 billion converts to qualifying capital; so we're down to $11 billion or $12 billion, which right now would only amount to about 50 basis points or so on the Tier 1 ratio.

So again, you can roughly assume 200 to 250 basis point spread between the two, Tier 1 Common and Tier 1 regulatory.

Under Basel.

So you would get credit for the perpetual preferred you have and then this $7 billion of TruPS it would convert.

Is that --?

Correct, exactly.

Yes, exactly.

All right, perfect.

Thank you.

Carole Berger, Soleil Securities.

Hi there.

Just a little minutia.

Last quarter you took about $400 million in litigation reserves, but you didn't talk about that this quarter.

Anything?

No, we are down from the second quarter and nothing special in this quarter.

Thank you.

Paul Miller, FBR Capital Markets.

Yes, thank you very much.

A question on mortgage banking.

Right now you even mentioned your getting 4, 4.5 points gross on those gain on sale margins.

It's really been a big surprise for the whole industry I think how well it's done, and I think we are looking for another strong fourth quarter.

How long do you think it can last as rate is sitting down here at 250?

And is this a new change in policy in the industry?

Because I don't -- it appears that a lot of the big guys who controlled the space didn't really expand capacity.

Is it just a really good sign for the whole industry in general?

The margins being a good sign?

Well again, we expanded the capacity.

We have been adding actually pretty significantly to the capacity, which is one of the reasons why our mortgage earnings are what they are.

I am not quite sure what -- where you are going with the question.

Our margins are very good right now.

We're adding capacity.

We are getting tremendous flows of business.

It is continuing into the fourth quarter.

So -- and if rates remain at these kind of levels I would expect this to continue for at least another couple of quarters.

And these are also very good rates for consumers.

Great.

These are also big wins.

Consumers on average are making up over 100 basis points of reduction on their loans.

So this is one of these win-wins.

No, I guess where I am going for this -- is this a change in the overall industry?

Because at times when we have seen rates fall like this capacity was added so quickly and the gain on sale margins were not sustainable.

I mean I was hoping that these gain on sale margins will be much more sustainable than they were in the past and the lumpiness in the mortgage banking earnings may be more smoother.

If you think about the past, in the past there was a time when there was very little margin in the prime business because there was outside margins in the subprime business.

Like I said just a couple seconds ago, or Howard said, we are adding capacity.

This is good for consumers.

It is good for the industry.

So it's -- things change, and we are making a fair return on this.

I don't know there is much more to the story.

We continue to add capacity, adjusted as we see business flows.

I guess -- can we expect to see these type of margins you think for the next couple quarters then?

We will leave it at that.

Well, we don't give guidance on that, but you can expect that we will --

If demand remains strong margins are going to be good, right?

We are going to serve our customers.

Okay, thank you very much, gentlemen.

Andrew Marquardt, Evercore Partners.

Morning, guys.

Wanted to circle back on the mortgage securitization issue and the repurchase demands.

Can you just give us a sense of where you think we are in the claims cycle, if you will?

In terms of how -- are we through 50% of the amount of claims you expect, or 75%?

How do you think about it?

Well again, as we said earlier, we believe that most of the issues are in those 2006, 2007, through mid 2008 vintages.

We have been working on those vintages with the agencies for five, six, seven quarters now.

So I can't tell you precisely how far through it we are with it, but it has got to be the majority of the vintage -- the loans of those vintages -- are already behind us now.

And as we indicated earlier that is probably one of the reasons why we are seeing repurchase demand requests actually decline in the last two quarters.

Any repurchase requests from the private label side?

You know, we had $69 million worth in the (multiple speakers) quarter.

Very modest.

Very modest, and again the reason for that is that that is a very small part of our servicing portfolio.

Unlike many of the other big bank peers we didn't do a lot of private-label securitization.

It's a small part, and most of that is part is prime.

Most of it is prime business and pre-2006 vintages.

So we don't see it as being a big issue.

Okay.

Then maybe I missed it -- in terms of you had mentioned at least in the release about the reserves continuing to go down.

I think you had mentioned.

Any color in terms of the degree?

How we should think about the pace of that continuing?

Also maybe in the context of NPAs not going down, how do we think about reserve release going forward?

Well again, we can't really give you guidance on that.

The allowance that we had at the third quarter was adequate for the risks that we see.

If you want to think about it maybe overly simplistically, our chargeoffs per quarter are now down $1.3 billion from the peak.

So you can do your own math in terms of what that means for an annualized charge-off rate, and draw some conclusions about where the allowance might go over a period of time if charge-offs remain low and continue to go down.

Got it.

Okay, thanks.

Then the last question is on capital.

When in fact you do get the green light to have more flexibility in deploying capital, what would be the top priorities from your perspective?

Well, I think John said it before, the dividend is a top priority for us and it's important to our shareholders.

Our shareholders have been very patient with us.

So that would be the first place to go.

We have been and will continue to buy back the warrants when it's economically beneficial to our shareholders for us to do so.

And --

We will continue to invest in our business.

We will continue to invest in the business.

We hopefully will be able to do some opportunistic share repurchase.

Another use of capital -- we talked about the TruP securities before.

We may call some of those to the extent that we can replace with lower-cost senior debt.

So there's lots of ways we can improve earnings for our shareholders by deploying capital going forward.

Great, thank you.

Thank you.

Well, thanks, everybody.

We ran a little over time but it was important, and we thank you for your interest in our Company.

We will see you next quarter at this time.

Thank you.

Ladies and gentlemen, this concludes today's Wells Fargo third-quarter earnings conference call.

You may now disconnect.