富國銀行 (WFC) 2011 Q3 法說會逐字稿

Good morning.

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

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

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

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

(Operator Instructions).

Please note that today's coal is being recorded.

I would now like to turn the call over to Jim Rowe.

Thank you, Regina.

Good morning everyone.

Thank you for joining our call today during which our Chairman and CEO, John Stumpf, and our CFO, Tim Sloan, will review third-quarter 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 that are subject to risks and uncertainties.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings release and quarterly supplement.

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

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

Thanks, Jim.

Good morning and thanks for joining us today.

We produced record results in the third quarter despite a choppy economic environment, as we continued to execute Wells Fargo's diversified business model, which has guided us for decades.

Our diversified businesses generated record net income of $4.1 billion in the third quarter, an increase of 21% from a year ago and a record EPS of $0.72, an increase of 20% from a year ago.

Our focus on meeting our customers' financial needs led to robust deposit growth and our strongest quarterly loan growth since our merger with Wachovia almost 3 years ago.

We also benefited this quarter from lower expenses and continued improvement in credit quality.

As the economic environment and recovery remains uneven, Wells Fargo has not wavered from our commitment to do all we can to help our customers and the overall economy.

For example, we remain committed to helping homeowners stay in their homes.

Since 2009 we have hosted 40 Preservation Workshops, opened 27 Home Preservation Centers, initiated over 716,000 active trial or completed mortgage modifications.

Within our Pick-a-Pay portfolio alone we have forgiven over $4 billion of principal since we acquired this portfolio from Wachovia and modified approximately one-third of our total Pick-a-Pay loans as we strive to give customers an affordable, sustainable payment.

We are also lending, providing companies with funds to invest for growth and job creation.

As the number one small business lender for nine consecutive years, we are committed to helping small businesses succeed by actively lending.

During the first three quarters of this year we made over $10 billion in new loan commitments to our small-business customers, an 8% increase from a year ago.

We are also the number one lender to middle sized companies and we have grown loans to middle market commercial customers for 14 straight months.

And we continue to lend throughout our businesses, both commercial and consumer, with our core loan portfolio growing by $13.5 billion in the third quarter alone.

In addition to serving the financial needs of our business and individual customers every day, we also strengthen our communities in many other ways.

Wells Fargo employs one in every 500 Americans.

And last year we contributed $219 million to 19,000 nonprofits across the US, making us America's third most generous cash donor according to the Chronicle of Philanthropy.

Our team members throughout the country are active volunteers in the communities where they live and work, volunteering a total of over 900,000 hours during the first nine months of this year alone.

We know that with each community success comes our success.

I also want to highlight a very important milestone that occurred this past weekend.

We completed our last retail banking state conversion, North Carolina.

With all our banking stores in the US operating under the Wells Fargo brand, I believe we now have the best leadership team, the best products and services and the best distribution system we have ever had at Wells Fargo.

Our successful integration reflects an incredible effort made by our entire team.

Since we first started working to integrate Wachovia almost three years ago, we have converted over 3,000 Wachovia retail banking stores and more than 38 million customer accounts, including mortgage, deposits, trust, brokerage and credit cards onto one common platform.

While the effort required to convert Wachovia stores and millions of accounts was tremendous, the real measure of success will be our ability to retain and grow customer relationships in the East and throughout our franchise going forward as one Wells Fargo.

A cornerstone of those relationships and one of the most valuable parts of our franchise is our ability to attract and retain core deposits.

Since the merger with Wachovia we have grown checking and savings accounts by -- deposits by $185 billion.

That is just in three years.

We achieved this growth through building relationships with customers, not pricing.

In fact, our average deposit costs were only 25 basis points in the third quarter.

So with the Wachovia integration nearing successful completion we remain focused on Wells Fargo's time-tested formula for success, an unwavering focus on helping our customers succeed financially.

By focusing on our opportunities to better serve our customers and grow our businesses, Wells Fargo has never been better positioned for future growth.

Let me know turn this over to Tim for more detail on our financial results.

Thanks, John, and good morning everyone.

My remarks, which will take approximately 20 minutes, will follow the presentation included in the first half of the quarterly supplement starting on page 2.

John and I will then take your questions.

As John highlighted, we had record earnings of $4.1 billion in the third quarter, up 3% from the second quarter and 21% from a year ago.

And we achieved record EPS of $0.72, also up 3% from last quarter and 20% from a year ago.

During a continued period of economic volatility, our diversified model has performed for our shareholders with four consecutive quarters of earning asset growth and seven consecutive quarters of EPS growth.

It is important to note that while our total revenue was down $758 million compared with the second quarter, half of this decline was from items that are relatively neutral to the bottom line, lower deferred compensation plan investment results and seasonally lower insurance, which have offsets and expenses.

And the rest of the decline is due to lower equity gains.

Our pretax, pre-provision profit increased slightly in the quarter to $8 billion.

Our ROA remained strong at 1.26% and our ROE was 11.86%, up almost 100 basis points from a year ago.

These results generated strong internal capital growth, producing an estimated Tier 1 common equity ratio under current Basel III capital proposals of 7.4%.

We remained focused on meeting the required capital levels once Basel III is finalized, while returning capital to our shareholders through dividends and share buybacks.

On page 3 we highlight our diversified business model.

Our results this quarter and the business momentum we see ahead derive from our basic banking strategy and the diversity of our businesses.

This is a major differentiator for Wells Fargo.

In the third quarter we remain balanced between consumer and commercial loans and fee and spread income and our sources of fee income were broadly diversified.

Each quarter is different in terms of which customer segments or businesses drive results, but as we have demonstrated through many different economic environments, our business model provides us with a tested ability to perform over time and through cycles.

It is also important to note that our performance has not come at the expense of risk discipline, as we believe we maintain one of the lowest risk profiles in our industry.

Let me take a minute upfront to highlight some of the key business drivers this quarter, and then I will follow up with more detail later in my remarks.

Starting with the balance sheet.

We generated strong loan growth this quarter with our core loan portfolio up $13.5 billion or 2% from the second quarter, which excludes the expected $5.3 billion runoff from the liquidating portfolio.

By staying consistent and serving customers when the market was soft, we are now benefiting from the relationships that we developed over the last few years.

We also actively deployed some of our liquidity this quarter with our securities portfolio increasing $20.9 billion, as we increased purchase activity.

We also generated exceptionally strong deposit growth with balances up $41.8 billion, driven by a flight to quality and new account growth.

This strong deposit growth was the primary driver behind the decline in the NIM this quarter, accounting for about 70% of the change from the second quarter, but was slightly positive to net interest income.

We also lowered our other funding costs by reducing long-term debt by $9.7 billion, and we called $5.8 billion of high-cost trust preferred securities in the third quarter, which were redeemed earlier this month.

This redemption will benefit net interest income and NIM starting in the fourth quarter.

Let me now turn to the income statement.

Net interest income was down $136 million as balance sheet repricing and lower variable income was partially offset by growth in loans, securities and the mortgage warehouse, as well as one extra day in the quarter.

Turning to the fee side, we had revenue growth in many of our businesses including an increase of over $200 million in mortgage banking.

If you isolate our revenue items that are market sensitive, trading, debt and equity gains, these three items again generated positive results, $202 million of revenue this quarter.

The linked-quarter decline in market sensitive revenue of $808 million was due to four factors.

First, as I have mentioned, equity gains declined $380 million from very strong second-quarter equity investment business results.

Second, trading losses included a $234 million linked-quarter decline in deferred compensation plan investment results, which reduced employee benefits expense by approximately the same amount, so no overall impact to the bottom line.

Third, a loss and a gain on resolving two legacy Wachovia positions partially offset one another, but reduced market sensitive revenue by $106 million.

And, finally, customer-driven trading results were down $108 million from the second quarter on weaker market conditions.

Noninterest expense declined $798 million from the second quarter, which included the $235 million reduction from deferred compensation.

The linked-quarter decline was also driven by $108 million in lower merger integration expenses and $230 million in lower operating losses reflecting lower litigation accruals.

Let me now cover our results in more detail.

As shown on page 6, period end loans were up $8.2 billion from the second quarter, reflecting our commitment to our commercial and retail customers through this period of economic uncertainty.

Most of this growth came near the end of the quarter and, therefore, our average loans were up just $3.3 billion.

Loan growth was once again driven by our commercial portfolio, which grew $9.1 billion or 3% from the second quarter and was diverse across our commercial businesses.

This growth also reflects our ability to capitalize on the opportunities generated in the business environment, including the purchase of $1.1 billion in loans from the Bank of Ireland, which were all US-based and largely all commercial real estate.

Excluding the runoff of $4.5 billion of liquidated consumer loans, core consumer loans grew $3.5 billion.

Loans grew in a number of consumer portfolios including mortgage, core auto, credit card and private student lending.

The runoff of the liquidating portfolio continued as expected down $5.3 billion from the second quarter and down $74 billion or 39% since the Wachovia merger.

As I mentioned earlier, deposit growth was exceptionally strong this quarter, driven by both the flight to quality and new account growth.

Average core deposits were up $29.4 billion from the second quarter and up $64.9 billion or 8% from a year ago, and were 111% of average loans.

Average core checking and savings deposits were $769 billion, up 12% from a year ago, and were 92% of average core deposits.

Consumer checking accounts were up 5.6% from a year ago, and we experienced strong growth throughout our markets, including 7% growth in California and 9.8% growth in North Carolina.

We continue to be effective in lowering funding costs with average deposit costs declining to 25 basis points, down 3 basis points from the second quarter and 10 basis points from a year ago, evidence that we still have the ability to reprice deposits even in this low rate environment.

This strong deposit growth will benefit Wells Fargo over time as we grow our relationship with new customers and use these deposits to fund future loan and securities growth.

But as I mentioned earlier, this growth was dilutive to NIM this quarter, which is why we have always said we don't manage to the NIM.

Our goal is to generate more business from our existing customers and grow our customer base, and that may increase or decrease NIM in any given quarter.

Instead, we manage our business with a focus on net interest income and this is how we return value to our shareholders.

Our net interest income declined $137 million from the second quarter.

Let me highlight the drivers on page 8.

First, lower income from balance sheet repricing was partially offset by growth in loans, securities and the mortgage warehouse.

And while the expected runoff of our liquidating loans, which had a weighted average yield of 5.61%, puts downward pressure on net interest income, these loans generally have higher charge-offs and cost more to service.

Second, we had lower income from variable sources, including loan prepayments and resolutions.

These factors were partially offset by the benefit of an extra day in the quarter.

Let me continue the discussion of net interest income on page 9.

NIM and net interest income do not necessarily move in sync, and this quarter was a great example of that.

The deposit growth we had this quarter actually had a small positive impact to net interest income of $13 million, but was diluted -- but diluted our NIM by 12 basis points.

Growing net interest income remains our focus and the size and mix of earning assets are keys to achieving that goal.

The available for sale portfolio has grown by over $39 billion in the last two quarters and loans outstanding have grown nearly $9 billion despite the continued runoff of the liquidating portfolio.

The mortgage warehouse grew by $11.5 billion in the third quarter, benefiting from the current refi wave.

While earning asset growth is the primary driver of net interest income growth, our liability mix also influences our net interest income trends.

The benefit from the redemption of $5.8 billion of TRuPS will begin in the fourth quarter, and the long-term debt outstanding was down $9.7 billion in the third quarter, with an additional $9 billion maturing in the fourth quarter.

Obviously, three of the biggest drivers of net interest income over time are the size and mix of our securities and loan portfolios and our funding costs.

Over the course of 2011 these have all moved in the right direction, and we feel confident that that trend will continue.

Noninterest income was down $622 million from the second quarter, driven by the $808 million linked-quarter decline in market sensitive revenue that I highlighted earlier.

Trust and investment fees declined $158 million from the second quarter on lower brokerage transaction activity and weaker investment banking.

We generated linked-quarter growth in deposit service charges, card fees, other fees, including charges and fees on loans, mortgage banking and operating leases.

Mortgage banking revenue was up $214 million or 13% from the second quarter.

Originations increased $25 billion or 39% from the second quarter, and application volume rose $60 billion or 55% during the quarter.

The unclosed mortgage pipeline increased $33 billion to $84 billion at the end of the quarter.

This is one of the largest pipelines we have had since the merger.

As it relates to revenue, it is important to note that we fair value our interest rate locks at the time of commitment, but we recognize the majority of our gain at the time of funding.

Therefore, the increase in applications in the third quarter should benefit fourth-quarter revenue.

As a reminder, last quarter we provided an update on the impact of federal reserve rules regarding debit interchange fees.

Our estimate is unchanged.

And starting in the fourth quarter we estimate these lower fees will reduce earnings by approximately $250 million quarterly after-tax before any offsets.

We expect to recapture at least half of this over time through volume and product changes.

Non-interest expense declined $798 million or 6% from the second quarter.

The large linked-quarter decline was driven by a few significant items -- a $384 million decline in employee benefit expense.

This is where the $235 million decline in deferred compensation is reflected, which was an offset in trading revenue.

Merger integration costs were $376 million, down $108 million from the second quarter.

We had $198 million of operating losses, down $230 million driven by lower litigation accruals.

We had a $107 million decline in insurance expenses due to seasonally lower crop insurance, which also reduced insurance revenues.

While we had strong reductions in expenses this quarter, as we have said previously, noninterest expense trends will vary from quarter to quarter, but we are still targeting non-interest expense of $11 billion in the fourth quarter of 2012.

For example, in the fourth quarter of this year we expect expenses to be higher than the third quarter, driven by higher mortgage expenses as we add team members to capture increased revenue opportunities driven by refinance activity.

We also expect higher merger integration costs and we typically have seasonally higher fourth-quarter expenses in a number of areas.

Also, as we said last quarter when we provided our expense target, we will continue to invest in our businesses and add team members where appropriate.

We expect to continue to have positive operating leverage and recognize savings as Project Compass is executed over the next five quarters.

Turning briefly to our segment results, starting on page 13, Community Banking earned $2.3 billion, up 11% from the second quarter, driven by stronger mortgage banking revenue.

Sales trends remain strong.

Core product sales in the West were $8.8 million, up 15% from the prior year, and core product sales in the East continued to grow by double digits.

Retail Banking cross-sell continued to grow to a record of 5.91 products per household, up from 5.68 a year ago.

Cross-sell in the East were 5.39, up from 5.10 a year ago.

The majority of our Retail Banking markets in the East were already converted by the third quarter, which helped to accelerate cross-sell growth in these markets.

The East is also benefiting from more than 1,000 incremental platform banker FTEs added over the past year, a 10% increase.

Wholesale Banking earned $1.8 billion, down 6% from the second quarter, driven by a 9% decline in revenue.

The decline in revenue was driven by lower capital markets, trading and resolution income and seasonally lower insurance.

However, most other businesses grew revenue, such as Commercial Banking, Government Banking, Capital Finance, Asset Backed Finance and international.

Wholesale Banking continued to generate strong broad-based loan growth from both new and existing customers, with average loans up 4% from the second quarter.

This growth occurred in almost all portfolios, including Commercial Banking, International, Commercial Real Estate, Capital Finance, Asset Backed Finance, Government Banking and Corporate Banking.

Average core deposits increased $19 billion from the second quarter, up 10%, our largest quarterly increase since the merger with Wachovia.

This growth reflects a combination of a flight to quality and the fact that our commercial customers are holding more liquidity.

Wealth brokers in retirement earned $291 million, down 13% from the second quarter, driven by lower securities gains and reduced brokerage transaction revenue, reflecting the lower market activity, while credit quality continued to improve, driving loan losses lower.

Average loans were stable from the second quarter with growth in brokerage originated loans.

Average core deposits increased $7.4 billion, up 6% from the second quarter, reflecting both a flight to quality and our continued success in attracting client assets, including deposits.

Managed account asset net flows remained strong despite market volatility.

Asset levels were down 9% from the second quarter, reflecting the impact of the market decline.

Our continued focus on meeting our customers' financial needs is reflected in achieving an average cross-sell ratio of 10 products per [WBR] household.

Our credit quality continued to improve as shown on page 17.

We are very pleased with how our loan portfolios are performing.

Charge-offs declined for the seventh consecutive quarter, down $227 million from the second quarter, 52% below the peak in the fourth quarter of 2009.

While we continued to see positive trends in credit performance, the rate of improvement moderated at some portfolios in the quarter, as expected at this point in the credit cycle.

Provision expense was $1.8 billion, down $27 million from the second quarter, including an $800 million reserve release.

Absent significant deterioration in the economy, we expect future reserve releases.

Other credit metrics showed continued improvement also.

Nonperforming assets were down $1.1 billion from the second quarter, reflecting lower inflows of commercial nonaccrual loans.

Early-stage delinquency balances were down modestly while delinquency rates were stable.

The past few quarters I have discussed the quality of our mortgage servicing portfolio and why we believe it is among the best in the industry, so I won't go into a lot of detail here.

But since the risks associated with mortgage servicing are still important to investors, let me highlight just a few key items starting on page 19.

The majority of our $1.8 trillion residential servicing portfolio, or 69%, is service for the agencies, and only 6% are private securitizations where we originated the loans.

Reflecting the quality of our portfolio, our delinquency and foreclosure rate is over 400 basis points lower than the industry average, excluding Wells Fargo, based on the most recent publicly available data.

Wells Fargo's total delinquency and foreclosure rate was 7.63% in the third quarter, down from a peak of 8.96% in the fourth quarter, but up modestly from the second quarter, due to seasonality.

Losses on repurchases were up $123 million in the quarter, but total demands outstanding were down in both number and balances for the fifth consecutive quarter, and down approximately 50% from the third quarter of last year.

We added $390 million to the repurchase reserve this quarter, up $148 million from the second quarter, primarily due to an increase in demands from Fannie Mae on 2006 through 2008 vintage loans.

Demands from Freddie Mac continue to be consistent with our expectations.

As shown on page 21, our strong internal capital generation continued and capital ratios grew.

Tier 1 common equity ratio increased to 9.35%, up 20 basis points from the second quarter and up 134 basis points from a year ago.

Our estimated Tier 1 common equity ratio under current Basel III proposals grew to 7.4% this quarter.

$5.8 billion of trust preferreds were redeemed earlier this month with a weighted average coupon of 8.45%.

This redemption reduced our Tier 1 capital ratio in the third quarter, but the benefit to net interest income and NIM will begin in the fourth quarter.

We repurchased 22 million shares in the third quarter and an additional estimated 6 million shares through a forward repurchase transaction that we will settle in the fourth quarter of 2011.

We plan to continue to repurchase shares in the fourth quarter, pursuant to our capital plan.

In summary, our diversified business model continued to produce record results this quarter, with earnings up 21% from a year ago.

In the quarter we saw continued growth in earning assets, loans, securities, deposits and capital.

Many individual businesses, both consumer and commercial, generated revenue and loan growth.

By focusing on meeting our customers' financial needs we continued to generate very strong deposit growth and had the largest linked-quarter increase in loans in eleven quarters.

And based on current business trends we expect loan growth to continue.

We remain focused on our efforts targeting $11 billion in quarterly noninterest expense by the fourth quarter of 2012.

However, next quarter we expect higher expenses driven by strong mortgage origination volumes, which will also benefit revenue, higher merger expenses and typical fourth-quarter seasonality.

During the first nine months of this year we have grown our securities portfolio by $35 billion in loans.

Excluding the expected runoff, we are up by $20 billion.

Deposits have increased $47 billion, long-term debt is down $24 billion, and we have redeemed $9 billion of TRuPS.

Clearly we have positioned our balance sheet very well for growth.

With the completion of the conversion of Wachovia Bank banking stores this weekend, we are very optimistic about the growth opportunities we have throughout our Company operating as one Wells Fargo.

I will now open the call up for questions.

(Operator Instructions).

John McDonald, Sanford C.

Bernstein.

Tim, a question on the net interest income and the margin.

So first, I guess, of the 17 basis point drop you mentioned 12 of it due to deposits.

What were the other 5, what you would you say that was driven by?

You know what, John, it was a mix across a number of factors.

None of them really stood out.

It was a 5 basis point decline, which really wasn't that significant.

Can you give us any feel for how much benefit you expect to get from the TRuPS retirement?

Well, just at the margin, John, you can take the 845 basis points and subtract it from our marginal cost of funds, which this quarter was 25 basis points.

And then you can annualize that, so it is pretty significant.

It is over $200 million, I think, after tax a year.

Then in terms of additional TRuPS, could you remind us what you have left, and if some of that is still something that you would consider calling?

Well, John, we've got to move forward with our capital plan for next year.

And we've got a plan in terms of calling the TRuPS, but in terms of specifically which TRuPS we will call and when we are going to call, I would prefer not to be specific about that right now.

But as we did this quarter, we are going to continue to be as aggressive as we can be in redeeming TRuPS pursuant to their terms as quickly as we can, given the cost of those TRuPS and the fact that they are not additive to capital any longer.

Okay, and then just back on the margin and the $42 billion of deposit inflow and that getting invested into low-yielding securities, what kind of stuff are you investing this deposit flow into, and where can we look on the balance sheet to see these growing low-yielding asset accounts?

Well, John, I didn't say they're going into low-yielding.

I think they're going into securities -- first, we want them to go into loans, right?

And, again, we were very pleased with the loan growth that we had in the second quarter, and we feel poised for continued loan growth in the fourth quarter.

As it relates to the types of securities, we go through our standard quarterly process.

We look at what we think provides a good risk return, but it was a mix from shorter term, kind of high-quality securities, all the way to medium-term as well as longer-term securities.

So it is a mix.

There wasn't anything in particular; it is just across all the categories in the statement.

Okay.

John, maybe I can just give you my sense.

The way I think about the NIM is, as Tim mentioned, we don't run the Company around the NIM; we never have.

We really run it around trying to add long-term shareholder value.

And we think we can do that best by serving individuals and companies completely and deeply.

And the things that we can manage, like loan growth and deposit growth and more customers and deeper relationships, we are doing those sorts of things.

Because of the unusual rate environment today, some of that you don't get paid for right away.

And we are making investments in -- we had best loan growth we have had in, frankly, since the merger.

And when we look at securities we look at safety, quality.

We look at the duration and all those things.

And because of our strong deposit growth we still are a very liquid company, but we continue to make investments as we see opportunistic opportunities.

Okay, thanks, John.

And one quick follow-up, just on capital return.

John, maybe you could comment on this.

What is your hope in terms of next year's capital return in terms of buybacks and dividends?

Do you hope to do more than you did this year in buybacks and dividends?

And do you know the rules yet that the Fed will hold you to in terms of 2012 capital distributions?

The answer is I think, yes and no.

So let me take the last question first.

We don't know what the SIFI reserve or the buffer is going to be.

We hope to hear sometime in the fourth quarter.

And you're right, we are -- we have the annual plan coming up soon -- our capital plan that we will discuss with our regulators.

And we have stated publicly that -- I have stated publicly, and I think we have also, you have seen it in Tim's comments and other things that we written, that we want to return more capital to our shareholders.

And I don't want to get into specifics about -- because the plan is just being developed now, but I am confident that given where we are today in the absolute number, we are at 7.4% Tier 1 common, Basel to the third degree, and we are not that -- when you look at the risk profile of the Company it is not on -- we are not global.

We are not -- we don't have a lot of the risks that others do.

And on top of that, we are generating just lots of internal capital.

So you put all that together, and that is why I just don't worry about that.

And I want to get as much back to shareholders as fast as we can.

And dividends are an important part of that, let me just say that.

Okay, thank you.

Joe Morford, RBC Capital Markets.

You mentioned, Tim, much of the loan growth came late in the quarter.

I was wondering if you could talk about how customers' sentiment evolved over the quarter, and if you are seeing more confidence there recently?

And, also, maybe comment on the risk-adjusted return opportunities you are seeing in the CRE area right now and competitive environment as well.

It seems like a long time ago, but there was a lot of volatility in the third quarter.

If you remember, some of the things we watched on television in late July and then, obviously, there was a lot of concern about what -- and there still is -- about what is going on in Europe.

But I think generally when you look at our customer base, customer sentiment is good.

The economy continues to bump along a little bit, but customer sentiment is good.

And as I said, and we will reiterate, we feel good about loan growth in the quarter.

And I think one of the reasons why we feel good about it is that it is really broad-based.

As I mentioned, gave some examples in terms of loan growth, both in our commercial -- or our wholesale and our consumer portfolios, that was seven, eight, nine businesses that are growing loans across the board.

It is not concentrated anywhere.

It is not one industry; it is not one geography.

So we're feeling good about that.

And as it relates to CRE, I think that the fact that we stayed consistent in that business over this cycle, which was very difficult at times for the commercial real estate business, is really paying dividends right now.

We are the largest commercial real estate lender in the country.

There is lots of opportunities to help our existing customers to refinance their existing loans.

As they buy new properties we can provide capital to them.

And then also as the CMBS market continues to mature and refinance there are opportunities there.

So, overall, the commercial real estate business and the risk-adjusted returns there are pretty attractive.

And also, Joe, as you noticed or you probably read, that we were able to buy some loans on an opportunistic basis from some international competitors that are getting out of the US market.

Yes, that's great and helpful.

I guess just one follow-up to John's question that the buyback was a bit less this quarter despite the recent drop in the stock over the period.

I guess any comments on that as part of your overall capital deployment plan.

That is a real fair question.

I think that when you think about our capital plan you've got to think about it as being a very balanced plan.

And it is true that we bought back fewer shares of stock in the third quarter than we did in the second, but on the other hand, we also retired some pretty high-cost TRuPS.

And to reiterate, we continue, or we plan to continue to buy back shares this quarter.

Again, we have a very measured and balanced plan that we want to execute to, and we think by doing that it will create some dividends as we go into the next capital planning cycle.

Okay, it sounds good.

Thanks so much.

Betsy Graseck, Morgan Stanley.

Just a couple of follow-up questions on the NIM, and just looking for the average balance that you have on your supplement.

Looking at things like commercial and industrial loans, which had deals come down pretty significantly, and I just wanted to understand how much of that was driven by just the repricing that you have within the C&I loan book because LIBOR came down or is that more net new borrowers coming on the balance sheet and you being competitive on pricing?

I think it is -- Betsy, it wasn't any one specific category, but it was a combination of some one-timers that we had in the second quarter versus the third quarter.

It was -- it also included some repricing of the existing book and then new loans on, but it wasn't really any one specific item.

And when we think about that loan yield going forward, a lot of that book is priced off of floating LIBOR, either one month, three months or what have you, is it pretty much repriced at this stage or is there more to do?

Well, there is generally a little bit of a lag, so that we have seen LIBOR started to pick up a little bit this month, which should have a bit of a benefit.

But there is about a one-month to two-month lag on average.

When you think about the TRuPS that you called in the quarter and third quarter, how much of an impact is that going to have on your NIM in fourth quarter?

Off the top of my head, I don't know.

Let us get back to you on that, Betsy.

I would be guessing right now, but we will get back to you.

Okay, and then, lastly on incremental loans that you are interested in buying from folks that are exiting portfolios, how much risk are you looking to take on to the balance sheet?

Are you only going to be playing in the higher investment-grade type of securities or in loans or are you willing to go into securities or loans that might be a little bit more costly from a capital perspective?.

Well, I think it is really going to be a function of, one, what is available.

And then, two, we've got -- even though there is a lot of opportunity to buy securities and loans today, you've got to -- we've got to continue to be really measured and follow the risk discipline that we have had for years.

And so a long answer to your question, but the point is I think we are going to buy across the spectrum as long as we are comfortable with the risk-adjusted return.

Sometimes the pricing is attractive at the high end and sometimes at the low end.

There are a lot of securities and loans that are available today.

I think this is really reflective of what is strong about Wells Fargo, and that is this is a time in a cycle that because we had a risk discipline over the years in place, we've got the opportunity to be a buyer today.

Betsy, let me add to that.

And I appreciate the question, because I want everybody -- I think you know us well enough.

We are not -- we don't feel any sense of urgency to have to do something that does not make sense here.

We are going -- we are looking for value, and the ones we bought in this last group happened to be the higher end and the more investment-grade, names that we knew.

Many customers we already had something out to.

But even though revenue was challenged this quarter, I feel, and our team feels, no sense of improper urgency to do something that does not make sense for this Company.

We just will not do that.

Would you prioritize growing the common Tier 1 ratio under Basel III or prioritizing earnings?

Well, I don't know that -- first of all, I would say the number one priority is to develop more long-term profitable customer relationships.

That is what we get up in the morning to do.

And the result of that is we make money, and when you make money you grow your capital.

Again, when John asked the question about the Tier 1 common Basel III, we are already at 7.4%.

I don't know what the buffer will be.

As I said before, the bid and assets are between 1% and 2.5%.

We are clearly on the low end or the -- to the left, if that makes it less risky.

7.4% is already 40 basis points over the minimum.

And then our capital generation, we are putting tons of capital on the balance sheet every quarter now.

So I think it starts with relationships, from that over time you make money and then you build capital.

And just to add to that, Betsy, I don't think it is an either/or for us right now.

We can do both.

We can go out and we can buy assets that are for sale with good quality customers that we have appropriately underwritten, and we can make money doing that and we can also grow capital.

It is really not an either/or.

Okay, thanks.

Brian Foran, Nomura.

I guess as we think about mortgage in the fourth quarter, it would seem like gain on sale is going to be very high, if not actually at record levels -- the percentage gain on sale for each loan.

Can you just -- is there any way to break apart how much of the expansion and gain on sale we have seen this cycle is cyclical because of low rates, capacity constraints in the industry, etc., and how much of it you think is secular given a more consolidated industry mainly of banks and hopefully more rational pricing?

I wish I was smart enough to know the answer to that question; I just don't.

I think what we are seeing is a very attractive mortgage market.

We have worked long and hard to be the largest mortgage originator in the country, and we are well-positioned, we've got a great team.

We are seeing a lot of good volume, as we mentioned, going into the fourth quarter.

But in terms of what percent of the margin is related to the industry and what percent is related to capacity, I would really -- I don't know.

I would make this comment.

Part of the reason that we are able to capture more share today is related to the fact that we don't have a lot of problems in our existing portfolio.

I mean, 400 basis points less in terms of delinquencies and foreclosures, that is a lot.

Especially when you service 9 million mortgages or so, that becomes a big, big number.

So we have continued to invest in systems and in people and in training and compliance and outreach.

And even during the big refi booms we never lost our interest or hunger in serving the purchase money market.

So what you are saying is right, there are good margins.

We have got a great pipeline, and we are busy.

If I could ask a follow-up, I guess, on the bad side of the mortgage business right now, the -- on page 28 you show $16.5 billion of FHA insured guaranteed by the VA delinquent, but still accruing loans.

I guess just in the spirit of things having put-backs and litigation risks having expanded further than most of us thought this cycle, is there any way contractually that those loans -- any part of those loans -- could become the responsibility of Wells Fargo?

We have not seen any change in our relationship with the FHA/VA.

When a loan goes 90 days delinquent, it is put back on our balance sheet, we work through it.

That is what happened this quarter.

It happens every quarter.

And then once we work through it, they honor their guarantee.

We haven't seen any change in that relationship at all.

Thank you.

Erika Penala, Bank of America Merrill Lynch.

I understand that you don't manage to the margin.

But given how the interest rate environment will be seemingly suboptimal for longer, and I understand that you have taken steps to redeploy some of your liquidity already in the third quarter, what would you have to see to be a little bit more aggressive in moving down your cash balances?

Erika, the first thing that -- the first call on liquidity, and I think Tim mentioned this, is to fund loans.

When you think about it, this quarter we had $13.5 billion of core loan growth.

That is a great quarter of loan growth.

And that is because we are out serving customers.

And I am not going to predict what is going to happen in the fourth quarter, but our people are busy and we are serving our retail household and the business households.

And then if -- and we are always looking at the market, and if we can get spreads that we think that are appropriate, recognizing that we are at record low levels.

We are not any better at market timing, so we are careful and cautious as we do that.

If you look at our cash balances they are pretty much on top of where they were a quarter ago, even though we have made a fair amount of what we think high-quality shorter-term investments along the way.

You recognize one thing that we still don't know yet is the LCR, the liquidity coverage ratio and that is important also.

So we are in a very balanced way moving forward here.

Do you have a sense from your conversations with Washington that there is a chance that the LCR in its final interpretation will likely get softened?

I don't -- I am not in the prediction business, especially when it comes to Washington.

But I can tell you this, our team has been very active and responsive to the requests [that we get] from Washington and other places to help them understand our view and the calibration and what happened during previous times with previous companies and so forth, and what happened with deposit runoff and loan line takedowns during times of stress.

So we think we have something to offer there.

Okay, and just one last follow-up question.

I just wanted to ask one of Betsy's questions another way.

I think a lot of investors were concerned about the C&I decline in terms of the yield.

I understand there is a lot of puts and takes in this line item.

But if you look at your pipeline of new originations, and you have told us that loan growth prospects are quite strong, and you look at what is set to renew, I guess, should we see or should we expect a similar quarterly decline next quarter aside from the movements in LIBOR?

We are too early in the quarter to be able to have any specific -- or give you a real specific answer to that question.

Because we are going to have loans that aren't even in the pipeline right now that are going to close toward the end of the year.

I don't know the answer to your question.

The point is I think from our perspective is that loan growth is real strong right now.

And think of it this way, Erika, a lot of loan growth we had in the third quarter didn't come until later in the quarter.

We have some purchases that we have made that will close in the fourth quarter that have been announced.

And a lot of what has happened in mortgage has not yet come through.

So think of it in those terms.

Got it.

Thanks for taking my questions.

Todd Hagerman, Sterne Agee.

Tim and John, just going back to the capital question, I understand that, Tim, you mentioned you have very very balanced, very measured approach in terms of your capital plan.

But the thing about the 2012 CCAR program and the Fed process, it appears that, number one, the Fed is taking a more active role in terms of determining the various scenarios for the program.

Then, two, it appears that the Fed is also taking a more conservative view as it relates to their concerns surrounding systemic capital risk.

And as I look at your buyback, for example, and I listen to some of your competitors, how do you think about that 2012 program in terms of -- you mentioned the uncertainty in terms of the operating environment.

You talk about the TRuPS potential.

But how do we think about Wells Fargo being more or less aggressive with the plan going into 2012, given your capital generation and what appears to be a heightened concern on the part of the Fed with capital and buybacks?

Let me just give you a sense before Tim talks about the numbers.

The best thing we can do, the most aggressive thing we could do, is serve our customers really, really well and produce great results and have a low risk profile for our Company.

And then -- and have lots of capital generation internally.

We do all those things well.

We can achieve the kinds of things our shareholders will want, i.e., returning capital to them as quickly as we can.

And you now one of my biases is dividends.

I don't know what we can -- well, add something to that, Tim.

I think, Todd, we haven't seen any major change in terms of our relationship with the Fed, in terms of how they are looking at this next CCAR process versus a year ago.

Again, I would step back and put this in a perspective.

Think about what our balance sheet, what our earnings, what our capital level was a year ago at this time and then compare them to where we are today.

Losses are down, nonperforming is known down, credit has improved.

We are generating a lot more earnings.

And we have more liquidity and we have more capital to start with.

So we don't go into this next CCAR process being pessimistic at all.

We've got a great story to tell; we've got a great relationship.

We are going to make a proposal, and we are looking forward to working with the Fed.

That is actually very helpful.

I appreciate that.

If I could, John, just to follow up or a question just in terms of an update on the AG settlement with California in particular opting out, opting in.

Just your latest thoughts in terms of the settlement process, how that may evolve as you currently see it?

There is nothing new to report.

(multiple speakers).

Positive, negative?

There is just -- if -- no, there is just -- there is nothing new to report.

All right, thanks very much.

Paul Miller, FBR.

Listen, just to follow-up on Brian's question a little bit on the mortgage banking side.

The big announcement this quarter -- well, you all know it is Bank of America getting out of the correspondent business.

And it sure looks like some of these bigger guys are pulling back capacity, especially in the wholesale and correspondent business.

Does that give an opportunity for Wells Fargo to expand capacity in that business?

I think that it is fair to say that we have a lot of opportunity to grow capacity today across the board, not just because of the correspondent business alone, but I think the key is to make sure you do it in a real measured way, because there are lots of correspondents that we like to do more business with and some we wouldn't.

But that is not the primary driver for why our refi's are up.

Our refi's are us because we are ready have a great servicing customer base.

In fact, Paul, that is one of the things that I think is missed a lot.

We have like a 25% or 26% share of overall originations, but it is much higher on the refinance.

Because of the fact that our people do such a great job in servicing we get a disproportionate higher number of people refinancing with us because of our servicing.

Okay, and the other issue is, I hear that a lot from my contacts in the industry is that -- and you have seen some of the notes I have written where the government is being tougher and tougher accepting mortgages now.

Does that give an opportunity for you to start to find some niches on your balance sheet and put some decent loans on your balance sheet that is not necessarily jumbos, but just doesn't fit the Fannie and Freddie and FHA boxes?

Well, we wouldn't put loans on our balance sheet just because the government didn't like them.

We would put loans on our balance sheet if they provided a good risk return.

But there is no question in this environment that there is some good risk return relative to other ways that we can deploy our liquidity, and mortgage is one of them.

That is an opportunity, Paul, clearly.

And one last question.

On the jumbo market, you saw that the FHA -- they're lowering the jumbo spreads a little bit.

Are you seeing a pickup in signing of that jumbo product or is that just (multiple speakers) very difficult?

It is pretty early.

Too early yet.

Okay, guys, thank you very much.

Marty Mosby, Guggenheim.

I had a question -- actually two questions.

One is the deployment of liquidity into loans and securities.

You put about $39 billion into securities and about almost $10 billion into loans.

What types of assets are you looking and what kind of yield characteristics and duration are you trying to peg as you're going through that process?

On the security side, it is really across the board.

It is -- we really look at the risk-adjusted return based upon what is out there today.

And so a portion went into short-term -- shorter-term, very high-quality investments, and a portion went into medium-term and some longer-term durations.

Obviously, there are more assets out there to buy than there were a few months ago.

On the loan side, again, it is across the board.

We feel really pleased that we are seeing loan growth in a number of our businesses and not just one or two.

And then as John mentioned, and we gave a couple of examples, we are also able to buy loans in the market today.

So it is not one specific area, it is across the board, and I think that just reinforces the value of the diversified model.

Then when you are looking at revenue compression from last quarter to this quarter you really have -- it looks like almost three components.

The market is sensitive is really going down over $800 million.

You can take some of those pluses and minuses and it looks like that probably netted out to about a $0.02 impact negative from second to third quarter.

And then you've got mortgage offsetting the decline in what you would see in net interest income.

The market sensitive revenues, how do you look at that?

And do you think that some of the uncertainty that we hit in this quarter you will begin to see some improvement, or did you see any improvement in that line as we moved through the quarter into the fourth quarter?

Well, Marty, I think you are right.

And as we pointed out, there are some puts and takes in the market sensitive revenue, so the $808 million is not what I would think about as a run rate basis, particularly compared to the second quarter.

Because you also had an outsized gain in the second quarter that we called out then that we didn't have the third quarter.

I don't know what is going to happen in capital markets in the next few months.

They feel like they have settled down today, but you know what, you could have made that same statement in July and you could have made that same statement in the middle of August.

I think the important thing as it relates to the capital markets is make sure you are focused on serving your customers, make sure the you've got good risk discipline in place so you're not sitting on a bunch of loans that you have to sell or other securities that you have to mark in a significant way.

And, again, we think that we are pretty good at that.

We've got a good team in place.

We are being thoughtful about being focused on customers, so we are not overly concerned about our capital markets activity at all.

And, lastly, would you say that your guidance on expenses, saying that it is going to go up in the fourth quarter, is primarily tied to the improvement that you see in your mortgage banking fee income?

Well, there is no question that we're going to have increases in expenses related to bringing on team members to support underwrite and close the mortgage pipeline that we are seeing.

That will be part of it.

But, also, we are still in the midst of an integration.

As John mentioned, we had a milestone this weekend, and so the timing of those expenses happen when they happen, and our guess is there it's going to be more of them in the fourth quarter than there were in the third quarter.

Then, also, there is generally some seasonality in all of our expense line items, so we will probably get a little bit of a pickup there, as we saw in the fourth quarter last year.

But again, we want to be really clear that we have made a lot of progress in terms of reducing our expenses this quarter.

We continue to believe that we are going to make a lot of progress and reiterate our goal of getting to an $11 billion run rate by the fourth quarter next year.

Thanks.

Mike Mayo, CLSA.

I am looking at your business optimization expenses, down $363 million linked- quarter.

So what is that since that fueled a lot of the expense improvement?

So that would have included a number of different items.

None of them were candidly very significant, Mike.

It is a bit here, a bit there, and it all totaled up to be the differential that is in the numbers.

But those are permanent savings?

Well, there are always some timing in your expenses, but I would -- I guess the important thing is that we wanted to call out the fact that we didn't believe that $758 million reduction in expenses that we saw from the second quarter to the third quarter was all permanent.

We called out the $234 million of deferred comp differential and we have mentioned that integration costs were a little bit low.

So I think that the permanent reduction is less than that.

But -- and again, we think the fourth quarter is going to be a little bit higher, but we will get to the $11 billion number.

I guess we are kind of dancing around the question, so do you think revenues will outpace expenses?

Linked-quarter it looks like it was a tie, revenues and expenses both down $800 million.

So as we look out, which will win, revenues or expenses?

Well, I think over the long term revenues are going to beat expenses.

And by the end of next year, which is the end of your Compass initiatives?

Revenues are going to beat expenses.

Okay, that is --.

In fact, that is the only way to run a successful company.

And there are short-term -- we can't tell from quarter to quarter, and we wouldn't try to predict that, but when you do the right thing over a long period of time, invest in your people, your distribution, your customers, serve them well, serve them broadly and deeply, revenue wins in that race.

Okay, and so -- and the key milestone then for us looking at the Company would be the end of next year we should see revenues surpass expenses if you achieve your target, if I heard that correctly?

Correct.

Okay, and then completely separate, you mentioned the foreclosure rate.

You are doing everything you can to keep homeowners in their houses, but there is some houses that are owned as second properties or speculators or are empty, so my question is what percent of homes that you foreclose on are not the primary residence of an individual that is living in the home?

I don't know that number, but I can tell you that when we get to a foreclosure customers on average are about 16 months past-due, and at the primary residence about 25% have already -- percent have already abandoned the property.

So, but I don't have the second home off the top of my head.

All right, thank you.

Ed Najarian, ISI Group.

I have a question on page 27 of the handout.

It is the page where you go through the PCI accretable yield.

And you outline the expected cash flows went up this quarter, by about $2.5 billion, which drove total accretable yield number up from $14.9 billion to $16.9 billion.

And then on a bullet down there you say most of that came from the Pick-a-Pay portfolio.

So I guess I am just looking for some insight on what drove your expected cash flow on Pick-a-Pay portfolio up that much during the quarter, and then if any meaningful amount of the total accretable yield difference came from somewhere other than the Pick-a-Pay portfolio?

Fair question.

I think, as you know, we look at this estimate every quarter, and there are lots of different factors that drive their assumptions.

There is interest rate assumptions; there is liquidation timing, modification assumptions and their performance.

And the performance in the Pick-a-Pay portfolio continues to be very strong.

So it wasn't any one of those in particular.

It was the combination of all of them.

But, again, we have had really good experience to date in terms of the performance of that Pick-a-Pay portfolio.

But that was the primary driver for the $2.5 billion increase.

Do you expect that number to keep going higher?

And could you remind us when we look at that $16.9 billion balance how you think about the weighted average or what is the weighted average duration of that $16.9 billion?

Well, on page 28 and page 29 we show the weighted average life on -- for commercial as well as Pick-a-Pay.

And I would say that the average is approximately 11 years or 10 to 11 years, because the lion's share of that yield is in the Pick-a-Pay side, so it is going to be around for a long period of time.

Okay, and no outlook in terms of where that $16.9 billion (multiple speakers)?

Oh, in terms of the number, no.

I wouldn't -- I would be guessing if there was a specific outlook.

As I said, we look at the assumptions and the flows each quarter and come up with what we think is a reasonable estimate and that is what we have here.

Okay, thanks, Tim.

And then as a quick follow-up, just looking at your average balance sheet and your mortgage-backed securities yield, that was one of the asset yields that came down a lot during the quarter, down I think by 62 basis point linked-quarter.

And I think I understand that some of that decline was because of an increase in the size of the MBS portfolio and the investment of some of the deposit inflows, but obviously probably a good chunk of it was from refinancing activity as well.

So I guess any insight as to how much more pressure you expect on that yield over the next quarter or two from refinancing pressure?

I wouldn't -- there is no question that we had some impact on refinancing, but I wouldn't say that is a big driver.

And we don't expect that to be a big driver going forward or at lease more than what we saw this quarter.

The other reason that the yield went down is just in terms of some of the securities that we invested in this quarter.

But generally we should -- well, it seems likely that number will continue to come down, but any sense of how we should think about that from a pace standpoint in terms of that MBS average yield coming down?

No, I really don't have one for you.

Okay, all right, thanks, Tim.

Chris Kotowski, Oppenheimer & Co.

Bank of America recently announced a $5 fee and by my calculations that would recoup most of the loss from Durbin.

And if that is the industry standard or if that is one of the -- what some of the major competitors out there -- I guess why are you still more guarded and guiding that you can only recover half?

And any idea how long it would take to recover what was lost on the Durbin side?

You know, the way we think about that is our focus is on building lifelong relationships with our consumers.

And we have, as you know, grown checking and savings accounts dollars by $185 billion in three years.

And they are binding to the value, the convenience and the choice that we are giving our consumers.

So -- and there is real value here.

We have the most stores of any bank.

We have 12,000 ATMs.

We give free online and free bill pay and all these sort of things.

So when you talk about how we are going to get paid for that, we are testing things and we're going to learn.

Our customers, they help us understand how they want to pay for that value, that choice, and that convenience.

And we will learn from those tests and then we will do what we think will be appropriate so we continue to growth grow household.

Sure.

Then, second question I have, it is more of a numbers question and referring to page 37 of the press release, and it is just that on a Basel I basis your risk-weighted assets grew by about $8 billion, but on a Basel III basis they grew by about $60 billion.

And I was wondering if that a new interpretation of the rules or they are very different assets that you put on the balance sheet and --?

It is an interpretation of the rules.

And in fairness, the rules aren't finalized yet, but we are making our best guess as to what they are, but that is the primary differential.

Can you flesh that out a little bit?

Is it beginning to stabilize in your models or -- and can you talk at all about what caused the difference there that (multiple speakers)?

Well, I don't know if we would say it is going to stabilize, because it is going to be a function of how we are going to grow the Company.

The easiest way to stabilize would be to shrink, and we don't want to do that.

Well, I meant under the rules, or what caused the delta here and (multiple speakers)?

Well, Chris, one thing is the OCI effects.

You're talking about the difference between Basel I and Basel III, that is an influence, and what we are (multiple speakers)?

Is that your question?

No, I guess my question was under Basel I your risk-weighted assets went up by $8 billion, and under Basel III -- I am looking at the prior press release and this press release side by side -- and your Basel III risk-weighted assets went from $1.12 billion, $1.13 billion to $1.272 billion and it is -- it just seemed like a big increase.

(multiple speakers) [your thoughts on Basel III].

Again, we had a growth in the balance sheet this quarter, right.

And then we've got, as we continue to refine our interpretation of Basel III, we are going to make adjustments.

But again, there wasn't anything significant, and we don't really break that out on an asset class by asset class basis.

Okay, all right, thank you.

Nancy Bush, NAB Research, LLC.

A couple questions.

There is sort of a shorthand in the market right now with regard to bank stocks that the larger your securities portfolio the more you're going to get hurt in the present rate environment.

You guys have always been very astute securities portfolio managers, could you sort of address that?

Well, I appreciate the compliment, first, thank you.

What we want to do, Nancy, is look at where we see good risk return.

As we have said for the last year, as soon as rates started to really drop it would be really easy for us to grow revenue and to grow the net interest margin by just investing in long dated securities.

And then we would be more at risk for a backup when it comes, and some day it will come.

I think from our perspective we want to look at good risk return in terms of what is out there today.

There is a lot out there today in terms of securities that we can buy.

But we also want to make sure that we are pretty balanced in terms of short, medium, and long-duration assets.

We think we are fairly well-positioned today, because we have an unrecognized gain on the balance sheet that is still pretty significant.

I think it is still over $6 billion.

So we think we are in pretty good shape even if we saw a rate back up.

But again, in a rate back up even if it might affect the unrecognized or unrealized gain, it would be very beneficial for the rest of the Company.

So -- and again, I think that is a testament to the balanced model that we have.

You know, I almost look at it -- I agree with everything Tim said.

And one of the things that's happening today, we are not getting recognized or paid for the wonderful deposit franchise we have.

And there is real value there.

Rates won't stay this low forever.

They will back up, and you are either going to see the real quality of the liability side.

And in the interim things look different in the market today than they looked nine months ago.

Some good and not -- some of it is not good, as far as we've got QE2s and twists and this and that.

And those things could have -- surely have an impact influence on rates.

But over time rates will rise and I think we are uniquely well-positioned for that time.

The second question is this.

I think the CFPB announced last week that one of their first forays would be an examination of the mortgage servicers to basically make sure you're not doing bad things.

And it just seems to me that it is getting a little crowded in the mortgage servicing space right now.

Could you guys just summarize for us the various regulatory issues or activities that are swirling around your mortgage servicing portfolio right now, and do you have any idea how much this is costing you?

You are correct, Nancy, that there is a lot of regulatory oversight in the mortgage servicing business today.

Whether you're talking about the CFPB's upcoming activities or any of the other regulators.

We feel like we are implementing -- we began to implement changes last year.

We have continued to implement more changes pursuant to the consent order though the cost of those changes are included in all of our numbers right now.

Think of it this way.

A lot has changed in the mortgage business really starting in 2008.

There is no -- this low doc and liar loans and stated income is all history.

So if you look at the originations, starting -- it is really the 2006, the 2008 vintages that we are working through.

But 2008 from then on it is really a different ballgame, first of all.

Secondly, on the foreclosure side, as Tim mentioned, we have made changes.

You are right, there are a lot of people and regulators and so forth that are swirling around, but in our case most of our production is done by our people on the direct side.

And we have been around this thing for a long time, and I am confident that we have got the right people leading that organization.

And you never know where all these things turned out.

But it is a very different environment today vis-a-vis five or six years ago.

Even we didn't participate in some of the most egregious things.

We held our disciplines really well during that time -- not perfect, but pretty darn well.

I can't predict what is going to happen next, but it is a very different business.

And just one final issue for you, John, as you are -- I am sure you are very well aware every day of Occupy Wall Street and Occupy Montgomery Street and all the other Occupies that seem to be going on.

You did a good summary at the beginning of the call of the stuff that Wells Fargo does, I think, that perhaps is not recognized -- the charitable contributions, the level of employment, etc., etc.

What do you and for your banking industry peers need to do to make it known that the banking industry is not some big, evil behemoth out to crush the middle class?

Well, that is a good question.

First of all, I understand some of the angst and anger.

This downturn has been too long.

Unemployment is too high, and people are hurting.

We get that.

We have 265,000 people of which most of them are in the US.

We live and work in these communities.

We are committed to lead more, hire more, lend more, be part of the solution.

And I don't think you do that through an advertising program.

You do that knee to knee, street corner by street corner, community by community, and that is what we are committed to do.

But, no, you don't see anything coming out of the industry that is an answer to some of the stuff that is being put out there by the administration and others at this point?

You know, I think we are all in this thing together.

And I think we are all trying to respond in the most appropriate way of serving our communities, serving each other, helping to get the economy going.

Again, I think this is very much about getting it done as opposed to some program of some type.

Okay, thank you.

Chris Mutascio, Stifel Nicolaus.

Tim, I've got two reconciliation questions.

Forget about the margin for a second, if I just look at net interest income dollars, your average earning assets were $26 billion in the quarter.

Your deposit growth was slightly accretive to net interest income.

And the accretable yields contribution wasn't materially different than what it was in second quarter.

And yet your net interest income dollars were down about $140 million sequentially.

What drove the dollars being down?

Well, it was a function of one-timers that we had in the second quarter.

It was a function of some security and loan runoff, and it was a function of repricing, but it was all those together in terms of the decline.

But it seems like if 12 of the 17 basis points of margin compression was deposit related, but the deposit was actually accretive to net interest income dollars, it seems like a difference -- the 5 basis points of compression would have been more than offset by almost, what, $30 billion of average earning asset growth in the quarter.

I am just -- I didn't see how the dollars came down as much as I had -- the dollars came down more than I would have anticipated given the growth in the balance sheet.

The second thing on a reconciliation, when I look at the one line item on the income statement, the net gains from trading activities, and I know you went through some of those numbers, but that was a loss of $442 million.

If I back out, I think, the three items you mentioned, the $234 million from deferred compensation investment income, the $106 million and the net loss between the two legacy Wachovia positions, and $108 million in the weak markets, if I net those out that line item would have been zero.

In the past four or five quarters it has been running about $500 million or so.

So what is the difference netting -- even netting out those three items what is the difference in that category this quarter versus what we have seen in the past three or four quarters?

Are you talking about the debt or equity or just the (multiple speakers)?

This is just net gains and losses from trading activities, which was a negative $442 million a quarter.

In the last four quarters it has been roughly about $500 million positive.

So within that number would have been the outsized equity gains that we had in the second quarter.

And that is the primary driver in terms of differential.

Because, remember, the equity gain -- the equity gains that we had in the second quarter were about $725 million.

In this quarter it was --.

No, that is in a different line item.

On your income statement your net gains on investment -- equity investments (multiple speakers).

I thought you're talking about the trading asset line.

This is just page 19 of your release this morning.

There is two different line items.

There is net gains on trading activities, there is also net gains on investment equity investments.

I think the net gain on the equity investments includes that one-time gain last quarter.

But if you are looking at the net gains on trading activities, and I back out those one-time items, if you will, that would have been a zero versus again about a $500 million run rate the past four quarters.

I don't think that includes the equity investment gains.

I thought you were talking about a different line item.

I am sorry.

So if you look at the -- you're talking about the $854 million, right, that differential?

(multiple speakers).

Yes, yes.

From $415 million to the $441 million?

Yes.

Right, so you would have had the gross effect of one of the legacy Wachovia positions that we are close to reaching a resolution on.

So that was about $370 million, $380 million.

Then you would have had the $234 million in terms of the deferred comp.

And the rest of it was just a function of what was going on in the market, nothing specific.

Okay, so there is no one line item in there that was more negative than the three items that you mentioned in your statements?

No, no, we would have called it out if that were the case.

All right, thank you very much.

Thanks Chris.

I appreciate it.

And thank you very much.

I appreciate everybody's time, and we will do this next quarter.

Thank you very much.

This does conclude today's conference call.

Thank you all for participating and you may now disconnect.