富國銀行 (WFC) 2019 Q1 法說會逐字稿

Good morning.

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

At this time, I'd like to welcome everyone to the Wells Fargo First Quarter Earnings Conference Call.

(Operator Instructions) Please note that today's call is being recorded.

Thank you.

I would now like to turn the call over to John Campbell, Director of Investor Relations.

Sir, you may begin the conference.

Thank you, Catherine.

Good morning, everyone.

Thank you for joining our call today where our interim CEO and President, Allen Parker; and our CFO, John Shrewsberry, will discuss first quarter results and answer your questions.

This call is being recorded.

Before we get started, I would like to remind you that our first quarter earnings release and quarterly supplement are available on our website at wellsfargo.com.

I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties.

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

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

I will now turn the call over to Allen Parker.

Thank you, John.

Good morning, everyone, and thanks for joining us for today's discussion of our first quarter results.

As you know, this is my first time participating in the quarterly earnings call.

I'm pleased to be with you, and I look forward to your questions and today's dialogue.

This morning, I'll outline the actions I'm taking, together with our leadership team, to continue to transform Wells Fargo and to get that transformation right for all our stakeholders, including our customers, our team members, our shareholders and our regulators.

Since assuming my new role, I've been focused on leading our company forward by emphasizing my top priorities, serving our customers and supporting our Wells Fargo team members, meeting and exceeding the expectations of our regulators and continuing the important transformation of the company.

Today, we're honored to serve 1 out of every 3 U.S. households, but we know that some of our past practices harmed our customers.

The team and I are committed to addressing these mistakes of the past.

And over the coming weeks and months, I plan to spend much of my time listening to our customers and working to understand how we can best serve them.

Our goal, with respect to our customers, is to develop even deeper relationships that are built on trust, accessibility and outstanding service.

As part of reaching that goal, we will continue, wherever appropriate, to contact customers we have let down and compensate them for any harm.

To this end, over a year ago, we created a customer remediation center of excellence, so that we could provide more consistent, timely and effective remediation to our customers.

This team, which sits outside our lines of business, establishes our company-wide remediation policies, sets standards and coordinates with our lines of business and the day-to-day management of remediation efforts, and provides our Board of Directors, our regulators and our senior management with comprehensive information about all customer remediation efforts that we are taking place at Wells Fargo.

And as you're aware, we have been providing updates on our remediation progress in our quarterly filings.

We've also been dedicated to providing customer-focused innovation.

A few examples include Overdraft Rewind, real-time balance alerts, Control Tower and our online mortgage application.

We remain focused on innovating for our customers, and these efforts will continue to be a top transformation priority.

The changes we're making to better serve customers are possible only because of the hard work of our over 260,000 talented and dedicated team members.

Since assuming my new role, I've had the opportunity to meet with and hear from many of my Wells Fargo colleagues around the country and across our businesses, and I'm impressed every day by their commitment and their enthusiasm regarding the opportunities ahead.

We continue to strengthen Wells Fargo's leadership team with both internal promotions and external hires, including our Head of Technology, Saul Van Beurden, who joined Wells Fargo earlier this week as a member of our Operating Committee.

Our new Chief Auditor, Julie Scammahorn, joins us later this month as a member of the Operating Committee.

And we've also strengthened our senior-most Enterprise Risk and Control Committee, which is co-chaired by our Chief Risk Officer, Mandy Norton, and me, and includes the heads of every business and enterprise function.

In addition to hiring Mandy last year, we strengthened our risk leadership team with both internal and external talent, and we've continued to be successful in hiring externally for key roles during the first quarter, our corporate risk management team grew by approximately 1,300 team members last year and we currently expect to add another 1,300 team members this year, with the overwhelming majority of these new hires dedicated to strengthening our compliance and operational risk management efforts.

In addition to these ongoing leadership changes, we're also realigning our business structure and making significant investments in key capabilities that, taken together, will help ensure that we meet the expectations of our regulators.

Let me give you just a few examples.

First, we've discarded our old decentralized corporate structure and centralized our enterprise control functions.

As we have already seen, this important change will enhance our visibility into all aspects of our business and improve the consistency and sustainability of our results.

Second, we're transforming our approach to risk management, and we will dedicate all necessary resources to getting these risk management enhancements right.

Wells Fargo has always excelled at management of credit and market risk, and our goal is to bring our operational risk and compliance capabilities to that same level of excellence.

Third, we're emphasizing operational excellence throughout the company.

And as part of that process, we've named a dedicated leader who is responsible for driving company-wide business process management.

We're building dedicated teams across each business group and enterprise function, and those teams will enable us to better deliver consistent, desired outcomes for our customers and manage our operations more efficiently and effectively, all while strengthening operational risk management.

Finally, we're transforming our technology platform with the goal of enhancing the customer experience by becoming more centralized, consistent and efficient in how we deliver technology products and solutions.

While we're aggressively addressing our risk and control issues and building a better bank, I want to acknowledge clearly that we have a substantial amount of work yet to do, both to satisfy the expectations of our regulators and, even more important, to create the financial institution we aspire to be.

Recent public statements on the part of our regulators have indicated their disappointment with our progress to date.

We understand and appreciate their criticism, and we are now redoubling our efforts to satisfy their expectations of us and our expectations of ourselves.

We're focused on not only satisfying, but also exceeding, the expectation of all our regulators.

I take this responsibility very seriously, and the Operating Committee and I have made clear that the entire Wells Fargo team must act assertively and decisively to meet our regulators' expectations as we go forward.

Specifically, we agreed with Chairman Powell's recent public comments that we have more work to do under the February 2018 Federal Reserve consent order.

That necessary work is at varying stages of progress, and much of the work consists of completing and implementing efforts that are substantially underway.

But regardless of the status of the progress of any particular part of the necessary work, I want to make clear that the most important thing for our company is that in our ongoing constructive engagement with the Federal Reserve, we focus on getting that work done in a first rate and sustainable way and not focus unduly on when we believe that process will be completed.

Accordingly, we do not feel it's appropriate to provide guidance as to the timing of the lifting of the asset cap.

We understand the seriousness of getting our work with the Federal Reserve right, and we are therefore making and will be willing to make the investments that are necessary to complete the work that's needed to improve our compliance and operational risk capabilities.

This work is fundamentally an evolution of our business model, and this evolution will both change how we manage compliance and operational risk and, by simplifying and strengthening our business processes, help us serve our customers better and become more efficient, all of which will benefit our shareholders over the long term.

As you know, we're currently operating well below the asset cap, and we have had and will continue to have the ability to serve the needs of all our 700 million customers -- excuse me, 70 million customers while we work to satisfy the requirements of the Federal Reserve consent order.

While we've been working to fulfill the commitments to our regulators, we've also continued to deliver strong financial performance as our first quarter results demonstrate.

We remain focused on reducing expenses even as we make significant and necessary investments to meet our regulators' expectations and to help ensure that we deliver best-in-class services to our customers.

We remain committed to our 2019 expense target.

We continue to pursue business simplification, so we can focus our efforts on businesses where we believe we have the leadership position that's required to excel long term.

This week's announced sale of our institutional retirement and trust business advances that goal.

We also remain committed to returning our excess capital for our shareholders, and this quarter, we returned $6 billion to our shareholders through common stock dividends and net share repurchases.

I've met with the leaders of all our businesses over the past few weeks.

And as we go forward, I will continue to work closely with them as part of the focus on my top priorities for the company.

Bringing this all together, I'm firmly committed to doing what's right for our stakeholders.

While there's a lot of work that still needs to be done, I believe the actions I have outlined this morning are the right steps to be taken by and for our company at this time.

The work we're doing, in conjunction with our regulators to improve operational effectiveness, will make Wells Fargo a more simple and nimble company while, at the same time, bringing us closer to our customers, which is the real reason we're here.

This, in turn, fits well with our objective of becoming more efficient.

I take very seriously my responsibility as a steward of our shareholders' capital, and I'm confident that these actions will create, day by day, a better company that will drive shareholder value over the long term.

Simply put, we're engaged in a transformative effort with the goal of building the most customer-focused, efficient and innovative Wells Fargo ever, a premier financial institution characterized by a strong financial foundation, a leading presence in our chosen markets, focused growth within a responsible risk management framework, operational excellence and highly engaged team members.

I have no doubt that we will achieve that goal.

I'm confident and optimistic about the opportunities ahead to build something extraordinary, and I look forward to communicating with you regularly on our progress.

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

Thank you, Allen, and good morning, everyone.

We share some of the highlights of our first quarter results on Page 2 including earning $5.9 billion or $1.20 per diluted common share and an ROE of 12.71% and an ROTCE of 15.16%.

As Allen mentioned, we returned $6 billion to shareholders through common stock dividends and net share repurchases, up from $4 billion a year ago, and we increased our quarterly common stock dividend to $0.45 per share.

We also had positive business momentum in many areas, including both customer loyalty and overall satisfaction with the most recent visit branch survey scores reaching their highest levels in 3 years in March.

Period-end loans grew from a year ago, with C&I loans increasing 4% and credit card loans up 6%.

Primary consumer checking customers increased 1.1% from a year ago.

The sale of 52 branches that closed in the fourth quarter reduced this growth rate by 0.5 percentage point.

Card usage increased with debit card purchase volume up 6% and consumer general purpose credit card purchase volume up 5% from a year ago, and high-quality nonconforming mortgage loan originations increased 35%.

Auto originations increased 24%, and small business originations increased 6% compared with the year ago.

On Page 3, we highlight noteworthy items in the first quarter.

Our earnings of $5.9 billion included $778 million of seasonally higher personnel expense.

And while it didn't affect our earnings, deferred compensation, which is impacted by equity market pricing, which, of course, recovered in the first quarter, increased fee income by $345 million and increased expenses by $357 million in the first quarter.

As you may recall, deferred comp results in the fourth quarter reduced fee income by $452 million and reduced expenses by $429 million.

So the linked-quarter change was over $780 million as equity markets recovered.

We added a table to our appendix to help you better track how deferred comp can cause volatility in our revenue and expenses even though it's P&L-neutral.

We also had a $608 million gain on the sale of $1.6 billion of Pick-a-Pay PCI mortgage loans.

We had a $150 million reserve bill, primarily due to a higher probability of less favorable economic conditions.

We had a $148 million gain from the sale of our business payroll services, and our effective income tax rate was 13.1%, which included $297 million of net discrete income tax benefit in the quarter.

We highlight year-over-year results on Page 4. Compared with the first quarter of '18, revenue declined 1%, primarily driven by lower trust and investment fees and mortgage banking fees, partially offset by 1% growth in net interest income.

The decline in expenses was driven by lower operating losses as well as a decline in a number of other expense categories, which I'll highlight later on the call.

While our net charge-off rate improved from a year ago, our provision expense increased due to a $150 million reserve build in the first quarter of 2019 compared with a $550 million reserve release a year ago.

And our capital levels remain strong while we reduced common shares outstanding by 7%.

I'll be highlighting the balance sheet drivers on Page 5 throughout the call, so let me just mention here that we adopted the new lease accounting standard in the first quarter which had no meaningful impact on our P&L, but requires operating leases to be recognized now on the balance sheet as a right of use asset, increasing our other assets by $4.9 billion.

On Page 6, revenue grew 3% from the fourth quarter as lower net interest income was more than offset by growth in noninterest income.

I'll highlight the fee income drivers later on the call.

As I mentioned earlier, our effective income tax rate in the first quarter was 13.1%, and we currently expect the effective income tax rate for the remainder of 2019 to be approximately 18%, excluding the impact of any unanticipated discrete items.

Average loans increased $3.8 billion from the fourth quarter, the second consecutive linked-quarter increase with growth in the commercial portfolio, partially offset by continued declines in the consumer portfolio.

Period-end loans increased $941 million from a year ago with growth in high-quality nonconforming first mortgage loans, C&I loans and credit card loans largely offset by $6.6 billion of Pick-a-Pay PCI mortgage and reliable consumer auto loan sales since the second quarter of 2018.

I'll highlight the driver of the linked quarter decline and period-end loans starting on Page 8. Commercial loans declined $1.2 billion from the fourth quarter, driven by C&I loans.

Recall that we had strong C&I loan growth in the fourth quarter, which included the benefits from the capital market disruption, and is expected some of those loans paid down when capital markets rebounded.

This market improvement drove a $4 billion decline in Asset Backed Finance.

At the same time, we had strong growth in commercial capital, reflecting seasonal strength in Commercial Distribution Finance as well as capital finance, that growth driven by a customer's origination activity and working capital needs.

Our credit investment portfolio also increased as we purchased CLOs in loan form rather than as debt securities, which doesn't change the risk profile of the asset.

Commercial real estate loans increased $460 million from the fourth quarter, the first linked-quarter increase since the first quarter of 2017.

Our growth in the first quarter reflected our continued credit discipline and high-quality loan originations as well as less runoff of previously purchased loan portfolios.

As we show on Page 9, consumer loans declined $3.7 billion from the fourth quarter.

The first mortgage portfolio declined $520 million from the fourth quarter, driven by the sale of $1.6 billion of Pick-a-Pay PCI mortgage loans.

We had $3.1 billion of Pick-a-Pay PCI mortgage loans remaining at quarter-end.

Partially offsetting this decline was $4.2 billion of high-quality nonconforming loan growth, which excludes another $776 million that were designated as held-for-sale in anticipation of future securitizations.

Junior lien mortgage loans were down $1.3 billion from the fourth quarter, as originations were more than offset by paydowns, primarily from loans originated prior to 2009.

Credit card loans declined $746 million from the fourth quarter, driven by expected seasonality.

Auto loan balances were down $156 million from the fourth quarter.

This was the smallest linked-quarter decline since the portfolio started to shrink in the fourth quarter of 2016.

We had $5.4 billion of auto originations in the first quarter, the highest since the first quarter of 2017.

We increased our auto origination market share with high-quality origination, so we currently expect our auto loan -- our auto portfolio balances to grow by midyear and as early as the second quarter.

Other revolving credit and installment loans declined $961 million from the fourth quarter on lower-margin loans and other securities-based lending, reflecting higher short-term rates as well as market volatility.

Personal loans and lines and student loans also declined.

Turning to deposits on Page 10.

Average deposits declined $35.1 billion from a year ago, reflecting both lower Wholesale Banking deposits, including actions taken in the first half of last year to manage to the asset cap, and lower Wealth and Investment Management deposits, as customers allocated more cash to higher-yielding liquid alternatives.

Average deposits declined $6.8 billion from the fourth quarter as lower Wholesale Banking deposits, driven by seasonality, were partially offset by higher consumer and small business banking deposits.

On average, deposit costs increased 10 basis points from the fourth quarter and 31 basis points from a year ago, driven primarily by increases in wholesale and WIM deposit rates.

On Page 11, we've updated the deposit beta slide we included last quarter.

The cumulative 1-year beta has increased to 43%, up from 38% last quarter, reflecting continued pricing competition across major deposit categories.

The cumulative beta, since the start of the cycle, was 35% as of the end of the first quarter.

Recall we provided at our Investor Day an estimate of through-the-cycle beta of 45% to 55% for our mix of deposits.

Our ultimate through-the-cycle beta will depend on a number of factors, including industry asset growth trends, which will, in turn, influence the supply-and-demand dynamics for deposits.

On Page 12, we provide details on period-end deposits, which decreased $22.2 billion from the fourth quarter.

Wholesale Banking deposits were down $37 billion from the fourth quarter, primarily reflecting seasonality from typically higher fourth quarter levels.

Consumer and small business banking deposits increased $9.4 billion from higher retail banking deposits, reflecting seasonality as well as growth in CDs and high-yield savings.

Wealth and Investment Management deposits decreased partly by our clients shifting cash back into investments during the quarter.

As you may recall in the fourth quarter, the market volatility resulted in our clients shifting into cash.

In addition, our WIM customers continued reallocating cash into higher-yielding liquid alternatives.

Net interest income decreased $333 million from the fourth quarter, primarily driven by 2 fewer days in the quarter, which reduced net interest income by approximately $160 million, the balance sheet mix and repricing and including the impact of a flattening yield curve.

Earlier this year, we said we expect net interest income growth for the full year of 2019 to be in the range of minus 2% to plus 2%.

Several factors have driven a shift in our view, including a lower absolute rate outlook, a flatter curve, tightening loan spreads, resulting from a competitive market with ample liquidity, and continued upward pressure on deposit pricing.

We now expect NII will decline 2% to 5% this year compared with 2018.

Noninterest income increased $962 million from the fourth quarter, driven by higher market-sensitive revenue and mortgage banking fees.

The $1.3 billion increase in market-sensitive revenue was driven by higher gains from equity securities, which included $797 million of higher deferred comp gains, net gains from trading activities rebounded from a weaker fourth quarter increasing $347 million, driven primarily by strength in credit and asset-backed products.

Mortgage banking revenue increased $241 million from the fourth quarter from higher servicing income due to negative valuation adjustments to MSRs in the fourth quarter.

Mortgage originations declined $5 billion from the fourth quarter, primarily due to expected seasonality, while the production margin increased to 105 basis points, primarily due to improvement in secondary market conditions.

We currently expect the production margin in the second quarter to remain in a similar range to what we've had for the past 2 quarters.

Applications in the first quarter increased $16 billion from the fourth quarter from stronger purchase and refi activity.

And we ended the quarter with a $32 billion unclosed pipeline, the highest pipeline since the second quarter of 2017 and up 78% from the fourth quarter.

As you would assume, with the recent decline in mortgage interest rates, a significantly higher percentage of our customers could benefit from a refinance.

We expect to see higher origination volume in the second quarter due to typical seasonality for home buying as well as some additional refinance activity resulting from the recent decrease in mortgage interest rates.

Trust and investment fees declined $147 million from the fourth quarter, primarily due to lower asset-based fees on retail brokerage advisory assets, reflecting lower market valuations on December 31, which is when these assets were priced for first quarter revenue purposes.

Turning to expenses on Page 15.

Expenses increased 4% from the fourth quarter and declined 7% from a year ago.

Let me explain the drivers starting on Page 16.

Expenses increased $577 million from the fourth quarter, driven by higher compensation and benefits expense.

This increase included $785 million of higher deferred comp expense, which is offset in revenue, and $778 million of seasonally higher personnel expenses in line with the seasonal increase last year.

These seasonally higher personnel expenses should decline in the second quarter, but salary expense is expected to grow, reflecting increases, which became effective late in the first quarter as well as an additional payroll day in the second quarter.

Revenue-related expenses declined $241 million from lower commission and incentive comp expense, mainly in WIM and Community Banking as well as lower operating lease expense.

Third-party services declined $219 million from lower outside professional services and contract services expense.

Running the business nondiscretionary expense declined $580 million, primarily from lower core deposit and other intangibles, as the 10-year amortization period on the Wachovia-related intangibles ended, and also from lower operating losses.

Finally, running the business discretionary expense declined on lower travel and entertainment expense and lower advertising and promotional expense, which are typically higher in the fourth quarter.

As we show on Page 17, expenses were down $1.1 billion from a year ago, driven by $1.2 billion of lower operating losses.

Expenses also declined from lower core deposit and other intangibles and lower FDIC expense.

These declines were partially offset by higher compensation and benefits expense, primarily driven by $353 million of higher deferred comp expense.

We're committed to and on track to meet our 2019 expense target of $52 billion to $53 billion, which excludes annual operating losses in excess of $600 million such as litigation and remediation accruals and penalties.

As I highlighted on our call a couple of weeks ago, our strategic and financial targets beyond 2019 will be established once we have a permanent CEO in place.

That being said, we're just as committed to our cost-saving initiatives.

And as you'll see, we found even more opportunity than previously anticipated.

However, we also have the need to spend more in the areas Allen described in his remarks.

While our 2019 expense target hasn't changed, as we show on Page 19, the investments we're making in our business have increased from the expectations we had at our 2018 Investor Day.

In May of 2018, we expected our high-priority enterprise investment spend to increase for full year of 2018 and to decline starting in 2019.

However, nothing's more important than meeting our regulatory obligations, and we've increased spending to improve operational and compliance risk management as well as for other high-priority projects.

As a result, our actual and anticipated investment spend for 2018 through 2019 has increased by $1.4 billion from our expectations at our 2018 Investor Day.

As we show on Page 20, while our expected investments for -- in 2019 have increased, our expected savings are also exceeding our original expectations, which is why our 2019 expense target hasn't changed.

We're tracking over 200 specific initiatives on a monthly basis, which drives accountability.

The major categories of savings are from centralization and optimization, including staff function rationalization and advancing our contact center of the future; running the business, which includes streamlining our mortgage operations and restructuring our Wholesale Banking businesses as examples; and governance and controls overspending, which is expected to further reduce third-party services spend, and includes a consistent approach to manager spans of control on hiring location guidelines for noncustomer-facing team members.

Turning to our business segments starting on Page 21.

Community Banking earnings decreased $346 million from the fourth quarter, driven by seasonally higher personnel expense.

On Page 22, we provided updated Community Banking metrics.

We had 29.8 million digital active customers in the first quarter, up 3% from a year ago, including 7% growth in mobile active customers.

And in the first quarter, our mobile banking top box customer satisfaction score was at an all-time high.

Primary consumer checking customers have grown year-over-year for 6 consecutive quarters.

Digital continued to generate strong checking account growth with new checking customers acquired through the digital channel, up more than 50% from a year ago.

And I already highlighted our strong branch survey scores, which reached 3-year highs in March.

On Page 23, we highlight the continued decline in teller and ATM transactions, down 9% from a year ago, reflecting continued customer migration to digital channels.

We completed 40 branch consolidations in the first quarter as we continue to evolve how we serve our customers based on their preferences.

For the first time, we're providing the number of consumer and small business digital payment transactions which increased 6% from a year ago, reflecting continued increases in usage and digital adoption.

Turning to Page 24.

Wholesale Banking earnings increased $99 million from the fourth quarter, driven by higher market-sensitive revenue and lower noninterest expense.

Wealth and Investment Management earnings declined $112 million from the fourth quarter, driven by lower asset-based fees, reflecting the lower 12/31 market valuations, which was when retail brokerage advisory assets were priced.

In the second quarter, these asset-based fees will reflect the higher March 31 market valuations.

WIM earnings also reflected seasonally higher personnel expense.

As Allen highlighted, earlier this week, we announced an agreement to sell our institutional retirement and trust business, which reflects our strategy of focusing our resources on areas where we believe we can grow and maximize our opportunities within wealth, brokerage and asset management.

The financial details related to this transaction as well as the associated gain will be disclosed after the transaction closes, which is expected to occur in the third quarter.

Turning to Page 26.

We continue to have strong credit results with a net charge-off rate of 30 basis points in the first quarter and net charge-offs down $26 million from the fourth quarter, driven by seasonally lower auto and other revolving credit and installment loan losses.

Nonaccrual loans increased $409 million from the fourth quarter as a decline in consumer nonaccruals was more than offset by a $609 million increase in commercial nonaccrual loans, driven in part by a borrower in the utility sector as well as increases in oil and gas.

As I highlighted earlier, we had a $150 million reserve build.

And while this was our first reserve build since the second quarter of 2016, it's important to remember that our net charge-offs remain at historically low levels.

We've been asked a lot about the impact of CECL, so let me give you our current expectation.

Using our loan portfolio composition at March 31, we estimate that the impact of the adoption of CECL will be in the range of 0 to a $1 billion reduction in reserves, which reflects the expected decrease for commercial loans, given their short contractual maturities and the current economic environment, partially offset by an expected increase for longer-duration consumer loans.

As a reminder, we have a smaller credit card portfolio than our large bank peers, which reduces the impact of CECL adoption -- the impact that it will have on our consumer loans.

In addition, our reserves may be further reduced by as much as $1.5 billion of recoveries related to pending FASB guidance to consider increases in collateral value on previously written down residential mortgage loans.

These loans were written down significantly below current recovery value during the last credit cycle.

Under current rules, increases in collateral value are only recognized when collected.

The ultimate effect of CECL will depend on the size and composition of our loan portfolio, the portfolio's credit quality and economic conditions at the time of adoption as well as any refinements to our models, methodology or other key assumptions.

Perhaps more importantly, as the credit cycle turns, there will be more volatility in the periodic remeasurement under a lifetime loss estimation approach.

Also of note, the expected reserve reduction due to the adoption of CECL will increase our capital levels.

Turning to Page 27.

Our CET1 ratio fully phased-in increased 20 basis points from the fourth quarter, as continued strong returns of capital, even with seasonally higher share issuance in the first quarter, were more than offset by capital generation from earnings, improved cumulative OCI and lower risk-weighted assets.

Returning excess capital to shareholders remains a priority.

We're well above the CET1 regulatory minimum of 9% and our current internal target of 10%.

We submitted our capital plan last week.

And similar to prior years, we assessed our current and projected levels of excess capital as one of the many key considerations in the evaluation of future capital distributions.

So in summary, our first quarter results continue to reflect strong customer activity and some underlying positive business momentum.

And we're on track to achieve our 2019 expense target.

We also understand the seriousness of the work that needs to be done, not only to meet, but to exceed the expectations of our regulators, which is one of our top priorities.

And we'll now take your questions.

(Operator Instructions) Your first question comes from the line of Ken Usdin with Jefferies.

I wonder if you could just flesh out a little bit more your updated NII outlook, which I think you gave us the litany of things that we're all observing.

Can you kind of try to parse out for us, is there, I guess, one or the other that's a bigger delta to your initial expectations?

And how do you also expect NII to traject throughout the year, I guess, will be another one to add on to that.

Yes.

Thank you.

So I would -- the things that I mentioned in terms of the state of the curve, absolute low level of rates, I'd put at the front end of the explanation.

What's going on in deposit prices or deposit costs is something that we're observing as betas catch up or attempt to catch up to historic norms.

And then this spread compression, which reflects not just competition for loans, but also the mix of loans on our balance sheet.

As we've sold some of these higher-yielding Pick-a-Pay loans, for example, those have disproportionally higher spread.

And when we consider on a quarter-by-quarter basis whether market conditions are right and we want to do that, that will have an additional impact as well.

We've talked about this before, I don't really use much from other banks, but this reinvestment out the curve of excess cash and prepayments or repayments of our existing AFS portfolio is something that we're -- that means a lot to us.

And when the curve is as slight as it is and yields are as low as they are, that becomes a big driver of the margin as well.

Most people think of interest rate sensitivity more on the LIBOR end of what happens to floating rate loans, but for us, that reinvestment out the curve is a big piece, too.

So all of those things relative to a quarter ago feel a little bit softer, and that's a combination.

Okay.

And then I'll just repeat my second part, which was just, and then from here, so can you just talk about the -- at the NIM versus the NII and just how you just expect that to traject from here, given, obviously, that it's now a year-over-year challenge on a year-over-year basis?

Yes.

Well, I think all of those things will play out relatively ratably.

I'd say that what happens to deposit pricing is probably a little bit more -- we've -- as I said before, we've tended to outperform historic expectations.

And if deposit prices continue to lag and catch up to the historic beta or maybe things are a little bit stronger until later in the year, if that catch-up takes until later in the year, that's one area where I can imagine a little bit of it not being ratable.

Is that a mix thing for you guys on the -- within deposits is still moving retail versus wholesale?

And I'll stop there.

Yes, in part, I think because a lot of our recent retail deposit gathering has been higher cost than historically as we've tried, whether it's through promotional high-yield CDs or other offers market-by-market And so that is a little bit higher cost than it has been previously.

But one other thing I'd point out, just in terms of you mentioned seasonality, this day count issue quarter-by-quarter, obviously, will have an impact across this about $150 million or $160 million in the first quarter that would be added back in the second quarter.

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

Allen, maybe I could ask you to give us a sense of the type of person that Wells Fargo is looking for as a permanent CEO.

I know the committee just got started on that, but it would be helpful to understand in the context of a couple of questions.

One is, how do you think about the priority of having either a female, a person of color, minority taking the lead?

And then the other question has to do with track record of this individual, managing either a bank or a financial, somebody with a balance sheet.

So I would like to understand how the organization is thinking through those 2 things in the context of the question.

Yes.

Betsy, thanks very much.

As you well know as well as anyone, choosing a company's leader is the most important thing a Board of Directors does.

And I know that our Board is approaching that task with care and seriousness, as they do all things.

Although I'm available to the Board for any necessary consultation or any other way they need me in connection with the process, I'm not involved in the search process.

So unfortunately, I don't have any insight into the criteria that they're applying to their work or the timetable that they're thinking about in terms of completing that work.

I do know that the Board's Search Committee has met and that they've chosen an outside search firm to help them with their work.

But as a general matter, my understanding is that the Board's work is in its relatively early stages.

And knowing the board as well as I do, I have no doubt that they are focusing on all the questions that you've just asked.

It's just not clear to me that anything in terms of their articulation of the criteria they're applying will ever be something that goes outside the board room.

The most important thing, though, I think from my perspective is for everybody to understand that while the search is underway, the company is going to continue to move forward assertively and decisively on the priorities that John and I have discussed this morning.

Betsy, I wish I could be more helpful, but I just don't have any further insight.

Got it.

Yes.

Just would share that it strikes several investors, who we've spoken with, as a little bit odd to be thinking about someone who's from outside of the banking system given the credit risk and rate risk that financial institution banks have that's unique to them.

So I'll just share that.

And then, I guess, secondly for both of you, we heard from others today about how tough it is to be running a mortgage business in the context of the tough rules and regs on the mortgage industry for banks.

And there's some players out there that have taken significant share that are benefiting from the regulatory arbitrage that exists for folks that are not banks that benefits their standing.

And so I just wanted to understand how you're thinking about the mortgage business that you run and how you deal with that, especially on the servicing component.

Betsy, I will let John speak to the mortgage aspect of your question.

I will just say, by way of comment, that, obviously, our Board Chair, Betsy Duke, has a tremendous amount of experience with regard to all the issues that are associated with managing, leading a financial institution.

And she's involved day-to-day in conversations with our investors.

And I know that they're going to formulate a really precise and appropriate set of criteria in that search.

Sure.

And Betsy, with respect to your point about the mortgage business and, as you described it, regulatory arbitrage, I would say that we're -- mortgage lending is core to Wells Fargo.

It's very important to our customers.

We're an enormous originator and servicer.

We've changed the business over the last couple of years to take some of the extra contractual risks out of the origination and the servicing side of things and to try and make it as tolerable as possible in the complex environment that we're operating in.

But that's not clear to me that on the servicing side that the rules are very different.

I do think that when you're a GSIB and you have lots of resources that the expectations are appropriately high, and we're trying to live up to that.

I do think that our nonbank competition has done a good job at setting the bar for us and in improving the customer experience and their tough competitors, and we're certainly up for it, but I think nonbank competitors, both on the origination and servicing side, are here to stay.

Your next question comes from the line of John McDonald with Anonymous Research (sic) [Sanford Bernstein].

John, I wanted to follow up on Ken's question around the NII.

Maybe you could give me a little bit of color on what scenario is it down 5% and what kind of things happen where it's down 2%?

And then just a follow-up, it doesn't sound like loan growth changed in your outlook.

That wasn't a driver from what I understood there.

So are you feeling better or worse of seeing, like on loan growth relative to where you were a couple of months ago?

Yes, I think we are on the loan growth front.

And loan growth, given what we've been doing in running off precrisis noncore assets, that will have an impact on our net loan growth.

But in terms of our new originations, et cetera, that doesn't feel much different than it has over the last couple of months.

Yes, the range of outcomes on the 2% to 5%, if deposit pricing -- if repricing continues to be slower than expected, but is on an upward trajectory, there's probably upside there, and get you closer to 2% than 5%.

If the long end of the curve stays right where it is, probably -- that probably takes you into the lower end of the range.

And then loan spreads are -- and loan spreads, which reflects mix as well in terms of what's going on in competition and the types of loans that we're originating will have an impact on that as well.

But we're sort of preparing you for the idea that it could be down 5%.

I think if everything that I mentioned went against us, that's a reasonable outcome.

But those are the drivers.

Okay.

And then on CCAR, I understand you obviously can't talk details.

But at a high level, as you put your capital plan together, do you factor in the regulators' disappointment in your progress or where you stand on operational excellence?

Or is that just completely separate issues?

Well, nothing's separate.

We -- the way we approach CCAR is starting with the feedback that we get in the prior year and working all year to improve our approach, which includes our operational risk, risk identification, control identification, our scenario designed to impact those types of things, the impact more broadly and what it means, both for PPNR generation.

And so I think we've fully accounted for that, and we'll see in June.

Okay.

And no formal change to the CET1 target yet?

Do you still think that's kind of an upside bias on that, but modest?

Yes, I think that's right.

I think we've mentioned before that it's 10% today knowing that how CCEL gets integrated into CCAR -- into the severely adverse CCAR scenario.

And then what the final rules are and application is of the stress capital buffer, the combination of those things probably drives us up to 10.25 to 10.5., that sort of range.

But until those things land, we're not going to set a new management target.

But those things are still out there.

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

So my first question is, it really has to do with what more you can do to deliver this company more efficiently.

We hear you loud and clear that until you have a new leader, you're not going to -- help us give us a sense of the expense trajectory, which is totally fair.

But as I think about the dynamics of capital return and opportunities to continue to restructure the firm, so as of year-end 2018, Wells Fargo had 2,595 more employees than JPMorgan, and your employee base declined just 3% since 2009.

And you have peer banks in the United States that have 50,000 less employees than you do for larger asset bases.

And I'm wondering, how is the board thinking about the interplay of the fact that you have a ton of excess capital, you continue to build excess capital, why shouldn't that be -- why shouldn't it now be an opportunity to restructure the firm in a more dramatic way than you've been telling us?

I mean, in essence, with a new leadership coming in, the market is giving you sort of a path, or so to speak, to really rethink the company beyond sort of taking 10% off of your head count in 3 years.

Yes, I think that's a fair observation.

I think the work that's happening right now, which is, frankly, underpinning a lot of the regulatory-related requirements around operational risk and compliance, is business process by business process, end-to-end understanding of how everything gets done at Wells Fargo in a very encyclopedic way.

That's work that's underway.

There's still a ton to do, but that's the gist of the underpinning of all of this work.

The outcome of that will put the -- Allen or the new CEO in the perfect position to make determinations about how we can continue to combine like work, how we can continue to streamline our operations, what we should be doing more of and what we should be doing less of.

But the head count -- I mean, the head count is a great thing to point to, to compare whether we're more or less efficient.

And there are opportunities for efficiency as a result of, as I said, combining like activity, where we have it disparate today.

There are changes in how customers are using the banks.

So we've got -- we just described 9% down year-over-year in branch and ATM transactions.

Our call center activity comes down as people do more on an automated basis.

There's lots of just secular changes that will drive head count down.

But in the short term, as we're adding in places like the control functions in the businesses and Mandy's team broadly in the second line of defense for risk and compliance, those will definitely be -- those will push numbers up in the short term.

We've got some seasonal activity in the first quarter that happens in branches and elsewhere as there's more people on the payroll than there are later in the year.

We've got cyclical businesses like mortgage, the dial-up and dial-down, as the pipeline swells or abates.

So all of those things are working together.

There's no question, we've had this discussion before, that at the end of this process, just for a company of our size relative to peers that you're mentioning, we have a lower risk mix of businesses.

We've got our less complex, less global, et cetera, mix of businesses, and our expenses per total dollar of revenue for our asset base should be lower.

That's definitely the goal.

Got it.

And Allen, if you could give us a sense.

Clearly, there could be an air pocket in the stock until you have a new leader in place.

Is there a time frame that the Search Committee is aiming for?

Obviously, your shareholders want you to find the right woman or man, but is there a time frame that you could help us in terms of whether the Search Committee is looking to go more urgently?

Erika, I think that based on the conversations I have, the committee wants to move as urgently as they can, but their biggest priority is making the right decision.

And so at this point, I'm not really in a position to predict how long that will be, but I think they're going to prioritize quality decision-making over any sort of focus on speed.

Got it.

And just one last follow-up question, John, on the revenue.

I guess, I hate to ask the NII question again, but as we think about your peers that reported this morning, they're facing similar curve dynamics, but they didn't quite pull their guidance for the full year yet.

And as we think about the timing of when you put out that guidance -- earlier guidance on NII at the Crédit Suisse conference, obviously, the yield curve flattened.

But is your sensitivity to the long end, that material, that the magnitude of change is not just significant relative to your old guy, but also significant relative to peers?

And what in the liability dynamics, going back to John's earlier question, are you assuming, particularly on deposit rate pricing more specifically?

Yes.

Good questions.

So on the long end, I would say that we have got more conviction that we're going to be reinvesting at lower rates for more of the year than when we went through the big rally in connection with the disruption of the fourth quarter.

Now it feels like it's here to stay.

Sitting on the sidelines and waiting for higher yields is less of an option.

And so we're beginning to redeploy here at these lower levels.

So that feels more locked in than it did at -- during February, at the Crédit Suisse conference.

And on the liability side, we are imagining a -- even if we're done with moves up -- Fed rate increases and moves up and the policy rate's at the front end of the curve, that there is some more catch-up this year to historic betas.

And if that doesn't happen, as I mentioned to John, that's going to be upside or, I should say, move us higher in the range of possible outcomes for this year.

And just one more question on -- sorry, just one more question on revenues, if I may, and I apologize for interrupting.

On the fee side -- and I don't mean to be cheeky at all, but excluding the idiosyncratic gains on Pick-a-Pay and the payroll services company, John, what would you call core fees for the year -- sorry, for the quarter?

I guess, I'm just trying to figure out.

So I think the frustration with investors is, I think, they've accepted that the expense trajectory is very hard to target, given the management change.

But if the revenue base keeps splitting down, I'm afraid that some of your loyal shareholders are going to start to exit before you have a new leadership in place and helping us figure out what the sort of -- where the fees -- the core fees are for the quarter, and what you expect for major line items would be really helpful.

Yes.

No, I appreciate that.

So we don't calculate something called core fees.

It's non-GAAP for us to do that for ourselves.

And so it's a tricky path to go down.

I think mortgage is going to be stronger as we roll forward.

If we're just thinking about the major line items, I think trust and investment fees will be stronger as a result of the recovery in the market.

There's a quarterly lag that's built into that.

On deposit service charges, we had a couple of things happen in the first quarter that were aberrant.

So I think the run rate is higher than what we posted.

We had a data center outage that caused us to reverse fees for people for a period of time.

There's a little bit of a government shutdown that caused us to reverse some fees for others, et cetera.

So those aren't recurring.

So as I go line item by line item, each one of them has its own story.

I guess, I'd point to mortgage probably as this year rolls through and given where the pipeline sits and the fact that we're up a little bit higher in terms of gain on sale.

And servicing, frankly, feels a little bit more stable compared to Q4.

We had some valuation adjustments, but it's very likely that we'll continue to -- I mean, we've always had a collection -- or we've often had a collection of different types of gains from things that happen naturally in the business and from strategic decisions like selling some of these precrisis loans.

And so they'll be there, too, throughout the course of the year depending on decisions that we make.

Whether they're core or noncore is in the eye of the beholder, but they contribute to capital generation and earnings in the quarters when they occur.

Erika, if I could just circle back for a second on the search.

Although the board is going to be moving forward with appropriate urgency, they have made clear that they have complete confidence in the team that we currently have in place.

And just to reemphasize, they have given us a mandate to move forward assertively.

So no one should have any doubt about that.

And does that mandate include perhaps pulling forward some of the opportunity that John outlined earlier as an answer to my question in terms of potentially more severe restructuring than you had earlier envisioned?

I think that you should understand that our current team is going to be thinking about all alternatives for the company going forward and working very closely with the Board to think about what's best for the company longer term.

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

There's a lot of focus on the fundamentals here, but I want to kind of back up to what I think is the biggest issue for the company.

You said in your prepared remarks at the very beginning, you understand what the regulators are disappointed in.

And maybe you could shed some light, what is it that they're disappointed in?

And what are you either doing differently now, say, versus 6 months ago or plan to do differently to address these things?

Well, let me start by saying something that's rarely said, but I think should be said, and that's the Prudential bank regulators play a really critical role in our system.

They're there to ensure the safety and soundness of financial institutions like ours, but they're also there to ensure the safety and security of the financial system more generally.

We get their feedback constantly, and we take it very seriously and we take it into account in terms of everything that we do.

As you know, Matt, the recent public statements on the part of the regulators have indicated their disappointment with our progress today.

The Fed, the OCC, the CFPB have all gone on public record in terms of saying that.

We understand and accept their criticism.

And as I said before, we're going to be redoubling our efforts to satisfy their expectations of us.

I met with all the regulators in Washington earlier this week, and one of the things that I tried to convey to them was that we're going to try to bring to our relationship with them going forward a greater level of urgency and seriousness, understanding again, that the single most important thing for us to do is to execute on our priorities and satisfy our commitments to them.

And we're doing a lot of things to help us do that.

We've hired a number of key leaders in new roles from outside the company, and they've had a significant impact in terms of what we're doing.

Now, as I mentioned before, we're engaged in a thorough reshaping of our risk management framework, and that's going to fundamentally change how we manage risk within the company.

And then finally, we're really going to be focused intently on operational excellence in all we do.

And a big part of that, as I've mentioned before, is our work on business process management.

I would emphasize, when you take all this as a whole, the basic answer to your question is that we're going to be working harder and smarter, and we're going to be focused more on execution.

And we're going to do all that with an appropriate sense of urgency.

We believe that we can complete all the work we need to do in a timely manner.

But much more important than that, I believe that we can do this all to the highest standards of professionalism and long-term durability for the company.

We want to not only meet their expectations, but also exceed them.

Just as a follow-up, like, I mean, where is the disconnect?

Like I would've thought a little over a year ago when the asset cap was implemented that that's when the communication would have been improved.

That's when you would have gotten the same page.

I mean, I don't know if it's just that the regulators don't appreciate how big, how granular, how diverse of a company you are, so how long it takes or if it's just been maybe bigger issues than you appreciate a year ago.

I just think a lot of us don't understand, when we look at Wells long term, you have a great track record from a risk management perspective, again, on all facets.

And a lot of the people that have executed on that strategy have been -- they're trying to kind of clean up these issues.

And it's just so rare for a regulator to go public.

So again, I don't know if it's just that you're so big and so granular that there's just so much to do and maybe they don't appreciate that.

Or was there something that you didn't appreciate as a company a little over a year ago.

I mean, it's a good follow-up.

I think one of the most important things to understand is that what we're talking about, as I said earlier, is essentially an evolution of our business model.

We have, in essence, picked out with our regulators a point on the horizon in terms of creating a truly extraordinary company, not only in terms of business performance and operational excellence, but also risk management.

Our engagement with the regulators, and this goes for all of them, particularly the OCC and the Fed, is an ongoing engagement.

We get their feedback constantly, and we, therefore, are called upon to respond to it constantly.

And that sometimes means that we have to work hard to understand exactly what their expectations are for us.

I have really had an opportunity through my meetings earlier this week to understand exactly what their expectations are.

And although our work is in various stages of progress, some of it is way down the road and is really pointed toward completion and implementation.

Other parts of it are a little bit earlier in the process.

I think I have a very good handle on where we want to go with them, and I think that they've been very clear with us.

The single most important thing, I think to note, is that we have really done a good job of restructuring our balance sheet so as to be able to operate under the asset cap for over a year.

And we're going to do whatever is necessary to ensure that we can continue to serve our customers for as long as the asset cap is in place.

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

Maybe you guys can touch -- you talked a bit about the mortgage banking business and the competitors.

The nonbank competitors are taking market share from everybody.

Now that's the way the business has been structured.

And John, in the past, you've talked about your nonbank financial lending.

I believe that portfolio is over $100 billion.

How much of the mortgage warehouse lines are in that portfolio, assuming they're in that portfolio?

And how are they growing?

Yes.

It's a good question.

I would say mortgage banker warehouse lines are a smaller portion of our -- of that total nondepository financial institution total.

We'll get you the exact total, but we do provide warehouse lines to people who deliver into Fannie and Freddie, just like we do also by correspondent loans into our own mortgage banking pool, which becomes part of our origination stats and part of our gain on sales.

So like a lot of these businesses, mortgage is one of them.

The people with whom we compete, who are outside of banking are customers of ours.

We give them access to the capital markets.

We finance them along the way.

We understand the underlying loans.

Sometimes, they're making loans where we're competing head-to-head and, sometimes, they're making loans where we'd rather be in a credit-enhanced position on a pooled basis than to be making the loans head-to-head.

That's more of a commercial loan example.

But in the mortgage case in particular, we do provide warehouse lines, and we do facilitate the sale of their conforming loans into agency execution.

I see.

And what -- how would you categorize the largest component of that portfolio?

What type of credits would you say are in that portfolio that constitute the majority or the biggest portion?

Of the $100 billion or so of [CLO]...

Yes, correct.

It's pretty balanced.

There's the CLO business.

There's CMBS.

There's RMBS.

There's card.

There's other commercial assets like leased assets, et cetera, where our customers are leasing companies.

It's quite diverse, but it's more Corporate Risk than mortgage risk.

Okay, good.

And then following up on your comments, if I heard you correctly that, I think, you said foot traffic and ATM transactions are down.

I thought I heard 9% or at least they're down.

Are those trends accelerating?

And did Zelle have any impact on the trends picking up in terms of the P2P payments that happened with Zelle now that's in place for about 1.5 years?

Yes.

No, I don't think so.

I think Zelle is taking some cash out of the system.

It's taking checks out of the system as well.

So that -- it hasn't been accelerating.

It's been relatively linear, and it's been this conversion to all forms of digital banking activity, not just P2P payments.

Great, I appreciate it.

Yes, go ahead.

Go ahead, John.

I was going to say, you can see the details on Slide 23.

That's all.

Your next question comes from the line of Vivek Juneja.

I just want to follow up on all the regulatory stuff that's been going on.

The regulators' comments that things have been very slow.

Given all the hirings you've been doing, it's a little bit surprising.

I guess, Allen, a question for you.

How much do you need to do in terms of changing the culture?

Because there seemed a tone of dismissiveness amongst senior management when this asset cap first came out.

And is there still more you need to do on that?

And as we parse through, I'm trying to understand where this quite surprising level of commentary from the regulators, which you rarely see a bank named of your size like this.

Is it coming more on the consumer side, the corporate side?

Or can you give us more color as to where there's more of this weakness?

Yes.

Vivek, thank you very much for your question.

I think that it's appropriate to say that there was always a sufficient level of seriousness on the part of our senior management in terms of approaching the Fed consent order.

We, early on, marshaled what we thought were the necessary resources to get everything done in a manner of appropriate urgency and thoroughness.

As time has gone on, and there's been greater clarity about all the work that's been done and the expectations of the regulators, we've continued to focus on everything that needs to be done.

I think above all else, I would say to you that the effort that we're talking about, which is enhancing corporate governance protocols, establishing an even stronger risk management framework and achieving true operational excellence just takes a certain amount of time.

And we're doing that methodically, but we're also doing it in conjunction with our regulators as they provide us with constant feedback.

And the other thing that I will say is that when we're going forward with respect to the asset cap now, one of the things that we feel is critical to do is to get the input of our new Chief Technology Officer and our new Chief Auditor, who are going to be -- one of whom, our Chief Technology Officer has just arrived, and our Chief Auditor will arrive soon.

We believe that their input, analysis, creativity will be a critical part of not only satisfying the requirements of the consent order, but getting them done in the way that's appropriate for the company that we want to be.

I would say that the feedback that we have heard is really not directed to any line of business.

It's really our larger corporate functioning in terms of our control system and framework for risk management.

And those are the things that we're going to continue to focus on.

And as I said to you before, we're going to do all that work with what we believe is the appropriate level of urgency, but we're not going to prioritize urgency over getting it right.

This is just simply too important for our company going forward.

It's work that's going on every day.

I'm confident that we get better every day, and I'm also confident that we'll get to the right conclusion.

I've got one follow-up, and it's also, I think, responsive to Matt's question earlier.

But just playing back the last year or so and how this has evolved.

There's an initial level of high level, medium level and extraordinarily detailed planning that goes into an evolution like this.

And then there's the initial hiring of the senior-most change agents, people with real experience to augment the folks that we have in the field doing the work.

And as Allen mentioned, this is -- this covers the entirety of the company.

This isn't something that just happens in a group called risk.

This happens in every line of business, in every function, dealing with every business process.

So you plan it at varying levels of granularity, senior hiring, next-level hiring.

And by hiring, it can be people who already work here moving into slightly different jobs.

But it's articulation of what those jobs are, what real roles and responsibilities are to accomplish the goals.

And then you begin the execution phase.

And the execution, again, it's business by business, function by function, process by process.

And it's the identification of risk and associated controls for effectiveness.

It's the testing of those controls and making sure that it works from end-to-end.

And then the development of the appropriate supporting technology because a lot of these things initially can be done by brute force and -- but are more appropriately done at a higher-quality level more efficiently with technological enablement that comes along behind it.

Then you have to understand what maturity looks like because you never get everything exactly right -- completely right the first time and you want to make it have -- the customer impact has to be understood.

The team member impact has to be understood in addition to the capability.

And then you go into a cycle of sustainment and improvement.

That's what's going on.

And it takes a while to do that from one end of the business to the other, from top to bottom, business by business, function by function.

And Vivek, I would also just comment because I'm sure it's on your mind.

I've had the opportunity to get out and speak to a very large number of the people who are on the Wells Fargo team and have also, as you would expect, had the opportunity to meet with every member of the Operating Committee over the last couple of weeks.

These are leaders who have performed extremely well in various uncertain circumstances.

They have been empowered by me and by our Board to move forward on the company's priorities, and they're highly engaged and motivated.

And above all else, they're really enthusiastic about what we can achieve.

So again, that's the source of my own personal optimism.

Yes.

And yes, I mean, look, you do have a great franchise, so there's -- it is important to protect that and grow that.

I have another question, completely different, if I can just shift gears.

And this is probably appropriate for John.

John, the business payroll services business you just sold, you mentioned the gain to us.

What is the impact from a revenue and a net income standpoint?

Any rough numbers?

It's negligible, not discernible.

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

I hate to beat a dead horse on the NII commentary, but, obviously, it does move the needle on numbers.

John, am I -- what are you assuming for deposit betas in that guide?

Are we assuming that you get to the 45% cumulative beta since the start of this cycle that you've expressed as sort of a normal run rate?

Is that embedded in that guide?

And how quickly do you get there?

It assumes continued -- our beta assumptions assume continued catch-up to the historic norm, which, if it doesn't happen, as I mentioned earlier, it is applied to that forecast.

Okay.

And the historic norm is 45%?

Is that...

Well, it depends on the mix, but it's the -- the range is -- goes all the way to 55%.

Okay.

Because if I -- your through-the-cycle beta of 35% which is based on, I guess, the 89 basis points, if the Fed funds goes -- stays where it's at, that would imply, by my calculations, you'd go to like 110 basis points in an environment where the Fed funds isn't moving.

I mean, is that -- are those numbers right?

Is that logic right?

Well, I'm sure your math is right, but we have a -- what happens in the shift from noninterest-bearing to interest-bearing, we have higher costs, as I mentioned, from things that we're doing in retail around the edges for promotional attempts market-by-market to understand what high-yield savings and CDs do to the mix.

Those are higher cost retail deposits.

The consumer beta has been really, really low since the beginning of the cycle.

And so by doing these things around the edges, we're moving it relatively meaningfully but without repricing the whole core of that portion of deposits.

I get that.

It seems just like a big delta in an environment where the Fed funds rate is flat.

And if we put that into any -- if I put that number into any of my models for any of my companies, it's going to be hard to see any NII growth for anybody.

And I'm just trying to get a sense as to whether there's a level of conservatism built into that deposit beta.

You might expect us to outperform then relative to what we just talked about that.

But we're -- I think it's cautious to be -- we want to be frank with what the outcomes might be.

We think this is what the outcomes might be.

That's one area where there's the opportunity to outperform depending on what happens in the market.

Got it.

I guess, if I could change gears a little bit and talk about cost, fully appreciating that the new CEO will ultimately determine what -- if and what the guides will be, what the expectations will be beyond 2019.

But you have outlined $2 billion of cost initiatives, I guess, that are in place, and you've talked about them with -- in a lot of details.

But is there a way to kind of think about what's already in place that's going to happen regardless, whether it's systems monetization, digitizing processes, organizational realignment and what's maybe a little bit more discretionary that might be able to be more managed a little bit and could have some variance in terms of the outcome?

Yes.

The items that we have on Slide 20, where we're showing you at least the relative expectation for cost takeout for '18 and '19 and the general -- how we're categorizing where those are coming from, will show you that the expectation is even higher now.

And it includes the types of things that you mentioned.

And as the prior slide shows, it's a good thing that it's higher because we're reinvesting more where we need to in clients, et cetera.

All of the types of things that you mentioned are things that we're going after hard.

If there was a -- if there's a risk to it, and I think we've accounted for it in our guidance, it's that as we're prioritizing, for example, capacity and technology or resources to get things done, there are some of these initiatives that have a -- whether it's digitization, automation or some technological solution to them,, that have to -- that will fight for priority along with the risk and regulatory-related capabilities that are technologically dependent too.

Again, I think we've captured that in our outlook.

But those trade-offs are being assessed every day because as you could -- at this point in time, with all of the possibilities of what technology can bring to the businesses, there are -- there's a boundless list of things that we'd all like to do.

Got it.

And I, guess just a final quick one, John.

I was a little surprised by the CECL estimates positively.

But I guess, broad strokes, the reversals you might get in C&I, because they're shorter duration or remaining lives on them more than offset any sort of increase you'll see on your resi book or, I guess, your consumer book as well, is that sort of the...

That's exactly right.

Your next question comes from the line of Chris Kotowski with Oppenheimer.

When we've had experience in -- with companies under consent orders in the past, historically, it's been about things like asset quality or capital levels.

And you could kind of visualize what success looks like, right?

I mean, the success would be having capital levels up to your standards and a world-class underwriting system and so on.

And when it comes to something like operational effectiveness, it's just harder for me to understand.

Like in this process, are you being benchmarked against other companies and do regulators expect you to come to standards that can be observed in other companies that are out there?

Or is it kind of an uncharted territory where there are expectations above and beyond that, that are not quite easy to quantify?

Obviously, Chris, as you know, we're -- when you talk about consent orders, we're looking at a number of different ones.

And some of them are in more focused areas in terms of our businesses and our operations.

With regard to the Fed consent order, there are really kind of 2 categories there.

One is the focus on corporate governance, which is really the role of the Board and the interface has between the Board and the management of the company.

And I think they're -- what we're all really looking for is what I would term as almost an ideal state.

What's the appropriate role of the Board?

What's the -- or what are the appropriate processes the Board could apply?

And what are the proper levels of interface as between the Board and management?

I think in some respects, that is not necessarily a philosophical exercise.

It's actually a highly structured exercise, but it's also informed by traditional notions of corporate governance and what the Fed thinks the proper role of the Board should be.

And we are -- we've completed a great deal of work in that regard.

With regard to the other parts of what we're doing, those things really focus on operational risk and compliance.

And I think just going back to your question, Chris, it's a combination.

It's somewhat a benchmarking, but it's also a focus by us and by the Fed on what would be the ideal state for us to be in.

There is a great deal of work under the rubric of operational risk and compliance.

You have to focus on things like operational issues, regulatory issues.

We're talking about customer remediation.

And one of the biggest aspects, as we've alluded to, is the simplification of business processes.

We want to all reach a place where we have fewer manual controls and fewer errors.

And I think it cannot be described as something that's being done on a whiteboard because there are a number of reference points.

But I would say, if anything, we are all trying to achieve something that may be almost an outer boundary in terms of the quality of operational risk and compliance, something that hasn't really been achieved at this level before.

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

Sorry, I'm going to go right back to the NII.

Does that NII outlook, does it assume any ongoing reinvestment of your excess liquidity position?

Because I would assume that if you do continue to use that to fund new loan originations, it could help temper the impact of the expectation that you're seeing on the deposit cost side.

Yes.

Well, it certainly does assume that we fund our expectation for risk asset generation through the available liquidity that we have.

So within the bound of what's likely in terms of risk asset opportunity, I think it's captured in the forecast.

If there were other interesting things for us to invest in, whether it was loans or securities, we'd do it.

But on the securities front, I think, given where we are in terms of yield, of risk-free rates and spreads, we've accounted for what is within our appetite.

And on the loan front, as I've mentioned before, we're competing vigorously in every market that we're enthusiastic about to grow loans.

So that is all in the forecast.

I don't think there's a -- unless there's a shift in aggregate demand for credit across the business or consumer space, I don't imagine a real breakout there.

Okay.

All right.

And then I'm not sure if this was explicitly asked, but based upon your commentary around the factors influencing the NII guide, how would you characterize the NIM progression from peers?

I mean, how much incremental compression do you see from now to the end of the year, for example?

Yes.

Well, I'm more of a dollar person than a NIM percentage person.

But you could see it -- you could see the trajectory down somewhat.

The big variable will be what happens with deposit pricing.

There's sort of a range of outcomes depending on whether they follow this historic path or the path toward a historic beta or whether they settle in at a lower response rate.

But if we're right in down 2% to 5%, then NIM will be -- will certainly be somewhat down from here.

Okay.

And then...

And then dollars, yes, they're just for everybody's benefit.

It's about the dollars of net interest income and their impact on our ROE generation that we're more focused on rather than the outcome-calculated NIM.

Got it.

Got it.

Right, okay.

And then, John, one more for you.

The -- I know you've talked quite a bit about expenses and everything.

But for this change specifically on your NII guide, is it fair to assume there's no cost offset just simply because on the upside, there's not much of a cost to margin expansion and everything and, therefore, on the way down, there couldn't be?

Or do you think -- or is there some type of cost offset to this change that may still get dialed in?

Yes, I would -- I'd think of them separately.

If there were, we would take it.

And there's -- as I -- we described, there's probably 200 programs going on right now that we're updating month-by-month to go after every bit of available efficiency opportunity.

On the one hand, separately, we're reinvesting everywhere we need to, and we'll continue to from a control risk and regulatory perspective.

But if there was any low-hanging fruit on the expense side, we'd be after it.

Your next question comes from the line of Marty Mosby with Vining Sparks.

I usually don't like hammering questions that we've been talking about so much, but there is another aspect of this that I did ant to bring out.

So 2 fronts.

One, John, on the net interest margin and NII numbers, you have been derisking your balance sheet quite a bit to free up capacity for your core customers.

And you mentioned the sale of Pick-a-Pay.

You've been doing that.

Your margin really year-over-year is only down 2 or 3 basis points with all of that derisking that's been going on.

So is this just as much of a structural shift in your balance sheet in the sense of how you've underperformed?

Because other banks aren't really derisking like you all have been.

And so in my mind, that is, over time and at least looking back over the last couple of quarters, that's really been more the impact.

Absolutely.

I'd say that the Pick-a-Pay is a piece of that.

The Reliable auto business in Puerto Rico is a piece of that, for sure.

And then, of course, the rundown of the junior lien mortgage loans are a piece of that also.

Yes, the -- we don't usually talk about the asset quality or sort of the risk-adjusted NIM because it's not a risk-sensitive concept.

But without a doubt, our asset quality on -- is as high as it's been in some time.

Now with respect to Pick-a-Pay, because of the way they've been marked historically, you can argue about what their lost content might be.

And people asked from time-to-time, why do we consider that risky given that we've carried them at such a markdown rate?

And unrelated to asset quality, I'll make the point that those are loans that we would not originate today.

And that as we go into the next cycle, they have more operational risk associated with them because defaults and foreclosures are going to be higher there, and we just assume to have less of them when the next cycle hits rather than more.

I think really what we're talking about is higher-yielding loans that have been run off, that because they're not really core relationships, like you said, you wouldn't reoriginate these.

So these weren't core relationships, they just happened to be higher-yielding.

So your cost of derisking and you're getting the incremental balance sheet usage pushed out to free up capacity for that core, which just has a lower margin than some of these higher-yielding portfolios had.

And then when you look at your deposit pricing in a sense of talking about this tail in, this has been a cycle where deposit betas have been much better than historic averages.

What has caused you to want to assume that all of a sudden, the performance is going to get that much worse, and there's a big catch-up versus the stability that we're already starting to see in deposit pricing that's in the market today.

Bankrate.com rates have already started to flatten out, if not come down, a little bit.

So I don't really see the inclination to keep assuming for this, other than just a measure of conservatism.

So I just wanted to see what you saw on the market that made you want to incorporate this.

Yes.

So very specifically, our own cumulative beta, trailing 12 months, today is 43%.

And a quarter ago, it was 38%.

So it feels like our experience is that we're catching up a little bit.

Now the through-the-cycle beta is still much lower, as you're pointing out, and this could very well be the end of it if risk-free rates aren't moving, if the Fed's not moving anymore.

So that we're taking what we've just seen in this quarter and extending it out a little bit, which is -- which if we're wrong, then we will -- it's not causing us to run around and raise all of our deposit prices, but it is causing us to forecast on what might end up being a conservative basis.

And then, Allen, I was going to add, when you start getting at talking to the regulators, which you have a chance to do -- I mean, I can't imagine that you all have been passive or not trying to be as aggressive as possible to fix the issues.

I mean, this has been a very critical issue for the company, and it's been something that, I think, the management's been talking about for -- since it began.

This is the most important thing to deal with.

So what specifically do you walk away with from those meetings in the sense of -- we've heard a lot of generics, but I mean, what in the -- or how do we amp up from what we've been doing?

Or is it more likely [M&T] Bank situation when you just explained we're kind of setting the stage or we're setting the new standard that then everybody will have to come to.

It just takes longer to get there, and they're just kind of keeping the pressure of the regulators are to make sure that you can kind of set the bar for everybody else as you go through this changing process that you've been working on?

Marty, it's a really good question, and I think there could be something to your notion that we are setting a new standard.

And if so, that's perfectly okay with us.

We really want to be the best company that we can possibly be.

We have been serious.

I think that we're going to do everything we can to do an even better job.

We're going to redouble all our efforts.

And all of us on the Operating Committee have made clear to everybody on the team that we're just going to do a better job across-the-board planning, hiring, motivating people, improving the quality of the work that we do and above all else, just to execute on what we know we can do.

I mean, this is an extraordinary team.

And if anything, we just have to work harder to bring to appropriate conclusions the things that we have in flight.

So yes, we're on a journey, but I think where journey people are motivated and excited about because it's a journey to a great place.

Your final question comes from the line of Steven Chubak with Wolfe Research.

So I wanted to ask a question on profitability targets.

At 2018 Investor Day, you provided profit targets.

It assumed a flattish revenue environment versus '17.

And if I look today, that core revenue run rate's about $5 million below that level.

And it's certainly encouraging to hear that you remain committed to the expense goals for '19, especially during this period of, well, let's just call it CEO purgatory.

But given the significant revenue shortfall that exists today, I'm wondering if there's any sort of commitment to deliver on the targets that have been outlined at that point in time, whether it's 14% or 17% ROTCE or the efficiency targets?

I think I'm just trying to understand what targets, if any, shareholders should be holding the current management team accountable to?

Those are good questions.

So with respect to different people's definition of core revenue, there will be, as we've talked about some of the fundamental line items that are relatively easy to track and how they performed through cycles, we also have a recurring -- different people will describe different levels of reliability to different types of gain-taking, et cetera, that's -- or gain generation that you could add to the top of that depending on what the market's delivering to us.

On expenses, we've re-upped for this year.

We've talked about the fact that we don't think 2020 its appropriate given the fact that a new CEO will be in.

And then importantly in that return generation is our capital plan in getting the denominator down because we carry a lot of excess capital.

And I think that shareholders should hold us accountable for executing, for delivering and performing on our capital plan as well.

So at this point in the cycle and where we are with rates, we're going to apply every level or lever within our risk framework for generating the right mix of loans and investing in the right mix of securities and noninterest income.

We're leaning hard in the areas where we generate trust and investment fees, deposit service charges.

There's mortgage and certain market-sensitive categories in particular.

And then, frankly, most importantly, I think shareholders will hold us accountable for the execution that Allen has described of moving the ball down the field against our regulatory commitments in 2019 and into 2020 as well.

But yes, those are very concrete steps that people can point to that will have outcomes attached to them.

Okay.

But could we hold management accountable when discussing some of those outcomes to the targets that have previously been outlined?

Or do we have to take a simply wait-and-see approach?

Well, I think for this year, since we've re-upped on expenses, you certainly can.

I think for 2020, what we're telling you is we're going to have a different CEO.

And so that's -- it's hard for us to put words in that woman or man's mouth before they've arrived.

And on the capital plan, for sure, I think that you should hold us accountable for that.

Okay.

And then just one follow-up for me.

There was an earlier question discussing the prospect of restructuring your strategic alternatives.

And I recognize that it's still early days in that search process, but one of the businesses that's gotten a lot of attention in some of my investor discussions is Wealth Management.

It's clearly been impacted by the account scandal.

But there are number of firms that actually indicated very strong interest in growing, whether it's organically or inorganically, in this particular area.

And I'm just wondering, given the steady pace of adviser attrition, strong interest from peers to maybe pursue M&A in this area, whether you'd be -- open to considering a strategic sale if it offered a path to creating greater shareholder value.

Or said differently, somebody else can maybe better monetize the asset.

Yes.

It's -- in the relatively near term, I certainly doubt it.

I think that the wealth opportunity, given our 70 million customer footprint and the attachment to our core banking capabilities, what we do in mortgage, et cetera, all are probably -- they provide a path to the greatest value creation.

The changes that Jon Weiss is making in running that business, I think, will continue to generate a high level of value creation.

The way you phrased the question, it presupposes that it would be a higher-value creation for Wells Fargo shareholders if we did that.

And of course, it's an obligation of the firm to look at anything like that.

I just doubt that, that would be true.

So it's not on the shortlist of things that we're talking about as we've been doing the noncore trimming here and there, like retirement, for example, most recently.

But as you say, if anybody made a proposal to Wells Fargo that was value-maximizing for our shareholders, that's our job, is to respond to that.

Let me close by thanking all of you for joining our first quarter conference call.

And as always, we'd like to thank all our team members for their hard work, dedication and enthusiasm.

As I hope we've made clear on the call this morning, this company is not standing still during this interim period, and our team members are a critical part of our moving forward.

We look forward to speaking with all of you again next quarter.

Thanks very much.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating, and you may now disconnect.