富國銀行 (WFC) 2021 Q3 法說會逐字稿

Welcome, and thank you for joining the Wells Fargo Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that today's call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Brad. Good morning, everyone. Thank you for joining our call today, where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss third quarter results and answer your questions. This call is being recorded.

Before we get started, I would like to remind you that our third quarter earnings materials, including the release, financial supplement and presentation deck, are available on our website at wellsfargo.com.

I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings materials.

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

I will now turn the call over to Charlie.

Thanks, John, and good morning, everyone. I'll make some brief comments about our third quarter results, the operating environment and update you on our priorities. I'll then turn the call over to Mike to review third quarter results in more detail before we take your questions.

Let me start with some third quarter highlights. We earned $5.1 billion or $1.17 per common share in the third quarter. These results included a $1.7 billion decrease in the allowance for credit losses as credit quality continued to improve. Revenue declined on lower gains from equity securities, which were elevated in the second quarter, though still strong.

Expenses continue to decline, reflecting progress on our efficiency initiatives and included $250 million associated with the September OCC enforcement action. And for the first time since first quarter 2020, we grew both period-end loans and deposits in the third quarter.

We continue to see that our customers have significant liquidity and consumers are continuing to spend. While lower than the peak in March, our consumer customers' median deposit balances continued to remain above pre-pandemic levels, up 48% for customers who received federal stimulus and 40 -- I'm sorry, up 48% for customers who received federal stimulus and 40% higher for those who did not receive federal aid.

Weekly debit card spend during the third quarter was up every week compared to 2019 and in the week ending October 1 was up 14% compared to 2020 and 26% compared to 2019. Areas hardest hit by the pandemic have recovered, including travel, up 2%; entertainment, up 39%; and restaurant spending, up 20% during the week ending October 1 compared with 2019.

Consumer credit card spending activity continued to increase, up 18% in the third quarter compared to 2019 and 24% compared to 2020. During the week ended October 1, travel-related spending, which was hardest hit during the pandemic, was up significantly from 2020, but remains the only category that is not yet fully rebounded to 2019 levels, still down 8% compared to 2019.

Commercial Banking loans were up slightly at the end of the third quarter, while line utilization was stable at historic lows. Supply chain difficulties and labor shortages continue to represent significant challenges for our client base. And as I said earlier, overall credit performance continued to be strong.

Now let me update you on the progress we've made on our strategic priorities. First, building an appropriate risk and control infrastructure has been and remains Wells Fargo's top priority. We reached a significant milestone with the termination of the CFPB consent order issued in September 2016 regarding improper retail sales practices. Its expiration reflects years of hard work by employees across Wells Fargo, intended to ensure that the conduct at the core of the CFPB order will not recur.

As a reminder, this is the second important regulatory milestone we achieved this year with the OCC terminating a consent order related to our BSA/AML compliance program in January. But the recent OCC actions are a reminder that the significant deficiencies that existed when I arrived must remain our top priority. I believe we're making meaningful progress, and I remain confident in our ability to close the remaining gaps over the next several years. Having said that, it continues to be the case that we are likely to have setbacks along the way. We are a different bank today than we were several years ago. We run the company with greater oversight, transparency and operational disciplines. We have a new leadership team. 15 of 18 operating committee members are now new to their roles.

I've spoken of our new leaders in many of our control functions, but we also have many new business leaders. This includes new leaders in consumer banking, small business banking, auto lending, home lending, credit card, Merchant Services, retail services and personal lending, digital, strategy, Wealth and Investment Management and Commercial Banking. Our control infrastructure is different, and we continue to invest in it.

We take a different approach to the consumer today. We created a sales practice oversight and management function and an Office of Consumer Practices. Our approach to consumer remediation is dramatically different as we have meaningfully increased the amount paid to consumers and have accelerated payments to customers. While we are committed to devoting the resources necessary to our risk and regulatory work, we are also focused on improving the products and services we offer. We're making investments in digital capabilities and making it easier for customers to do business with us.

In the third quarter, we announced our new long-term digital infrastructure strategy that will move us to a multi-cloud environment. This is a critical step in our multiyear journey to be digital-first and offer easier-to-use products and services.

We also joined AutoFi's North American network to provide car buyers and dealers with fast and easy online sales and financing. And as I've spoken about previously, we're on track to roll out a new consumer mobile app at the beginning of next year.

We've also been making significant enhancements to our payments capabilities and are seeing that momentum pull through on our customers' Zelle usage, with Zelle users increasing 24%, transactions up 50%, and volumes are up 56% from a year ago.

We're executing on our work to simplify our products and build compelling offerings tailored to different customer segments. Clear Access, our no-fee overdraft checking product now has over 1 million outstanding customer accounts. As a reminder, this launched in September 2020. And all of our retail accounts, which receive ACH direct deposit have our Overdraft Rewind feature, which automatically reevaluates transactions from the prior business day that have incurred an overdraft. This feature has helped over 1.3 million customers avoid overdraft related fees on 2.5 million transactions in the third quarter.

For the emerging affluent and affluent segments, we're making substantial changes to more consistently and intentionally serve these customers, including products, service, marketing and management routines. You'll hear us talk more about how we're executing on this in the coming quarters.

After successfully launching Active Cash, our new cash-back credit card in July earlier this month, we launched the Reflect Card that rewards customers for making on-time payments. Our new Head of Small Business, Derek Ellington, will start in just a couple of days, and we believe this is another attractive growth segment for us.

Next month, Paul Camp will be joining Wells Fargo as the Head of our Global Treasury Management businesses. This new role brings together our treasury management and global payment solutions teams into one organization, which will enable us to be more efficient and leverage our capabilities more effectively to help clients manage their funds and process payments worldwide.

While we've been focused on improving the products and services we offer to our customers, we've continued to support our communities. We voluntarily committed to donate all gross processing fees from PPP loans funded in 2020 and created the Open for Business Fund to support small businesses impacted by the pandemic. We've now donated $305 million in support of small business recovery, including 215 CDFIs, which in turn is expected to help nearly 150,000 small business owners maintain more than 250,000 jobs.

Additionally, in the third quarter, we launched Connect to More, a resource hub for women-owned businesses and a mentoring program partnering with Nasdaq Entrepreneurial Center to empower 500 women-owned businesses.

We committed to invest $5 million through the NeighborhoodLIFT program to help more than 300 low and moderate income residents in Philadelphia with home down payment assistance. And we published our updated ESG report and goals and performance data, which includes new disclosures on our workforce by race, gender and job category.

As we look forward, while there certainly are risks that remain, including the latest wave of COVID infections, the recent U.S. fiscal policy stalemate and inflation concerns, the outlook for the economy is promising. Consumers' financial condition remains strong with leverage at its lowest level in 45 years and the debt burden below its long-term average. Companies are also strong as well.

We remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we've discussed in the past on a run rate basis at some point next year, and we'll then discuss our plan to continue to increase returns.

I want to thank our employees for continuing to work hard to make Wells Fargo better for our customers, shareholders and communities.

I will now turn the call over to Mike.

Thanks, Charlie, and good morning, everyone. Charlie summarized how we're helping our customers and communities on Slide 2, so I'm going to start with our third quarter financial results on Slide 3.

Net income for the quarter was $5.1 billion or $1.17 per common share. Our results included a $1.7 billion decrease in the allowance for credit losses. This is reflective of the continuing improvement in credit performance and the economic recovery.

Pretax pre-provision profit grew from a year ago as lower revenue driven by a decline in net interest income was more than offset by lower expenses. We continue to execute on our efficiency initiatives, which has helped improve the expense run rate. And as Charlie highlighted, the third quarter included $250 million in operating losses associated with the September OCC enforcement action.

Noninterest income was relatively stable from a year ago. Within that, equity gains declined from the second quarter but increased $220 million from a year ago, predominantly due to our affiliated venture capital and private equity businesses.

We also had an increase in investment advisory and other asset-based fees from a year ago, as well as in card, deposit related and investment banking fees. These increases were more than offset by declines in other areas, including lower mortgage banking revenue and lower markets revenue in Corporate and Investment Banking. Our effective income tax rate in the third quarter was 22.9%.

Our CET1 ratio declined to 11.6% in the third quarter as we repurchased $5.3 billion of common stock. As a reminder, our regulatory minimum will be 9.1% in the first quarter of 2022, reflecting a lower GSIB capital surcharge. Additionally, under the stress capital buffer framework, we have flexibility to increase capital distributions and if possible, we will be able to repurchase more than the $18 billion included in our capital plan over the 4-quarter period, depending on market conditions and other risk factors, including COVID-related risks.

Turning to credit quality on Slide 5. Our net loan charge-off ratio was 12 basis points in the quarter. Commercial credit performance continued to improve, and net loan charge-offs declined $42 million from the second quarter to 3 basis points. The improvement was broad-based and included modest net recoveries in our energy portfolio and in commercial real estate. The commercial real estate portfolio has continued to perform well. The recovery in retail and hotel properties reflected increased liquidity and improved valuations. While we have not seen any widespread stress in office, we continue to watch this sector closely and believe that any impact as a result of return to office or hybrid working plans will take time to play out.

Consumer credit performance also continued to improve with strong collateral values for homes and autos and consumer cash reserves remaining above pre-pandemic levels.

Net loan charge-offs declined $80 million from the second quarter to 23 basis points. We continue to have net recoveries in our consumer real estate portfolios, and losses in both credit card and auto declined.

Nonperforming assets declined $321 million or 4% from the second quarter driven by lower commercial nonaccruals with declines across all asset types, Energy was the largest driver, given significant improvement in fundamentals on the back of higher commodity prices.

Our allowance level at the end of the third quarter reflected continued strong credit performance, the continuing economic recovery and the uncertainties that still remain. If economic -- current economic trends continue, we would expect to have additional reserve releases.

On Slide 6, we highlight loans and deposits. Average loans were relatively stable from the second quarter with a decline in residential mortgage loans, largely offset by modest growth in our -- in most of our consumer and commercial portfolios. Total period end of loans grew for the first time since the first quarter of 2020 and were up $10.5 billion from the second quarter with growth in commercial and industrial loans, auto, other consumer, credit card and commercial real estate.

Average deposits increased $51.9 billion or 4% from a year ago, with growth in our consumer businesses and Commercial Banking, partially offset by continued declines in Corporate and Investment Banking and Corporate Treasury, reflecting targeted actions to manage under the asset cap.

Turning to net interest income on Slide 7. Net interest income grew $109 million or 1% from the second quarter and was down $470 million or 5% from a year ago. The decrease from a year ago was driven by lower loan balances and the impact of lower yields on earning assets, partially offset by a decline in long-term debt and lower premium amortization on our mortgage-backed securities. We had $20 billion of loans we purchased out of mortgage-backed securities or EPBOs at the end of the third quarter, down $4 billion from the second quarter. These loans do contribute to net interest income, and we expect these EPBO loan balances to decline substantially by the end of 2022.

At the end of the third quarter, we also had $4.7 billion of PPP loans outstanding, and we expect the balances to steadily decline over the next several quarters and to be under $1 billion by the end of next year.

We continue to expect net interest income to be near the bottom of our initial guidance range of flat to down 4% from the annualized fourth quarter 2020 level of $36.8 billion for the full year.

Turning to expenses on Slide 8. Noninterest expense declined 13% from a year ago. The decrease was driven by lower restructuring charges and operating losses and the progress we've made on our efficiency initiatives. During the first 9 months of this year, these initiatives have helped to drive a 16% decline in professional and outside services expense by reducing our spend on consultants and contractors, an 8% reduction in occupancy costs by reducing the number of locations, including branches and offices. Occupancy costs have also declined from lower COVID-19 related costs and a 5% decline in salaries expense by eliminating management layers and increasing expansion controls across the organization and optimizing branch staffing.

Now let me provide some specific examples of progress we're making on some of the initiatives. We are continuing to work on reducing the underlying costs to run our Consumer Banking business. The pandemic accelerated customer migration to digital, which continue with mobile log-ons up 14% in the third quarter from a year ago. While teller transactions were flat from a year ago, they were over 30% lower than pre-pandemic levels as transactions have migrated ATMs and mobile. Over the past year, we've reduced our number of branches by 433 or 8% and lowered headcount and branch banking by 23%.

We continue to focus on generating efficiencies in our branches and have a number of initiatives designed to further reduce expenses, including reducing cash handling time and simplifying certain branch processes.

Wealth and Investment Management has had strong increases in revenue-related compensation. However, by executing on efficiency initiatives, nonrevenue-related expenses in the third quarter declined 6% from a year ago, and non-adviser headcount was down 10% from a year ago. We have aligned our Wealth Management business under 8 divisional leaders, creating better coordination and efficiency. We have also implemented a more efficient client service model across all distribution channels and have reduced total square footage by rationalizing our real estate footprint.

Corporate and Investment Banking has continued to make progress on various efficiency initiatives. These efforts include reducing headcount supporting products, regions or sectors with low levels of market activity and opportunity, optimizing operations and support teams, vendor optimization and insourcing and reducing spend on contractors and consultants.

We're also working on initiatives in centralized functions, including operations, where we have realized savings from location optimization, lower third-party spending by eliminating consulting arrangements and consolidating vendors. The operations group has also reduced spend and layers with savings coming from eliminating manager roles.

Automation efforts and strategy enhancements have driven process improvements while reducing costs in many areas, including fraud management and card collections. We've also been working on additional opportunities through technology enablement that have longer lead times, but should result in benefits that we expect will reduce operations-related expenses over time.

With 3 quarters of actual results already, our current outlook for 2021 expenses, excluding restructuring charges and the cost of business exits, is approximately $53.5 billion. Note that we had $193 million of restructuring charges and cost of business exits during the first 9 months of the year. This outlook includes an expectation of higher operating losses and higher revenue-related expenses than we assumed earlier in the year. Our expense outlook also assumes a full year of expenses related to Wells Fargo Asset Management and our Corporate Trust Services business, and we expect these sales to close during the fourth quarter. We will update you on the expense impact of these initiatives after they close.

As mentioned, the outlook accounts for the fact that we expect full year operating losses to be approximately $250 million higher than our assumptions at the beginning of the year. This includes approximately $1 billion of operating losses incurred during the first 9 months of the year, and our outlook assumes $250 million of operating losses in the fourth quarter. Just a reminder that operating losses can be lumpy and unpredictable, especially as we continue to address the significant work needed to satisfy our regulatory requirements.

Our current outlook also assumes revenue-related compensation will be approximately $1 billion this year, which is higher than the $500 million we assumed at the beginning of the year. Strong equity markets have driven revenue-related expenses, which is a good thing as the associated revenue more than offsets any increase in expenses.

Now turning to our business segments, starting with Consumer Banking and Lending on Slide 9. Consumer and Small Business Banking revenue increased 2% from a year ago, primarily due to an increase in consumer activity, including higher debit card transactions and lower COVID-related fee waivers.

Home Lending revenue declined 20% from a year ago, primarily due to a decline in mortgage banking income driven by lower gain on sale margins, origination volumes and servicing fees. Net interest income also declined driven by lower loan balances. These declines were partially offset by higher gains from the resecuritization of loans we purchased from mortgage-backed securities last year.

Credit card revenue was up 4% from a year ago, driven by increased spending and lower customer accommodations and fee waivers in response to the pandemic. Auto revenue increased 10% from a year ago on higher loan balances.

Turning to some key business drivers on Slide 10. Our mortgage originations declined 2% from the second quarter with correspondent originations growing 2%, which was more than offset by a 5% decline in retail. We currently expect our fourth quarter originations to decline modestly, given the recent increase in mortgage rates and the typical seasonal trends in the purchase market.

Despite strong consumer demand for autos, inventory shortages are putting downward pressure on industry sales and driving higher prices. The competitive environment has remained relatively stable, and we've had our second consecutive quarter of record originations with volume up 70% from a year ago.

Turning to debit card. Transactions were relatively stable from the second quarter and up 11% from a year ago, with increases across nearly all categories.

We had strong growth in new credit card accounts up 63% from the second quarter, driven by the launch of our new Active Cash Card. Credit card point-of-sale purchase volume was up 24% from a year ago and 4% from the second quarter. While payment rates remain high, average balances grew 3% from the second quarter, the first time balances have grown since the fourth quarter of 2020.

Turning to Commercial Banking results on Slide 11. Middle Market Banking revenue declined 3% from a year ago, primarily due to lower loan balances and lower interest rates, which were partially offset by higher deposit balances and deposit-related fees. Asset-based lending and leasing revenue declined 12% from a year ago, driven by lower loan balances and lower lease income. Noninterest expense declined 14% from a year ago, primarily driven by lower salaries and consulting expense due to efficiency initiatives as well as lower lease expense. After declining for 4 consecutive quarters, average loans stabilized in the third quarter, line utilizations remained low and loan demand continued to be impacted by low client inventory levels and strong client cash positions. However, there was some increase in demand late in the quarter and period-end balances increased $1.6 billion or 1% from the second quarter.

Turning to Corporate and Investment Banking on Slide 12. In banking, total revenue increased 12% from a year ago. This growth was driven by higher advisory and equity origination fees and an increase in loan balances, partially offset by lower deposit balances predominantly due to actions taken to manage under the asset cap. Commercial real estate revenue grew 10% from a year ago driven by higher commercial servicing income, loan balances and capital markets results in stronger commercial gain on sale volumes and margins and higher underwriting fees.

Markets revenue declined 15% from a year ago, driven by lower trading activity across most asset classes, primarily due to market conditions. Noninterest expense declined 10% from a year ago, primarily driven by reduced operations expense due to efficiency initiatives. Wealth and Investment Management revenue on Slide 13 grew 10% from a year ago. A decline in net interest income due to lower interest rates was more than offset by higher asset-based fees primarily due to higher market valuations. Revenue-related compensation drove the increase in noninterest expense from a year ago. I highlighted earlier the progress we've made on efficiency initiatives to reduce nonrevenue-related expenses, including salaries and occupancy expense.

Client assets increased 13% from a year ago, primarily driven by higher market valuations. Average deposits were up 4% from a year ago, and average loans increased 5% from a year ago, driven by continued momentum in securities-based lending. And Slide 14 highlights our corporate results. Revenue declined from a year ago driven by lower net interest income, primarily due to the sale of our student loan portfolio and lower noninterest income due to lower gains on the sale of securities in our investment portfolio. The decline in revenue from the second quarter was primarily driven by lower equity gains from our affiliated venture capital and private equity businesses, and expenses included the $250 million operating loss associated with the OCC enforcement action in September.

With that, we will now take your questions.

(Operator Instructions) Our first question will come from Scott Siefers of Piper Sandler.

I just was hoping you could sort of address the cost outlook. I certainly appreciate the commentary regarding the fourth quarter in particular. I think as we look forward, you guys have had the expectation that costs could come down year-over-year for the next couple of years. I mean that, of course, puts you guys in a very unique position vis-a-vis many of your peers. But so many people are talking about things like wage inflation right now. Just curious to what degree are you seeing that and more importantly, is there enough flexibility in your existing outlook such that even despite higher wage pressures, you could still see costs down year-over-year for the next couple of years.

Sure. This is Charlie. Thanks for the question. I guess let me start with the wage inflation. I think we certainly are seeing wage inflation. I would say it's very different across different parts of the company and very different across different job categories that we have.

And so as we approach it, we're trying to be very thoughtful about ensuring that we're continuing to be as fair with people as we can be as well as paying competitively. We actually are making awards to people in our branches, which equate to roughly $2.50 an hour from the beginning of October through the end of the year, to thank them from what they're doing, but also address the competitiveness that exists out there, and we're evaluating what makes sense for the longer term.

And in places of the company where we do see wage pressure, we're acting accordingly. But I would not say that it's something that we see everywhere across the entire company in every single job. But we're certainly prepared for it and look at it very, very regularly as we look at things like attrition and whatnot.

To the broader question, I think, first of all, we're in the middle of doing our budgets now, as I'm sure you hear from everyone when they do these calls at this time of year. Our goal is still the same that we've said in the past, which is we still would like to see net reductions in the overall expense base. We are in a unique position in that, I would say, in 2 ways.

First of all, we do have the significant amount that we're spending on regulatory orders, and we're not assuming that we get efficiencies out of that in the near future. But one day when we're -- when we have built all that's required, that will be an opportunity for us, but that's not even on the radar screen for us right now.

But we still have just tremendous excess expenses across the company. You can see it in headcount. You can see it in efficiency ratios across the businesses. And what I found here is the same thing, I think, that Mike and I've seen in a lot of other places, which is it's like peeling an onion back. You think you see what's incredibly clear. Once you actually get rid of those inefficiencies, you then start to see the next level and it becomes part of the culture, and we engaged the entire company in moving that way.

So we still think that they're extremely meaningful efficiencies that we can pursue for quite some time here, which hopefully will both allow us to have net reductions, but also invest appropriately, whether it's in technology or products, which as we've said, we're extremely focused on as well.

Perfect. And then I was hoping, Mike, you might be able to expand on a comment you made about loan growth -- or excuse me, loan demand improving later in the quarter. There seems to be a little bit of a divergence emerging between the kind of demand we're seeing it, say, smaller and middle market companies, for instance, versus what we're seeing with larger corporates that might have better access to the capital markets. Curious if you could just provide a little more color on where you're seeing that improved demand, please?

Yes. And I assume we will see some divergence across different -- some of the peers as you sort of look at this. But if you look at the commercial bank, as an example, we're actually seeing the demand and the pipeline build in kind of the middle and upper end of the client base with a little bit less of demand emerging so far on the lower end, which I know is counter to what you -- the way you asked the question, but I think that's what we're seeing right now.

And I think in part, that's because the clients in the lower end of our client base still have a lot of excess liquidity and they're still dealing with supply chain crunches and other issues that are sort of impacting their need for liquidity and their need for credit. And so I think -- and I think that will -- we'll start to see more demand, I think, more consistently across the client base over time as things play out, but that's what we're seeing in the commercial bank.

I think when you look more broadly and you look at the consumer side, we have seen balances grow in auto. We've seen them in card. When you look through the home lending data that we give you, we are seeing growth on our kind of core nonconforming mortgage book as well. That's offset by the declines in the loans that we bought out from securities last year, but we are seeing some growth there, too.

And then you see some growth in the corporate investment bank. And that's really a little bit of a lot of things happening across the corporate investment bank, whether it's real estate, subscription finance and other sectors that are really driving some of that growth.

And so again, it's still relatively modest so far in terms of what we've seen. And I think it will take some more time for it to really play out in a more meaningful way. But it's encouraging to start to see at least a little bit manifest so far.

And I would just encourage you to make sure that you look at the period-end balances as well as the averages because it certainly gets to the heart of the question.

And then just one final thing I'll say on this, which is we're not stretching in any way in terms of credit or pricing or things like that to try and get to a result. We're continuing to have the same disciplines that we've always had, and it's going to be a question of our balances are rising because of greater customer activity.

The next question comes from Ken Usdin of Jefferies.

Just wondering, Mike, if you could just talk a little bit about just some of the ins and outs underneath NII outside from balance sheet movements, meaning you saw a little bit of increase in premium am. Can you just remind us like how that mechanism works in terms of what rates need to do to have an ongoing improvement there?

And are you at the point -- how close are you to the point where your incremental purchases or replacements on the securities book are getting closer to what's going off?

Yes. Thanks, Ken. I think when you think about premium amortization, I think you said it backwards, but like we're getting a benefit from premium amortization coming down in the quarter. And you saw that in our results is roughly $90 million, a little bit, maybe a couple of bucks less, but -- and so we expect -- as we've been saying, we expect that to continue to come down. I think it will be somewhat gradual as we look out the next couple of quarters. You're not going to see big step downs. I think it will come down again in the fourth quarter, maybe a little less than we saw from the second to the third quarter.

And as rates -- as you've seen over the last 3 months, rates have been a little all over the place. And so it's a bit of a function of where mortgage rates are, and there's a little bit of a lag to it as it comes through the data. So -- but we still expect the general trajectory to be coming down on premium amortization. It's just a matter of exactly how fast and over what time period that will happen.

I think on the second part of the question, what was the second part again, Ken, the...

Just about reinvestment rates versus the underlying portfolio on the securities book?

Yes. No. And again, even on that, I keep reminding people, as you sort of look at the third quarter and rates were much, much lower than they are today for most of the second quarter. And so really, we've seen them rally at the tail end of the quarter and kind of stabilize to come down slightly since then over the last week or so. And so that gap is closing, obviously, in terms of what's rolling off and getting closer to kind of the overall average in the portfolio. But we still have a little ways to go to -- for rates to -- for reinvestment rates to match sort of what's rolling out of the portfolio.

Okay. Got it. And just last quick one. Just long-term debt, you've been meaningfully reducing the footprint and helped by the mix improving on the balance sheet. Just how much more of an opportunity is that to continue to lower the long-term debt footprint and reduce the cost of it?

Yes. Yes. No, it's a good question. And I think our constraint is going to be TLAC, how much TLAC we have to hold. And I think you can probably model that out a little bit. So we have a little bit more room to go to continue to optimize the mix here and bring the long-term debt down. But it's likely at some point -- it's likely at some point next year, that will start to change.

The next question comes from Steven Chubak of Wolfe Research.

So I wanted to ask a follow-up on Ken's last line of questioning around the NII outlook. And if I take all the different component pieces that you mentioned and just throw it in the blender, so more constructive loan growth commentary, some modest but steady premium and benefit, but still some reinvestment headwinds. Is it reasonable to expect that you can grow NII versus the lower end of the guidance range for '21?

And separately, what's your appetite to deploy excess liquidity just given your excess reserves parked at the Fed at least as a percentage of the overall balance sheet is still quite elevated relative to many of your peers?

Yes. Maybe I'll start with the second one, and I'll come back to the first part, Steven. As we think about redeployment, we're still being pretty patient. And as I just mentioned to Ken's question, you look at what's been happening over the last few months, rates were much lower. They rallied recently. At the same time, the basis between treasuries and mortgages is actually compressed a bit, so made them a little bit relatively more expensive.

And so I think -- so we're -- and if you look at what's happening in inflation and with tapering coming and we still think that there's more risk to upside on rates than there is downside at this point. And so we're still being patient as we sort of look at our redeployment there.

And when opportunities present themselves, we'll take advantage of them. And we did that a little bit at -- right at the end of the third quarter where we accelerated some purchases that we were making given the spike in the rally that we saw there. And so we'll continue to do that, but we're going to be patient as we see how things develop over the coming months.

As you sort of think about the range for the full year, we've been giving a range for a reason, right, because there's a lot of moving pieces, right? And there's still a few months to play out. And I think if we obviously, see faster loan growth than we expect that will be a positive. If we see rates move a little bit higher than what the forward curve has, that will be positive. We have -- we still have to -- just to keep up with where the securities portfolio, we have a lot of purchases to make in the fourth quarter. And so where rates end up throughout will be important.

And then on the margin, there's things like PPP and other factors that sort of drive that, and that will be determined based on the client forgiveness trends that we see in our client base. So I think there are scenarios where we could be a little bit better than what we projected there. And there are some scenarios where we could be a little bit worse, depending on how all those factors play out.

The next question will come from John McDonald of Autonomous Research.

I wanted to follow up on the expenses. When we think about the aspiration for expenses to be down next year and understanding that you're going through budgeting and that's a goal right now, Mike, is that -- can we think of it as that your goal kind of relative to the 53.5 and wouldn't include help from the business exits?

Yes, John. No, I think we think about the business exits just separate from the core efficiency we're driving. And for lack of a better way to describe it, if you -- if we think that there's going to be a savings of X dollars as these businesses roll off, take the 53.5 and subtract the X, and that will be the new -- our new goal, our starting place, yes.

And so -- and when we gave you at a high level some detail about that in April and when these close and we've got good clarity on it, we'll be very transparent about how to reset the baseline and the starting point.

Sure. And in terms of you expect some gains on sales, I assume those are you're thinking in the same lines, and those should probably come in the fourth quarter is what you're currently thinking?

Yes. They may not all be in the fourth quarter given how the deals were structured, like not 100% of the gains will be in the fourth quarter, but a good chunk of it will be in the fourth quarter. And obviously, we'll be clear on what that was when it happens.

Okay. And the last thing for me is if we want to dream about loan growth coming back for the industry, how do we think about how much capacity you have to grow loans while staying under the asset cap? And where does that come from? It comes from cash, liquidity, mix and moving other stuff around the balance sheet? Can you just give us some thoughts on that?

Yes. We all dream of faster loan growth. So I think we're aligned there. But look, I think we've got plenty of room to grow on the loan side. And whether it comes from initially from cash that's sitting at the Fed or that would be the kind of the first place. But if we needed to, we could reduce the securities portfolio as well. If it grew much faster than what we expected, that would be a nice problem to have. But at this point, we have plenty of capacity to grow.

The next question comes from Ebrahim Poonawala of Bank of America.

I guess just one big picture question, Charlie. I appreciate you mentioning the risk of setbacks as you go through the whole regulatory process. At the same time, when we talk to investors, I think there's a franchise the longer you stay within that asset cap. I was wondering if you could address just in terms of when we think about the franchise, both from a talent and client standpoint, how -- what should your shareholders be about that? Or do you think that's well taken care of?

Well, I think it's -- well, I would say I do think it's well taken care of, I'll start there, but I think we think about it every day that we take actions to stay below the cap.

I think, as Mike talked -- just spoke about, we have significant room on the asset side of the balance sheet, which is where you really want to be there for clients where they need you. And so when you're out hustling for business, we're certainly able to fulfill their needs on -- it doesn't matter whether it's a consumer or whether it's a corporate.

Our experience has been that we continue to find ways to optimize the balance sheet in a way that has very little client impact and where we have to move deposits off the balance sheet. We work with customers to come up with other off-balance sheet solutions for them. And I think our experience has been that customers are very, very understanding of what that is.

So again, I think, as we think about -- and by the way, we have not limited the growth of deposits on the consumer side at all. So when we think about the more long-term impacts, I think we certainly would have liked to have been in a different position if we had a choice, but we're trying to be very smart about having as little franchise impact as possible when we make these decisions and make sure we're communicating with customers.

And I think the people here at Wells have done an amazing job of striking that right balance. And as I said, I think we're as open for business as anyone on the asset side. And I think customers appreciate that as well.

Got it. Just one quick one, Mike, on the NII. When we look at the fourth quarter, year-on-year full year guidance, should -- does the net-net of all of that imply that fourth quarter NII should at least grow from third quarter levels? And can you disclose what the PPP impact was for the third quarter NII number?

Yes. I think on the fourth quarter, you can model like based on what your assumptions are, right? And as I said, we'll be sort of near the bottom of the range, and you can sort of pick where you think we'll be based on how you feel about it.

I think for the third quarter, the PPP impact was about $115 million. And just to give you a little context, that was a little bit lower than what we saw in the second quarter, and we would expect the fourth quarter to be a little bit lower than that potentially, but that will all be based on how clients the pace of forgiveness request that we get from clients. But overall, a pretty small sequential impact. That's all baked in our forecast.

The next question comes from John Pancari of Evercore ISI.

How -- on the expense side, how should we think about the timing and the magnitude of the remaining $4.3 billion in cost saves? And would you say that any of the latest regulatory developments impacted how you're thinking about the magnitude or the timing of the realization of those saves?

Yes, John, it's Mike. As we said at the beginning of the year, we were going to get about $3.7 billion of the $8 billion this year, and the annualized impact starts to build as you go through the year. So some of that you get in the run rate coming out of 2021. And some of that will take more time to get at.

And as I mentioned, where we have to introduce new technology or other new capabilities, it just takes longer to get at some of it. And as we sort of said in the beginning of the year, this is a multiyear plan. So we're not going to get all of that in the first 12 months by any stretch. And as we get to January, we'll give you a better view of what to expect on 2022.

Okay. Got it. And then separately, on the loan front, can you just maybe give us a little more detail on the trends you're seeing in the card business, including spending volume as well as payment rates? And then separately, any thoughts on the impact of the "buy now, pay later" product on how you're thinking about your product set?

Yes. I think when you look at payment rates, they're still really high, like they bounce around a little bit month-to-month in the last quarter or so, but they're still really high. And so what you're getting -- when you look at the balance growth you're seeing, you're really getting that through an increase in the point-of-sale purchase volumes that are coming through.

Charlie highlighted a bunch of stats based on what we're seeing in the book. But I'd say overall, spend patterns, spend is pretty -- still pretty strong, pretty stable from what we saw in the second quarter, up versus the comparable periods last year or in 2019. And as you'd expect in any given week or month or quarter, the different categories move around quite a bit depending on what's happening for what's happening based on that time period.

And then I think when you look at -- so you can see that point-of-sale volumes are up 24% from the quarter a year ago, 4% sequentially. And you can see the new account growth, which is up quite a bit under 50% from a year ago and 63% from the second quarter based on the new products we've launched. So we're still -- I'd characterize it as still really strong activity levels despite the noise you see out there related to the Delta variant and other things.

And on the -- this is Charlie, on buy now, pay later, I would say I would describe buy now, pay later as another option of providing credit and serving the merchant. I think it's -- I think as others have said, it's still overall a relatively small portion of the market. But I think there'll be a place for it, but it's not going to supplant all the other types of credit that exist out there.

We have our own retail services business. We have our own personal lending business. So -- and we've got a significant number of merchant relationships ourselves. So it's a place that we will be in addition to the products that we have. And over time, my guess is it will continue -- it will -- you're seeing a proliferation of people involved now. At some time, at some point, it will become far more consolidated for all the reasons that these other industries have been consolidated, including those that can really provide a differentiated experience for the merchant. So hopefully, that helps.

The next question comes from Matt O'Connor of Deutsche Bank.

Charlie, I wanted to follow up again on the comment about likely to have additional setbacks on the regulatory stuff, and just to push here for a little bit, if you don't mind. Is this kind of like a broad risk statement just in case like you never know? Or should we just be prepared for something more meaningful, whether it's a speed bump or potential land mine between here and specifically the end of the asset cap, which I think everyone views as a key turning point.

I guess I would describe it this way. I mean everyone focuses on the asset cap, and I understand all the reasons for that, for sure. And I think just what's important to us is that we want to make sure that there's complete transparency, which we believe we have, if you read our 10-Q. But also, we want to make sure that you're just thinking about the broad set of things that we're dealing with.

And the reality is the asset cap embedded in the Fed consent order is one very important order, but we still have other consent orders with other agencies, which are still extraordinarily important. We have other inquiries that are in progress that are described in there. And so I just think it's important that we're completely transparent. It's nothing different than what we've been saying.

And when you talk about speed bump versus land mines, hopefully, we all work to make sure that we minimize the likelihood of a land mine. But as I said before, there's the interconnectedness, just the pure amount of things that we have to do are complex. We're judged on practices that were in place years ago as well as practices that are in place today. And we're judged based upon the overall progress, based upon the initial due dates of some of these things.

And so nothing changes my perspective about -- net-net, are we moving forward? I absolutely believe we are. Again, we have -- we're able to see all the internal metrics, every interim date and things like that, which the outsiders can't see. But we choose our words very careful on things like that. And so I just want to make sure that people understand that we have these things that are out there and don't want you to be surprised if something happens, but it doesn't change our point of view of what the opportunity is and how confident we are about being able to close these things.

And as a follow-up, I know you can't tell us what the conversation kind of content is with the regulators, but can you at least tell us like do you have like the point of conversation like on the asset cap, you submitted a plan, you accepted it, like how long is this going to take. Like is there -- we are just on the outside trying to understand like what the level of communication is because I think on some front, there's a lot of communication, like the OCC, I think sits in all the banks offices. So there's a lot of regular communication there. But with the Fed and the asset cap, it's kind of like -- is there any conversation about it, even if you can't tell us...

So a couple of things. First of all, we have -- and I think this is not just us, I think this is true of all banks. We have regular conversations with all of our regulators. Absolutely with the OCC, as you say, there are many examiners in our offices on a regular basis. But we have an extremely open and interactive relationship with the CFPB, with the Fed, with the FDIC and all other appropriate regulators, including the SEC, FINRA overseas regulators, and that is the way we treat the relationships.

I have found the Fed to be clear, consistent in their approach to issues that relate to supervision. I think that's just a general comment that I would say. I haven't seen things deviate from that. And as I've said, when you look at the consent order, it doesn't say submit a plan, and then we'll talk about lifting the asset cap. It describes them there what we have to do. And so you should just assume that there's -- there is -- we have a constant level of engagement that we're really clear on what we have to do, and we're doing the work to get there.

Our next question comes from Gerard Cassidy of RBC.

Mike, can you share with us -- your credit quality is very strong, similar to many in the industry. Your net charge-off ratio, of course, was an incredibly low 12 basis points. Do you have an idea how long you could kind of sustain such a strong level of net charge-offs? And when you -- when it may reach a more normalized level sometime looking out?

And then second, your reserves relative to loans, I think, were about 170 basis points. And when we go back to that day 1 CECL number that you guys put out in January of 2020, it was about 93 basis points. And that difference, you're about the widest of all your peers. So any thoughts on just where the reserve could go as well?

Yes. Thanks, Gerard. A couple of things. I think so far, we've all, I think, in the industry have been wrong about when credit or how credit will normalize. And at some point, I think we all expect that we're going to get back to more normal charge-off rates. Now having said that, the new normal might be different if people keep higher -- sustained higher liquidity balances throughout time. So I think that's something that still play out.

I think at this point, as Charlie highlighted in his script, we still -- people still have high liquidity balances. We're seeing high payoff rates and credit cards and other loans. And so there's no reason to think that we shouldn't continue to have strong credit performance in the near term. It may not be 12 basis points, but it should still be historically quite strong, at least in the near term, and we'll see how it starts to normalize. I think as it...

Let me add one thing on that. I just think when we think about long-term earnings power of the company, and we talk about our ability to get to sustainable return numbers, we assume that the charge-off number will go up from there. So we agree it's extremely low, that it won't stay here. And just as you think about when we think about our returns, we make adjustments for that. And so if they do start to rise next year, then it's -- it will be hopefully in our assumptions. And if not, then we'll get there sooner maybe, but we'll explain why.

Yes. And as it relates to the coverage ratio today, as we've said for the last couple of quarters, we continue to be reserved for a whole different -- a whole number of different scenarios. And it hopefully will prove out to be very conservative relative to what plays out over the coming quarters. And if we continue to see trends continue, we'll have more releases as we go.

I think whether you get back to day 1 CECL levels or not, I think it's a really almost impossible question to answer, given it's going to be a function of all the variables you now have to consider and what your outlook is, what the different risks are at that time. And if you go back to first quarter of 2020, I think we had, what, 3.5% unemployment at that point. And it was a very -- I think pre-COVID, it was a very kind of utopian environment, I think, from an economic perspective. And so will we be getting back to exactly that outlook? Hard to say. But I think we continue to think if things play out, we'll have more releases, and that number will go down.

Very good. And then as a follow-up, can you give us an update in middle market investment banking initiatives? How successful have you guys been in penetrating your existing customer base?

Yes. Look, as we've highlighted, Gerard, we think that's a really big opportunity over a long period of time, but it doesn't happen in a quarter or two. It takes some time to really make sure that we've got those relationships built out in the way we want. We really started to put some extra focus on it in a very disciplined way late last year. So I'd say we're still early.

I think we're seeing some encouraging green shoots where we've had some opportunities that we've won over the last few months or a couple of quarters that we might not have been in a position to have before that. But this -- it will take some time to play out, but we do think the opportunity is pretty big.

The next question comes from Betsy Graseck of Morgan Stanley.

Two questions. One on the branch network, just wanted to get your updated thoughts on how you see your footprint today. And is there more of an opportunity to expand or to optimize?

That's a good question, Betsy. I think we're actually doing a bunch of work on exactly what that looks like because we have been very, very focused on net reductions given the fact that we were behind some others. And so the team has done a great work and just in terms of identifying -- we'll describe them as just we had a significant number of very obvious consolidation opportunities. They're really not closures. They're really consolidation where we have the appropriate local coverage.

I think the work that we're doing is to really think through at this point where we have significant share, where we have less share, but we have enough concentration, what our footprint looks like in some of those places to figure out how we can actually reorient the existing number of branches that we have over a period of time.

So I think the reality is we will continue to optimize because as time goes on, we will continue to need less. We're focused on not leaving communities that need our help with our solutions. We're going to certainly wind up with smaller footprints in a lot of the places because branch usage is changing, but we will use that as an opportunity to figure out how to redeploy some of those resources as well.

Okay. And then I have the same question on your wealth platform. I know you recently brought in Barry to run that. And just want to understand the strategy there, if you don't mind.

Sure. I think we've got the strategy, it falls into kind of 4 distinct buckets. Number one is we have our -- think of it as our independent broker channel, where it's the old A.G. Edwards and businesses like that, we first -- that came together to form that network. We have then financial advisers that work extremely closely with our bank branches and believe that's still a relatively untapped opportunity for us. We also have a platform where brokers can actually go in -- when I say independent, that was a wrong phrase in the beginning. That's -- those are people who are employees, but we have a platform where people can actually go independent and continue to do the business through us. And then we have our online business, WellsTrade.

And so we've got those distinct different points of distribution, and we're focused equally on maximizing the value that existed in all of those. Historically, I think we ran it much more as just one big opportunity. And I think we feel like we have underinvested in the online piece and the independent piece for sure. And the bank branch piece is something which we think is just, as I said, just a very meaningful opportunity given the amount of affluent customers that we have in our branch footprint.

(Operator Instructions) Our next question comes from Vivek Juneja of JPMorgan.

Charlie, can I go back to the regulatory consent orders. I just want to get a sense from you. Given the setback we had this quarter with the additional consent order, you've obviously spent a lot on these. You've hired -- you brought in a lot of folks already since you've been there over the last 2 years and a lot of consultants, a lot of in-house people. So what do you need to do differently, especially as a management team to not have more of those setbacks and to have it go in the direction you were hoping it would go, which is...

Yes, I would say, Vivek, there's nothing new that we have to do as far as reaching an end point. So if you said pre-consent order or post-consent order, does it change what we have to do to build out the right capabilities with the right controls, in this case, in mortgage? The answer is absolutely not. And so again, whether or not it's being done fast enough in the regulators' minds relative to how long some of these things have been going on, which predate many of us, that's the context which they need to look at this in because that's who they regulate and how they have regulated.

So again, I think for us, and I'm not minimizing a consent order. Consent order is a very big deal. But the work that's embedded in there, the end state is the same end state that we would have contemplated building ourselves. And so there's some more -- a lot more formality that's part of the process now. And the OCC will be more deeply involved in a series of the checkpoints and things like that. And there certainly is some more work that comes out of an exercise like that, but the end state is the same.

And so when you said several years, Charlie, should we be thinking of that in terms of is it a 3-year time frame? Is it a 5-year time frame? Just -- you're right, we've all been dealing with this before you got there. So it has already been 5-plus years. So any sense of direction there?

I think, listen, I don't want to -- again, I believe -- in the perfect world, we'd lay out all of our plans for everyone, but we're obviously not in a position to do that. And I think what I would just encourage you to do is look at the things that we've closed. Hopefully, you'll continue to see progress as we look forward, and you'll be able to draw judgments based upon that. And relative to what it means for our business, as I've said, we still have a fair amount of flexibility in order for us to grow fee-based businesses and grow businesses that require balance sheet usage on the asset side.

So I think I just can't give you any more specificity other than we don't want to mislead people. And it's not as if we're not thinking about the future. And so again, we try and be very careful not to weigh too much on one side or the other. But we've got a lot of people here that serve customers every day. And every single person isn't working on a consent order. Many are. We've got a huge amount of resources that are dedicated to it.

But as you see, we're building products in the card business. We're building products in our retail services business. We're doing the same across the digital platforms across the company. And so -- and as we execute on these items, you build the confidence of the regulators. So it's not as if you have to wait until everything is completely done to be able to continue to move forward, not just with your confidence, but with their confidence as well. So hopefully, in terms of the progress that we believe we're making, we're -- that's what we're seeing. And so you'll see us put all the resources towards these things to minimize the time frame but get them done properly at the same time that we're moving the business forward.

At this time, we have no further questions. And I'd like to turn the call back over to management.

Great. Well, listen, thank you all for the time today. We appreciate it. And we're all here to answer any follow-up questions you have. Take care.

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