Wells Fargo & Company's (WFC) CEO Timothy Sloan On Q3 2016 Results - Earnings Call Transcript

| About: Wells Fargo (WFC)

Wells Fargo & Company (NYSE:WFC)

Q3 2016 Earnings Conference Call

October 14, 2016, 10:00 AM ET

Executives

Jim Rowe - Director of Investor Relations

Timothy Sloan - President and Chief Operating Officer

John Shrewsberry - Senior EVP, Chief Financial Officer

Analysts

Matt O'Connor - Deutsche Bank

Erika Najarian - Bank of America Merrill Lynch

Betsy Graseck - Morgan Stanley

John Pancari - Evercore ISI

John McDonald - Bernstein

Paul Miller - FBR Capital Markets

Mike Mayo - CLSA

Ken Usdin - Jefferies and Company

Brian Foran - Autonomous Research

Eric Wasserstrom - Guggenheim Securities

Marty Mosby - Vining Sparks

Chris Kotowski - Oppenheimer

Vivek Juneja - JPMorgan

Nancy Bush - NAB Research LLC

Kevin Barker - Piper Jaffray

Brennan Hawken - UBS

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] I would now like to turn the call over to Jim Rowe, Director of Investor Relations. Mr. Rowe, you may begin the conference.

Jim Rowe

Thank you, Regina. And good morning, everyone. Thank you for joining our call today where our President and CEO, Tim Sloan; and our CFO, John Shrewsberry, 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 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 President and CEO, Tim Sloan.

Timothy Sloan

Thank you, Jim. Good morning, everyone. And thank you all for joining us today. A lot has happened since our last earnings call. So our formal presentation this morning will be a little bit longer than usual. I couldn’t be more proud of our financial performance in the third quarter, and John Shrewsberry will be discussing those results more in a few minutes. But I’d like to focus on the events of the past few weeks and the impact on our company.

This week, John Stumpf announced that he was retiring from Wells Fargo and the Board. He made this decision because he believed his leadership had become a distraction, and therefore the best thing for Wells Fargo was for him to retire. This action demonstrates the dedication John has had to Wells Fargo throughout his 34 years with the company, including successfully leading us through the financial crisis and the largest merger in banking history.

As the new CEO, my immediate and highest priority is to restore trust in Wells Fargo. As you know, on September 8, we announced settlements with the CFPB, the OCC, and the Los Angeles city attorney related to sales practices in retail banking. I know that this is not the type of activity you expect from Wells Fargo and is certainly not what we expect from ourselves. We let down our customers, our shareholders, and our team members. We simply failed to fulfill our responsibility to all our stakeholders.

Our vision of satisfying our customers’ financial needs and helping them to succeed financially is about building lifelong relationships one customer at a time. The core values of Wells Fargo are as true today as they were a month ago, a year ago, and 164 years ago. However, we had serious problems in our retail bank where products became the focus rather than the relationships with our customers.

Our senior management could have and should have done more. I'm fully committed along with the entire leadership team to fixing these issues and taking the necessary actions to restore our customers’ trust.

We have a specific action plan in place to lead our company forward during this period, which is focused on outreach to everyone who has been impacted by retail banking sales practices, including our customers, our team members, our investors, our regulators, elected officials, and the communities that we do business in. It includes being transparent in our communication, and we've included a lot of information in this quarterly supplement for you.

On pages three and four, we provide some background regarding the sales practices settlements, along with details of the account review that was completed by PricewaterhouseCoopers. I believe most of these facts are familiar to you, but let me highlight a few key points.

The 2.1 million consumer and small business accounts that were identified as accounts that may not have been authorized cost Wells Fargo much more than the $2.6 million of fees we received, which we have fully refunded. And let me clarify that these accounts had a de minimis impact to the retail banking household cross-sell ratio that we report on a quarterly basis with the maximum impact in any one quarter of 0.02 products per household or 0.3% of the reported metric. At no time were all of the identified accounts included in our reported cross-sell ratio, because unused deposit accounts rolled off.

While the revenue generated was small relative to our annual income, and the impact on our cross-sell ratio was not material, the implications for our company and on the trust of our customers are significant. We’ve made several changes to enhance our oversight, expand customer transparency, and improve the customer experience, which we highlight on page five.

Effective October 1, we eliminated product sales goals for our retail banking team members; and next year, we will introduce a new performance plan based on updated metrics around customer service, growth, and risk management. We want to make sure nothing gets in the way of doing what is right for our customers and the elimination of product sales goals has been positively received by both our team members and our customers. And we’ve made system and process enhancements, including sending automated emails, application acknowledgments, and multifactor authentication.

We expect to spend a total of over $50 million this year enhanced quality assurance monitoring. We’ve implemented an independent third-party mystery shopper program targeting 15,000 to 20,000 annual visits to our branches to test actual product purchase interactions. We’ve added risk professionals to provide greater oversight and significantly expanded our customer complaint servicing and resolution process. We will continue to invest in process enhancements and product monitoring, a proactive monitoring, and we’re committed to getting it right for our customers.

We’re reaching out to all retail and small business checking, savings, credit card, and unsecured line of credit customers, and we’re asking them to contact us if they have any concerns about their accounts or any aspect of the relationship with Wells Fargo. We've dedicated resources available 24/7 for inquiries and questions.

In cases where customers believe they have received a product that they did not want or authorize and they are not satisfied with our resolution, we’re providing an option of mediation through a third-party that is convenient and free for the customer. Our team members are proactively calling a meeting with their customers in all areas of the company.

Additionally, we’ve been working on contacting the credit card customers identified by PricewaterhouseCoopers. As a reminder, their analysis included all credit cards that were open, but not activated. There are a lot of reasons why customers don't activate their cards, so we’re trying to contact all unactivated credit card customers with open accounts to confirm whether they want their credit cards.

For consumer credit card customers identified, over half have closed their accounts, in part reflecting the passage of time as some of these accounts were opened five years ago. For those accounts that are still open, we’ve called 166,000 un-activated customers so far and we’ve spoken with 34,000 customers who have made a decision whether to keep or close their account. Of those customers, 17% have said that they did not apply for a credit card and 8% said that they did not recall applying for a credit card.

We’re also focused on determining potential additional impacts that the identified consumer and small business deposit and credit card customers may have incurred. We’ve allocated significant resources to this effort. We’re contracting with a third-party firm to work with us as well as with the primary credit card bureaus to develop a plan for submission to the regulators for their approval.

Here's what we've learned so far. According to FICO, the impact on FICO scores from a credit card application varies based on a person's unique credit history. But, in general, credit inquiries have a small impact on FICO scores. For most people, one additional credit inquiry will take fewer than five points off their FICO scores for a period of up to 12 months.

We’re working on determining potential financial impact for customers who obtained a loan with Wells Fargo or another company during the 12-month period where their FICO score may have been impacted by the credit inquiry. For example, if the loan was from Wells Fargo, and the customer was impacted by a lower FICO score, we will adjust the line size, modify pricing, and refund any additional costs incurred. As we did with our original account analysis, in all circumstances, our intent is to err on the side of the customer and to make it right. We've been actively monitoring and tracking our customer activity since the announcement.

In order to be as transparent as possible, on page nine, we are providing data to compare activity levels across a number of metrics in retail banking. When analyzing these trends versus the prior month, it’s important to remember that September had two fewer business days this year than August.

While it is too early to determine the long-term impact, and we’re prepared for things to get worse before they get better, here's what we’ve observed so far. Our customer traffic to our branches and call centers remained at typical levels for September. Customers calling and speaking to a phone banker are up 4% from a year ago. And so far, formal complaints related to sales practices have been less than 1% of the calls we’ve received.

Historically, approximately 70% of banker interactions are service, not sales related, and this percentage increased slightly in September. Customer visits with bankers in our branches, a subset of overall customer traffic, were down 10% in September compared with a year ago. The lower level of interactions in September was driven by lower internal referrals, decreased product offerings and reduced marketing.

We have begun to reintroduce marketing and will be gradually increasing our marketing efforts throughout the coming months. The drivers of lower banker interactions also resulted in new consumer checking account openings declining 25% in September compared with openings in September a year ago. To put this in perspective, account openings were down 143,000 from a year ago on a base of 33.2 million accounts.

We continue to have year-over-year growth in primary consumer checking customers, up 4.5% in September. As a reminder, primary checking customers are those who actively use their checking accounts and, therefore, this metric was not impacted by the accounts identified by PricewaterhouseCoopers. Our deposit customers continue to use their accounts with balances up $6.5 billion in September compared with August and debit card transactions up 9% from a year ago.

Lower referrals, marketing and product offerings also impacted credit card applications, which were down 20% in September compared with September a year ago. Applications were down 77,000 from a year ago compared with 7.8 million total active cards. We continue to see increased usage among our customers with active cards up 9%, balances up 10%, and transaction volume also up 10% from a year ago.

We are also actively monitoring customer experience scores with over 80,000 branch customer surveys completed in September. Loyalty scores in September were down from an all-time high in August, but were consistent with where they were as recently as two years ago. We also asked customers about the quality of their most recent branch visit. The score in September was down from August, but was also consistent with two years ago. Our enhanced focus on service seeks to bring these scores back to pre-settlement levels as we work to rebuild confidence and trust with our customers.

We’re also tracking the impact from the announcement on our other businesses, which we highlight on page ten. Mortgage referrals from retail banking, which account for 10% of our year-to-date mortgage originations, were down 24% from August to September. Auto originations have been minimally impacted since over 90% of our originations were through the indirect channel in the third quarter. We remain focused on maintaining our deep and long tenured dealer relationship, which drive most of our origination volume in our auto business.

Within wholesale banking, our team members are actively meeting with customers and responding to their concerns. There have been a few state treasurers and municipalities who have made public announcements about temporarily suspending certain business activity with Wells Fargo, while several others have reaffirmed the relationship with us.

Overall, we did not see any meaningful change of business trends in wholesale banking late in the quarter and deposit balances were up 4% during the month of September and loan pipelines were in line with the second quarter. We've also seen minimal impact so far within our wealth and investment management business. September-ending deposit balances were up 1% from August month-end and up 11% from a year ago. Client transaction activity was muted in September, but largely reflected the market environment. Retail brokerage advisory flows in September were strong, up $1.6 billion from August.

September closed referred investment assets – these are the referrals resulting from the Wells community banking partnership – were more than $1 billion, in line with prior trends. But these referred assets are dependent on banker referrals, so we will be watching this trend very closely.

We’ve always believed that our team members are our most important asset. And it’s been disturbing to hear claims of retaliations against team members who contacted the ethics line. We are investigating these claims. We are also assisting former team members who left retail banking due to sales performance and who remain eligible for rehire and applying for available positions at the company.

Leaders throughout Wells Fargo have had ongoing regular outreach with their teams throughout our markets. Mary Mack, who was the new head of community banking, has met with team members in ten cities so far to gather ideas, concerns and questions from frontline retail managers at all levels to help inform the go-forward strategy for a service-driven community bank.

Eight additional executive officers and their leadership teams met with more than 116,000 team members across the country. During these meetings, we’re reinforcing our code of ethics, business conduct, ethics line and non-retaliation policies.

We’re also shifting our language in retail banking training and communications to make it more customer focused, less sales focused, and reinforcing our commitment to do what's right for our customers.

We offer all of our team members competitive pay and benefits, which we highlight on slide 12. For example, tellers and customer service representatives earn at least $12 an hour, 60% above the federal minimum wage. 99% of team members are eligible for company-sponsored health benefits and our benefits programs cover more than 515,000 team members, spouses, domestic partners and their dependents.

We believe that team member engagement is critical to our success. In each spring, our team members have the opportunity to take an anonymous survey administered through Gallup. It's a chance for our team members to share their perspective on what it's like to work at Wells Fargo.

In 2016, over 90% of eligible team members participated in a survey and Wells Fargo's overall engagement scores were above 88% of the companies represented in Gallup's database. While we ranked high on the survey, this is not a mechanism – the only mechanism to identify team member concerns, like sales practices, and we’re implementing other ways for our team members to share their views with management.

Our team members are active in the communities where they live and work. And in 2015, the United Way ranked our workplace giving campaign the largest in the US for the seventh year in a row. We’ve just finished our 2016 campaign last week. And during the time that has been very challenging for our company, our team members demonstrated their continued support for their communities. The preliminary contribution results are similar to last year.

We’re also committed to team member development. And last year, we invested $300 million in team member training in credit, risk, technology and customer service. Additionally, we provided $21 million in tuition reimbursement. As we move through this period, we will continue to be transparent regarding trends across the company.

John Shrewsberry will now discuss the details of our financial results.

John Shrewsberry

Thank you, Tim, and good morning, everyone. Our strong financial results in the third quarter were relatively straightforward. And in order to allow extra time to take questions, my prepared remarks regarding our results will be shorter than usual.

I want to start on page 13 with a few key takeaways from our third quarter results, which reflect the benefit of our diversified business model and the momentum across many of our businesses. For the 16th consecutive quarter, we generated earnings of greater than $5 billion. Our loan, investment and deposit balances are all at record levels. Compared with the second quarter, we grew revenue driven by growth in net interest income. Many of our businesses had their best non-interest income results in five quarters, including strong mortgage banking results.

We grew revenue despite equity gains being at five-quarter lows and $780 million lower than a year ago. Expense growth was driven by higher operating losses and the contribution to the Wells Fargo Foundation. Credit quality improved including lower losses in our oil and gas portfolio and our capital position remains strong as we returned $3.2 billion to shareholders.

Turning to page 15, let me highlight a few balance sheet trends. I believe our balance sheet has never been stronger. We grew loans and deposits and our liquidity and capital remained strong. Our funding sources grew in the third quarter with long-term debt up $10.9 billion on $20 billion of issuances, including $9.2 billion that we anticipate will be TLAC eligible.

We also had strong deposit growth, up $330.4 billion from the second quarter. We purchased $57 billion of securities during the quarter, primarily agency MBS in our available-for-sale portfolio. The amount of securities purchased was higher than in prior quarters, but wasn't outsize when factoring in that we did not add duration in the loan portfolio with interest rate swaps as we had in prior quarters. We remain asset sensitive and will benefit if rates increase.

Turning to the income statement overview on page 16, revenue increased $166 million from second quarter, with net interest income up $219 million. The slight decline in non-interest income was driven by a $303 million reduction in market sensitive revenue, which is at its lowest level in the past five quarters and a decrease in other income reflecting the $290 million gain on the sale of our health benefit services business last quarter.

The $402 million increase in expenses from second quarter was primarily driven by $243 million increase in operating losses on higher litigation accruals. We also had a $107 million contribution to the foundation during the quarter. I will provide more detail on expenses later on the call.

As shown on page 17, loans grew 6% from a year ago and were up $4.1 billion from the second quarter. Commercial loans grew $1.9 billion from the second quarter on higher commercial real estate and C&I loans. Consumers loans were up $2.2 billion with growth in first mortgage loans, auto, credit cards, student lending and securities based lending.

On page 18, we highlight year-over-year loan growth. I'm not going to highlight each portfolio, but as you can see on this page, we had strong and broad-based growth across many of our commercial and consumer portfolios.

As highlighted on page 19, we had a record $1.3 trillion of average deposits in the third quarter, up $62.6 billion or 5% from a year ago and included 8% growth in consumer and small business banking deposits. Our average deposit cost was stable with second quarter at 11 basis points and up 3 basis points from a year ago, reflecting an increase in deposit pricing for certain wholesale banking customers.

Page 20 highlights our revenue diversification. Our results continued to benefit from our growth in earning assets and our diversified business model.

Net interest income was up $219 million or 2% from the second quarter, reflecting earning asset growth and one additional day in the quarter. The net interest margin declined 4 basis points from the second quarter, primarily driven by growth in long-term debt and deposits, partially offset by the benefit of earning asset growth. Net interest income grew 4% from a year ago, even with a 14 basis point reduction in NIM.

Non-interest income declined $53 million from the second quarter, which included a $290 million gain on the sale of our health benefit services business and declined $42 million from a year ago, which included $780 million of higher gains from equity investments. Across a number of our fee businesses, we had the best results in five quarters, including deposit accounts, trust and investment, mortgage banking and lease income.

Our mortgage banking results reflected strong residential and commercial mortgage originations. Residential origination volume was $70 billion, up $15 billion or 27% from a year ago and up $7 billion from the second quarter, which is typically the strongest quarter due to seasonality in the purchase market.

Applications were up 5% from second quarter and we ended the third quarter with a $50 billion unclosed pipeline, the highest since second quarter of 2013. Our production margin on residential held-for-sale mortgages was 181 basis points in the third quarter, up 15 basis points from the second quarter. Given our strong pipeline at the end of the third quarter, we currently expect origination volume in the fourth quarter to be up from a year ago, but down slightly from the third quarter due to seasonality in the purchase market. And we currently expect the production margin in the fourth quarter to be at or above the upper end of the range of the past five quarters, which was 188 basis points.

As shown on page 23, expenses increased $402 million from the second quarter, driven by $243 million of higher operating losses, reflecting increased litigation accruals. Operating losses could continue to increase related to outstanding legal matters such as sales practice issues as we’ve disclosed in our 10-K filing RMBS. $125 million in higher salaries due to an extra day in the quarter and FTE growth, $107 million donation to the Wells Fargo Foundation and higher FDIC insurance expense, reflecting the increase in deposit assessments.

Expenses also reflected lower foreclosed asset expense from commercial foreclosed asset recoveries and lower commissions and incentive compensation expense reflecting the forfeiture of unvested equity awards from John Stumpf and Carrie Tolstedt. Our efficiency ratio was 59.4% in the third quarter and we expect the efficiency ratio to remain at an elevated level.

While our expenses increased this quarter, we remain focused on managing expenses while actively reinvesting in the franchise for future growth, which we highlight on page 24. We focused on reducing non-core businesses in order to simplify our organization and improve our risk profile. We’re also working on creating a simpler and more collaborative way to seamlessly serve customers and team members by aligning similar teams in areas like marketing, finance and operations. We've also been reducing discretionary spending such as travel and facilities.

Earlier this week, we announced the formation of a new payments virtual solutions and innovation group that will be led by Avid Modjtabai. This new group will bring teams from across the company together to accelerate our focus on delivering the next generation of payments capabilities, advancing digital and online offerings and investing in new customer experiences and products. This new group includes our innovation, consumer credit card, deposit products, treasury management and virtual channels teams.

We continue to be active in providing our customers new products, services and technologies. For example, starting in the third quarter, customers can now send and receive real-time payments with any customer of a bank that participates in clearXchange network and our wholesale customers can now send and receive same day ACH.

We’re also making it easier for our customers to open accounts through mobile channels including brokerage, business direct, and personal credit products.

Turning to our business segments starting on page 25, community banking earned $3.2 billion in the third quarter, down 9% from a year ago and up 2% from the second quarter. The decline from a year ago was due to the lower gains on equity investments. We've already discussed earlier on the call, many of the business trends within community banking, so I'll just briefly highlight that our customers continued to actively use our payment and digital products with debit card transaction volume up 8% from a year ago and credit card purchase dollar volume also up 8%. Mobile active users grew to 18.8 million.

Wholesale banking earned $2 billion in the third quarter, up 6% from a year ago and down 1% from the second quarter. Revenue was $7.1 billion, down 2% from the second quarter due to the gain last quarter on the sale of our health benefits services business. Revenue benefited from record net interest income, up 4% from second quarter and 12% from a year ago.

Loan growth was driven by acquisitions and broad-based organic growth with average loans up $48.7 billion or 12% from a year ago, the eighth consecutive quarter of double-digit year-over-year growth. During the third quarter, we closed a portion of our acquisition of GE Capital's commercial distribution finance business. And earlier this month, we completed the final phase of [indiscernible].

Wealth and investment management earned a record $677 million in the third quarter, up 12% from a year ago and up 16% from the second quarter. WIM generated a pretax margin of 27% in the third quarter and had positive operating leverage on both a year-over-year and linked-quarter basis.

Positive operating leverage was driven by solid revenue growth, while continuing to invest more in the business. WIM’s average deposits were up 10% from a year ago and average loans increased 12%, the 13th consecutive quarters of double-digit year-over-year loan growth. Client assets across WIM reached record highs this quarter driven both by market gains and continued positive net flows.

Turning to page 28, credit results improved from second quarter with only 33 basis points of annualized net charge-offs. Net charge-offs declined $119 million or from second quarter from lower oil and gas, credit card and consumer real estate losses, and continued commercial real estate recoveries.

Non-performing assets decreased $1.1 billion from second quarter with improvement across our consumer and commercial portfolios and lower foreclosed assets. Non-performing assets were only 1.25% of total loans, the lowest level since the merger with Wachovia in 2008. And for the first time this year, we did not have a reserve build.

Slide 29 provides details on our oil and gas portfolio. Outstandings declined to $16 billion, down 6% from second quarter, and there were no defensive draws again this quarter. Our total oil and gas loan exposure, which includes unfunded commitments and loans outstanding, was down 2% from the second quarter and down 11% from a year ago. We had $168 million of net charge-offs in the oil and gas portfolio in the third quarter, down $95 million or 36% from the second quarter, driven by improvements in industry conditions.

Non-accrual loans were $2.5 billion, down slightly from the second quarter, and criticize loans declined $1.1 billion or 13%. While another decline in commodity prices would have a negative impact on the performance of our oil and gas portfolio, given the current environment, we believe losses peaked in the second quarter.

Turning the page 30, our capital levels remained strong with our estimated common equity Tier 1 ratio fully phased in at 10.7% in the third quarter. Our net payout ratio was 61% as we returned $3.2 billion to shareholders through common stock dividends and net share repurchases.

Regarding the new Fed proposal for the stress capital buffer, while the initial information provided by the Fed was limited, we have performed our internal analysis and the potential impact appears manageable and the overall changes to CCAR framework are generally aligned with our expectations.

I also want to provide an update on where we stand related to TLAC. As I mentioned earlier, we issued $9.2 billion of debt in the quarter that we anticipate will be TLAC eligible. However, this was partially offset by $2.1 billion of long-term debt rolling into the less than one-year maturity bucket.

In summary, our results in the third quarter demonstrated strength and momentum in a number of businesses. However, the impact on future performance from the sales practices related events late in the quarter is still unknown. We’re working closely with our customers, our regulators and our team members to move forward and make things right.

Timothy Sloan

Thanks, John. Before we end our prepared remarks, I wanted to address a few of the most common questions that we’ve been getting from all of you. The first is whether Wells Fargo's culture is broken. Our goal of building lifelong relationships with our customers and appropriately offering them additional products is still the foundation of our business model. But there was clearly something wrong and we will make the necessary changes to fix it.

The values we've always embraced, people as a competitive advantage, doing what is right for our customers, diversity and inclusion, ethics and leadership will continue to guide our company through this challenging period.

Second, we’ve received questions about the sales practice activities, who was involved and what the timeline of events was. We have acknowledged that we've made mistakes. However, our board is conducting an independent investigation into our retail banking sales practices and related matters and we’re not in a position to discuss those topics today.

Finally, we know there is uncertainty due to the events that have occurred over the last month, including this week. Let me outline what you should expect from us before we have our next earnings call 90 days from now.

First, in our retail banking business, we’ll continue our outreach efforts to our customers and focus on making things right.

Second, we will continue to work with the board on their investigation as well as all the other inquiries we have received, including meeting the required deliverables under the consent orders.

And third, as you’ve heard on the call today, we’re committed to being transparent regarding business trends and you should expect updates on these activities during the quarter. We’re also planning on an off-cycle investor day for next year where we will update you on our business strategies.

And finally, I know there is a lot we need to get right. And make no mistake, I get it and our team is on it.

Jim Rowe

Before we open up the line for questions, for today, to be as fair as possible, we’re asking that you limit your questions to one question and one follow-up, so we can get to as many questions as possible. Thank you. And with that, Regina, we’re ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Matt O'Connor with Deutsche Bank.

Timothy Sloan

Hi, Matt.

Operator

Matt, you may be on mute.

Matt O'Connor

Sorry, can you hear me?

Timothy Sloan

We can hear you now, Matt. Thanks.

Matt O'Connor

Okay. Apologies. I thought I saw a blurb out there that you’re hiring 2,000 employees for various compliance controls areas. And I just want to see if that is true. And then related to that, as you think about the expense impact of all of this, any estimates on what that might be?

Timothy Sloan

Matt, the blurb really reflected the fact that we’re moving approximately 2,000 of our team members that are in risk and control positions within our business lines to our corporate risk functions. Its’ not necessarily a net increase in the number of team members.

Matt O'Connor

Okay. So, I guess, the broader question is, there’s going to be some cost impact of the sales practice issue, probably some revenue impact as well. And do you have any estimates on what that might be. The revenue impact is probably a little bit trickier. But I would think there may be some way to frame some early thoughts on the cost side of things.

Timothy Sloan

It’s tough to be specific because we will definitely be adding people in control positions as we build out the go-forward plan and have it agreed to by our regulators. So that’s definitely a cost headwind. And I guess I would calibrate the relevant range in the tens of millions of dollars for that, specifically as it relates to this. And I think you're right on the revenue side. Some of the early trends that we’re seeing just in terms of account openings etc. don't really have a revenue impact. They may ultimately, with respect to how incremental deposits are redeployed or transactional activity in cards, things like that, but they don't have an immediate revenue impact on this quarter, next quarter. The bigger picture, of course, some people have asked is, what will the business model feel like in community banking with a more service oriented culture rather than a more sales oriented culture. And you'll be hearing more about that as it’s fully developed. It’s our intention to to be successful in providing all of our customers with what they need in terms of financial products through a service oriented model. So that'll take some time to develop and to describe for people. And then it will work its way in over the course of the coming quarters, but it’s a question that people have asked and it’s one that we’ll provide a lot of transparency around, so that people can understand the impact of that change as it’s being made.

Matt O'Connor

So these costs and then any revenue give-up, do you feel like it’s going to be absorbable in your current earnings power? Or I think the fear out there in the market is not just the headline risk, which will go away at some point, but I think the fear is kind of this $4 plus of earnings power, is that meaningfully at risk when you factor in some of the costs and revenue reduction, and I don’t know if you can comment on that? Thank you.

Timothy Sloan

Thank you. It’s tough to say with specificity. We have a very diversified revenue model as you know. There’s so much coming from wholesale. There’s so much coming from WIM. This will be a headwind in community banking. And it’s one that we’ll intend to absorb. But that’s why we’re upping our transparency, so that people can develop their own sense and we can share facts as they’re happening.

Matt O'Connor

Thank you.

Timothy Sloan

Thanks, Matt.

Operator

Your next question will come from the line of Erika Najarian with Bank of America Merrill Lynch. Please go ahead.

Timothy Sloan

Good morning, Erika.

Erika Najarian

Good morning. Maybe I can ask Matt’s last question another way. You said return goals during investor day of 1.1% to 1.4% ROA. And I guess, really what the question is, is given the uncertainty of the community bank impact on revenue and expenses going forward, are there other levers within Wells Fargo in that you can deliver that 1.1% to 1.4% ROA within the next two years and can you grow earnings without any help from macro next year despite this uncertainty?

Timothy Sloan

Erika, it's a very fair question. And let me take the macro orientation of that first. It's always a function of what the economic environment is and what the interest rate environment is. But I think if you’ve seen from our third quarter results that the other businesses that drive this company performed quite well in the quarter. And we’re excited about their growth. But as John indicated, it's a little bit sooner to rate in terms of what the impact, the longer-term impact of the sales practices issues are going to be within community banking. But, boy, I'm very optimistic about the leadership of Mary Mack, very optimistic about our ability to work through those. But it's going to take a while. And as we said, it could get a little bit worse before it gets better. But I’ll tell you, the team in community banking is up to it.

John Shrewsberry

I think those – what we announced at the last investor day in terms of targets are still a reasonable guideposts. I said just a little bit earlier, I think we’ll still be at the higher end on expenses. And, of course, now in addition to what we just talked about with Matt about compliance costs, we’re going to have incremental operating losses as a result of this litigation etc. That’s got to work its way through. And that will definitely be around for a little while. As Tim mentioned, we’re going to have an off-cycle investor day next May. And between now and then, we'll be talking a lot. And if we think that those aren’t reasonable guideposts anymore, we’ll tell people.

Erika Najarian

And my second – my follow-up question, part of your stock’s appeal has always been the dividend and the overall capital return, and I'm wondering if some of the overhang from these issues from litigation, from potential DoJ investigation impact how you think about capital return going forward?

Timothy Sloan

Overall, it doesn’t. We’ve provided similar metrics in terms of the range of capital payout, and we are well within those this quarter, and our expectation is to continue to stay in those ranges.

John Shrewsberry

We certainly account for a broad range of stressed outcomes in the capital planning process as it relates to operational risk and operational losses. That’s always been true. And it’s true for other filers as well. So it will certainly be our intention to take a similar path going forward with the approach to distribution that we’ve had.

Erika Najarian

Okay, thank you.

Operator

You next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Timothy Sloan

Good morning, Betsy.

Betsy Graseck

Hey, good morning. Hey, could you give us a sense as to why you chose Mary Mack to run the retail bank and give us a sense as to what she's bringing from the wealth management platform, from anything she's done at Wachovia and what your expectations are for how she’s going to deliver?

Timothy Sloan

All good questions. First, Mary was the best person for the job. I could not be more excited about what she's been able to accomplish in this environment thus far. She brings experience not only within the brokerage business, but also in the retail banking business. And my expectations are very high and I hope she's listening because they’re high and I'm pretty certain that she's going to be able to exceed the expectations. But she was the best person for the job.

Betsy Graseck

But is that – can you just give us a sense why – we’re looking for a culture shift or culture enhancement, change in the business model, and that’s a big ask. So I'm just wondering if – what you saw in her at – while she was running wealth management?

Timothy Sloan

Betsy, I saw an executive with decades of experience in the financial services industry and decades of experience at Wachovia and Wells Fargo, who's been through a variety of challenges in her career and who is an incredibly effective leader and somebody who I believe in, and our entire senior leadership team and the board believe, that who can effectuate the change that is needed on our retail banking platform.

Betsy Graseck

And is there opportunities to enhance the efficiency of that platform over time, not in the next several quarters as you work with the outreach with your clients, but over time given the digital investments spend that you've been making and I think given the fact you’ve been running them as separate geographies, so maybe I'm wrong there, maybe very centralized.

Timothy Sloan

Well, the short answer is yes. And we talked about that a fair amount at investor day and we talked about it as part of an omni-channel experience. Our customers continue to use our branches as frequently today as they have a month ago, a year ago and so on. But having said, there is incredible opportunities to continue to improve our product set, how we offer convenience to our customers, how our products and our people interact with each other. And, candidly, that's one of the reasons why we announced on Monday the creation of the payments virtual 20 channel and innovation group. And if you want to ask why we picked Avid for that because she was the best person for the job. And that change, I think, I want to just reinforce is very important because what we've done is we've brought together all of the payments businesses, how so many of our customers, both retail and commercial, interact with us every day, we brought them all together. And we think that’s going to create a fair amount of innovation, but also efficiency over time.

Betsy Graseck

Okay, thank you.

Timothy Sloan

Thank you.

Operator

Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

John Pancari

Good morning.

Timothy Sloan

Good morning, John.

John Pancari

Just want to go to the wholesale impact. I know you commented on the select states, municipalities that have made some decisions to pullback business. Could you just clarify again, which states and municipalities have indicated – I believe, it was California. We’ve also seen Chicago. And I believe Seattle. And then how we should think about that impact. Can you help us quantify the amount of revenue that you generally generate from that type of business?

Timothy Sloan

Sure. John, I'll start. Maybe John will want to jump in. I don't have a list of all the states and municipalities that have either indicated they want to put us on a temporary pause or those that have reaffirmed their business with us. In our investor day materials, we broke out the revenue associated with our government and institutional banking business. One of the benefits that we have at Wells Fargo is that we have these diversified set of businesses, and so frequently in our list of 90 different businesses, not every one of them is necessarily material in any one quarter to the impact of the company. Having said that, our goal is to earn all that business back. Those states and municipalities had chosen to do business with Wells Fargo for a reason. We have great people. We have great products. Are we disappointed that they decided to put us on suspension or pause? We are. But given the environment, it's not surprising. And we respect their decisions. But we’re going to work hard to make things right within the company to earn that business back over time.

John Pancari

Okay. All right. Thanks. And the separately, back on to the cost side, I know you flagged the legal costs for the quarter and then you also alluded to a more focused marketing effort, I want to see if you have any way to help us quantify those two items at least for the near term. And then separately, the offsets that could come on the expense side to those types of items, I believe you allude to branch consolidation potential later on in your slide deck as well as the travel that you flagged on your comments, so wanted to see how we could think about the timing of that type of relief from those items.

John Shrewsberry

Sure. So this is John. There’s a lot of puts and takes there, which is why we usually revert back to the efficiency ratio of target because while we’re definitely going to have elevated compliance related costs and operational loss related costs, we’ve got a lot of initiatives underway, some of which you alluded to. Some are immediate and some are over the forecast horizon of a couple of years. And it’s designed to keep us in or below the high-end of 55% to 59%. So my guidance at this point is that we’re going to be at the high end of that range accounting for all of those things that we’re showing as levers in order to offset the elevated expense.

John Pancari

Okay. And no quantification of the legal costs this quarter, correct?

John Shrewsberry

It’s difficult to do. It’s very early for the matters that we filed in our 8-K and that you’re reading about in the newspaper. And as those things mature over time, then they’ll begin to have an impact. But they don’t have a dollar impact yet.

John Pancari

Okay. Thanks, John.

John Shrewsberry

Yeah.

Operator

Your next question comes from the line of John McDonald with Bernstein. Please go ahead.

Timothy Sloan

Good morning, John.

John McDonald

Hi. Good morning. Tim, I know it's early here, but maybe you could talk about what factors are you going to be balancing when you redesign the sales incentive scorecard? How are you going to make sure you don't overshoot and cut off legitimate needs-based selling and relationship building while also making sure you don't encourage the wrong behavior?

Timothy Sloan

Yeah, it’s a good question, John. I think the focus is going to be, first, on – and this is a little bit high level, but I'm thinking about what are the drivers of developing those lifelong relationships with our customers. It’s about service. It's about convenience. So think about our bankers being incented to provide good service, and so we’ll be measuring that on an independent basis, to think about our bankers being focused on helping our customers do more business, but being measured on product usage and activity as opposed to individual product sales and also about an overall growth in assets and balances and also think about it being much more driven to a team approach as opposed to just on an individual basis. We think that that is going to be successful. Now, Mary and team are working on the specifics of that right now and when we complete the analysis and they recommend the program, that's one of the other areas that we’ll provide some transparency about.

John McDonald

Okay. And then, so a follow-up for John, on the net interest margin and net interest income, when we try to assess the impact of what a potential rate hike would do, one rate hike, it’s hard to discern what happened after the December hike last time because the first quarter, you had a few moving parts. What’s your best guess of kind of what kind of help you get to your NIM from one rate hike? And then what’s the ongoing impact to NIM on the side of – from TLAC issuance in terms of drag?

John Shrewsberry

The net number that I would look to for ease of modeling if we got one 25 basis point move would be something on the order of $150 million per quarter in the first year. There’s a lot going into that in terms of asset liability mix, loan growth, deposit growth, TLAC issuance, etc. But that’s a reasonable placeholder that accounts for the net.

John McDonald

Okay, thank you.

John Shrewsberry

You’re welcome.

Timothy Sloan

Thanks, John.

Operator

Your next question will come from the line of Paul Miller with FBR Company. Please go ahead.

Timothy Sloan

Good morning, Paul.

Paul Miller

Hey, good morning, guys. Thank you very much. Hey, relative to some of the shakeup, you guys had an executive leadership. Has there been any thought to bring somebody from the outside? Because a lot of you guys have been with the bank for multiple, multiple years. And to bring somebody from the outside to give a fresh look of the culture.

Timothy Sloan

It’s a fair question. It’s one we've been getting. I think the board, by the changes that we’ve made over the last week and a few weeks is comfortable with and very supportive of the management team. I think over the last few years, really since the financial crisis, we had a huge opportunity years ago to reset the entire team and we selected the best folks that were available for all the roles. Since then, one of the great things about the company has been how we’ve been able to attract many senior leaders from outside the company, not only in our business lines, but also in many of our support functions, including corporate risk. So that's already really happened from my perspective.

Paul Miller

Hello?

Timothy Sloan

Yeah, you there? Go ahead.

Paul Miller

I'm sorry. And then, on the independent audit, is there any timeline for that? Did you disclose who is doing the audit?

Timothy Sloan

Well, it’s an investigation that’s being spearheaded by Shearman & Sterling, which is working on behalf of the board. It’s independent and we don't have a date by which it’s going to be finished. Hopefully, it will be finished as soon as practical, but I think independence and thoroughness is much more important than getting something done in a short period of time.

Paul Miller

Hey, guys. Thank you very much for taking my questions.

Timothy Sloan

Thank you, Paul.

Operator

Your next question will come from the line of Mike Mayo of CLSA. Please go ahead.

Timothy Sloan

Good morning, Mike.

Mike Mayo

Hi. Of the 115,000 accounts that were open without authorization and charged to fee, how many customers did those 115,000 accounts reflect? And what’s been your retention rate of those customers?

Timothy Sloan

I think the customer count is somewhat lower than the incidence of the product count at least. With respect to the $1.5 million deposit accounts, which is the bigger number, but the ones that couldn’t be rolled out. That’s related to 1.1 million customers. So it was a 3:2 ratio there. So I’d say it’s somewhat south of a 100,000 customers for the 115,000 impacted accounts. And the retention ratio – I don’t have the retention ratio at hand. It’s not something that’s independently being measured, at least not at this level.

Mike Mayo

I guess, a follow-up, this is a long wind-up here, but it’s a little frustrating not getting that retention [indiscernible] the customers that were impacted the most, what’s been your retention rate. I guess we can’t really ask about the internal investigation. There’s no timeframe. We can’t ask who knew what and when. We can’t ask why it took so long to stop the problem. This is the first time we’ve had to ask a question on the call. We don’t have Steve Sanger on this call. And so, it’s a long wind-up like I said. A little bit more on potential branch closings. Slide, I guess, 24, you talk about, it could allow you to review the branch footprint for consolidation opportunities. 6000 branches. You’re having success with digital delivery and it’s exciting that Avid is promoted into this new position. I'm sure you’ll look at that. Can you give us something concrete as relates to all this? Maybe when you look at the new chapter, what the potential might be for efficiency improvements, especially if you’re telling us efficiency should be elevated for some time?

Timothy Sloan

Mike, listen, I appreciate your question. And as one of the many stakeholders at Wells Fargo, I'm sorry that we've disappointed you. But we just spent 30 minutes talking about what’s going on at the company and we provided a lot of information. We provided new slides that provide a tremendous amount of detail on some of the retail sales practices issue and we deliberately and diligently walked through the performance of all of our businesses. And you know what, if that doesn’t satisfy you, I am sorry.

Mike Mayo

All right. Well, maybe at the next year’s investor day, do you think we’ll hear more about how you’ll configure your branches and kind of the next stage of that?

Timothy Sloan

Sure, absolutely. We talked about that at our last investor day. And that’s one of the reasons why we want to accelerate the timing of our investor day because we want to provide increased transparency which we’ve done today and we want to provide a more continuous updates as to how we are operating the company.

Mike Mayo

All right. Well, I look forward to the incremental updates that you give. Thanks.

Timothy Sloan

Likewise.

Operator

The next question will come from the line of Ken Usdin with Jefferies and Company. Please go ahead.

Ken Usdin

Thanks a lot. I was wondering if we could just talk about the environment a little bit. Loan growth was okay, but, certainly, we've seen this kind of air pocket on the commercial side a little bit from the industry perspective. And I'm wondering if you could just talk about what you guys are seeing in terms of commercial demand, especially? And if you’re seeing any just noted changes in terms of customer activity and whether you think that's either fleeting or whether you guys are a taking a different view of the extension or credit at all?

Timothy Sloan

I think, overall, in the wholesale businesses, as you said, every quarter can be a little bit different in terms of loan growth. We didn't see any trends in any of our wholesale businesses that would cause us concern that commercial real estate loans are going one way or asset-based loans are going another. One of the reasons why our loan growth in the third quarter was in commercial wasn't as strong as in prior quarter is because our energy book declined by – I can't recall exact figure – $1.5 billion to $2 billion. We’re still very active in the energy industry. But it makes sense that there is a bit of a decline there. We had a few kind of larger underwritings that either paid off or were transformed into long-term debt or equity for our customers, but nothing alarming from our perspective.

Ken Usdin

All right. And then to follow-up, John, I noticed that the securities book was $390 billion at the end of the quarter. It looks like you're moving some of that liquidity and maybe also replacement of some of that loan growth. Can you just talk about the reinvestment philosophy? What kind of stuff you're investing in? And are you able to find a good ROA, ROE on moving the book into securities at this time, given where rates are?

John Shrewsberry

Sure. Well, the first call on that liquidity would be loans that we just talked about to the extent that there was incremental loan demand. We’ve – versus how we’ve deployed liquidity in the past, we, obviously, have more of a bias toward things that qualify for HQLA just because of the environment that we’re living in for liquidity. So you’ve seen a lot of agency mortgage-backed securities. You’ve seen some treasuries. We’ve actually got a program of late to be a little bit more active in the Ginnie Mae securities because of their liquidity properties. We also have a portfolio of – a smaller portfolio on the security side are somewhat more credit sensitive, so high-grade corporates or CMBS, things like that we replenish every quarter as well. The returns are okay and we have this lower for longer bias that makes us comfortable deploying capital in that way and liquidity in that way and the capital to withstand what happens if we’re wrong about rates and we end up in a higher rate environment. But it’s consistent with the approach that we’ve taken over the last couple of quarters. We paused in the first quarter while there was a real, real drop in – it was market volatility that gave rise to risk-free rates going as well as they have. But now in the second quarter and the third quarter, we’ve been back to converting cash into duration basically.

Ken Usdin

Thanks, John.

John Shrewsberry

That helpful?

Ken Usdin

Yep.

Operator

Your next question comes from the line of Brian Foran with Autonomous Research. Please go ahead.

Brian Foran

Good morning. I wonder if you could talk a little bit about overdraft charges. A few articles out there have kind of maybe asserted some of the opt-in processes were over-zealous, let's call it, at the retail network, so is that something you've looked at as part of your review? And then, we don't get a ton of history from the reg filings, but it is broken out now. It seems like your overdraft was running about 12%, plus 12% year-over-year in terms of growth which is a good bit stronger than the industry, so even separate from any of the sales practice stuff, maybe just what was driving that kind of overdraft fee growth?

Timothy Sloan

Sure, Brian. We saw some of the same reports that you did. And, candidly, those were a little bit of a surprise. Having said that, like all facets of our retail banking business, we’re going to review those. And to the extent there any issues, we will deal with them. But we’re not aware today that they were a driver of overdraft income.

Brian Foran

Great. And then maybe on some of these new account production metrics, it's very helpful. I appreciate the disclosure. I'm assuming the average life of checking accounts and credit cards is pretty long, so is there like a rule of thumb translation you can give us? If the run rate of new accounts is down 25% for six months, let's say, is that a 1 percentage point headwind to balance growth, 2 percentage points? How should we think about that in terms of thinking about balance growth, all else equal over the next two years?

Timothy Sloan

Yeah. I would separate that into credit cards, one, and deposit accounts, second. I think credit cards it's a little bit tricky just because over the last few years we’ve seen such gross in our credit card business in terms of penetration and our usage numbers have been good. But you could imagine a point where there – if credit card growth is down a little bit that in a year or so from now that we could see some decline. But, of course, that assumes that we don't make any other changes in our credit card products, in our offerings, how we interact with customers and the like. So don’t have a great rule of thumb there. And, again, as it relates to the deposit accounts – and, John, jump in here if you feel differently – we’re so new into the impact. And what we tried to do in the expanded disclosure is show you the decline in a monthly basis, but also give you a sense of what the impact was on the total base. I think that's how I would think about it. And I appreciate that you appreciated our increased disclosure.

Brian Foran

Thank you.

John Shrewsberry

And I guess the only thing I would add is that not all deposit accounts are equal in terms of the contribution to deposit balances. I think we have deposits growing by $6 billion when we have new accounts not opening as quickly.

Timothy Sloan

Brian, that’s another reason why we want to continue to provide enhanced disclosure because we want to make sure that you are comfortable with how any of the headwinds we’re facing right now are affecting business.

Brian Foran

Thank you, both.

Operator

Your next question will come from the line of Eric Wasserstrom with Guggenheim Securities. Please go ahead.

Timothy Sloan

Good morning, Eric.

Eric Wasserstrom

Hi. Thanks for taking my call. I guess my question gets back to, sadly, to the account issue. But can you describe if there's been any review of interactions and communications about these kinds of issues with the board? And just to sort of get to my follow-up, what I'm really wondering is, if this raises the risk of qualitative review, as it relates to CCAR or any other kind of regulatory action?

Timothy Sloan

So let me take the first part of that question. As I mentioned, the board has engaged Shearman & Sterling to do an investigation of retail sales product issues and other matters. And we want to be very respectful of their process. And we want that process to be taken seriously and to be viewed independently. So I don't want to comment on the specifics of how they’re going to go about their review. But we look forward to…

Eric Wasserstrom

Sorry to interrupt, but I guess I'm getting to the issue of – it seemed like at least from the press reports, this issue went on for several years before management made the board aware and I'm just wondering if that issue has been addressed.

Timothy Sloan

Well, here's how I would answer that and that is there’s going to be an independent review and I think that it would be appropriate to wait for the independent review as opposed to jumping to conclusion about what media might think. I don't mean to be disrespectful to the media, but I don't know if they have all the facts and the review will look at all the facts and will make some recommendations, I'm sure.

Operator

Your next question will come from the line of Marty Mosby of Vining Sparks. Please go ahead.

Marty Mosby

Thanks.

Timothy Sloan

Hi, Marty.

Marty Mosby

Hey. You created a new role on the board, a Vice Chair, and you put Elizabeth Duke in that role and appointed her there. She has an extensive amount of industry and regulatory experience. You created that role for a purpose. Can you frame that a little bit for us and let us understand better what you – how you expect to leverage her in that role?

Timothy Sloan

Sure. Marty, I want to be very respectful of the fact that neither John nor I created that role, the board did. First, we have a terrific board. It’s diverse in terms of the types of industries that they’ve been involved in, their experience, and we just couldn't be more pleased with the quality of that board, in particular, having both Steve Sanger and Betsy being – Betsy Duke being willing to step up into these roles is I think absolutely the right decision that the board should be making in the circumstance. Separating the CEO and Chairman role is something that we've done in the past. But, again, in particular to Betsy, to have somebody like that with not only industry experience, but also regulatory experience in this environment to provide assistance for Steve is exactly what’s needed.

Marty Mosby

And then not to Monday morning quarterback or rehash what you've done in the past, but, Tim, I really wanted to ask you, what, in this experience, has changed the way you think about the role of CEO, as you now assume it, and Wells Fargo as a company or a culture? And what is the key takeaway? Whenever you go through these extreme crises, there's always something that you've learned that will make the company better as you move forward. What have you learned that you're going to now take to the – your new role and be able to push forward?

Timothy Sloan

Marty, that’s a great question. And by the way, don’t apologize for being a Monday morning quarterback. Candidly, we deserve that and we’re used to it over the last ferw weeks. I also want to preface my remarks by saying, I’ve been in this role for less than 48 hours. And I want you to have high expectations for me, but actually I want to make sure that those are a bit tempered. When I think about the retail sales practices issues we’ve had at the company, I wish that the business had escalated the issues sooner. I wish when the business escalated the issue that while the senior management team did a lot in response, I wish we could have done more. And I highlight that because I think that one of the lessons that I've learned – one of the lessons the entire company has learned and one of the reasons that we’re organized the way we are today and we’re making many of the changes that we’ve talked about are that we've got to escalate issues wherever they occur within the company sooner. We’ve got to deal with them sooner and we’ve got to make sure that to the extent that they have any impact on our customers that we deal with that impact as quickly as we can. So it’s about escalation and it's about speed and dealing with challenges and also dealing with opportunities as they come, Marty.

Marty Mosby

Do you feel that in that vein, being a high performer and being looked at as a high-quality bank for so long created some blinders, that maybe those blinders have now been taken off in your – like you're saying, reacting and moving quicker at this point?

Timothy Sloan

Yeah, I don’t know. It’s a fair question. I don’t know if they’ve created blinders. But, again, the fact of the matter is we should have escalated these issues sooner and we should have dealt with them more quickly than we did. So to the extent that some of our prior success impacted that, so be it. I can assure you that we’ve talked about what you just described a lot. And we’re going to make sure that that doesn't create a blinder now or in the future.

Operator

Your next question will come from the line of Chris Kotowski with Oppenheimer. Please go ahead.

Chris Kotowski

Good morning. I never thought I'd ask you about this page of your press release again, but I'm looking at page 31 at the accretable yield, which usually wiggles and wobbles by $100 million or $200 million a quarter, and all of a sudden the expected cash flows are down by almost $5 billion. So can you say what happened there and does that – is that a headwind to net interest income going forward?

Timothy Sloan

I'm glad you asked. I wasn’t sure whether anybody was going to get there. But the – so the accretable balance was down $4 billion in the quarter. It stands at about – I think – about $11.2 billion right now. So what’s happened here is that prepayments have sped up. We’ve reached a point where a lot of these borrowers have gotten themselves in the money for refis because of the path of HPI and we’re experiencing and modeling faster cash flows as a result of that. And so, frankly, in the near term, I think we’ll see an increased interest income as more of that comes through. But what it means is those loans won’t be outstanding for as long as we might have previously predicted because they will be refi-ed.

Chris Kotowski

So that would be elevated accretion into net interest income than the next four – couple quarters, whatever, as you experience that?

Timothy Sloan

Correct.

Chris Kotowski

Okay. And then, headwind in future quarters after that. Okay. And the other thing I was wondering is how should we think about the impact of the settlement on op risk RWAs? Obviously, the financial impact is minor, but the impact on your company has been big in terms of management and press and reputation and so on. So how quickly does it all get factored in and any light you can shed on whatever the algorithm is?

Timothy Sloan

Yeah. So it’s tough to say because the chapter – the middle chapters haven’t been written of what the op risk outcome is. We know what the settlement was, but we’ve got a variety of legal matters that we have to attend to, all of which will factor into a future view of what the total op risk experience is from it. So at the margin, it would be increasing. I think I mentioned earlier, in CCAR, our own stress analysis, we concoct and imagine outsized op risk outcomes to demonstrate that we’ve got the capital and earnings power to overcome them and the magnitude of what we’re talking about here frankly, – while it’s significant, is modest in comparison to what you can imagine in stress, both in our own scenario as well as in CCAR. And, of course, what it means from the regulators perspective is they think about our op risk capacity in the future is up to them. But it will have an increase with the margin. It doesn't have a material increase in the moment because the numbers, as you say, have not been that big on the scale of Wells Fargo's balance sheet and earnings power so far. But it’s a headwind and op risk. We’ve been fortunate to have had modest op risk outcomes relative to the GSIB peer group over the CCAR era and this feels different because of the severity of the reputational harm that’s been created.

Chris Kotowski

Okay. Alrighty. Thank you

Chris Kotowski

Your next question comes from the line of Brian Kleinhanzl with KBW. Please go ahead.

Timothy Sloan

Hey Brian.

Brian Kleinhanzl

Great, thank you. Hi. Quick question just on – easy one first, on the long term debt, I know you said it went up based on the TLAC issuance, but didn't you also have debt that you put on related to the GE deals for pre-funding those deals that was puttable? Is that still on the balance sheet or did you put that back this quarter as well?

John Shrewsberry

Yeah, it’s still on the balance sheet. So it is puttable and it's FHLB asset financing. So it shows up as longer-term debt. And you can see that on page 15, I think, of today's deck. So still in place. Now, of course, we’re just using it as part of the general liability structure overall and will use it as long as we think that it is a good component of the stat.

Brian Kleinhanzl

Okay. Thanks. And then on the slide where you're monitoring the customer activity in the retail banking, you note that consumer checking account opens were down 25% year-on-year, credit card applications down 20% year-on-year. But if you start to annualize those numbers, they start to get very large, if you think about the credit card applications. That would be down on a full-year basis down 12% year-on-year relative to the total outstanding. So is there a way to quantify what that monthly impact was as it relates to revenue? I'm sure like not all applications actually get opened, but…?

John Shrewsberry

The waterfall there is that applications may or may not become approvals and approvals may or may not become activated cards and activated cards have to become utilized and utilized cards become balances and balances accrue interest. So there’s a lot of steps that have to be gone through before applications have an impact on either assets or revenue. One of the reasons for showing this is to help people understand what the immediate impact is and then to roll it forwards, so we can see whether annualizing that September number is really the right way to approach. September, obviously, was the first month. It’s the month where we pulled back on marketing. It’s the month when our team members were probably the most uncertain in terms of what the go forward model is going to be as we pivot toward service. It’s the month when our customers and prospects are first reflecting their real dissatisfaction with Wells Fargo, all those things put together. And those are going to change in different ways as we roll it forward. So it’s the installed base that drives the P&L results and that is where it is. And Tim mentioned that we’re going to roll this forward probably during the quarter, so people can see whether October looks like September and November looks like October and then we can start to build a projectable impact on the trend. Hopefully, that’s helpful.

Brian Kleinhanzl

It is. Thanks.

Timothy Sloan

Thank you.

Operator

Your next question will come from the line of Vivek Juneja with JPMorgan. Please go ahead.

Timothy Sloan

Vivek, how are you this morning?

Vivek Juneja

Good. Good, Tim. Congratulations even though we would have all hoped it would have been under better circumstances.

Timothy Sloan

Me too.

Vivek Juneja

A question for both of you. You took a charge in the second quarter for CFPB several months which was announced September 8. Why no disclosure in the financial filings and are you planning to change anything as you think about that aspect as you look forward?

John Shrewsberry

So it’s tricky one because we certainly account for these items when they become known or probable and estimable under GAAP. But, separately, we’re also – these are also part of a confidential supervisory information that – there’s a limitation of how much you can talk about while you’re in the middle of a negotiation with the regulator. They can talk about whatever they choose to and they do sometimes and other times they wait until it ends. So we think about the circumstances in the moment. We, obviously, would love to be just close with and help people understand what's going on. We’re certainly taking the charges when we need to take the charge. But we’re not alone in that discussion. And usually, the circumstances are governed by – in the case of a regulator, the regulator. So that’s how I think about that.

Vivek Juneja

So not even without giving us the amount, you couldn't even disclose a set of facts or the existence of those discussions?

Timothy Sloan

Vivek, the way that I would think about it is that this stems from the lawsuit that the City of LA filed a year before that. And so, there were issues that we were dealing with. But as John said, we’ve got to be very careful and respectful of what we disclose in terms of conversations that we have with our regulators and that's really important, and the so short answer is we followed appropriate policies, procedures, rules and disclosure requirements.

Vivek Juneja

Okay. Separate question, sort of linked to all of this regulatory scrutiny that's going on, Tim. As a G-SIFI bank, scrutiny, obviously, with all of these happening, is going to increase for you. Does that have any bearing on how you think about the asset size as one metric? You're almost $1.95 trillion, the third largest bank. Citi reported a gap, gets companies to widen [indiscernible] growing even faster. Is that something that factors into how big is too big or what does it mean longer term?

Timothy Sloan

Yeah. It’s a fair question. I think – we’re focused less on size because size is ultimately determined by our customers. It’s not necessarily determined by us. We want to arm our team members with the right incentives and have them work together and provide a good advice and service to our customers and make sure that we’ve got great products out there. That’s what’s going to drive our size. Having said that, we need to make sure that as we think about our returns, so putting the [indiscernible] you might use, which we do all the time. Are we getting and providing the appropriate returns for our investors based upon our size? That's how we think about it.

Having said that, we’ve looked at across the company and you’ve seen us exit some businesses that we believed would not provide us with as strong return as they might provide another owner. We sold our crop business. We sold our HSA business and so on. And because we appreciate in this environment and given the amount of liquidity and capital that we have that we’ve got to be very mindful in terms of for how we deploy our assets.

Vivek Juneja

Okay. Thank you.

Operator

Your next question comes from the line of Nancy Bush with NAB Research LLC. Please go ahead.

Nancy Bush

Good morning, gentlemen.

Timothy Sloan

Good morning, Nancy.

Nancy Bush

Couple of questions, Tim. The first one, much has been made of the investigation that the board is independently conducting, the Shearman & Sterling investigation. I have not heard everything that's been said about that, whether the results of that will be made publicly known when it's over.

Timothy Sloan

A good question. I do not know the answer to that. The board will decide that.

Nancy Bush

Okay. So there's no sort of regulatory imperative along with that? I'm assuming the regulators will have a look at that, but I'm just wondering if there's a transparency issue here that sort of needs to be overcome.

Timothy Sloan

Well, I wouldn’t jump to a conclusion about whether it’s a transparency issue or not. As you can see, we’re trying to be more transparent in terms of the operations of the company than we’ve ever been. But, Nancy, I want to be very respectful to the Board because that’s the Board’s decision.

Nancy Bush

Okay. My second question would be this. Obviously, there are going to some near term issues here, not only retaining customers, but in attracting new ones. And I'm wondering if there is any thought being given to deposit pricing or fees, et cetera, as one of the levers to attract these clients?

Timothy Sloan

Nancy, all good ideas in this company are on the table. And we’ve got an impressive management team whenever a company and it’s the certainly case for us faced with these kinds of challenges. It’s absolutely appropriate to step back and think about all aspects of how we provide product and service and convenience to our customers. And we certainly are thinking about price. Having said that, when you think about the driver of our company, one of the drivers for our company for decades is building that lifelong relationship that's not based on price. So could we make some changes in our pricing of certain products, deposit or otherwise? Sure, we could. But I would not expect us to lead with price.

Nancy Bush

Okay. If I could just ask as an add-on to that. Obviously, your employees have really been put through the wringer through this whole process. Is there any thought about additional compensation or bonuses this year or something just as a way of saying, we're sorry?

Timothy Sloan

I think that saying that we put our team members through the wringer is an understatement. I really do. I really do. Especially team members on our retail banking platform. But it's throughout the company. We want to make sure that we retain the best people that we can. And we think we offer a very competitive set of compensation and benefits. We talked a little bit about that on one of the slides. But we appreciate that we’ve got to recruit our team in this kind of environment and all ideas are on the table.

Nancy Bush

Okay, thank you.

Operator

Your next question comes from the line of Kevin Barker with Piper Jaffray. Please go ahead.

Kevin Barker

Thank you. I just wanted to follow up on…

Timothy Sloan

Hi, Kevin.

Kevin Barker

Hey, how are you doing? Thanks for taking my questions. I just wanted to follow-up in regards to your comments around the expenses and the efficiency ratio and you're saying it's going to be elevated. And you said it's going to be elevated or on the higher end of the 55% to 59% range into 2016. Are you now saying that that range is no longer valid and longer term – going into 2017, you might be above the efficiency ratio range or how should we think about that?

Timothy Sloan

You should think about it as an annual range. This quarter, we popped up above it, but still a good annual range. And if we start thinking that it’s not, then we’ll telegraph that to people. It’s hard to be more specific. The operational or compliance-related issues are one set of cost that maybe can be modeled in the near term. But to the extent that we’ve got lumpy operational losses that drive it up, those are just harder to predict and they’ll happen when they happen. But if we think we’re – the band is no longer the right band, then we’ll tell you that.

Kevin Barker

Okay. And then when we think about the spend on marketing and compliance, are you expecting that to be offset by the potential to have branch closures or reductions in your branch costs in order to keep the expenses under control due to other areas or how should we think about the puts and takes around the expense number?

Timothy Sloan

Yeah. I wouldn't tie the two together. And I certainly wouldn't be focused on branch closures. What we’ve talked about, and again I reflect back and how we described our branch platform at investor day, that we continue to update it all the time. We move branches around. We open new branches. We combine branches. We may close a few. I think this year, in fact, there’s going to be a reduction unrelated to what we’ve talked about here. But as John described, we’ve got to look at our expenses and we have been looking at our expenses for some period of time to be able to keep the efficiency ratio within the range, even though it's at the upper end of the range because we need to invest not only in compliance, we’ve got to invest in technology and bringing on new products and cyber defense and all of the above.

John Shrewsberry

Another thing, Kevin, is – as it relates – because other people have asked today with regard to that whatever might happen on the branch network side of things. That doesn't necessarily give you an immediate lift if you’re thinking about today's elevated compliance cost or today’s elevated marketing costs. If we’re making moves on the physical distribution side of our business, that creates benefits in year two, year three, year four, but it’s not really an immediate offset. So as Tim said, I wouldn’t think about those as offsetting levers.

Kevin Barker

Okay. Do you think you can stay within your target if rates were to remain flat from where they are right now?

John Shrewsberry

Well, the way that range was constructed was with our expectation for rates, which is practically flat. But, for example, if we get a 25 basis point move in December, that wouldn’t be unreasonable and that’s essentially baked into being in that range. If we stay flat, we’re not that far off of that. It’s not that big. If we had a big move up in rates, which I think is highly unlikely, then that would probably move us down in the range. I think we’ve said that before.

Kevin Barker

Yeah. Thank you very much.

John Shrewsberry

Thank you.

Operator

Our final question will come from the line of Brennan Hawken with UBS. Please go ahead.

Timothy Sloan

Good morning.

Brennan Hawken

Good morning. Sneaking in under the wire here. Just wanted to follow-up with – on Marty's question. Tim, the response seemed largely tactical. And so, I guess, as far as thinking about changes that your leadership might mean, does that mean that your view on the strategic approach versus prior leadership is largely unchanged? And it's certainly true you haven't been in the seat very long, but the idea that you would be taking over is certainly something that wasn't out of the blue. So I'm sure you had some ideas coming in here?

Timothy Sloan

Well, I have lots of ideas, but candidly I'd be a lot more nervous if I were you if I came out with some new strategic plan for Wells Fargo in 48 hours. That would be pretty dangerous from my perspective. But, look, the company – when I think about the company that I joined 29 years ago, it’s so different today. My guess is Wells Fargo is going to be different five years from now, 10 years from now and 15 years now. And you know what, I hope it is, because by changing and adapting to the environment we are in, that’s one of the reasons why we've had a history of success, notwithstanding the last month or so. The last month or so has been a real challenge as we’ve talked about on the call today and I am sure we’ll continue to talk about for a while. But we've made some important announcements this week. Again, you might call them tactical. I think they're actually in the strategic bend. The creation of a new business line, the elevation of some new senior leaders in our wholesale banking and our community banking business as well as consumer lending. They’re going to bring some new ideas. So, no, fair point that it’s probably a little bit more tactical and strategic, but over time you'll see some updates and we'll talk about those over the next few months and I'm sure we'll talk about some of that at Investor day next year.

Brennan Hawken

Sure. And actually, the spirit of my question was actually in response to Marty's question. I think you had talked about making adjustments to the escalation methods on the back, right? So that was more the reference of tactical rather than the management changes that you’ve made. Okay. Sorry, Time, go ahead.

Timothy Sloan

No, no. I appreciate it. Fair question. So a different direction here, for the second question. One of your wire house competitors did come out and confirm the recent stories on their policies for dealing with the DOL rule. Have you finalized your policies and can you tell us any details about those?

John Shrewsberry

So we’re – this is John.

John Shrewsberry

We’re still in the process of refining the overall implementation approach to be compliant with the rules. I think we’re still going to approach every client relationship with an emphasis on every client having a customized plan that guides their investment activity. We’re going to emphasize advisory solutions and continue to offer traditional brokerage for certain clients that include self-directed options. And we’ll be sharing more details as we get closer to implementation. I think with each ensuing quarter between now and later in 17, you should expect to hear a little bit more about the specifics of the implementation. But we haven't reached the same conclusion in the same timeframe as the comparator that I think you're referring to.

Brennan Hawken

Thanks for the call.

Timothy Sloan

Thank you.

I know it's been a busy morning for everybody and our call has been a little bit longer than normal. But I really want to thank all of you for your thoughtful questions, the discussion I think has been incredibly helpful for both John and me and we look forward to continuing to provide additional disclosure to you as we move through the quarter. And we thank you for your interest in Wells Fargo.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you all for joining. And you may disconnect.

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