Wells Fargo & Company

Good morning. My name is Catherine, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Wells Fargo fourth quarter 2020 earnings conference call. All lines have been placed on you to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. 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, Catherine. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Sharp, and our CFO, Mike Santamassimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth 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 FTC 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 Sharp.

Thank you, John, and good morning to everyone. I'll make some brief comments about the operating environment, our fourth quarter results, and I'll discuss our priorities. I'll then turn the call over to Mike to review fourth quarter results in more detail before we both take your questions. I'm going to start by making some brief comments about the economy based on what we're seeing. The benefits from both fiscal and monetary stimulus continue to provide important support for many, and the additional $900 billion stimulus is an important step in helping those who are still in need. Though there was solid economic growth in the fourth quarter, we continue to see an uneven recovery and increases in COVID cases towards the end of the quarters negatively impacting the path to recovery. Overall, our customers continue to be in much stronger position than we would have anticipated when this crisis began. But unemployment levels remain high, inventory levels remain lower than pre-pandemic levels, and confidence to invest is dependent on an effective bridge until broad-based vaccination can be accomplished. Given this, we expect 2021 will get off to a slow start, but there is great potential in the second half of the year for a strong 2021, especially if there is another significant stimulus package. Before turning to our performance this quarter, let me discuss our new business segments. One of my early observations when I joined the company was that we were not managing the company at the level of granularity necessary. As a result, we've made significant changes to the management structure, most notably having more of our businesses report directly to me. That change also drove us to completely alter our internal reporting to provide us with more transparency into our performance and underlying business drivers and give us the data necessary for us to create plans to improve our performance. This is how we now manage the company with reporting and reviews conducted at a business level at which decisions are made, a big change from what had been the practice. As you can now see, we've also made meaningful changes to our external reporting with the goal of giving our investors a clear understanding of our results, as well as the ability to compare our businesses on a more like-for-like basis to competitors and track our performance as we do internally. What you see now is what we've been reviewing internally. Our strengths and weaknesses should be clearer to you than ever, but the potential for improvement should also be clear. The changes go well beyond the addition of business segments. We've reevaluated capital allocation, how we do funds transfer pricing, as well as our internal expense and revenue allocations. We have also added more detailed revenue and performance metric disclosures to help you have more transparency into our results. We think these disclosures are an important step forward in showing you the size and scope of our businesses, as well as forming the basis for how we talk about them going forward. We hope you find it helpful as you evaluate our results and our potential. I'm going to let Mike take you through the results of the fourth quarter in detail, but they continue to be affected by the ongoing impact of COVID, as well as our actions to improve performance and put our past issues behind us. While rates have begun to move upward, the overall level and shape of the yield curve continues to be a significant drag on our net interest income. And for now, we have limited flexibility to offset these headwinds with balance sheet growth, given our constraints of operating under an asset cap. In terms of major business trends, corporate loan demand remains soft, driven by continued strong capital markets conditions and an improving but still uncertain economic backdrop. Credit continues to perform well as both consumers and companies have benefited from accommodations, ongoing fiscal and monetary stimulus, and an improving economic outlook. Actual charge-up rates are at multi-year lows, but again, the ultimate timing and magnitude of losses depend on the broader recovery. On consumer spending, we're seeing a continuation of the trend observed in the second half of the year. Debit spend is up double digits, while credit volumes have largely stabilized at flat to down low single digits compared to the prior year. Recently, we've seen the impact of the new stimulus with roughly half of the dollars that were deposited into accounts being spent. All in all, our returns remain significantly below where they should be or what this organization is capable of, but we are taking significant actions. Our agenda is clear and we're making progress, though it will take some time. Our focus is as follows. Number one, building the right management team. Number two, making progress on our risk and control build-out and satisfying our regulatory obligations. Number three, put our significant historical issues, including legal and customer remediations, behind us. Number four, reviewing our business exit activities that are non-core and focus our efforts on building our core scaled businesses and capitalizing on the power of an integrated Wells Fargo. And lastly, identifying and beginning to implement changes to make us a better run and more efficient company. I will briefly cover each of these. First on the management team. We've transformed the team by elevating strong internal talent while bringing in people with the experience and skills necessary for our success. Our operating committee, which are the 18 senior-most members of the company responsible for running it, is an entirely new management team. Over two-thirds are new to the company or their role. Of the 17 members other than myself, I've hired nine leaders from outside the company, Four others are in different roles, and four were relatively new to the company when I joined. Each member has expertise and experience in their area of responsibility and brings a diverse set of skills, backgrounds, tenures, and perspectives toward discussions and decisions. Our broader group of senior leaders is also a new team. Nearly half of our top 150 leaders are new to their role from the start of 2020, including over 40 who are new to the organization. regarding our risk and control build-out. In 2020, we announced an enhanced corporate risk organizational structure to provide greater oversight of all risk-taking activities and a more comprehensive view of risk across the company. We made a number of important hires throughout the year. In just the fourth quarter, a new chief compliance officer and new chief risk officers in consumer and small business banking, commercial banking, and wealth management have joined the company. These and the many other leaders that joined the company in 2020 who have done similar work at other institutions have been critical to the early progress we are making. As we announced last week, the OCC terminated a 2015 consent order related to the company's Bank Secrecy Act anti-money laundering compliance program. This is just one accomplishment for us, but it's evidence of the progress we're making and our ability to build the right risk and control infrastructure and remediate our legacy issues. However, this is a multi-year journey. Progress may not be a straight line. We still have significant work to do, but we are diligently doing what's necessary, issue by issue. It will continue to be our top priority to dedicate all necessary resources and make meaningful progress on this critical work. In addition to the continued investment we're making to build out the risk and control infrastructure, we're also moving with urgency much more than had been done before I arrived to put our substantial legacy issues behind us. This includes working through our legal and customer remediation matters, which are almost entirely tied to our historical issues. In doing this work, we're committed to treating customers fairly. To provide some context, this work is complex, oftentimes involves going back many, many years and looking across multiple platforms and systems. We've also had new leaders come in this year, and as a team, we've been diligently working through issue by issue. It requires this level of rigor. We've made significant progress over the course of 2020, and it's absolutely critical that we get this work done so we can do what is right for customers and move our organization forward. Over the past year, I've discussed our businesses with an eye towards assessing strategic fit to the company, assessing risk return profiles, and creating a roadmap for improved operational and financial performance. Our goal is to be the preeminent provider of core financial services in the U.S. and in doing so seek to reward all stakeholders, including investors, employees, customers, and the communities where we do business. We believe our business model as a fully integrated U.S. bank with significant scale and breadth of capabilities positions us to achieve our goal and that we are one of only a few who have this position, though we do compete with thousands. Our strategy is about becoming even crisper about our target market and taking actions necessary to leverage our strong competitive position. We are clear on who we are. Our core target market is U.S. consumers and businesses of all sizes. We do have capabilities outside the U.S., but these activities are predominantly to support our core U.S. customers with their global needs or are in domains where we have scale and expertise to compete locally. We provide the same capabilities for both consumers and companies of all sizes, though the words we use to describe what we do is sometimes different. We are a trusted advisor and provide core banking services, including deposits, capital, payments, and investments. Capital includes both private and public access to debt and equity. Our scale and sophistication allows us to have a differentiated physical presence and technology platform few can compete with. The importance of scale is clear and will continue to increase. We have the right businesses at Wells Fargo to achieve our goal. Our individual businesses are strong and valuable. We have excellent individual franchises that compare favorably to all competitors, large and small. We have the products, services, people, and scale to be a leader in each. And each has opportunities to serve customers more broadly and improve its own financial profile. I wouldn't confuse our recent underperformance with our great franchise value and how our business fits together to put us in a great competitive position. And then there is the great power of an integrated Wells Fargo. While our businesses are strong individually, they're even more powerful when working together. Though we talk about separate lines of business, we operate as one company in our communities. Our branches serve our consumers and small businesses, as well as commercial banking and corporate clients. Our ability to support our local communities is based on that breadth locally, but also by the support and resources of Wells Fargo nationally. At times, our lines of business has served as artificial boundaries for us, delivering the very best for our customers and clients. we're breaking down those barriers to more effectively serve our customers, and each should add to our profitability and returns. We have opportunities across our entire franchise, but just a few examples include serving low to moderate income, as well as more affluent consumers consistently across our platform, payments, and investment banking for our commercial clients. We've completed the review of our businesses and are taking action for those that are at core to our mission. In the past few months, we've announced sales or intention to exit the student loan business, international wealth management, and direct equipment finance in Canada. We are also in the process of exploring options for asset management, corporate trust, and our rail portfolio. As I said, we're focusing all of our efforts on our core scale businesses, and these other activities, which may be good businesses, are not consistent with the core strategic priorities I just outlined. and we're taking actions to run a better company which is far more efficient. I've acknowledged many times that our returns are below where they should be and what this company can deliver. I pointed out that our efficiency ratio is not competitive. You can now see this by line of business as well, and it is an important data point to guide us to drive efficiency and simplicity in how we manage the company. As we do this, we will reduce complexity and risk, and our expenses should decrease even as we continue to reinvest in building our infrastructure and growing the company. As we look at financial goals, today we're targeting our overall expense level and return on tangible common equity. And just to be clear, we will spend whatever is necessary to complete our risk and regulatory build-out. We have started to take significant actions. Mike will share the details of our initiatives and our expense outlook, but I would like to emphasize that that we will continue to be cautious about putting firm timeframes around our goals. We're making dramatic changes to put us in a position to capture our full potential, but we do have constraints today that impact our ability in the shorter term to realize our earnings and return potential or commit to firm timelines. We remain subject to an asset cap as part of our consent order with the Federal Reserve, and we must prioritize balance sheet usage more so than if it was not a limitation. a significant constraint, especially given the current operating environment. But we believe we're making meaningful progress. There is substantial work to do. We're also temporarily limited in our ability to return capital to shareholders due to special restrictions placed on the largest banks by the Federal Reserve due to the uncertainties around COVID. As the path to economic recovery becomes clear, these restrictions should be lifted, and we will be able to return excess capital to shareholders through a combination of higher dividends and share buybacks. And the negative impact to our results from COVID is clear and will likely continue until broad-based vaccinations allow for a clear and even economic recovery. As these headwinds abate, our earnings and returns should benefit materially. We're taking action for things in our control, but we'll remain cautious until there's more clarity around when these constraints will recede. That said, we're hopeful that our actions to increase efficiency in the company and the ability to return excess capital to our shareholders creates a clear path to a return on tangible common equity in excess of 10%. Beyond that, the ability to grow our balance sheet, higher interest rates, and executing on additional efficiency and growth initiatives presents a path to longer-term ROTCE of around 15%. Again, it's hard to put specific timeframes around these goals with any confidence today, but we're confident that our franchise is capable. I mentioned we continue to have significant excess capital above our regulatory requirements. Last month, the Federal Reserve authorized the nation's largest banks to pay common stock dividends and make share repurchases in the first quarter that, in aggregate, do not exceed an amount equal to the average of the firm's net income for the four preceding calendar quarters. Based on this criteria, we have the capacity to return approximately $800 million in the first quarter. Assuming the Board declares a first quarter dividend consistent with the past two quarters under the Federal Reserve's criteria, we expect to have common stock repurchase capacity in the first quarter of approximately $600 million, including repurchases for employee compensation. Returning capital share to shareholders remains a priority. Our board of directors has also approved an increase in our authority to repurchase common stock by an additional 500 million shares, bringing the total authorized amount to 667 million shares. In summary, we're taking meaningful actions and believe we have line of sight to a double-digit ROTCE ratio. While returning to low double-digit ROTCE would mean an improvement from where we are operating today, As I've said before, I continue to believe there's no structural reason why we shouldn't be able to generate comparable returns to our peers over the longer term, and that continues to be the goal. 2020 was certainly a challenging year for all, but I'm proud of what Wells Fargo and my more than 265,000 partners have done to support our customers, our country, and our communities. We've begun a multi-year process of transforming Wells Fargo, and I look forward to making more progress in 2021. I want to thank everyone at Wells for what they've done through an extremely difficult set of circumstances, and I look forward to a better 2021. I will now turn the call over to Mike.

Thank you, Charlie, and good morning, everyone. First, I'd like to thank John Shrewsbury for all his partnership over the last few months and wish him success in the future. I'm going to review our fourth quarter results, and then I will provide some information on our expectations on a few additional topics. 2020 was a challenging year, and I'm proud of the support we provided to our customers, communities, and employees, which we highlight on slide two. We summarize our consolidated financial results for the fourth quarter on slide three. Net income for the quarter was $3 billion, or 64 cents per common share. Our effective income tax rate was 3.5%, which was lower than we expected due to discrete tax benefits related to resolving some legacy tax matters. We expect our effective income tax rate for the full year of 2021 to be in the mid single digits. Our fourth quarter results also included 781 million in restructuring charges, similar to the third quarter. These charges included severance expense, but the fourth quarter also included charges for software impairment and costs related to reducing our real estate footprint. We also had a 757 million reserve release, due to the announcement that we are selling our student loan portfolio, which is expected to close in the first half of this year. Finally, we had 321 million of customer remediation accruals, primarily for a variety of historical matters, down 640 million from the third quarter. Our capital and liquidity remained strong. Our CET1 ratio increased to 11.6% under the standardized approach and 11.9% under the advanced approach. Our liquidity coverage ratio was 133%. We continue to have significant excess capital with 31 billion over the regulatory minimum. And we hope to return more to shareholders this year. Turning to credit quality on slide five, our net charge off ratio in the fourth quarter was 26 basis points, the lowest it's been in a number of years and certainly better than what we would have predicted earlier in the year. As we've previously mentioned, although our customers seem to be in better shape than we would have forecasted, the accommodations we've provided since the start of the pandemic are also helping delay the recognition of the charge-offs, which is reflected in our allowance level. Non-performing assets increased 9% from the third quarter. Commercial non-accrual loans increased $381 million, primarily due to a small number of commercial real estate exposures. While there's still a lot of uncertainty regarding commercial real estate, the performance has been better than expected as our customers are benefiting from low interest rates, which is helping them preserve liquidity. It's also important to note that approximately 70% of our commercial non-accrual loans were current on interest and principal as of the end of the fourth quarter. Consumer non-accrual loans increased $325 million on higher consumer real estate and auto non-accruals. Our allowance coverage ratio was unchanged versus the third quarter. Similar to the third quarter, while observed performance was strong, there was still a significant amount of uncertainty reflected in our allowance level at the end of the fourth quarter. Just a reminder that the reserve release in the fourth quarter was almost entirely due to the announcement that we were selling the student loan portfolio. As we show in slide six, the percentage of our consumer loan portfolio that remained in a COVID-related payment deferral as of the end of the fourth quarter decreased to 3%, with declines across all the portfolios. We are no longer offering COVID related deferrals except for home lending and new deferral requests are down significantly. Loans that have already exited deferral are performing better than we anticipated with over 90% of the balances current as of the end of the year. On slide seven, we highlight loans and deposits. Our average loans declined for the second consecutive quarter and were down 6% from a year ago. The decline in commercial loans from the third quarter was driven by lower commercial and industrial loans as demand remained weak and line utilization continued to be very low amidst strong capital markets and a soft economic background. On the consumer side, residential real estate loans declined as prepayment rates remained elevated. Lower consumer balances also reflected the transfer of student loans to help for sale. We had strong deposit growth throughout the year with average consumer deposits up 19% from a year ago. However, average deposits in the fourth quarter decreased modestly on a link quarter basis driven by intentional runoff of certain deposits, primarily in corporate treasury and corporate investment banking, reflecting targeted actions to manage under the asset cap. Turning to net interest income in slide eight, net interest income declined 17% from a year ago as lower interest rates drove a repricing of the balance sheet. The decline also reflected lower loan balances and investment securities as long as higher mortgage-backed security premium amortization. Net interest income declined modestly from the third quarter, reflecting lower loan balances and the impact of lower interest rates, which drove balance sheet repricing. These declines were partially offset by higher investment securities and trading assets, higher commercial loan fees, higher hedge-in effectiveness accounting results, and lower mortgage-backed security premium amortization. As a result, our net interest margin was flat compared with the third quarter. Turning to expenses on slide 9, non-interest expense was down 5% from a year ago and 3% from the third quarter. The decline from the third quarter was driven by lower operating losses and declines in other non-personnel expense, including lower professional and outside service expense, primarily due to efficiency initiatives implemented towards the end of the year. These declines were partially offset by higher personnel expense driven primarily by the timing of incentive compensation expense. Our expenses in the fourth quarter also reflected the restructuring charges that I highlighted earlier on the call. And as a reminder, we typically see seasonally higher personnel expense in the first quarter. Turning to our business segments, starting with consumer banking and lending on slide 10, net income increased versus both third quarter 2020 and fourth quarter 2019 as lower revenue was more than offset by lower expenses and a decline in the provision for credit losses. Home lending revenue of approximately $2 billion declined 21% from the third quarter at servicing income declines driven by MSR valuation adjustments reflecting higher prepayments and increased servicing costs. Net interest income was down due to a decline in loan balances and lower interest rates, and revenue also declined as lower mortgage originations were only partially offset by higher spreads. Versus the fourth quarter of 2019, home lending revenue was up slightly as higher net gains on mortgage originations were partially offset by lower net interest income due to lower balances, loan balances, and interest rates, a decrease in gains on the sale of loan portfolios, and lower servicing income. Credit card revenue increased 2% from the third quarter, driven by lower deferrals and seasonally higher spend. Average balances grew modestly from the third quarter but were down 9% from a year ago as COVID-related headwinds persisted. Average deposits grew 18% from a year ago, reflecting COVID-related impacts. including government stimulus programs. This deposit growth represents long-term opportunities as we work to build on these important deposit relationships with new and existing customers. Turning to some key business drivers on slide 11. Mortgage originations declined 10% from a year ago, while retail originations increased 17%. Correspondent originations declined 33% from a year ago, as we maintain margins in a more competitive market and suspended non-conforming correspondent originations earlier in 2020. Auto originations declined 22% from a year ago and were down 2% from the third quarter. Our underwriting policies remain slightly more conservative than pre-COVID levels. Turning to debit card, to both transactions and dollar volume increase in quarter, while purchase volume increased 11% from a year ago, transactions were down 2% as customers made fewer purchases but spent more per transaction. As a reminder, debit card fees are based primarily on transaction volume, not dollar volume. Credit card point of sale purchase volume has rebounded from second quarter lows and fourth quarter volume was up 8% from the third quarter and relatively stable from a year ago. Commercial banking net income was up from the third quarter driven by decline in the provision for credit losses, but was down versus the fourth quarter 2019 on lower revenue. Middle market banking revenue declined 4% from the third quarter, driven by lower net interest income due to lower loan balances, and was down 26% from a year ago, primarily driven by the impact of lower interest rates that the lower interest rates had on what we earned on deposits and lower loan balances. Asset-based lending and leasing revenue grew 5% from the third quarter, driven by higher loan syndication fees and valuation gains on equity investments, but was down from a year ago due to lower interest rates and loan balances. Non-interest expenses declined 4% from the third quarter, partially reflecting efforts to increase efficiency in client coverage and streamline the organization. While overall headcount was down, we've hired more bankers in key markets to drive new business growth in our middle market business. Average loans declined for the third consecutive quarter with revolving credit line utilization at very low levels. Loan balances started to stabilize late in the fourth quarter, but loan demand remains weak overall. reflecting continued high liquidity levels, strength in the capital markets, and lower inventory levels. Turning to corporate investment banking on slide 13, banking revenue growth in the third quarter was driven by an 18% increase in investment banking revenue on higher advisory fees and equity origination. The investment banking pipeline remained strong at year end. Commercial real estate revenue grew 15% from the third quarter, driven by higher CMBS volumes and improved gain on sale margins. as well as an increase in low-income housing tax credit income. The 12% growth in revenue from a year ago was primarily driven by our low-income housing business, which in the fourth quarter of 2019 included lower revenue due to the timing of expected tax benefit recognition. Markets revenue declined 26% from the third quarter on lower trading volumes across fixed income and equities. Overall, 2020 was a good year with strong performance across fixed income and equities, especially during the first half of the year. However, our results were impacted in part due to actions we took to reduce trading-related assets in order to manage under the asset cap. Non-interest expense declined 10% from the third quarter, primarily reflecting the timing of incentive compensation accruals. And average deposits declined 20%, with average trading assets were down 19% from a year ago, primarily driven by actions we've taken to proactively manage deposits and other liabilities. Wealth and investment management net income increased 16% from the third quarter, driven by revenue growth primarily reflecting higher asset-based fees. Non-interest expense increased 2% from the third quarter, driven by higher revenue-based compensation. Versus the fourth quarter of 2019, net income increased reflecting the impact of lower interest rates on net interest income, which was more than offset by lower expenses due to one-time charges in 2019. Average loans increased 5% from a year ago with growth in both securities-based lending and non-conforming mortgages. Average deposits grew 22% from a year ago, and we ended the year with a record client assets of $2 trillion, up 6% from a year ago. Wells Fargo assets under management of $603 billion increased 18% from a year ago due to net flows into money market funds and higher market valuations. Corporate on slide 15 includes corporate treasury and staff functions as well as our investment portfolio and affiliated venture capital and private equity partnerships. And it also includes certain lines of business that we've determined are no longer consistent with our long-term strategic goals or have previously divested. In the quarter, this primarily includes our student loan business, institutional retirement and trust, rail, and our direct equipment finance business in Canada. Turning now to our expectations for 2021, starting with net interest income in slide 16. As a starting point, if you were to annualize the fourth quarter's net interest income, you get approximately $36.8 billion. We currently expect full year 2021 net interest income to be flat to down 4% from this level. It's important to note that approximately 1% of the potential decline is driven by the announced sale of our student loan portfolio. Our assumptions to get to the top end of this range include interest rates that generally follow those implicit in the current forward curve. It is worth noting that while the recent increase in rates is helpful, rates remain below levels at which most of our portfolio was originated, and that results in some ongoing downward yield pressure as we reinvest cash. We also assume stable total loan balances from the fourth quarter, with a modest reduction in the proportion of consumer loan balances consistent with recent trends. To achieve this, we would need some improvement in loan demand, which has been soft across the industry for the past couple quarters. Additionally, mortgage balances will likely continue to see headwinds in 2021, given the elevated level of prepayments, which have exceeded portfolio originations, and given the expected sale or resecuritization of loans previously purchased out of agency mortgage securitizations. Finally, we assume stable to modestly improving credit spreads across major loan and securities categories. Recently, we have seen significant tightening, and most credit-sensitive assets are now trading through the pre-COVID levels of early 2020. Our net interest income expectations for 2021 also assume the asset cap will remain in place. Regarding the asset cap, we are focused on getting the work done properly and believe we're making progress. However, there remains a significant amount of work to do and a series of steps required by the consent order, requiring both successful execution and implementation by us and ultimately a determination by the Federal Reserve as to when the work has been completed to their satisfaction. Recognizing we're early in the year and uncertainties exist, the range we have provided reflects the potential for pressures on each of these assumptions. Turning to expenses on slide 17, we're focused on building a more efficient company with a streamlined organizational structure and less complexity so we can better serve our customers. Our efficiency initiatives are designed to improve staffing models, reduce bureaucracy, and lower reliance on expensive outside resources. Importantly, we're not seeking efficiencies related to the resources needed to complete our regulatory and control work, and we'll continue to add if necessary. We have rigorous reviews to help ensure that we have the required resources in place to complete this important work. We are executing on a portfolio of over 250 efficiency initiatives, which we expect to span over the next three to four years. They amount to over $8 billion of identified potential growth saves that are concentrated in the five categories that we highlight on the slide. In addition to these initiatives, we have a long list of others that are in the process of being vetted. While we are focused on becoming more efficient, we will continue to invest in our risk and regulatory work as well as to support business growth and improve our products and services. We are not forgoing opportunities with good returns to grow revenue, even if they may increase expenses. We are targeting net expense reductions each year, and our restructuring charges become clearer. We will build our growth plans, and as we build our growth plans each year, we will provide further details. We provide some selected details on our efficiency initiatives on slide 18, and as you can see, some of these initiatives are company-wide, while others are business-specific. As we've streamlined our organizational structure, we've been able to reduce layers of management across businesses and functions, which has increased the average span of control by approximately 10%. Our flatter organizational structure has also given us the opportunity to reduce support function headcount and reapply these savings in the growth areas. We've also had the opportunity to reduce our non-branch real estate by using our space more efficiently. We currently have approximately 46 million square feet of real estate, which we expect to reduce by 15 to 20% by the end of 2024. Much of this reduction is due to our underutilization of the space pre-COVID. Turning to some of the business specific opportunities. As of year end 2020, we had 5,032 branches, which is down from a peak of over 6,600 in 2009. Reflecting acceleration of digital adoption and usage among our customers, we closed 329 branches in 2020 and expect to close approximately 250 more this year. We are also changing our branch staffing model to better reflect the activity that is occurring within the branches, which is less transactional and resulted in an approximately 20% reduction in branch staff in 2020. We will continue to adjust staffing in response to changing customer needs. We have also identified opportunities in our home lending and auto businesses. In the fourth quarter, 73% of home lending's retail applications were sourced through our online mortgage application tool, and we expect to continue to improve our digital capabilities in the origination process, which makes for a better customer experience and is expected to reduce expenses. As the economic environment improves and the processes become more technology driven, we expect significant home lending servicing efficiencies over the next four years. In our auto business, we're investing in our loan origination system and credit decision tools, which we expect will increase decision automation to more than 70% by 2022, up from 59% in 2020, enhancing the customer experience while improving controls. We also have significant opportunities within commercial banking, including changing how we serve our customers, and optimizing operations and other back office teams, which is expected to reduce headcount expenses. This includes working to reduce the number of commercial banking lending platforms by over 50% and standardizing automating customer onboarding, which should reduce costs, but more importantly, improve the customer experience. Turning to our 2021 expense outlook on slide 19, we reported $57.6 billion of non-interest expense in 2020, Included in that were 2.2 billion of customer remediation accruals and 1.5 billion of restructuring charges. So a good starting point for discussion of 2021 expenses is approximately 54 billion. If market levels remain strong, we expect to see an increase in revenue-related compensation of approximately 500 million in 2021, primarily in wealth management. This impact may increase if markets or business performance exceeds our expectations. We expect to realize 3.7 billion of gross expense reductions in 2021. This will be partially offset by incremental spending in a few important areas, including personnel technology, including investments in risk and regulatory work. After factoring in incremental spending, our net reduction for 2021 is expected to be approximately 1.5 billion, with reductions accelerating through the year. Our full year 2021 expenses, excluding restructuring charges and business exits, are expected to be approximately 53 billion, with lower annualized expenses towards the end of the year. In prior expense outlooks, we had assumed $600 million of annual operating losses, which is still the normal amount of losses we have for theft and fraud-related items. However, we also typically have some level of customer remediation accruals and litigation costs, which are hard to predict, but we've assumed approximately $1 billion for total operating losses in our 2021 outlook. While we've made significant progress on working through our legacy issues, we still have significant outstanding litigation and regulatory issues that can be unpredictable. The restructuring charges we took in 2020 reflect what we believe will be needed for 2021 headcount reductions. While we haven't included any restructuring charges in our 2020 outlook, we may have some smaller amounts, primarily real estate related, and we will evaluate later this year the need for additional severance and or restructuring charges for initiatives in 2022 with a focus on ensuring the payback periods continue to be strong. We will call out these charges as appropriate as we move through the year. We made significant progress in 2020 in identifying efficiency opportunities across our businesses and we started executing on these initiatives resulting in the restructuring charges during the second half of the year. This is just the beginning of a multi-year process and our ultimate goal is to improve our efficiency while continuing to invest in our businesses. Now on slide 20, we've finished our business reviews and we've updated you on our expense expectations. Now let's turn to what we as a management team are ultimately focused on improving our returns. We believe we have a clear line of sight to increase our return on tangible common equity to approximately 10% in the short term if we continue to reduce expenses and we are able to optimize our capital levels closer to our internal target. After that, we believe we can further improve our returns through a combination of factors including moderate balance sheet growth once the asset cap is lifted, a modest increase in interest rates or further steepening of the curve, our ongoing progress or incremental efficiency initiatives, a small impact from returns on growth-related investments in our businesses, and continued execution on our risk, regulatory, and controls work. The combination of these factors, we believe, would take our return on tangible common equity from, you know, approximately the 10% to approximately 15% over time. To be clear, this is a multi-year process dependent on the path of the economic recovery and requires successful execution on our part, particularly in controlling expenses, as well as an improved operating environment. But the takeaway is that we believe our business model is capable of producing these returns. We will now take your questions.

Ladies and gentlemen, as a reminder at this time, if you would like to ask a question, please press star and then the number one on your telephone keypad. Your first question comes from the line of John McDonald with Autonomous Research.

Hi, good morning. Mike, I thought I could ask about the expense slide on page 19. Is the right way to look at it that you said you've identified, you know, over 8 billion of gross saving opportunities and you're realizing, you expect to realize 3.7 of that, you know, 8 or so in 21?

Hey, John, thanks for the question. Yeah, at this point, that's where we are. We've got, you know, probably a little over $8 billion that we're sort of working on as we speak, and we'll get, you know, $3.7 in the year. And as I said in the, you know, commentary, you know, those savings, you know, get bigger as you go throughout the year. So that implies, you know, the exit rate's, you know, better than the 53%.

Okay. And if you think about the gross to net, you know, you're realizing one and a half billion of net saves for like 3.7 of gross, you know, maybe 40% of the, you know, 3.7 you're achieving. That ratio of gross to net, could that improve in the out years, you know, based on what your investment spend forecast is?

Yeah, you have to sort of think about it that you don't get the benefit all day one. These things sort of take, you know, get executed throughout the year. So that ratio of 8 to 3.7, you can't really look at it, or I'm sorry, the ratio of 8 to the sort of net that you're seeing, you sort of have to look at that over a couple-year period as you get the full annualized benefits of all the saves coming into the P&L.

Hey, John, this is Charlie. How are you doing? I would also just add to that, in that, you know, the $1.6 billion of investments that's broken out on slide 19, that does include a significant continued increase in expenses related to the risk and infrastructure build-out that we have. And so, you know, as we continue to move forward, you know, there's a point at which, you know, that, you know, the increase certainly slows.

Gotcha. Okay. Thank you.

Your next question comes from the line of Betsy Grosick with Morgan Stanley. Hi. Good morning.

Morning.

A couple of questions. One, Charles, you walked through the businesses that you have sold or are, you know, in the process of contemplating selling. Should we take that to mean that that's the full extent of what you're looking to do with the business model at this stage and that there's anything else beyond those areas are not being contemplated for sale or – You know, maybe just give us some color on that. And then how you identified what to keep. Like, what was the bar for sale versus retain?

Sure. Yeah, I think the answer is yes. You should look at this as the complete list, you know, with the one aside that, you know, all companies should always re-look at this on a regular basis to make sure that whatever assumptions you've made are accurate. But we've gone through an exhaustive review of everything that we do business by business at a – at a level of detail well beyond, you know, the level that we report publicly. We've come up with these activities. We've thought about a whole bunch of other things and so, you know, this is the list that we're actively working on and we feel very good about everything else. As we think about the lens that we use, it starts with we look at the core customer base that we want to serve and is it part of our capabilities that we have either targeted towards that customer base or are they part of a package that's logically offered to customers as one. Also look at risk returns. I would just make a comment on risk returns because I've heard a little, you know, people talking about this a little bit. We're not looking at the risk return of a given quarter. We're looking at the risk return over a much longer lifecycle of these businesses. And so you add that together and, you know, the businesses that we're exiting, they're perfectly, you know, good businesses. And the things that we're thinking about, there's certainly, the question is, are they best housed within Wells Fargo? And so, you know, we think the answer is probably best housed someplace else. You know, there are different ways to get there and different arrangements that we can have with folks in terms of what that means. But, again, I do feel very good at this point that we've looked across the enterprise.

And then you've outlined where there's been, you know, a pullback in loan balances or earning assets because of these exits. But what do you do with that? you know, opportunity there? I mean, there's a lot of discussion, as you well know, about the asset cap, and it's hard to know when you get out of it, but are you creating room for your core businesses to grow into that space, or how are you thinking about that?

Yeah, so I guess I would start with we did not approach this exercise with we have to sell businesses to create room under the asset cap. It was really the view was driven by what do we think actually belongs within Wells Fargo for the long term. To the extent that it helps us with the asset cap, that's certainly a benefit, but that was not the lens with which we viewed this. When you look at what we've done, you know, the education finance business is roughly $10 billion or so in assets. You know, the things that we've announced, that is the most significant piece. And so, sure, you know, that, you know, over time creates the ability for us to, you know, redeploy that capacity elsewhere.

Okay. And then just lastly on the tax rate, I think you mentioned this year it's going to be single digits. Can you speak to that? you know, what's driving that and, you know, what your sustainable tax rate is. And also, is there a difference throughout the year, like how that tax rate, is it single digits throughout or does it just start super low and then goes up to normalized by 4Q? Help us think through the seasonality there.

Hey, Betsy, it's Mike. Yeah, you know, it bumps around a little bit based on, you know, earnings and what's in the quarter. But I think, you know, the simple way to think about why it's lower than, you know, kind of the past is, We've got a significant amount of investments that are multi-year investments in whether it's low-income housing, other renewable energy that create tax credits. And those tax credits are what's driving – what's offsetting sort of the normal statutory tax rates that we have. It's no more complicated than that. And so, as you've seen over the last couple of years, those have increased a bit, you know, over time. And so, as we sort of look for – look at 2021, that's the big driver. But sustainability – yeah, go ahead.

Sorry. I was going to say, so the dollar impact of those is, you know, it's up a little bit, but it obviously has a much bigger impact on the rate when you're earning less.

Right. So, I mean, as you earn more, obviously, your tax rate will, you know, bleed higher, but – For a good reason.

Correct. Correct. Okay. Thanks. Thanks.

Our next question comes from the line of Ken Euston with Jefferies.

Hey, thanks. Good morning, guys. Coming back to your slide 20, just wondering, I know that it's a pass and it's a hypothetical, and that long-term ROI is a long ways away. But on that interim step, the 10%, do you have a way of helping us think about what type of time frame might be possible to even get to that middle step, that 10%?

Yeah, I think – hey, Ken, how are you? I think the way we're trying to describe it is, you know, that is where we have clear line of sight. So when we look at the impact of expenses, these are actions that we are – actively taking, but we're also, in order to get to 10% without any changes to the revenue equation at this point, we also have optimized capital levels, which means that the Fed, you know, have to relax restrictions. And so, you know, the reason why we're not talking about a timeframe is because we don't know when that will happen. But the amount of excess capital that we have, as you know, is extraordinarily significant. And we're also in the position of not being able to use it because we have the balance sheet limit. And so the timing is dependent on that. But, again, in our minds, very clear line of sight when that occurs to be able to get there in a relatively short timeframe. And then on the longer-term piece, you know, which you didn't ask about, again, there, too, I think, you know, there's some words off on the right-hand side. But again, I would not describe this as just something that we're dreaming about. You know, when we look at what is possible with modest balance sheet growth, you know, really moderate increases in the rate curve or steepening and efficiencies that we believe we can get, we really do believe that that is what we will achieve. We're just not in a position to put timing around it because we don't control the timing on most of those items. But when those things become clear, we should be in a position to be clear with you about timing.

Yep. And on a follow-up to the capital and then the potential business sales, how do we get a sense of what earnings might potentially go away with those business sales? And then if you were to get gains on those business sales, is that capital also kind of contemplated in these ROE improvements, or would that be extra or incremental juice to at that point you're able to do something with capital generated to offset some of the lost earnings?

Yeah, I think a couple things. So it's Mike, Ken. Thanks for the question. You know, I think, you know, we'll give you more detail as sort of we announce plans for each of the businesses. But, you know, think of the revenue impacted by the, you know, the four things Charlie sort of outlined as, you know, very low single digits, you know, around a few percent of revenue. And we'll sort of give you more clarity as sort of the plans come into focus with the timing. And I think you're right, as we, you know, if we book games, as we sort of, you know, divest of items that's helpful from a capital perspective that can either get redeployed in the business or through, you know, buyback capacity.

And this is Charlie. Let me just add, you know, given what we've announced, you know, those are announced transactions, not closed. So, you know, it'll take a period of time for these things to close. So once you factor into certainly what will impact 2021, it's a smaller amount. And, you know, we're working hard at making sure that when we exit businesses, we get the expenses out. It obviously frees up capital that we have invested in those businesses as well as the gains. And so you put those things together and – You know, that's why we don't think of the impact of these things as being material to either a plus or a minus on what it means for our ratios. But it cleans up the company. It gets us focused on making sure that we're putting resources towards the right things. And we've just got the company set up properly going forward. Got it. Thanks very much, guys.

Sure.

Your next question comes from the line of Steven Chubak with Wolf Research.

Hi, good morning. So I wanted to start off with a question on the NII guidance. Where are some of the assumptions informing the lower and upper bound of the guidance range for 21? And maybe more specifically, where are you reinvesting today versus the back book yield of 196 basis points?

Hey, Steven Spike. You know, look, I think as you sort of think about the top end of the range, you know, we're assuming, you know, roughly the implied, you know, forward curve, even though that's bumping around, you know, day by day, week by week here over the last, you know, couple weeks. So assume, you know, we're not assuming, you know, much improvement from where it is relative to the, you know, to get to the top of the range. We're assuming loan balances are in total roughly flat. We'll see some declines, we think, on the consumer side, particularly in the mortgage book as we go into this year. But we will, you know, and so we'll need to see a little bit of growth in the commercial and corporate side to get there. And then we're assuming, you know, spreads are about where they are, you know, relative to the other asset classes that we would invest in And then a very modest, you know, expansion of the securities portfolio, but not very big. So, you know, further steepening of the curve, you know, kind of increases overall sort of are positive relative to our assumptions. You know, I think the biggest, you know, the biggest sort of downside risk is, you know, what happens to loans, loan growth, particularly on the commercial and corporate side. But a lot of the activity we're seeing from stimulus and what the potential could be in terms of the recovery, particularly in the latter part of the year, should be constructive for that. So I think it's not a Herculean task to sort of get to the top end of the range, but it does require a little bit of growth in the loan book from where we are today. And then maybe just, I guess, related, I'll give you a little sense of how the mortgage market is sort of doing in the first quarter. You know, we are – you know, we did have a – the last couple quarters have been, you know, pretty strong for, you know, for origination, the mortgage origination market. And, you know, as we sort of see the first couple weeks of January, it's still pretty strong relative to both volume and margin on that balance. So that should be also constructive as we sort of look into Q1.

No, it's great color, Mike. And just for my follow-up on capital – You mentioned that you're running with significant excess capital. The strategic actions have been outlined should significantly de-risk the overall loan portfolio. And just given your strong CCAR track record and the de-risking efforts, is there room to manage to a lower target versus a 10.5% internal objective? I know you're running above that. It just feels like that might be a little bit too conservative given all the actions that you've taken.

Yeah, I mean, that's certainly something we think about a lot, you know, Steve, in terms of what's the optimal level to run. I think publicly we've said it's around 10%. And as you noted, we're running well above that, you know, that target. So, you know, that's something we'll keep in mind. But as you know, we've been restricted from, you know, returning a lot of that back to shareholders at this point. And You know, we always start, you know, the conversation first with, you know, ensuring that we're allocating enough capital to grow the underlying, you know, businesses and invest in them inside the company. And at this point, we're just restricted from returning. So hopefully that will change over time.

And then this is Charlie. If I could just add, you know, when we think about, you know, the conservative capital position that we completely agree with and, you know, as we look at our performance over time, as CCAR does, that does allow us to rethink about what you're talking about. You also have to, you know, we also think about just the position that we have with our allowance for credit losses. And so, you know, we're seeing what everyone else is seeing, which is that the performance is substantially better than we would have thought when we went into this and when a lot of those Cecil reserves were established. But we've also, you know, when asked, you know, we've been very clear in terms of what it takes to start to use that, which is we, you know, we'd like to see something which we really do believe is more sustained and more equitable recovery because so many uncertainties exist. So everything that we see is extremely positive. But we think the right thing to do is to, you know, be prudent there. And so, you know, overall, the only – really the only meaningful reserves that we reversed were because of the student loan sale, which we had to do. But that, you know, positions us from, you know, just a quality of balance sheet perspective even stronger going into 2021. That's great.

A very helpful caller. Thank you both for dating my questions. Sure.

Your next question comes from the line of Scott Fevers with Piper Sandler.

Morning, guys. Thank you for taking the question. I just wanted to revert back to that $8 billion plus of potential gross savings in the slide deck. Would you say are you guys kind of completely done with the reviews that got you to that $8 billion number, or to what extent are those ongoing? I noticed one of the sub-bullets talks about formalizing a program for additional feedback. And I guess the context of the question is, in the past, you guys have noted that 10 billion number as sort of a kind of a guidepost that would have gotten you toward peer efficiency. So, just trying to sort of square the two together, if 8 billion is sort of all there is, or if there's more as time unfolds.

Sure. This is Charlie. Thanks for the question. I think we're actually talking about slightly different things. And so let me just try and walk through what I mean by that. The $10 billion that I referenced on the call was just the very simple math of our efficiency ratio versus our competitors. To say that that is the difference in efficiency between with which we run the company and they run the company. And when we look at... at what Wells is, we don't believe that there's any meaningful difference why that should be different. That doesn't mean that we're going to get to that number in a short period of time because these efficiencies take a long time to build in. They're based upon both expense levels but also the revenue levels that other people have. And so that was what the math is. But it certainly served as a guidepost for us to sit and say, hey, why are others where they are versus where we are? And we didn't look at it just overall. We looked at it by business. And, again, as I mentioned in my comments, now you've got the ability to do more direct comparisons by business, so you can see a little bit more of what we've seen. So the $8 billion reference is what we have, are the list of initiatives that we have that are in progress of moving forward with. As the slide mentioned, it says there are 250 plus. There really are a list of 250 initiatives that we go through as an operating committee, and each operating committee member is in the process of executing on, which we believe we will be able to reduce on a gross basis the expense base by $8 billion. Away from that, we're not done. We still, first of all, it's like peeling an onion back, and so once you get a series of efficiencies. It helps you look at everything else that's left as well. And so, you know, we're confident that there'll be more after that, which will help continue this multi-year drive to get to, you know, what we think is a reasonable efficiency level. Over a period of time, to be comparable with our competitors, first of all, you know, it took them years to get there. And so, you know, that's why it'll take us you know, a fair amount of time as well. We'll accomplish a lot of it through expenses, but we certainly need higher net interest income and some growth in our non-interest income expenses would certainly be helpful there. So I still think of efficiency as, you know, something longer term, that as we focus on just getting the expenses out and focusing on returns, our efficiency ratio will naturally become more competitive as opposed to a specific target in a specific year.

Yeah. Okay. That's good context, and I appreciate that. And then separately, just as it relates to the asset cap, so under the new business line reporting, a lot of this becomes a bit more self-evident, so I appreciate that. But just as you guys look at it on a day-to-day basis, what is the asset cap doing to your ability to retract and attain customers at this point. You know, I feel like all this excess liquidity in the form of deposits that's washed into the system over the past nine or ten months has just been such an embarrassment of money for the industry. But unfortunately, you guys have just a company-specific hurdle in having to manage that dollar amount. So as it relates to sort of customer interface with existing ones and potential ones, you know, how is the cap impacting things at this point?

Yeah, so let me start, and then Mike can certainly pick up. I think, you know, first of all, I think the way you asked the question is a good and interesting one, and you need to separate the conversation about the asset cap between impact on our financial performance and impact on the franchise. And there's no question that the impact on our financial performance is material in this environment, right? When you just look at – Well, I said when we look at actions that we've had to take to prioritize balance sheet usage in an environment where certainly early on there were significant draws and then, you know, those receded with people's ability to refinance elsewhere, but deposit inflows or, you know, having to manage to those things certainly has been a cost to us, and then I would certainly also add to that as we think about additional stimulus, we need to create room on the balance sheet to be able to deal with that stimulus, be it fiscal or monetary. And so even versus where our balance sheet was running when we went into the pandemic, just because of this environment, we have to manage it lower in addition to the specific actions that we've had to take because of the request that we've had both on the asset and the liability side for management of the balance sheet. You know, then we also think about, you know, when we went through the crisis, you know, the ability to add higher yielding assets when we were focused on staying below an asset cap is something that we were not able to do, that others are able to do. And then you look at, you know, our, you know, need not just to keep the balance sheet flat, have it be incrementally lower to create the capacity versus others' ability to increase it. You add those things together and financially in this environment, there's no doubt that it is a, you know, it is a really meaningful drag on our ability to offset certainly NII. In terms of franchise, which is a separate question, as we've gone through the exercise which we were doing daily, and now we don't do as closely daily, but we do do it regularly, the conversation that we have is all around, you know, where can we make changes or create capacity which has the least franchise impact? So if you look at what we've done, we're not limiting our consumer deposits, and we've seen very, very strong growth there. We have pulled back on our non-conforming correspondent business for a period of time. We think, you know, when we turn that back on, you know, if we're the right provider at the right price, then we'll be in the market for that. You know, certainly on our wholesale businesses, they've been more impacted by actions that we've taken. I think on the commercial side, we've tried to be very, very smart. And I would say we and the team there, Perry and the team to try to be very smart about, you know, operational versus non-operational where our customers have other choices and they understand the position that we're in. And the same thing on the corporate investment banking side. So that's just a very long way of saying I think that we've done a very good job of having as little franchise impact as possible. Hard to say nothing, but I think the places that we've done are places where people have the sophistication to understand why we're doing. We continue to do the other business with them. And it's something that, you know, we continue to obviously be really thoughtful about. Mike, anything else you'd add?

No, I think that's right. And, you know, just to kind of underline what Charlie said on the consumer side is that, you know, we're not putting any kind of restrictions there. And I think that, you know, we're seeing, you know, almost a 20% increase in consumer deposits. And I think that's a good sign of how people, you know, feel about us and doing more with us. And so I think that's encouraging to see on the consumer business.

All right, that's perfect. Thank you very much for your thoughts. I appreciate you guys taking the questions. Sure.

Your next question comes from the line of Brian Kleinhanzel with KDW. Hey, good morning.

Good morning. Just a few quick questions. First one on the reserve. I know that you said you had the reserve release related to student lending this quarter, but I guess if you think about the reserve and where it stands as of year-end. I mean, if we could equate that relative, it seems like you reserve for something worse than the base case. I mean, if you move to a base case where it returns to kind of a normal, I mean, how much does that imply for potential reserve release relative to what you had at year-end?

Well, I mean, Brian, I think as you sort of think about the reserve levels, I think for anybody, given the way the accounting standard works, you're not necessarily reserved just for a base case, right? You're reserved for a whole number of scenarios that could potentially play out that are far worse potentially than a base case scenario. And that's kind of where we are today. As you sort of look forward, I think as we sort of see the path of the recovery, I think we're hopeful that all the stimulus and support that the government's been putting in in its many different ways and the potential for more of that should help provide a good bridge to the other side. And as Charlie said, I think if that's the case, I think we're We feel that we're very conservatively, you know, accrued for, you know, that kind of positive, you know, outcome. But, you know, I think we'll see how it plays out over the next couple quarters.

And the only thing I'd add, I mean, it's just, you know, when you wind up, you know, quarter over quarter, our, you know, allowance for loans is, as a percentage basis, is the same. And we sit here today and we say, You know, the performance continues to be better than expected, which would suggest we feel even better about the level of reserving. But, again, we're just, you know, given the unknowns, we think it's, you know, it's a good position to be in and a prudent thing to do. But we certainly feel better off quarter by quarter.

Okay. And then just a separate question on those likelihood efficiency initiatives that you outlined on slide 18. Can you just kind of walk through which ones are the biggest impact to the overall expense savings? I know you had five different ones kind of summarized there, but what's like the number one, two with regards to potential expenses? Thanks.

Yeah. I would bring you back to page 17 in the presentation. On the right-hand side, we've dimensioned, you know, the percentage savings that each of the categories contributes to the 8 billion, Brian. So I think that'll probably give you a good sense of where the most impact's coming from. And really the things that we're doing across the company in terms of really streamlining the structure and finding ways to optimize are the biggest single piece, but it impacts most groups across the company. And then as you sort of look at the other categories, they're somewhat comparable on a relative basis in terms of their contributions. So you can see what that looks like.

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

Hi, guys. One nitpicky question and one bigger picture. First on the nitpicky, when we look at that path to the 10% short-term ROTCE, using the fourth quarter as a base, you obviously had a very low tax rate. I think it's about 3%. And even if we strip out the reserve release, it was about 25 basic points of charge off. So, you know, that 10% kind of Roxy in the short term, whatever that is, is that kind of dependent on, you know, still unusually low tax rate and reserve release? Or, you know, is that really driven by, you know, the incremental expenses beyond what you've laid out and obviously the capital, too?

Yeah, no, it's a good question. You know, as we sort of look forward, I think as you think about the different components of what you walk through, you know, I think the – you know, as we said, for 2021, the tax rate is going to be sort of in mid-single digits. And so you get a sense of how we think – how sustainable that is for a little while. And really, the big drivers here, though, are going to be driving the expense down, as we sort of outlined, and really getting the annualized benefits of all the stuff we're doing today and the stuff that will have more impact in 2022. And then, obviously, we've got to get the restrictions lifted on the buyback. So, Now, I wouldn't over-index on sort of the one-timers that you see in the quarter because, you know, the reserve releases are offset by some of the restructuring charges and other things that you sort of look that are embedded in that 8%. I'm sorry, Matt. I guess, Charles, the only thing I would add is this.

I'm sorry, Matt. Yeah, sorry. The only thing I would add is just being very practical about it is, you know, as Mike said, I think, you know, there are lots of pluses and minuses. We go through each of them and we do think it is a reasonable starting point. But the thing I would add is we obviously at this point have really detailed plans as we look into 2021 by quarter and for the full year and do feel very good about that as a starting point.

Okay. And then the bigger picture question, and there's probably no super tactful way to ask this, but You know, you've assumed, at least here for the targets and guidance, no lifting of the asset cap this year. And it seemed like that was being telegraphed by some of the media articles in recent months. But, you know, I guess if we do kind of look out a year from now and the asset cap hasn't been lifted, you know, would that be disappointing to you, Charlie? And I appreciate that, you know, it'll be a little over two years you've been here. But at the same time, it takes time to build a management team. And there's been COVID, which, you know, your firm and the banks in general have done a lot of things for employees, a lot of things for customers, and that can be distracting. So I know there's some puts and takes, but, you know, a lot of us on kind of the investor and self side, you know, obviously look at the asset cap being in place for quite some time. And I'm sure you're impatient and we're all impatient too. So how would you feel a year from now if it's still here?

Yeah, Matt, listen, it's a very, very tactful way of asking the question of when we think the asset cap will be lifted, which you know that I'm not in a position to answer. And so I think, you know, I think your sentiments are right about, you know, what it takes. It takes time. It takes a management team. I think, you know, what I'll say, you know, if you look at the remarks that we made in the prepared part of the call, you know, the words are very carefully chosen. And so, we do believe that we're making progress. As I, you know, even more broadly, I feel great about the team we have in place, our understanding of what has to get done for this consent order and for the others. As I said, I made the statement, I do believe that we're making progress. But if you look at the words that are required in the consent order, they're really clear, which is execute and implement that, and we've got significant work to do. And I can't share with you. I understand why you're asking. I said this last quarter, too. I really do. I wish I could share with you the specifics of what the plan is. I can't do that. And ultimately, it's up to the FRB anyway. So I really am just not in a position to put the timeframe around it, other than I feel very confident that we know what has to get done and we're moving forward. And I wish I could be more specific than that.

Okay, thank you.

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

Morning. Morning. Charlie, sorry to hop right back to the answer, but one more thing on that I wanted to see if you can let us know. I know part of that process is the third-party review. Are you able to let us know if you're yet at that stage of the third-party review for the – It's an order that includes the Africa? I really can't. I'm just, again, we're not in a position because of CSI to be able to talk about where we stand, the progress, where we are, and, you know, along that continuum. Again, I just, I'll go back. I wish I could say more. I go back to the word. I do believe that we're making progress. As I said, it's really clear what we have to do. I think we have people that don't just understand what needs to be done but are capable of, you know, adopting and implementing, which is what's required for the third-party review, you know, at the point at which the Fed, you know, ultimately, you know, accepts the or just chooses to accept. And that's really all I can say at this point. That's helpful. All right. Thank you. Separately, on the expense front, the $8 billion in cost saves, does that already reflect the real estate rationalization, the 15% to 20% reduction that you mentioned? I know you just cited it on the slide around the expense efforts, but I'm not sure. Does it reflect that whole rationalization? Because that's a fairly substantial cut to your real estate footprint.

Yeah, the bulk of it's included in the $8 billion number that we gave you.

Okay, thank you. One more thing on that. Regarding the cadence of the remaining $4.3 billion of that $8 billion beyond 2021, I know you indicated it would be over several years. Is that still going to be more front-end loaded, meaning could the savings realized in 2022 – be higher than what will be realized in 2023? Is that how we should think about it?

Well, I think we'll give you better guidance on 2022 as we get towards the end of the year, but it's something, you know, it's something that will take, you know, a few years to sort of work our way through that list, and as Charlie said, we're not done. You know, there's a long list of other items that are being vetted as we speak that sort of add to that list, so.

And let me just add to it just so – I mean, we're not trying to be coy in any way, shape, or form. What we're trying to do is do what we said we would do, which is we said last quarter that we would give you what we thought was our clearest line of sight to our expenses for 2021, which is what we've done. As we look beyond that, we do believe there are significant additional gross cost saves to take out, but we're also – making sure that we've got the ability as we go through the year to understand what continuing investments need to get made, which include doing everything that we need to do on the risk and regulatory front. So we don't want to give a net number and box ourselves in and then believe we need to spend a different amount on the risk and regulatory side because that's going to be what it needs to be. And so, you know, what the prepared remarks laid out was, You know, the growth saves are significant. We expect to, you know, what we're targeting is to continue to show net reductions year over year. So we continue on this path to increasing efficiency, acknowledging that we're not giving you the specificity beyond 2021 at this point. Got it. That's helpful. All right. Thank you.

Your next question comes from the line of David Long with Raymond James.

Good morning, everyone. Charlie, you mentioned in your prepared remarks that the bank's number one focus is building the right management team. Obviously, a lot of changes near the top and in your top operating team for the last 15 months since you've been CEO. Are there still additional changes needed on that team and any specific positions that you would still like to fill?

Yeah, so just first of all, our number one priority is getting the risk and regulatory work done, which will ultimately resolve, you know, these consent orders that we have. The management, building the management team is one of the key enablers in getting there. Yeah, I feel great about, you know, the management team that we have. I think that, you know, this is – these are always – it is always an ongoing process where, you know, we're always looking at, you know, once one level gets filled, everyone's looking to make sure that they've got the right members of the team behind them. And, you know, there's no question that with all of the talent we brought in from the outside, given where we are, that enables us to leverage more of the talent inside the company and put them in the right roles. So I don't foresee, you know, these, you know, the, you know, the, you know, the pace and, you know, the dramatic changes that we've made. I think, you know, most of that is done at this point. And then it's just, you know, continuing to build at, you know, the lower levels and recognizing that, you know, there are always some changes that happen here and there for different reasons.

Got it. I appreciate the color. And then you talked about additional costs still needed to improve the operations and your investments in 2021. to get out of all the remaining consent orders. You know, where do you still think you need to spend? Do you have any areas earmarked at this point?

Yeah. I mean, so when we look at that, what page is it? It's the page 19 that shows where we break out from the $54 billion going to $53, and then we break out the net billion and a half reduction. We show you the gross versus the investments. Embedded in that billion six is a series of things. You know, roughly a third of it or so are specific ads that we're doing to continue the work on building out the risk and control infrastructure. Those are everything from continued ads in compliance, independent risk, and all the functions that are necessary to, for the most part, build the operational compliance infrastructure that's required in, you know, Fed and OCC consent orders, but is you know, the right foundational work to do. We have a series of increases embedded in there, which are investments in technology. Some of the expenses relate to things we need to build to get the efficiencies out. But we also have some net increases there, also to continue building out some, you know, some product capabilities and things like that. So I just point you back to that billion sixes, you know, on a gross basis, what's embedded in our numbers this year, 2021, that is. Got it.

I appreciate the color. Thanks for taking my question. Sure.

Operator. Operator, are you there? Hold on everyone. Give us a minute.

John Campbell, you're working on this?

Your next question comes from the line of Gerard Cassidy.

Thank you and good morning. Gerard, it better be a good one, given the anticipation. There you go. I thought maybe you guys, on your expense savings, you only paid for 90 minutes and they cut you off short or something. But anyway, thank you for taking the question. Maybe, Mike, I know the net servicing income is always volatile quarter to quarter. Can you share with us what went on with hedging this quarter? Obviously, it was a negative number. But again, I know it's volatile quarter to quarter.

Yeah, sure. And, Gerard, I may take you up on that idea, by the way, of limiting recall maybe next quarter. You know, look, I think, you know, as you sort of look at the, you know, the MSR asset, obviously there's a bunch of things that sort of impact what's happening, which, you know, sort of drives the servicing income in there. You know, and I think a couple things you saw, you know, was the higher prepaids. and sort of the velocity in the mortgage market impacting that. And then you also saw servicing costs as modeled. So as you probably know with these assets, like you're modeling your future costs, which then reduces or increases your income in the current period. And you look at that servicing income going up a little bit as you sort of look at the cost that you might have to incur, given some of the forbearance programs and the extensions of those. And so there wasn't anything. you know, outside of those items that was really driving the result.

Very good. And then as a follow-up, and I understand about the asset cap and the balance sheet, but in your net interest income expectations in slide 16 – What kind of interest rate environment would you need to see for the drag that you give us in that slide for that to go away? If you had your druthers, if you could paint the interest rate environment that the sensitivity analysis I'm assuming you guys do, what would we need to see for that to disappear?

Yeah, look, as I said earlier, you know, to get to the top end of that range, you know, we're using sort of the implicit, you know, the implied forward curve, you know, as it stands, you know, over the last, you know, week or so. And so I think as you, you know, think about all wealth equal, you know, any steepening from here or, you know, just overall increase from here I think would be helpful and additive to that.

Great. Appreciate it. Thank you.

Can you have time for one more question? And that question comes from the line of Erica Natarian with Bank of America.

Hi, thank you for taking my question. And, Charlie, thank you for your patience on this long call. I just wanted to get back to the question on ungross versus net, and I wanted to get clarity on the $1.6 billion of investment spend. I think earlier in the call you mentioned that it was still mostly related to risk and regulatory-related work. You know, and as we go forward and, you know, we think about the potential for, you know, a higher ratio of net versus gross, how should we think about offensive, more offensive type of expense of investment? I think one of your peers today, you know, laid out, you know, $2.4 billion in investment spend and $900 million of which was related to tech.

Yeah, so just to be clear, because I don't, of the billion six that's in the investment line, again, roughly a third of that is very clearly the risk and control build out. But the reality is there could be other things that we're doing that's in the remainder. Another big chunk of what's in that increase are things that we're doing to drive efficiency in the company. And then there are obviously things that we're doing to, you know, build the future of the business. You know, your question of, you know, how to think about, you know, gross and net and the level of investments for the future, I think that is, that's one of the reasons why we're just being very careful not to commit to anything beyond 2021. For 2021, we've been very, very thoughtful about, what we believe we need to do, what we want to do, and what do we actually have the capacity to do. And that's what's reflected in these numbers here. We've hired, you know, a series of new people both from the business side as well as Aether on the digital side. And, you know, as we think through what the expense base could be in 2022 and beyond, we don't know at this point what we want that increase to be, which over time, hopefully becomes more about building products and services that can work effectively in the marketplace. And so I'm not sure, again, how to answer the question other than we expect to be doing that. We do have some of it embedded in the numbers today, but we want to make sure that we understand what you know, we might want to do, at the same time that we're saying we believe, based on everything we know today, that we still should be able to do that and drive the expense base down on a net basis. Just not sure what the net number is sitting here today.

Great. Thank you for taking my question.

Of course.

And your last question comes from the line of Vivek Ginger from J.P. Morgan.

Hi. Thanks for squeezing me in. So a quick one, firstly, to start with, which is expense reduction. Charlie, Mike, sorry, I jumped over and didn't go with the pleasantries of saying hello because I know you're squeezing me in. You said revenue digits down, low single digits from the business exits. How about expense reduction?

Yeah, in fact, we'll give you more color as we sort of announce those and we get to the closing of some of those transactions. But, you know, it's probably not that different, I think, relative to the revenue contribution.

Okay. Then, Charlie, since this is the only opportunity we have to talk to you, I have a question strategically just to understand since you are making a lot of changes. Three areas. Firstly, CRA, since you are the biggest player, have been – What are you thinking there in terms of outlook for that business, including your UK commercial real estate mortgage banking? Since you've cut back disclosure, is that a sign that you're pulling that back a little? And lastly, Charlie, also your outlook for trading since assets are down sharply year on year. Are your plans for trading?

Yeah. Listen, CRE, as you can see in our disclosures, is an extremely important business for us. We think we have a you know, a great franchise which is made up of the customer base, but it's also the people that we have. You know, we're not, you know, our portfolio is not immune to, you know, losses that will inevitably be taken because of this environment. Separate that out from we believe that we are, you know, hopefully more than appropriately reserved for that, but time will tell. You know, the devil is in the detail when you talk about commercial real estate in terms of it's a very broad caption, but when you look at who you're lending to, what the structures are, obviously a big difference between hotels, retail, office space, you know, the level of security you have. And so, you know, we continue to believe – that, you know, done properly, it will continue to be a really important part of what we do. And we've got a team that, you know, reacts appropriately, and actions they've taken, certainly going, you know, even into COVID, you know, will serve us well. Trading, listen, I think, as I said before, Vivek, I think, You're expanding the impact a little bit. I think there's no question that when you look at our corporate investment bank in addition to our commercial bank, when we've asked people to take actions to reduce balance sheet, that's a place where we've gone. And it's true on the deposit side, but it's also true on the trading side as well, both in terms of customer financing as well as trading assets where possible. Again, I would say the same thing here. I think You know, our customers understand what, you know, we're doing and why we're doing it. They understand the position that we're in. And, you know, I think, you know, when we've looked at where we've had to make reductions, it's been with an eye towards when the asset cap does eventually go away and we have the latitude to continue building as we were building in the past. we would expect to see more resources put there, certainly to bring us back in line where we were, and then to build the business like we want to build the rest of our businesses as well.

Okay, great. One last one was mortgage banking, Charlie. Any color on that, your plans for that? Obviously, you've been a leading player. It's a much bigger piece for you than the other GCFs. What's your thinking on that? You've cut back on correspondent. What are you thinking as you look ahead You know, given that you've cut that disclosure, it's making me wonder.

No, listen, I think it's a, home lending is a really important business for us to be in. You know, I don't, you know, when we look at what we want to do to serve consumers across Wells Fargo, the home lending, when I say consumers, I mean both in our consumer and small business bank, as well as customers that they deal with directly through their own channels, as well as our wealth segment, home lending products are extremely important to that relationship. We've got a great team there. As you know, Mike Weinbach runs all of home lending. Christy Furco joined us as the CEO of our home lending business. And I think, you know, for us, it's going to be going to that next level of detail. which is really understanding on the origination side by channel, what does profitability look like? How do we continue to drive more profitability? How do we compete more effectively in digital originations where, you know, the banks generally have not done a great job versus what others have done? And on the servicing side, being more thoughtful probably than we've been about – portfolio by portfolio, what are the servicing economics? Where do we think it makes sense for us to service? Where does it not make sense for us to service? And so, you know, I think what you'll see is us, you know, becoming, you know, putting a finer point on what that looks like from the service perspective and driving, you know, more profitability on the origination side. But it's important for us. Okay. Thank you. Okay, listen, thank you very much. Certainly we appreciate all the time that you've put in, not just on this call, but we know the revised disclosures create a bunch of work for you all. But hopefully it helps us have a better conversation going forward as we talk about what the future of the company is. And as I said, I think we've got a lot of work still to do. I believe we're making great progress. And when these headwinds abate and the actions that we're taking – are reflective in our performance. I continue to feel really good about what the opportunity holds for us. So thanks again for the time and look forward to talking to you some more. Take care.