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spk03: Welcome and thank you for joining the Wells Fargo fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press Star 1. If you would like to withdraw your question, press Star 2. 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.
spk04: Thank you, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, Mike Santamisimo, 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 wealthmargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K file 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.
spk11: I will now turn the call over to Charlie. Thanks very much, John. Good morning, everyone. I'll make some brief comments about our 2021 results, the operating environment, and update you on our priorities. I'll then turn the call over to Mike to review fourth quarter results and some of our expectations for 2022 before we take your questions. Let me start with some 2021 highlights. We earned $21.5 billion or $4.95 per common share in 2021. Expenses declined 7% from a year ago, reflecting lower operating losses and progress on our efficiency initiatives. Revenue increased 6% as we benefited from strong gains from equity securities and gain from sales of our student lending, asset management, and corporate trust businesses. We also have broad-based revenue growth across our businesses, including home lending, consumer and small business banking, credit card, auto, commercial real estate, banking, and wealth and investment management. Credit quality improved significantly as the economy improved and our customers had high levels of liquidity. Our loan charge-off ratio declined from 35 basis points in 2020 to 18 basis points in 2021, and our allowance for credit losses declined by $5.7 billion. Deposits increased $78 billion, or 6%, and loans grew 1%, with declines in the first half of the year offset by a 5% increase in the second half. We also returned a significant amount of capital to our shareholders, including increasing our common stock dividend from 10 cents per share to 20 cents per share in the third quarter, and we repurchased $14.5 billion of common stock, predominantly in the second half of the year, after the return to the SCB framework. Our results in the fourth quarter also showed continued broad-based momentum. We earned $5.8 billion, or $1.38 per common share. We grew loans by $32.6 billion, or 4%, and deposits by $12.1 billion, or 1% from the third quarter. Expenses declined 1% from the third quarter and 11% from a year ago, and we generated positive operating leverage over both periods. Most importantly, we continued to prioritize our risk and control work. And the strong economy continues to positively impact our customers and our results. Consumers continue to have more liquidity than prior to the pandemic, Though we do see this declining, as the median balances today are 27% higher than pre-pandemic levels, but are down 10% from the third quarter. Consumer credit card spend also continued to be strong, up 28% from the fourth quarter 2020, and up 27% from the fourth quarter 2019. Holiday sales were strong, with spending up 31%, the three weeks leading up to Thanksgiving, and that momentum continued post-Thanksgiving. All spending categories were up in the fourth quarter compared to a year ago, with the largest increases in travel, fuel, entertainment, and dining. Weekly debit card spend during the fourth quarter was up every week compared to both 2019 and 2020. This increase was driven by higher transactions, but also higher spend per transaction, reflecting inflationary impacts and increased spending in higher cost categories such as travel. We are watching the impact from Omicron on consumer spending. And while there is some softening in restaurant travel and entertainment in recent weeks, overall spending remains strong in the first week of January with credit card up 26% and debit card up 29% versus the same week in 2020. And we saw strong loan growth from the third quarter across our commercial businesses, including commercial real estate, asset-based lending, middle market banking, and our markets and banking businesses. So I've been at the company for a little over two years now, and I thought I'd spend a few minutes giving you my thoughts on our progress. Overall, I feel great about what we've accomplished and continue to feel energized about the opportunities in front of us. I think about this along several dimensions, talent, leadership, and culture, risk regulatory and control, financial and strategic progress, and our work on ESG and broader reputational issues. I've spoken of the substantial talent changes we've made, but just to remind you, 11 of 18 members are new to the operating committee and two are new to their job since I arrived. Additionally, well over half of the senior-most people at our company, meaning those who are one level below the operating committee, are new to their roles, and a significant proportion of them were hired from outside the company. This is a dramatic change, in our leadership, and with it, we've changed how we run the company, how we prioritize our work, and how we view our responsibility broadly. We began a process two years ago to change the culture and priorities of the company, and the most significant part of this prioritization was the building and implementation of an effective risk and control framework across the company. Our approach and our progress are entirely different than they were when I arrived. We are laser focused on meeting our own expectations and those of our regulators. We have clear plans in place and clear owners for every regulatory deliverable we have. We have detailed reporting on how we're progressing on those plans. We review this reporting every single week at the operating committee level. The detailed involvement of the operating committee members is very different from what was happening before I arrived. Our ability to identify issues has also improved from two years ago. I continue to believe that we're making significant progress, and this is based on what we see in our internal reporting. It doesn't mean that we're perfect. The fact that we have multiple consent orders makes it complex. It takes time to build all of our capabilities, and it's certainly in the regulator's purview to look at issues that have been outstanding for a long time, like the OCC did in the third quarter. But I would point you to the comment made by the OCC in their recent consent order. that highlights that we have taken steps to comply with their 2018 order and we're committed to addressing remaining requirements. I remain confident in our ability to continue to close the remaining gaps over the next several years. Having said that, it continues to be the case that we're likely to have setbacks along the way, but that doesn't change the fact that we believe that the quality of the talent we now have and the processes we now have in place will enable us to get the work done. We're making progress increasing the earnings power of the company and have also begun to invest in a more holistic and aggressive way to drive stronger organic growth in all of our businesses. We are just now beginning to bring things to market that are differentiated and the number of significant opportunities are exciting. We're continuing to track to the financial return goals we've discussed. First, achieve a sustainable 10% ROTCE subject to the same assumptions we've discussed in the past and then target 15%. We continue to believe that we will achieve the 10% during one of the quarters in 2022 on an annualized basis. To achieve this, we're aggressively focused on driving efficiencies and we're seeing net expense reductions after significant investments in our control build-out and our businesses. We are aggressively returning excess capital to shareholders now that we've returned to the SCB framework. We continue to manage credit well and we're seeing early benefits from higher interest rates, growing loan balances, and higher fees in certain businesses. We're doing this while devoting significant resources to building our franchise. We have fallen behind in providing competitive digital capabilities for our clients. This is changing. In the fourth quarter, we announced a rebuilt mobile banking experience for consumer and small business customers that is set to begin rolling out this quarter. It has a new, modern look and feel and a simpler user experience that will help our customers more easily accomplish their banking needs. This platform is necessary to drive significantly higher digital adoption from our customers. Even with our existing capabilities, in the fourth quarter, our customers logged in 1.6 billion times using a mobile device, up 7% year over year. Teletransactions remained more than 30% lower than pre-pandemic levels. We also announced that later this year we'll be adding an all-new virtual assistant, Fargo, to the app. Customers will be able to get answers to their everyday banking questions, ask Fargo to complete the task for them, and Fargo will also provide personalized insights and recommendations to help customers better manage their finances. We will also be introducing the first phase of the redesign of our public website early this year. In addition, we're beginning to become more active on the wholesale side. For example, we announced that we're collaborating with HSBC to optimize the settlement of foreign exchange transactions through a blockchain-based solution, which will reduce settlement risks and associated costs. We're also approaching payments and credit cards very differently. We believe credit cards will remain important as both a credit and as a payment vehicle. We were also doing additional work around non-card payments and believe we must succeed here via key financial services provider. Two years ago, our products and capabilities supporting those products were not as competitive as necessary. In 2021, we launched two products, including Active Cash, which we believe is the best cashback product in the marketplace, and Reflect, which rewards customers for on-time payments. We improved the core experience, including investing in advertising, simplifying our digital application, and enhancing our underwriting. These efforts have driven an increase in digital card activation, paperless statements, and enrollment alerts. We are opening approximately twice as many accounts as we were prelaunch of these products, and importantly, we're not competing on credit. In fact, the quality of applications and the accounts we're booking continues to be better than what we were booking historically. Away from CARD, we're beginning to invest in our broader digital payments across the platform, enhancing our capabilities, increasing limits, and broadly reducing the friction in moving money. As evidence, Zelle momentum continued to accelerate with Zelle transactions up 46% from a year ago. We are also taking a very different approach in that we believe that for us to be successful, we must consider a broader set of stakeholders in our decisions and actions. This is not in lieu of shareholders. In fact, we believe it will enhance our returns to shareholders over time. We have taken significant efforts to support small businesses since the beginning of the pandemic and recently fulfilled our roughly $420 million Open for Business Fund commitment to assist small businesses in recovering from the pandemic. by working with not-for-profits to offer capital, technical assistance, and long-term programs. The fund was created by donating the gross processing fees we made from administering the Paycheck Protection Program loans in 2020. Additionally, we made significant climate commitments in 2021. In the fourth quarter, we joined the Net Zero Banking Alliance, an industry-led leadership group designed to foster collaboration and support banks in aligning their financing with the goal of achieving net zero greenhouse gas emissions. Climate change is one of the most urgent environmental and social issues of our time. And last year, we announced our goal to achieve net zero greenhouse gas emissions, including emissions attributable to financing by 2050. We expect to announce our first finance emission targets for the oil and gas and power sectors later this year. We made our first solar plus battery storage tax equity commitment. Once it is operational, it will be one of the largest solar and battery projects in the company. Last year, we surpassed $13.3 billion in cumulative tax equity investments in nearly 600 wind, solar, and fuel cell transactions. These investments have provided 13% of all utility-scale wind and solar capacity in the U.S. over the past 16 years. We continue to be one of the top investors in affordable multifamily housing in the U.S., as well as an active lender for affordable rental housing developments. Additionally, we're committed to expanding affordable homeownership. For example, in the fourth quarter, we committed to invest $5 million through the Neighborhood Lift Program to help more than 300 low- and moderate-income residents in Houston with home down payment assistance. We've also supported our employees, and in December, we announced that as part of our commitment to providing comprehensive benefits and competitive pay, we're increasing U.S. minimum pay hourly pay levels to a range of $18 to $22, effective at the end of this month. Just this week, we announced new efforts that will roll out over the course of 2022 to help our consumer customers avoid overdraft fees and cover short-term cash needs, building on other changes we've made over the last several years. The changes we announced include the elimination of transfer fees for customers enrolled in overdraft protection, the elimination of non-sufficient fund fees, early access to direct deposit by providing customer access to funds up to two days before their scheduled deposit, a 24-hour grace period for customers that overdraw their account to cover the balance before incurring an overdraft fee, and a new short-term credit product for customers to meet personal financial needs. This builds on existing features we already have in place, including clear access banking, our no overdraft checking account that we launched in September 2020, and we now have over 1.1 million outstanding customer accounts. Overdraft Rewind, which was introduced in 2017, which automatically rewinds overdraft fees when a covering direct deposit is received by the next morning, which will be replaced by our expanded 24-hour grace period. Balance Alerts that help customers avoid overdrafts by sending more than 1.3 million alerts every day. Putting all of these changes in perspective, these fees are down significantly since the financial crisis. We have alternatives for both customers that do not want to overdraft and those that do. This is a competitive marketplace. We continue to review our capabilities and pricing with the goal of providing value to our customers. And let me make a few comments now as we look forward. While there is a risk with the continued growth of the Omicron variant, or potentially other variants later this year, I expect to see continued strong economic trends in 2022. Consumer's financial condition remains strong. Modest debt growth, strong asset appreciation, and higher deposit balances have left household balance sheets in excellent condition, which should help drive continued strong consumer spending. Corporate America has demonstrated the ability to adapt to the ever-changing pandemic conditions. Inventories remained unusually lean as businesses adopted a defensive posture and supply chains have been disrupted. This is expected to result in substantial gains in industrial production as they continue to restock. We're beginning to see loan growth and expect this to continue. In a moment, Mike will provide our thoughts on net interest income and expenses for 2022. I commented earlier that we remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we've discussed in the past, on a run rate basis at some point this year, and that once we've achieved this goal, we'll discuss our plan to continue to increase returns. But at a high level, we continue to believe we can further improve our returns through a combination of factors, including a modest increase in interest rates or further steepening of the curve, ongoing progress on incremental efficiency initiatives, a small impact from returns on growth-related investments in our businesses, continued execution on our risk and regulatory control framework, and moderate balance sheet growth once the asset cap is lifted. It's important to note we currently have the ability to grow loans even under the asset cap. The changes we've made to the company and continued strong economic growth prospects make us feel good about how we're positioned entering 2022. We also remain cognizant that we still have a multi-year effort to satisfy our regulatory requirements with setbacks likely to continue along the way, and we continue our work to put exposures related to our historical practices behind us. As we look forward, we will continue to be aggressive in driving progress and improvement in our performance, embrace our responsibility to our customers and communities, and I remain incredibly optimistic about our future. I want to conclude by thanking our employees who continue to serve our customers through another challenging year. I appreciate their hard work and their resiliency while we made progress on making Wells Fargo better. I look forward to all that we accomplish in the year ahead.
spk10: I will now turn the call over to Mike. Great. Thanks, Charlie, and good morning, everybody. Charlie summarized how we helped our customers, communities, and employees last year on slides two and three. So I'm going to start with our fourth quarter financial results on slide four. Net income for the quarter was $5.8 billion, or $1.38 per share. Our fourth quarter results included a $943 million net gain on the sales of our corporate trust services business and Wells Fargo asset management. There could be future gains related to these sales due to post-closing adjustments and earn-out provisions. An $875 million decrease in allowance for credit losses as credit trends continue to be strong, and a $260 million impairment of certain leased rail cars due to changes in demand for these cars. We also had $2.5 billion or $1.9 billion after non-controlling interest of equity gains, primarily from our affiliated venture capital and private equity businesses, the third consecutive quarter of strong returns in these businesses. Our effective income tax rate in the fourth quarter was approximately 23%, including the discrete impacts related to business divestitures. Our CET1 ratio declined to 11.4% in the fourth quarter, reflecting share repurchases and an increase in risk-weighted assets, primarily from loan growth in the quarter. We repurchased $7 billion of common stock in the fourth quarter, partially offset by $1.4 billion of new issuances, predominantly for the annual matching contribution for our 401 plans. As a reminder, the regulatory minimum for our CET1 ratio will be 9.1% in the first quarter of 2022, reflecting a lower G-SIB capital surcharge. Turning to credit quality on slide six, our net charge-off ratio was 19 basis points in the fourth quarter. Commercial credit performance continued to be strong with net loan charge-offs declining 10 million from the third quarter to two basis points. Despite the challenges created by the pandemic, the commercial real estate portfolio has continued to perform well. Commercial real estate valuations and investment activity has rebounded off their lows across all property types. although there still is some risk in office and select hotel and retail segments. Consumer credit performance also remains strong with higher collateral values for homes and autos, and consumer cash reserves remain above pre-pandemic levels. Consumer net charge-offs of $393 million increased $172 million from the third quarter. $152 million of the increase is related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans. Non-performing assets increased 145 million or 2% from the third quarter, driven by an increase in residential mortgage non-accruals, primarily resulting from certain customers exiting COVID-related accommodation programs. Loans that were modified in 2021 upon exiting forbearance are reported as non-accrual until they perform for a period of time. Overall, early performance of loans that have exited forbearance have been aligned with our expectations. After increasing during the first four quarters of the pandemic, commercial non-performing assets have declined for four consecutive quarters, and we're back to pre-pandemic levels in the fourth quarter. Our allowance level at the end of the fourth quarter reflected continued strong credit performance, the ongoing economic recovery, and the uncertainties that still remain. If the economic recovery continues, we would expect to have additional reserve releases. On slide seven, we highlight loans and deposits. Average loans grew 2% from the third quarter, with growth in both our commercial and consumer portfolios. We had strong growth late in the quarter, and period-end loans grew $32.6 billion, or 4% from the third quarter, with broad-based growth across most of our commercial and consumer portfolios. I'll highlight the specific growth drivers when discussing business segment results. Average deposits increased $89.9 billion, or 7% from a year ago, with growth in our consumer businesses and commercial banking, partially offset by continued declines in corporate investment banking and corporate treasury, reflecting targeted actions to manage under the asset cap. Turning to net interest income on slide eight. A year ago, we provided our expectation for 2021 net interest income to be flat to down 4% from the originally reported annualized fourth quarter 2020 level, and we ended up being down 3% for the full year. Fourth quarter net interest income was down 93 million or 1% from a year ago and grew 353 million or 4% from the third quarter. The increase in the third quarter was driven by higher loan balances including higher interest income from loans purchased from securitization pools or EPBOs. We also benefited from higher trading assets and a favorable funding mix. In the fourth quarter we had 318 million of interest income associated with EPBOs And at year end, we had a total of $17.3 billion of these loans, down from $34.8 billion a year ago. And as I highlighted last quarter, we expect these balances to decline substantially by the end of this year. We also had $130 million of interest income in the fourth quarter from Paycheck Protection Program loans, or PPP loans, and our outstanding decline to $2.4 billion at year end. We've reflected the headwind from these portfolios running off in our 2022 net interest income waterfall that I will review later on the call. The net interest margin increased eight basis points from the third quarter, three basis points of which was due to higher interest income from EPBOs. Now turning to expenses on slide nine, non-interest expense declined 11% from a year ago. The decrease reflected progress we made on our efficiency initiatives, including reductions in personnel costs, consultant spend, and occupancy expense. I will provide specific examples of the progress we made in our efficiency initiatives in 2021 later on the call before updating you on our expense expectations for 2022. We also had lower restructuring charges and operating losses in the fourth quarter compared with a year ago. Fourth quarter expenses included one month or approximately $100 million of operating expenses from our corporate trust services business and Wells Fargo asset management prior to their sales on November 1st. Now turning to our business segment, starting with consumer banking lending on slide 10. Consumer and small business banking revenue increased 4% from a year ago, primarily due to higher deposit-related fees, as fourth quarter 2020 included some COVID-related fee waivers. Fourth quarter 2021 also reflected an increase in consumer activity, including higher debit card transactions compared with a year ago, and the benefit of strong deposit growth was largely offset by lower spreads. Charlie highlighted the enhancements and changes we're making to help our customers avoid overdraft fees. The impact from the fees that will be reduced, including the elimination of non-sufficient fund or NSF fees, as well as overdraft protection transfer fees, is estimated to be approximately $700 million annually. Also, we expect that they may be partially offset by other fees due to higher levels of activity, as well as the expiration of various fee-related waivers that were in place in 2021. In terms of new features to be rolled out in the latter part of the year, including a 24-hour grace period for overdrafts and a new short-term loan product, we will have to observe how customers respond. Home lending revenue declined 8% from a year ago, primarily due to lower mortgage banking income driven by lower gain-on-sale margins and origination volumes. Even before the recent rate backup, we started to see a drop in application volume in December, and we expect originations to decline in 2022, which will put pressure on margins as the industry adapts to the lower volume. Credit card revenue was up 3% from a year ago, driven by higher point-of-sale volume, partially offset by higher rewards costs, including promotional offers on our new active cash card. Auto revenue increased 17% from a year ago in higher loan balances, with the average balances up $6.8 billion. turning to some key business drivers in slide 11. Our mortgage originations declined 7% from the third quarter. We expect our first quarter originations to continue to decline due to lower refinance activity and the typical seasonal slowdown in the purchase market. We increased our non-conforming originations in the fourth quarter and have grown our non-conforming portfolio for seven consecutive months, reflecting the improvements in our capabilities as well as the reintroduction of cash out refinancing late in the first quarter of 2021. Turning to auto, limited vehicle inventories continue to constrain industry new car sales. However, we had our third consecutive quarter record originations with volume up 77% from a year ago, with the majority of our originations coming from used cars. Originations also benefited from the enhancements we continue to make in our capabilities. Importantly, we are maintaining our underwriting standards and continue to be cautious about the increase in vehicle prices over the last year or so. Turning to debit card, transactions were relatively stable from the third quarter and up 10% from a year ago with increases across nearly all categories. Credit card point of sale purchase volume continued to be strong and was up 28% from a year ago and 11% from the third quarter. While payment rates remain elevated, balances grew 5% from a year ago due to strong purchase volume and the launch of new products. New credit card accounts more than doubled from a year ago driven by our new active cash card and we're pleased by the quality of the accounts we've been attracting. Turning to commercial banking results in slide 12. Middle market banking revenue increased 2% from a year ago. Results included higher deposit balances and modestly higher investment banking fees, partially offset by the impact of lower interest rates. Asset-based lending and leasing revenue increased 1% from a year ago, driven by higher net gains from equity securities and higher revenue from renewable energy investments, partially offset by lower loan balances. Non-interest expense declined 10% from a year ago, primarily driven by lower personnel and consulting expense due to the efficiency initiatives as well as lower lease expense. Loan balances started to increase late in the third quarter and now have grown for four consecutive months with growth accelerating in December. As with other portfolios, we are adhering to the same credit risk appetite. Increases in middle market banking were driven by growth from our larger clients, a modest uptick in revolver utilization, and strong seasonal borrowing. Growth in asset-based lending and leasing was driven by new client wins as well as increased levels from higher prices and some increases in inventory levels. Turning to corporate investment banking on slide 13. Banking revenue increased 17% from a year ago. Investment banking had a strong quarter with higher debt origination and advisory fees. Banking results also benefited from higher loan balances. Commercial real estate revenue grew 8% from a year ago, driven by higher loan balances, and capital markets result from stronger commercial real estate financing activity. Loan originations returned to pre-pandemic levels, and we had a healthy pipeline as we started the new year. Markets revenue was relatively stable from a year ago. It was down 14% from the third quarter, primarily due to lower trading activity and spread products and equity derivatives. Average deposits in corporate investment banking were down $23.7 billion from a year ago, driven by actions taken across all lines of business to manage under the asset cap. Average loans increased from both the third quarter and a year ago across all lines of business. On a period-end basis, loans grew every month since June and growth accelerated in December. Wealth and investment management, on slide 14, The revenue grew 6% from a year ago with higher asset-based fees and market valuations more than offset a decline in net interest income due to lower interest rates. The 5% increase in expenses from a year ago was primarily driven by higher revenue-related compensation, which was more than offset by higher revenue. This increase was partially offset by lower salaries expense reflecting progress on efficiency initiatives. Client assets reached a record $2.2 trillion, up 9% from a year ago, primarily driven by higher market valuations. Average deposits were up 7% from a year ago, and average loans increased 5% from a year ago, driven by the continued momentum in securities-based lending. Slide 15 highlights our corporate results. Revenue increased from a year ago, driven by strong results in our affiliated venture capital and private equity businesses, and gains on the sales of our corporate trust services business and Wells Fargo asset management. These businesses contributed $1.6 billion of revenue in 2021, excluding net gains and sale, and $1.5 billion of non-interest expense. We expect approximately $200 million of these expenses associated with transition services agreements to remain in 2022, with offsetting revenue so it's P&L neutral. We also expect approximately $300 million of corporate overhead expenses related to these businesses to remain in 2022, which we expect to manage down over time. Turning now to our expectations for 2022, starting with net interest income in slide 16. As the last couple of weeks have demonstrated, it's challenging this early in the year to predict the rate environment, loan demand, and other variables that impact net interest income for the full year. But let me highlight the key drivers of our net interest income for 2022. We are assuming the asset cap will remain in place throughout 2022. Moving left to right on the waterfall, as we've discussed previously, we have a headwind this year from the runoff of PPP and EPBO loans. However, our current outlook for loans is for average balances to grow low to mid-single digits from the fourth quarter of 2021 to the fourth quarter of 2022. Along with other balance sheet mix changes, this is expected to more than offset that headwind. This net result would increase net interest income approximately 3% in 2022 from the $35.8 billion we generated in 2021. Moving to rates and repricing, the recent forward curve includes approximately three 25 basis point rate hikes this year beginning in May. Assuming this were to play out, net interest income has the potential to grow up to an additional 5%, resulting in approximately 8% in net interest income growth in 2022 versus 2021. That said, the implied forward curve has changed a lot over the last month and a half, so it's very hard to forecast with any certainty. Another way to view our asset sensitivity is from the disclosure we provided in our third quarter 10Q filing. It showed that the estimated impact of an instantaneous 50 basis points increase in short-term rates would increase net interest income by approximately $2.7 billion over the next 12 months. Ultimately, the amount of net interest income we earn in 2022 will depend on a variety of factors, including the absolute levels, interest rates, the shape of the yield curve, loan demand, and cash redeployment. Now turning to expenses on slide 17. We made progress last year on our efficiency initiatives, and we've continued to identify new opportunities. Our portfolio of initiatives that includes realized and identified potential gross saves has grown from approximately $8 billion to $10 billion, and we are continuing to work across the company. We expect to execute on our remaining identified initiatives over the next two to three years and will continue to invest across our businesses. Importantly, similar to last year, we are excluding from our efficiency initiatives the resources needed to address our risk and control work and will continue to add resources as necessary to complete this important work. We've been reducing expenses across our businesses, but let me highlight a few examples of the progress we made last year. We eliminated management layers and increased span of control with a 20% decrease in managers with low span of control. We completed approximately 270 branch consolidations in 2021, a continuation of the progress we've made the last few years with branches down 11% since 2019. We've also optimized branch staffing levels to better reflect how our customers are using our branches. Within our technology organization, we reduced non-engineering roles by approximately 40%, driven by accelerated adoption of the Agile framework. and headcount across the company declined approximately 6% from a year ago, excluding divested businesses. In addition to reducing the number of branches, we also reduced our office real estate portfolio by approximately 7%, and occupancy expense was down 9% compared with a year ago. This year, we expect to continue to realize savings from these initiatives, including an incremental 5% reduction in office real estate. Additionally, the investments we're making in technology should drive improvements in operations, consumer banking, consumer lending, commercial banking. Importantly, these efforts should not only reduce expenses but also improve the customer experience with enhanced fraud detection, more self-service capabilities, and faster underwriting decisions. Now turning to our 2022 expense outlook on slide 18. Following the waterfall from left to right, we reported $53.8 billion of non-interest expense in 2021. This was largely in line with our most recent guidance, except for higher operating losses. We had approximately $500 million of expenses in 2021 related to business exits and restructuring charges and the civil money penalty associated with the OCC enforcement action in September. We also had approximately a billion dollars of expenses in 2021 from the Wells Fargo asset management and our corporate trust services business, which were sold and that will not continue in 2022. So we believe a good starting point for the discussion of 2022 expenses is the $52.3 billion. We are assuming a modest increase in equity markets this year and expect revenue-related expenses to grow by approximately $300 million. This includes expected increases in wealth and investment management and corporate investment banking. partially offset by expected declines in home lending, reflecting lower origination volumes. Higher revenue-related compensation is a good thing, and the associated revenue will more than offset any increase in expenses. We also expect approximately the same benefits-related inflationary increases in 2022, above and beyond the normal level of merit and pay increases, driven by higher personnel expenses, including the minimum wage increase that Charlie highlighted and other compensation changes. Through our efficiency initiatives, we expect to realize approximately $3.3 billion of gross expense reductions in 2022. This reduction is expected to be partially offset by approximately $1.2 billion of incremental investments, primarily related to higher personnel in expenses in commercial banking, corporate investment banking and technology, as well as increased spending on risk management. We also expect approximately $500 million in increased spending in other areas, including higher FDIC insurance assessments, higher travel and entertainment expenses, which were significantly lower in 2021 due to the pandemic. Accordingly, our full year 2022 expenses are expected to be approximately 51.5 billion, a net reduction of approximately 800 million versus the 52.3 billion. Embedded in our assumptions are approximately 1.3 billion of operating losses for 2022, which is the amount we had in 2021, excluding the $250 million associated with the OCC enforcement action. While we've made significant progress on working through legacy issues, as we've previously disclosed, we still have outstanding litigation and regulatory issues, and related expenses could significantly exceed the levels we had in 2021. We made substantial progress last year in executing our efficiency initiatives, but we still have significant opportunity to get more efficient across the company. We are focused on achieving net expense reductions while appropriately investing in our businesses. This remains a multiyear process with the ultimate goal of achieving an efficiency ratio in line with our peers and based on our business mix. We'll now take your questions.
spk03: At this time, we will now begin the question and answer session. If you would like to ask a question, please first unmute your phone and press star 1. Please record your name at the prompt. If you would like to withdraw your question, you may press star 2 to remove yourself from the question queue. Once again, please press star 1 and record your name if you would like to ask a question at this time. Please stand by for our first question. Our first question of the day will come from John McDonald of Autonomous Research. Sir, your line is open.
spk09: Hi, good morning. Mike, I was wondering if you could give us some sense of if the asset cap remains in place, how much capacity do you have to grow loans? Obviously, the H-8 debt is picking up. It feels like loan growth is getting better for the industry. I just want to make sure that you're invited to that party and you guys can grow loans while staying under the asset cap.
spk10: Yeah. Hey, John, thanks for the question. So just as you know, and I think it's implicit in what you asked, but the constraint for us on the on the asset cap is really on the deposit side, and so that's the part where we're actively taking action to make sure we've got the room we need, particularly for our retail clients, and we're continuing to do that. On the loan side, we still have – we're not constrained on growth on the loan side, so we still have plenty of room to continue to grow with our clients.
spk09: Could you give us some sense in your NII outlook what kind of loan growth you're building in and also – liquidity deployment assumptions and how you're thinking about liquidity deployment given where the curve is here?
spk10: Yeah, sure. You know, embedded in slide 16, you know, we've assumed, you know, kind of low to mid single-digit growth when you compare fourth quarter 21 to fourth quarter 22. You know, and so hopefully, you know, we're optimistic that, you know, we'll be able to get there and, you know, maybe it'll, you know, there's certainly some scenarios where it could be, you know, it could grow faster than that, but that's the assumption that we used there. Embedded in that column, too, on the chart in the loan growth and other balance sheet stuff is some modest redeployment into the securities portfolio. I'd say modest. So sort of, you know, kind of mid to low single-digit sort of increases in the securities portfolio as well. And so those are the assumptions embedded there. And, you know, I think as we look at where the curve is today – We're still being overall pretty prudent and patient, but we are in a very kind of small way beginning to buy some securities in the portfolio.
spk09: Okay, got it. Thanks, Mike.
spk03: Thank you. The next question will come from Ken Houston of Jefferies. Your line is open.
spk02: Thanks. Good morning, guys. Mike, you had mentioned that you did a little bit better last year, $4 billion of gross saves versus what you originally thought at $3.6 billion. And you just commented that you still have a good line of sight as far as efficiency initiatives. Can you help us understand like $3.3 billion for this year? how you're feeling about that, but more importantly, you know, that line of sight, how far out do you have that, and do you continue to see an ability to take out this type of cost as you go forward even past this year? Thanks.
spk10: Yeah, no, and Ken, you know, what we're really trying to do is make sure we embed this in the DNA of how we operate the place, and so that's, you know, ultimately what's going to be really important for us over the long run, and I think you're seeing that, you know, the portfolio grew from $8 billion to $10 billion in terms of the the initiative that we've either executed on or in the process of executing. And so I think you're seeing sort of that progress and growth there. So you can sort of do the math of what we've accomplished so far, what we've identified for this year, and what's left for next year. And I continue to believe that we've got more to do that we haven't sort of built into that portfolio yet. And so the team continues to work on that every day. As you look at our confidence level on the 3-3 that we put into the forecast, we feel good. We've got really good line of sight. And I think given what the team was able to do last year, we have confidence that we'll be able to execute on that.
spk11: Let me just add to something that Mike said, which is I'm a firm believer on these efficiency initiatives, especially in a company like this. Even if you go back over a decade, you know, You know, one of the strains to this company was never efficiency. It was far more on the revenue side. And so, you know, as we get the efficiencies that we're starting to see, it is like peeling the onion back where then the next set of opportunities become even clearer. And so, you know, we're ginning up the same process that we did at the beginning of this venture where we came up with the initial $8 billion to go back and say, okay, now what's next in a very methodical way across the company. So I feel really good about what's in our numbers for next year, and we're going to continue to pursue this. And, you know, I think it's, you know, just as you've seen in our numbers, you know, it gives us the ability to, you know, spend our investments and to become more efficient overall as a company. So, you know, I personally don't feel like we're close to done.
spk02: Got it. And if I could just ask the other side of that question too, which is that you're doing a little less in the incremental investments versus what you did last year. How do you get comfortable that you're doing enough, especially what we're hearing from, you know, the industry pressures, not just inflation, but just on the need to continue to, and you mentioned this, Charlie, about all the new things you're rolling out, but how do you land on that number and how do you get the confidence that it's the right amount that you're reinvesting?
spk11: Yeah, that's a good question. I think, you know, we do, I think what, you know, most you know, good companies do, which is they sit around tables and they ask everyone to come back with, you know, what you want to spend money on and, you know, then figure out what you can actually do. I think, you know, we've accomplished a tremendous amount on the technology side since Saul Van Burden, who runs technology for us, was brought in. And I think, you know, we're going to try and spend as much as we physically can get done But I think we're always asking the question of what's next. But, you know, I think, you know, the different position that we're in versus others is, you know, we're still in the ramping up stage, which I also look at as opportunity because, you know, we have moved slower historically investing in some of these areas. And to the extent that, you know, we find, you know, more efficiency money, it gives us the opportunity to spend more broadly. But I do feel, I think we as a company, we as a management team do feel good about what we're investing next year relative to where we stand as a company.
spk03: Okay. Thanks a lot, guys. Thank you. The next question comes from Betsy Gracek of Morgan Stanley. Your line is open.
spk06: Hi. Good morning.
spk11: Betsy.
spk06: I have two questions. One was on, you know, the overdraft fees that you mentioned. I think you said that it was like a $700 million impact but you know we look at the regulatory filings and the regulatory filings show a higher level of overdraft fee run rate like in the billion kind of range so I'm just trying to understand what you know why it would be only 700 well well first of all I mean we're not eliminating overdraft fees we're making a series of changes that we think make sense for the consumer
spk11: We have an account that doesn't allow overdraft, but we have an account that does allow overdraft. And so we think it's more consumer-friendly than it was in the past, but we do continue to believe that there are a substantial number of customers out there that want us to pay overdraft on their behalf after they've worked through a bunch of the buffers and benefits we're giving them, and they're willing to pay for that.
spk06: Got it. Okay. So the NSF fees will be eliminated, but you'll have a different product that comes in.
spk11: Well, no, it's the same. NSF fees will be eliminated entirely. Our overdraft fee will stay, but we've added a series of things such as we'll give you availability on direct deposits two days in advance. We'll give you an additional 24 hours after you would otherwise would have been charged for an overdraft. to cure it. So our overdraft fees will go down, but we're still going to be providing the overdraft product and we'll still be charging for it.
spk06: Okay. All right. So my bad, because I thought overdraft and NSF were pretty similar, but that's not right.
spk10: Yeah. Betsy, think of the NSF fees as when you don't pay something into overdraft, like a check, and you return it, then historically you would have charged a fee for that returned item. That's an NSF fee. The overdraft fees come into play when you actually pay something in overdraft.
spk06: Yeah, yeah, I got it. Okay. So I was using too much shorthand, and that's my bad. All right. And then the second question is on the loan growth that you were talking about earlier, you know, in the prepared remarks with John. You know, LIBOR is, you know, no longer – able to be used as a reference rate for CNI or CRE or any loan or any product starting Jan 1. How does that impact you? Could that be a benefit to your loan growth in CNI and CRE? And how are you thinking about shifting the reference rate that you're going to be using with your clients?
spk10: Well, I mean, we've started that shift already, as you would imagine, right? And we stopped offering new, you know, effectively stopped offering new LIBOR-based loan products at some point in the fourth quarter. You know, we've probably done, you know, in the wholesale side, you know, maybe including WIM, so take out the consumer mortgage business, We've done something like 4,500 or just under that new facilities, you know, based on SOFR. With the large majority, and obviously there's different ways to calculate SOFR, the large majority of those are using sort of a daily simple rate. So if SOFR moves, obviously that will, you know, adjust. And so I think we're seeing clients start to, you know, get used to it and start to use it. You know, complementing what we're doing on the wholesale side is, you know, we've got we've stopped offering LIBOR-based arms last year. And so we've got, you know, tens of thousands, a couple tens of thousands at this point in terms of arms on the books using SOFR there as well. And so I think it's starting to take hold.
spk06: Yeah, I'm just thinking, like, the capital markets might not be deep enough yet to be competitive against SOFR, you know, or Bisbee, you know, products. at least for the first half of this year. So could that give you a little advantage here in originating?
spk10: I don't see that having a huge impact on loan growth, but maybe we'll be surprised a little bit, but I don't see that happening.
spk06: All right, because I didn't think the CLO bid was there yet for SOFR.
spk10: Yeah, like I said, I don't see that happening. I think there are starting to be some CLOs in SOFR, but I don't see that being a big driver.
spk06: Okay, thanks.
spk03: The next question comes from of UBS. Your line is open.
spk01: Hi, good morning. Mike, my first question is for you. Could you give us a sense of what deposit growth or runoff assumption you have in your 2022 NII simulation? And similarly, what kind of deposit repricing you presume?
spk10: Yeah, thanks, Eric. As you can guess, we're in a bit of a different spot than others, right, given our asset cap. And so we're already constrained on deposits. And so we're pushing away deposits every week now. And so I don't expect this year to have much of a runoff in deposits. And if we start to see deposit levels going down, we'll stop pushing others off. And so I don't see that going to be a big driver. for 2022. As you think about betas and deposit pricing assumptions, it's largely similar to what we saw the last rate cycle. But I would say that over the last three, four, five years, our deposit base has changed quite a bit. If you look at just based on the segments we are in as a shorthand, we're 57% of our deposits are in our consumer and small business banking business today. If you go back a number of years, that was probably closer to 43% or 45%. And so the remixing of sort of our deposits as a result of some of the actions we've had to take will kind of lower the overall beta for the first number of rate hikes. But I think it'll look pretty similar to what we saw. And as you can imagine, since we're constrained on growing deposits, we're not going to be the leader on pricing likely as we go over the next number of quarters.
spk01: And just to clarify, so the betas in the last cycle If I remember, we're driven by, you know, a handful of CIB deposits, right? And, you know, clearly that has been, you know, pushed out given asset or some of that has been pushed out given asset cap restrictions. So embedded in this NII number is the experience of the last cycle that included the betas contributed by those deposits, whereas as we actually look out today, you have a much better and less rate-sensitive deposit base.
spk10: For sure. And, you know, the betas might be similar on the CIB deposits. We just have less of them as a percentage of the overall book, which lowers our overall beta. It's just a mix. Yeah. So, but we'll see. And a lot of that will be driven by what we see, you know, in the competitive environment, right? So, particularly on those wholesale deposits. But it'll have a smaller impact on us than it did in the past, just given the mix.
spk01: Understood. And my last question is for Charlie. I think your investors are receiving very warmly what you and Mike have said about you're trying to change how this bank is thinking by constantly identifying cost saves to fund future investments. And as we look out in what looks like a more favorable rate backdrop and revenue backdrop from a growth perspective for banks, do you see yourself reinvesting more of the identified savings you know, as we enter a more favorable revenue backdrop?
spk11: You know, I don't think, I guess the way I'd put it is we don't think about it relative to what the rate scenario is or how much we're making in NII. I think, again, you know, just think about where we are in the stage of our evolution, which is we're limiting our investments based upon just, you know, what can physically be done, not based upon, you know, how much we actually want to spend. I mean, there are always a couple of small places around the place where people want to spend and you do have to prioritize. I think, you know, a lot of the answer to your question will have to do as we continue to do our work strategically to determine where we want to create additional capabilities across the company. we would expect the investment number to grow for sure. But also, you know, as you know, we're spending a lot of money on infrastructure and I'm not talking about the risk build out. I'm just talking about the basic infrastructure of the company. So, you know, I think as we sit here today, you know, we still think that we have an opportunity to both become much more efficient and to continue to grow the level of investments that are going to drive business results inside the company. And, you know, that's, I would say, is focused upon where we think we need to get to relative to how much money we should be spending as a company as opposed to any upside that we have because of just the change in rates at this point.
spk01: Got it. That's clear. Thank you.
spk11: And the only reason I would add is I just think for us, you know, that just takes the – it takes the pressure off of us to think that, you know, if we were to think that way. If we were to say, okay, you know, because of nothing we've done, rates have gone up, we then start spending a lot more money. We're still in this, as I said earlier, we're still in this phase of, you know, challenging ourselves to become as efficient as we should be. And, you know, having that pressure across the company at this stage for us is still a good thing. just as it is to challenge people to come up with where we should be investing.
spk01: Thanks, Charlie.
spk03: The next question comes from Matt O'Connor of Deutsche Bank. Your line is open.
spk07: Good morning. So I wanted to ask about the asset cap and Can you just remind us, like, where you are in the process from your perspective? Have you implemented everything that you submitted in your proposal, and it's just a matter of consistently executing on those changes? Or are there still, you know, call it material changes that you're making to address those issues?
spk11: You know, Matt, I understand, you know, you're very consistent in wanting to know the answer and I certainly appreciate that. You know, we have across all of this regulatory work, we still have a substantial amount to do. It's really not right for me to talk about, you know, under any specific consent order where we think we are in the process because, again, what I've said ultimately is what's going to matter is whether our regulators believe it's done to their satisfaction. you know, it's really unhealthy to get into, you know, the game of, you know, do we think we're done? Do we think they're making, you know, the right conclusions? I think, you know, it's on us to continue to do all that's necessary. And when they're comfortable that we satisfy those obligations, you know, they will make that determination. And so I just, you know, again, I'm sorry, I understand, you know, why you seek more detail, but it's just a difficult, thing and probably not the right thing for us to get to that level of specificity.
spk07: I appreciate that. And I know I ask this line of question kind of every quarter, but obviously it's such a key part for the stock. And I know I've also asked this kind of follow-up question. I think you have like a slew of local regulators on-site or at least on-site virtually. But I think there's a perception that it's kind of more of the central regulators that are kind of going to be the ones that make the call. And just remind us in general, you know, what is like the frequency of the dialogue with some more of those central regulators and just any flavor you can add on the communication there. Thank you.
spk11: You know, I think it's fair that, you know, I think I would speak for most big banks, you know, that, you know, the level of dialogue with both local staff and with D.C.' 's is substantial and meaningful. I mean, I can just tell you even from my last role, you know, it is, it's the right thing to do. Again, you know, we certainly have increased, I think, the level of dialogue that we have since, you know, the new team has gotten here. And, you know, it's hard to put specific, you know, how often we do it, but it's very, very regular. And, you know, I think it's true that, you know, all of the big banks, both the local staff as well as, You know, the staff in D.C. are both extremely important in their monitoring and in the way they draw conclusions about the company. And, you know, we, you know, work hard to treat both extremely respectfully. There's a very direct and open communication on their side, as far as I can tell. And, you know, and as I said, you know, we say the same to the local people as we do to the D.C. staff. But again, they're a very, very important part of the journey that we're on. And we want them to be as knowledgeable about what's going on here on all of these important issues. And we're always available and willing to have those conversations with them. Okay, thank you.
spk03: The next question comes from Scott Seifers of Piper Sandler. Your line is open.
spk14: Morning guys. Thank you for taking the question. Mike wanted to ask in a little bit more detail about repositioning. I think I can figure this out mostly from, from your guide and disclosures, but would still be curious to hear your thoughts, you know, just with your significant asset sensitivity, can you talk a little bit about sort of where you're most sensitive on the curve and sort of when and how you'll benefit, like, you know, put simply is the first hike, the same benefit as the third and so on, or where is it more, where, when is it more or less powerful?
spk10: To state the obvious probably, the short end of the curve is most meaningful. When you look at just the whole curve shifting up, something like two-thirds of the benefit ends up being on the short end. That's going to be by far the most meaningful piece of it. I think for the first number of rate rises, it's hard to say exactly how many. I think the first three or four, though, it's pretty linear. And you can use our disclosures as a way to sort of model that. You get it earlier in the year. You get it in March. It's worth, you know, a quarter more than if you get it in June and so forth. And so it's pretty, you know, it's a pretty good guide at this point to use it that way.
spk14: Okay. Perfect. Thank you. And then just separately, one of the criticisms on the story over death, past few years has been that there are a number of competitors, a lot of smaller banks out there that sort of suggest that it's still pretty easy to steal talent and business from Wells Fargo. Your emerging loan growth seems to be running kind of contrary to what's been that argument for the last couple of years. Can you just sort of touch on that criticism and sort of where you are in terms of comfort with sort of stability and growth of the workforce?
spk11: Listen, I feel... I feel great about the people that we have here. And, you know, I've listened to that, you know, for quite a while since I've been here. And when I ask people for specifics, you know, very little seems to come back. You know, listen, you know, it's a very, very competitive workplace. We lose people to competition. We hire people from competition of all sizes. You know, I think... I would say, as I've said before, when you look at the team that we have in place, both at a senior level all the way down to people that we cover, customers, I feel great about it. And I can honestly tell you, I'm trying to remember, Mike, keep me honest here. Have we sat around a room and talked about, gee, oh, my God, look at all the people that we're losing to these smaller competitors and what are we going to do about it? That conversation hasn't happened. And we're very knowledgeable about that. attrition that's happening at the company. So, you know, if a small company hires a banker, it might be a big deal for them. You know, we're lucky enough to have, you know, a very broad set of coverage officers, but that's not to say it's not competitive. So, you know, maybe they're right, but, you know, we feel good about the people that are here, and we're going to work hard to keep the people that are here.
spk10: Yeah, and I would just add a little color. We've been happy at what we've been able to recruit in places like the investment bank. We've hired almost two to three dozen relatively senior investment bankers. We've hired a bunch of people in the commercial bank on the front line. And so I think, as Charlie said, it's definitely competitive, and you could always find an anecdotal story of where somebody left to go do a bigger job at a smaller place or so forth. But we feel, you know, I think the teams feel good about being able to attract good people into the roles. And so, you know, obviously we've got to be competitive on pay. We've got to be, you know, but I think people are attracted to the franchise and attracted to the sort of direction. And, you know, so far it's been constructive there.
spk11: Yeah, and I just want to say one other thing, which is especially when you get out, you know, you know, our, you know, different businesses that cover consumers. You know, as we've talked about having to improve the talent in some parts of the company, the talent that we have in those areas is really exceptional, and it's really deep. And it's a huge strength of the company. It's been a strength of the company for a very long time. So, again, I think that, you know, might tell you, you know, just how we think about, you know, the people that we have. And, again, we never want to lose good people. But it happens, but it's not something that we worry about hurting the franchise at this point.
spk14: Good. Okay, perfect.
spk11: I very much appreciate those thoughts, so thanks again.
spk03: Sure. The next question will come from John Pancari of Evercore ISI. Your line is open.
spk13: Morning. low single-digit to mid-single-digit loan growth assumption. Can you give us a little more detail how that breaks out among the products, either in a core CNI versus commercial real estate and consumer? And then separately, are there any areas of the loan book that you're really emphasizing at this point or seeing opportunities to ramp your activity similar to what you've been doing on the credit card side? Thanks.
spk10: Yeah, look, it's a little bit of growth really across the board, John, and I think we're seeing opportunity really everywhere. And I think if you look at on the card side, we are expecting to see some growth in the card side. Some of that will be like true revolve balances. Some of that will be some of the intro balances coming off the new products, which will start to really pay off at the end of next year into the year after. You know, we've been really happy with what we've seen in the auto space, which in this environment are pretty good assets, pretty short-lived assets and high quality in terms of what we've seen there. So we see some continued opportunity to grow there. And then on the consumer side, you have to go a little bit – I'm sorry, on the mortgage side, you have to go a little bit below the covers. And if you look at the non-conforming space, you know, we are seeing some growth there, which we think will – you know, continue as we go into the year. You know, that's offset, you know, by, you know, these EPBO loans going away. But nonetheless, we see some growth there. So it's really, you know, and I gave some color on the commercial banking stuff in my comments. And, you know, we do expect some more opportunity in the multifamily and apartments and asset classes like that and commercial real estate. So, you know, in places like commercial real estate, we're being really targeted about it. And even where, you know, you see a little limited growth in places like office in the quarter. And even in places like that, you know, cash to equity, you know, ratios are up, you know, structures are better, spreads are better, you know, given sort of what we've, you know, the way we're managing that. So we're being really cautious in that space. But I do think it'll be a little bit of growth, you know, across the board if we're successful.
spk13: Okay, great. That's helpful. And then separately, on the buyback front, buybacks came in a little bit better than we had expected in the fourth quarter. Maybe if you can just give us your thoughts on the outlook there, on your appetite, buybacks, and also how you're thinking about the dividend here in terms of deployment. Thanks.
spk10: Yeah, look, I think we've talked about this before, and we're maybe in a different spot than others just given some of the constraints we have on the asset cap. But You know, we still feel like we've got, you know, excess capital. You can see that in the numbers yourself. You know, we do expect that we'll continue to see some loan growth, so that'll drive some RWA. And so that, you know, we've got to be thoughtful about that. And so, you know, as we laid out earlier last year, you know, we said we would do 18, you know, at least $18 billion of buybacks through the four-quarter period ending in the second quarter. You know, that's still, you know, you know, is achievable, and we potentially have the opportunity to go above that if we decide that's the right path, either this quarter or next quarter. So, you know, we'll look at sort of how we feel with all the things we've got to think about and make that decision. You know, as you sort of think about the dividend, you know, I think Charlie covered this a couple times last year, is you think about a payout, you know, ratio that we hope to get to on a normalized basis, so take out some of the one-time things that you see in the results, it's really kind of a 30 to 40% payout ratio is what we target over time. And that just takes some time to get there. And so, you know, I think we'll, ultimately that's the board decision in terms of when and how much we increase the dividend. But we'll, you know, we're still marching down that path, but it takes some time to get there.
spk13: Got it. All right. Thanks, Mike. Appreciate it.
spk03: The next question comes from David Long of Raymond James. Your line is open.
spk12: Good morning, everyone. You've talked in the past about the operating expense savings being a multi-year plan or initiative. And so with your guidance this year in the $51.5 billion range, should we be expecting 2023 operating expenses to still be below that level?
spk10: Yeah, look, at this point, as we think about it, our goal would be to see a net reduction next year. You know, I think we'll obviously give you more guidance on how that's progressing as we get towards the end of the year. And that'll be a function of what we think, you know, we can invest, you know, properly and what inflation looks like and a whole bunch of factors. But, you know, we're certainly given what our, you know, view on the efficiency side is, you know, targeting that. But we'll give you more guidance on that later in the year. I don't know if you have anything to add.
spk12: Okay, great. And then, you know, as a follow up, you know, a little bit longer down the road, once the consent orders are mostly in the past, if you replace the cost today to improve and upgrade your internal operations with the expected cost to sort of just maintain proper controls and risk management efforts, you know, how much savings do you see there?
spk10: Yeah, look, I think that there is some savings there, but that's, you know, our focus now is getting the work done and getting all the stuff in place and making sure it's operating properly. And so we're focused a little bit, you know, we're being thoughtful about how we implement that stuff. But, you know, our focus is a little bit less on, you know, making it the most efficient and optimized process. So we will get there when that stuff is all done and running for a while. But, you know, that's a few years off, I think, in terms of really optimizing the risk and compliance.
spk12: Got it. Thanks, Mike.
spk03: Appreciate it. Yep. The next question comes from Steven Chubek of Wolf Research. Your line is open.
spk05: Hi. Good morning. So, just wanted to squeeze one more question in here just on the fee outlook. A fair amount of noise in the fee line this quarter. I know you didn't give an explicit fee guide for 2022. But as we reflect the impact of business sales, the overdraft change, some weaker mortgage banking, and normalization equity gains, how should we be thinking about the right jumping off point for fee income just looking ahead to next quarter and 2022 just more broadly?
spk10: Well, I think you just outlined it, to be honest. I think you just have to take each of the lines, right? And I know we've talked about this on calls before. Like, if you look at you know, one of the biggest fee lines, you take the investment advisory and other asset-based fees, you know, that's a function of our client assets and what the equity market is doing primarily. And so that's, you know, probably something that you can model. And we've got, you know, that grew a bit as we went through, you know, through the year last year. You know, and then I think, as you said, we've, you know, we're in the mortgage space. Well, You know, we'll see some, you know, the fourth quarter number in the consumer side is probably a good place to start your jumping off point in modeling. And as, you know, I think others have spoken about, too, is, you know, we all expect the mortgage market to be down with refinancings really, you know, driving that. And, you know, how well we do will be a function of how well we're able to sort of penetrate on the purchase side. you know, hopefully we're down a little less than what the market is, but that'll be a function of what we can deliver. And so I think you just got to take each of those lines and sort of model it forward.
spk05: Thanks, Mike. And maybe I'll just squeeze one more in if I can. Just on the earlier discussion around excess liquidity deployment, it looked like you deployed some of that excess in the quarter. And yet, if I look relative to pre-pandemic levels, you've still seen a doubling of excess reserves. And those deposits that you guys have on balance sheet, as you noted earlier, should be stickier as the Fed initiates QT, just given some of the changes in deposit mix. I was hoping you could just size the amount of excess liquidity available for deployment today. If the long end continues to grind higher, is there any appetite or willingness to deploy more aggressively than that mid-single-digit growth that's contemplated in the NII walk?
spk10: Yeah, I mean, the first thing we'll be looking at is how fast loans are growing, right? So obviously, you know, that's like the place you'd want to see that liquidity get deployed first to support customers. And so that'll be a function of what we think is going to happen over a series of quarters. But, you know, and I think when you look at the securities portfolio, we have done a lot in the last year, you know, both in increasing our mortgage exposure, increasing our structured product CLO exposure. you know, the place that you saw the decline was really in the Treasury side. And so given sort of what was happening in the rate environment. And so I think you will see us start deploying more. And as I mentioned earlier, we've started, you know, in a very small way already, given sort of what we've seen over the last couple of weeks. And I think really how much, how fast we go or how much we go will be both a function of what we think is going to happen with rates, but also how fast we think loans will grow. And so you know, those two things I think will drive sort of the pace. And at this point, embedded in our outlook or considerations there, we do expect a modest increase in the portfolio. And so we'll see how, you know, but we'll make that determination, you know, based on all the factors there that I mentioned.
spk05: Very helpful call, Mike.
spk03: Thanks so much for taking my questions. The final question for today will come from Gerard Cassidy of RBC Capital Markets. Your line is open.
spk08: Thank you. Good morning, guys. Charlie, you talked about joining the Net Zero Alliance, as with some of your peers. Can you frame out for us, as you guys get deeper into that, and your peers do as well, how should we try to estimate what types of risks you might be coming up against, and how do you guys monitor those risks?
spk11: Listen, I think it's a great question. I think it's the question that everyone is asking, and I think the whole point about joining these alliances is to ensure that we're all benefiting from each other's experiences and those that have experienced this in other parts of the world to understand how to actually think about that. What we're doing is we're going through how we think the impact of climate on a much longer term basis can impact all of the different businesses from a risk perspective, but also understanding where the opportunities for us are. And so whenever we talk about where we're going on climate with our goal to get to net zero, I think people too often jump to, that means we're gonna stop doing things. First of all, what we're trying to do is to assure that we're doing everything we can to help all of our clients transition And that doesn't mean walking away from clients. It means helping them invest in areas, whether it is, you know, and we can do that in lots of different ways across the company. We know with our own balance sheet or the public markets to invest in very, very different ways. And I think what you'll start to see from us and others is a lot more disclosure on what the embedded risks are but also all the different things that we're doing to play our part in reducing emissions more broadly. So I just think it's a question that I think we should continue to ask as we all continue to provide more significant disclosures than we've all done in the past on the topic.
spk08: I appreciate that. Thank you. And pivoting to the follow-up question on credit, obviously your guys' credit is fantastic, like the industry, considering what we just came through. Can you give us some color on the reserve? I assume as we normalize credit, you and your peers, how should we be looking at the reserve building over the next, you know, in 2022 going into 2023, loan loss reserve building, that is?
spk11: Well, let me start, Mike, and then you just pick up. I think the one thing I obviously, and I think you guys all know this, is not everyone starts at the same position when you look across what people have done with reserving across the industry. I think we feel very good about where we are relative to what we're seeing. We all have to make determinations, remember, on a forward-looking basis as to what the embedded losses are. And I think... Everyone's got a different point of view on the way that looks, and I think we're doing the right thing, but I still think our assumptions are appropriate and conservative. Beyond that, remember the idea of looking forward in terms of what's going to change. in addition to just loan growth and making sure that we provide for growth in the balance sheet, it's going to depend on the ultimate outcome of the performance of the economy. As we sit here today, we feel very, very good about it, but it can take lots of different turns. Hopefully, we're still insulated from you know, some level of, you know, downturn from where we sit today given the assumptions that we've made because of the uncertainty that exists in the environment. So, you know, I'm not worried about where we are in 2022 personally, but I think, you know, as we look beyond that, you know, it's a living, breathing calculation.
spk08: Great. Thank you.
spk11: Listen, thank you very much, everyone, for the time, and we appreciate it, and we will talk to you over the next quarter. Take care. Bye-bye.
spk03: Thanks, everyone, for your participation on today's conference call. At this time, all parties may disconnect.
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