© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.
Thank you, Regina. Good morning. Thank you for joining our call today where our CEO and President, Tim Sloan, and our CFO, John Shrewsberry, will discuss preliminary results and answer your questions. This call is being recorded.
Before we get started, I would like to remind you that our first quarter earnings release and quarterly supplement are available on our Web-site at wellsfargo.com. I'd also like to [caution you that we] [ph] may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplement.
Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings, in the earnings release, and in the quarterly supplement available on our Web-site.
I will now turn the call over to our CEO and President, Tim Sloan.
Thank you, John. Good morning and thank you for joining us today. I know it's a busy morning for everyone. As we noted in our earnings release, our first quarter financial results are preliminary. These preliminary results are subject to change due to our ongoing discussions that we are having with the CFPB and OCC to resolve matters regarding our compliance risk management program and our past practices involving certain automobile collateral protection insurance policies and certain mortgage interest rate lock extensions, which the CFPB and the OCC have collectively offered to resolve for an aggregate of $1 billion in civil money penalties.
At this time, we are unable to predict the final resolution of the CFPB/OCC matter and cannot reasonably estimate our related loss contingency. Accordingly, the preliminary financial results we report today may need to be revised to reflect additional accruals for the CFPB/OCC matter when we file our final statements in our Quarterly Report on Form 10-Q with the SEC. It is important to note that these are not new matters.
Turning to our preliminary first quarter results, we earned $5.9 billion. Our results included continued strong credit performance, liquidity, and capital levels. We returned $4 billion to shareholders through common stock dividends and net share repurchases in the first quarter, up 30% from a year ago. There were [indiscernible] noteworthy items that impacted our results, which John will highlight later on the call.
I want to focus my comments on the actions we took during the quarter to transform Wells Fargo as part of our efforts to build a better bank and rebuild trust with our stakeholders. These efforts include progress on our [six] [ph] goals.
Starting with our goal of becoming the leader in customer service and advice, we focused on new ways to create a better customer experience. This includes a number of changes to help our customers better manage their accounts by leveraging data and technology.
In the first quarter we rolled out predictive banking, which provides personalized insights and guidance to mobile deposit customers. A year ago we introduced automatic zero balance alerts and we now send over 20 million low and zero balance alerts a month. In November last year, we introduced Overdraft Rewind, which has helped over 800,000 customers avoid overdraft charges. We also offer our customers a variety of ways to waive the standard monthly service fees on checking accounts based on account usage or direct deposit, and as a result approximately 90% of our checking account customers do not pay a monthly fee.
These actions are designed to help our customers succeed financially and to build long-term relationships, and we have made changes to compensation and processes in our branches which are also improving customer service, and in the first quarter customer loyalty survey scores reached their highest levels since August of 2016.
Team member engagement is our second goal and I believe we have the best team in the industry. In March we increased the minimum hourly pay rate for U.S.-based team members to $15 an hour and approximately 36,000 team members received an increase. We also reviewed pay for team members whose salaries were slightly above the new minimum wage and this month we are increasing base pay for approximately 50,000 additional team members. In March, we granted an award of restricted stock rights to about 250,000 team members, including 50 shares of stock for full-time eligible team members and 30 shares for part-time team members. In the first quarter, our team member turnover continues to be about 15% below fourth quarter of 2016 levels.
Our next goal is being a leader in innovation. In the first quarter we rolled out our digital mortgage application which combines the power of Wells Fargo's data with a You Know Me customer experience. In many cases homebuyers are now able to receive preapproved loan decisions immediately, either online or through their mobile device. In March, 10% of completed retail applications were through our digital mortgage application.
We also started a team member pilot of our Control Tower feature designed to provide customers a comprehensive view of the places their Wells Fargo card or account information is connected. January, we were named one of only 12 companies in Apple's Business Chat pilot, which is a new way to connect with our customers and accelerates our customer service transformation towards messaging. Our industry-leading technology was recently recognized by Dynatrace, which named Wells Fargo's mobile app #1 in overall performance, functionality and quality, and availability.
As part of our goal of setting the global standard in managing all forms of risk, over the past 19 months we've taken significant actions to strengthen the way we manage operational and compliance risk at Wells Fargo. In March, [indiscernible] new risk management organizational design, which is an important step to ensuring that risk management functions operate independently and provide improved and effective oversight of our businesses. In addition, per the Consent Order, earlier this month we submitted governance and oversight, and compliance and operational risk management program plans to the Federal Reserve.
Our goal of making positive contributions to the communities we serve was recognized in the first quarter by United Way Worldwide, who named our workplace giving program #1 in the United States for the ninth consecutive year. We also increased our charitable contributions in the first quarter as part of our goal to increase donations to non-profit and community organizations by approximately 40% in 2018.
As part of our goal of delivering long-term shareholder value, we have been making progress on streamlining and centralizing [indiscernible] and our organizational structures. In our auto business, we completed the centralization of collections and funding from 57 regional business centers into three regional centers during the first quarter, which helps us to further standardize processes in that business. Our auto relationship team remains in the individual markets, keeping us close to our customers.
We are also closely looking at how our customers are using our channels. Branches continue to play an important part in serving our customers and we will have as many branches for our customers to use for as long as they want to use them. However, our customers are increasingly using our digital channels and digital sessions and they increased 13% from a year ago, while teller and ATM transactions declined 4%.
We closed 58 branches in the first quarter and we are on track to close approximately 300 branches this year, which is an increase [indiscernible] 250 branches we announced at our last Investor Day. As we highlighted last quarter, we currently expect our total branch network to decline to approximately 5,000 by the end of 2020.
I'm confident that we are on the right path with the transformational changes we are making and with our progress against our six goals. We have more work to do and it will take time to put all of our challenges behind us, but the result will be a better Wells Fargo for all of our stakeholders.
John will now discuss our financial results in more detail.
Thanks, Tim, and good morning everyone. We highlight the noteworthy items that impacted our preliminary results on Slide 2. Our revenue included a $643 million gain from sales of Pick-a-Pay PCI mortgage loans; $250 million in mark-to-market unrealized equity gains due to the new financial instruments accounting standard, which I'll discuss a little later on the call; a $202 million gain on the sale of Wells Fargo Shareowner Services; and $176 million reduction from a LOCOM adjustment relating to $1.9 billion of loans transferred to held-for-sale.
Our expenses included $781 million [indiscernible] seasonally higher personnel expense, and $668 million of operating losses, largely litigation accruals. Our results also included a $550 million reserve release, driven by a significantly improved outlook on hurricane related losses. And our effective income tax rate in the first quarter was 18.8%.
On Page 3 we provide an update on the Consent Order. Tim mentioned, we submitted governance and oversight, and compliance and operational risk management program plans to the Federal Reserve. We take the Consent Order seriously and we'll work to fully satisfy all of the Consent Order's requirements. We are focused on compliance with the Consent Order's asset cap and maintaining liquidity and other financial risk management targets, while minimizing the impact to our customers, minimizing adverse long-term strategic effects, and maintaining our financial risk discipline.
With nearly $2 trillion in total assets, we believe we can meet our customers' financial needs and continue to deliver strong results without growing our balance sheet in the near term. As a reminder, prior to the Consent Order, we were already focused on reducing our exposure to riskier assets including certain legacy consumer real estate loans and near-prime and sub-prime auto loans. We have also maintained our credit risk discipline for new originations in commercial real estate during a period of high liquidity and increased competition, resulting in four consecutive quarters of lower balances.
Our balance sheet declined $36.4 billion from year-end, primarily due to a $32 billion decline in commercial deposits from financial institutions, including approximately $15 billion of actions taken to comply with the Consent Order asset cap. The earnings impact of managing within the asset cap was modest in the first quarter due to the minimal actions we needed to take. We'd expect the earnings impact to increase in subsequent quarters but we continue to estimate that the net income after tax impact will be $300 million to $400 million for the full year of 2018.
I'm going to highlight much of what's on Page 4 later on the call, so let me just point out that the decline in deposits drove the $20 billion reduction in cash and short-term investments in the first quarter, and the decline in stockholders' equity was driven by a $2.8 billion decline in [OCI] [ph], resulting primarily from higher rates.
I will be highlighting our income statement drivers on Page 5 throughout the call, so let me just mention that we adopted new accounting standards in the first quarter, which we summarized on Page 17 and 18 of the earnings release. I'll summarize here the two most significant impacts.
With the adoption of the new recognition and measurement of financial instruments standard, all equities, including those previously classified as AFS, are now required to be mark-to-market to earnings each quarter, and as a result in the first quarter we recognized $250 million of unrealized gains on equity securities. This accounting standard will increase volatility and while the impact this quarter was positive, in future quarters the impact could be negative or positive.
The second one is the adoption of a new revenue recognition standard, which didn't significantly impact our bottom line results but it does change where some of the revenue and expense items are reported. The most meaningful change for us is card fees. In the first quarter, card fees were reduced by $43 million due to card payment network charges which were previously reported in outside data processing expense now being netted against related interchange and network fees.
Turning to loans on Page 6, average loans declined $798 million from the fourth quarter, with commercial loan growth of $1.8 billion more than offset by a $2.6 billion decline in consumer loans. The decline in loan balances were not related to any actions we took in connection with the Consent Order but was driven by opportunistic or strategic loan sales, seasonality, and continued declines in certain portfolios that we've been reducing for some time including auto, Pick-a-Pay mortgage, and junior lien mortgage loans. I'll summarize the specific drivers of period-end loan declines starting on Page 7, but let me first point out that the average loan yields increased to 4.5% in the first quarter, the highest yield since the fourth quarter of 2012.
Commercial loans were relatively flat compared with fourth quarter, with C&I loans up $1.6 billion offset by continued declines in commercial real estate due to continued credit discipline in a competitive highly liquid financing market as well as ongoing paydowns on existing and acquired loans.
Consumer loans declined $9.5 billion [indiscernible] fourth quarter. The first mortgage loans were down $1.4 billion, driven by sales of $1.6 billion of Pick-a-Pay PCI loans. The sales were consistent with our ongoing evaluation of non-strategic portfolios and were similar to the decision to sell part of the Pick-a-Pay portfolio in the second quarter of last year. We continue to have growth in high-quality non-conforming loans, which were up $3.2 billion from the fourth quarter. Junior lien mortgage loans continue to decline as paydowns more than offset new originations.
Credit card loans declined $1.9 billion from the fourth quarter from seasonality, consistent with the decline we had in the first quarter of 2017. Balances increased $1.4 billion from the first quarter of 2017 due to higher purchase volume, and 11% growth in new accounts reflecting higher bonus offers, and a 55% increase in digital channel acquisitions. 43% of new credit card accounts in the first quarter were originated through digital channels. Our new credit cards have higher balances, 31% higher than a year ago. We expect credit card balances to grow as we continue to focus on digital channels and customer engagement.
Auto loans were down $3.8 billion from the fourth quarter and included the transfer of $1.6 billion of loans to held-for-sale as a result of the pending sale of certain assets of Reliable Financial Services, a Puerto Rican subsidiary of our auto business. This sale is expected to close in the second quarter.
After declining for five consecutive quarters, auto originations have stabilized the last two quarters. With the completion of the centralization of our collection and funding activities, which Tim highlighted earlier, we're now positioned to start to increase originations over time and currently expect the portfolio of balances to begin growing in early 2019.
Average deposits declined $14.4 billion from the fourth quarter, driven by lower commercial deposits. Average consumer and small business banking deposits declined $2.1 billion as higher community bank deposits were more than offset by lower deposits in Wealth and Investment Management, reflecting movement into other investments.
Our average deposit cost increased 6 basis points from the fourth quarter and was up 17 basis points from a year ago, versus the 75 basis point change in the Fed fund's rate. The increase in our average deposit cost was driven by increases in commercial and Wealth and Investment Management deposit rates, while rates paid on consumer and small business banking deposits have remained stable.
Since the increase in interest rates began at the end of 2015, [indiscernible] price-sensitive commercial deposits have been relatively consistent with the prior interest rate cycles, and we expect this trend to continue. It's important to note that our commercial deposits include a high percentage from financial institutions which drive our deposit betas higher as most of these deposits have betas of almost 100%. The response rate in Wealth and Investment Management has increased over the past couple of quarters but is still somewhat below historical trends, although we expect it to increase over time.
While other consumer [indiscernible] banking deposit pricing has not yet responded to rate movements, we expect deposit betas in that category will start to increase. However, the timing of the increase is difficult to predict.
Net interest income in the first quarter declined $75 million from the fourth quarter. The drivers of this reduction included an approximately $160 million decline from two fewer days in the quarter, $148 million from hedge ineffectiveness accounting, and $144 million in lower swap-related income related to the receive-fixed loan swap position that we finished unwinding early in the first quarter. These declines were partially offset by the net repricing benefit of higher interest rates.
Our NIM was stable at 2.84% as the impact of hedge ineffectiveness accounting and lower swap income was offset by the repricing benefit of higher rates. I also wanted to update that impacts from the tax act reduced our NIM by 4 basis points in both the fourth quarter from a one-time adjustment related to leverage leases and in the first quarter primarily from a decline in tax equivalent yield on municipal bonds. We expect the reduction in tax equivalent yield that we recorded this quarter to remain at approximately the same level throughout the rest of the year, and while it should not impact linked quarter trends, it will reduce year-over-year trends by approximately 4 basis points.
We highlighted on the call last quarter that we had started to unwind our receive-fixed commercial loan swaps, which provided a hedge against lower rates, and we completed that unwind in the first quarter. The cost of unwinding the swaps, which was approximately $1 billion, will be amortized through C&I interest income over the remaining life of the original contracts, which is approximately three years on average.
It's important to note that during the extended period of low interest rates since the swaps are entered into, they generated incremental net income of approximately $3 billion. While the elimination of these swaps will reduce interest income in 2018, it has increased our asset sensitivity to be slightly above the middle of our previously provided guidance of 5 to 15 basis points for a 100 basis point parallel shift in the yield curve and is expected to improve interest income in future periods as interest rates increase.
From an interest rate risk management standpoint, we are fairly well-balanced and we will generally perform better in both higher and steeper interest rate environments. We have much larger repricing exposure for both assets and liabilities at the front-end of the curve and our earnings simulations are particularly dependent on deposit rate betas given the scale of that funding source.
While we have significantly less assets and liabilities with repricing exposure at the long end of the curve, our net asset sensitivity to long-term rates is a meaningful part of our overall asset sensitivity profile. This sensitivity reflects both the reinvestment and premium amortization that occurs in our long-term debt securities and loan portfolios.
Noninterest income declined $41 million from the fourth quarter. While the dollar decline was minimal, I want to spend some time describing the different drivers. Starting with deposit service charges, the $73 million decline from fourth quarter was driven largely by the impact of customer-friendly initiatives, including the first full quarter impact of Overdraft Rewind. Card fees declined $88 million from the fourth quarter. The new revenue recognition standard reduced these fees by $43 million. The rest of the decline was driven by seasonality.
Mortgage banking results were in line with the fourth quarter. Servicing income increased $206 million, driven by higher net MSR valuation gains, lower unreimbursed servicing costs, and lower payoffs. Residential mortgage origination revenue declined $200 million from the seasonal declines in originations with volumes down $10 billion from the fourth quarter. We expect originations to increase in the second quarter, reflecting seasonality in the purchase market.
The production margin in the first quarter was 94 basis points, down from 125 basis points in the fourth quarter. Approximately two-thirds of the margin decline was driven by market competition and the remaining one-third was driven by a higher percentage of corresponding originations in the first quarter which is significantly lower margins but also lower cost. Given current market pricing trends, we would expect our production margin to continue to decline into the second quarter. The $109 million decline in insurance fees was due to the sale of Wells Fargo Insurance Services in November.
Finally, other income was up $44 million. The first quarter included a total of $845 million of gains from the sale of Pick-a-Pay PCI loan portfolios and Wells Fargo Shareowner Services and the fourth quarter included an $848 million gain on the sale of Wells Fargo Insurance Services.
Turning to expenses on Page 12, expenses declined $2.6 billion from the fourth quarter, largely driven by $2.9 billion of lower operating losses. On Page 13 I'll explain the drivers in more detail.
The $594 million increase from the fourth quarter in compensation and benefits expense reflected $781 million of seasonally higher personnel expenses, in line with the seasonal increase last year. The seasonally higher personnel expenses will decline in the second quarter but salary expense is expected to grow reflecting increases which became effective late in the first quarter.
Revenue related expenses declined $233 million from lower commissions and incentive compensation, primarily in Wholesale Banking and home lending. Third-party services were down $213 million, primarily from lower project-related spend which is typically higher in the fourth quarter and from lower legal expenses. The $2.6 billion decline in running the business non-discretionary [indiscernible] category reflected lower operating losses.
On Page 14 we show the drivers of the $450 million year to year increase in expenses. Compensation and benefits expense increased $143 million, primarily due to salary increases and higher employee benefits expense, partially offset by the sale of Wells Fargo Insurance Services [indiscernible] reductions in Wholesale Banking. Our total FTE were down 3% from a year ago and also reflected lower FTE in Community Banking and consumer lending. The increase in expenses was also driven by a $386 million increase in higher operating losses from an increase in litigation accruals.
On Page 15 we highlight the expected full-year 2018 total expense range, which has not changed since we provided it last quarter. The range of $53.5 billion to $54.5 billion includes approximately $600 million of typical operating losses and excludes any outsized litigation and remediation accruals and penalties. We will provide a dollar range for 2019 expenses at our Investor Day in May.
Last quarter on our earnings call, we said that we expected to achieve a quarterly efficiency ratio with a 59 handle by the end of 2018. However, that expectation was prior to the issuance of the Consent Order. The expected decline in revenue from the balance sheet actions needed to comply with the Consent Order's asset cap will likely result in our efficiency ratio remaining above 59% throughout this year. However, we are still on track to achieve our targeted $4 billion of expense reductions by the end of 2019.
As a reminder, this does not include the completion of core deposit intangible amortization expense at the end of this year, which will amount to $769 million in 2018. It also doesn't include the completion of the FDIC special assessment, which we expect should happen by the end of this year. Finally, it doesn't include expense savings due to business divestitures, which we highlight on Page [indiscernible]. We provided a similar page last quarter, which we have updated to include the sale of Wells Fargo Shareowner Services in the first quarter.
Turning to our segments, starting on Page 17, Community Banking earned $2.7 billion in the first quarter. The majority of the benefit from the tax act was included in Community Banking results in the fourth quarter, which was the primary reason for the linked quarter decline in earnings.
On Page 18 we provided our Community Banking metrics. The primary consumer checking customer annual attrition rate was at the lowest level in five years and we've now had modest year-over-year growth in primary consumer checking customers for two consecutive quarters.
On Page 19 we highlight strong growth in credit and debit card purchase volume, both up 8% from a year ago. As Tim highlighted, customer loyalty survey scores reached their highest levels since August of 2016 and overall satisfaction with most recent survey visit – overall satisfaction with the most recent visit survey scores continue to improve. Our team members have made great progress by focusing on customer service and providing exceptional service remains a priority. We know that exceptional customer service leads to positive outcome, so we continue to reinforce that within our branches.
Turning to Page 20, Wholesale Banking earned $2.9 billion in the first quarter. Lower taxes drove both linked-quarter and year-over-year increases in net income. Wealth and Investment Management earned $714 million in the first quarter, and similar to Wholesale Banking, the lower tax rate drove the growth in [net income] [ph].
Turning to Page 22, our credit performance remained strong in the first quarter and our loss rate was 32 basis points of average loans. For the second consecutive quarter, all of our commercial and consumer real estate loan portfolios were in a net recovery position, including our residential and junior lien portfolio. Nonperforming assets have declined for eight consecutive quarters and were less than 1% of total loans for the third consecutive quarter.
As I highlighted earlier, we had $550 million of reserve release in the first quarter with approximately $400 million driven by a significant improvement in our outlook for 2017 hurricane related losses. As you may recall, in the third quarter of last year we increased reserve coverage by $450 million for potential hurricane related losses based on an initial review of our portfolio. The release this quarter also reflected continued improvement in residential real estate and lower loan balances.
Turning to Page 23, our estimated Common Equity Tier 1 ratio fully phased-in remained flat at 12%, still well above our target of 10%. Capital generation from earnings was more than offset by approximately 20 basis points of higher unrealized losses in OCI from higher interest rates and approximately 35 basis points of capital return to common shareholders. Risk-weighted assets were modestly lower than fourth quarter.
Given we are well above our internal target, we remain focused on returning more capital to shareholders and returned a record $4 billion through common stock dividends and net share repurchases in the first quarter, up 30% from a year ago. As a reminder, our share issuance in the first quarter is typically higher, reflecting annual issuances for benefit plans. Period-end common shares outstanding declined by 123 million shares or 2% from a year ago.
In summary, our preliminary results in the first quarter continued to reflect strong asset quality, liquidity and capital, and we remain on track to achieve our target of $4 billion in expense saves by the end of 2019. While we continue to have some near-term challenges, we look forward to sharing more information regarding our financial outlook and the transformational changes we are making throughout Wells Fargo at Investor Day next month.
And we'll now take your questions.
[Operator Instructions] Our first question will come from the line of Ken Usdin with Jefferies. Please go ahead.
I wanted to ask you guys to talk a little bit more about the outlook for net interest income, and specifically, there are a lot of moving parts here with the asset cap impact, you mentioned it's supposed to increase from here, but then there is the benefits to come from the swap roll-off over time and the NII sensitivity improving, so can you help us just understand like do you have an expectation you can grow NII and what will drive that, will it be rate more than volume at this point?
I'd say you mentioned the big drivers. The swap roll-off probably will be a net negative in 2018 because we are stepping down from the higher fixed rate to what currently is a lower floating rate. The expectation is that that floating rate moves up through where we were previously capped up on receiving fixed. So that's probably more of a 2019 benefit than a 2018 benefit.
With respect to – the biggest driver obviously will be the growth in loans and deposits. And related to that, what happens with deposit pricing, particularly among retail and small business deposits, will be a big driver. We, the industry, have been outperforming previous expectations in this early part of the normalization of short term rates and to the extent that there is a meaningful catch-up, which I think people think is a fair expectation, that will actually probably be a negative adjustment while we go through that until we figure out what the stable beta is for those types of deposits. So, I would say those are probably the big drivers.
At the longer end of the curve, we are continually reinvesting what's coming through in amortization and prepayments from a mortgage securities portfolio, and if long rates remain in the call it sub 2.80 range, then that won't be much of a driver. If they move up appreciably as the short end comes up, then there's an opportunity to earn more there as well.
One important point that I'd make that I don't think is really well appreciated is that a lot of what's been happening on the asset side of our books as we've run down some higher yielding assets on purpose is that there's an increase in overall credit quality that's coming with a lower spread component. So even though I mentioned that our loan portfolio has the highest coupon with the highest rate that it's had since 2012, that's happening at the same time that the credit quality profile is improving. So, it's not quite apples to apples when we're thinking about one year's assets versus the next.
Ken, I would just reinforce a couple of themes that John mentioned. The asset cap really isn't impacting our ability to grow loans. I mean our folks are out there facing off with our customers every day across the entire platform. And so, I don't think we are going to have an impact from the asset cap on loan growth. Where you see an impact from the asset cap on deposits is primarily what you're seeing in the first quarter, at least for 2018, is related to some of the deposit relationships that we have in the financial institutions group, corporate and the like. Those tend to be higher cost deposits, and as we've talked about, generally have higher betas.
Yes, good point. And my follow-up would just be then on the asset cap related stuff to that point, Tim, John, how would that traject from here? Like you said, you only got a little bit of that impact. Does it get to a run rate quickly just from the actions that you have already taken or is it just going to kind of be a bleed-in as we go along?
It depends on the organic rate of growth in underlying customer deposits and loans because the faster they grow, the more headroom we would create by taking up some of these [fake] [ph] deposits, as Tim described. And so, I guess if I were modelling it, I would bleed it in, but we still think 300 to 400 of [indiscernible] is the right number and it was negligible in the first quarter because of just the seasonal roll-down in the size of the balance sheet, and so it's more of the second half of the year realization.
Okay, understood. Thanks guys.
Your next question comes from the line of John McDonald with Bernstein. Please go ahead.
Just wanted to [indiscernible] what you can and can't do in terms of the – I know you can't say too much about the pending legal matter, but did the 1Q results include any provisioning for an eventual settlement with CFPB and OCC, are you able to put something in there, and you are saying that you might have to refine it from here?
John, it's a really fair question, and given the status of our discussions, all we can really say is what we said in the earnings release and then what I said in my prepared remarks. So, I again appreciate the question but that's as far as we would be able to go today.
Okay. So just another somewhat related for you, Tim, with a lot of negative headlines in recent months, could you discuss how the team members and customers are dealing with the challenges here, specifically kind of how your employee and customer attrition, how has that been going in wealth management and the commercial businesses? We hear a lot of things outside the Company. What are you seeing in terms of reaction to headlines and all the challenges you have?
John, it's a really good question, and as you and I have talked about and we've talked about on these calls, it's truly been – when we think about rebuilding trust, first and foremost our most important asset in this Company is our people. And so we have made fundamental changes in how folks are compensated, making sure that more of our team members, now all of them, have the ability to be Wells Fargo shareholders, which I think is an important connection between what we do for our customers every day and what we are doing for our shareholders.
We have made changes in how folks are – our incentive plans work, we've made changes in leadership and business practices, and the result has been a continued improvement in attrition or turnover. As I mentioned, it's about 30% better than it was in the fourth quarter of 2016.
I've heard the same anecdotal stories that you have about folks from some of our businesses leaving in mass. I don't know what company they are talking about because it is just not happening. Not only is team member turnover down across all of our businesses, but in particular we are able to attract really high quality folks in entry-level positions but at senior leadership positions in the Company.
In particular when we look at the Wells Fargo Advisors, as you mentioned, just because I hear about that just a little bit, the FA population that could be leaving to go to other competitors, that's down 24% year-over-year and in fact our experienced FA recruiting is up year-over-year and the productivity from our existing FA is up about 7% year-over-year.
So again, I hear the same anecdotal comments all the time but it's not impacting our business to serve – our ability to serve our customers and we just don't see it in the numbers.
The other part of your question is around customer activity and I would say where we either see it, hear about it, talk about it from customers themselves or from team members is around our most publicly exposed types of customer groups. So the many types of business, there's more competition and more to talk about. We competed against other firms when they were going through perhaps analogous reputational cycles, and now others are working their hardest to do the same with us, and we have to control a bit harder.
Okay. And one more follow-up on the regulatory side, you are doing the work to satisfy the Fed's Consent Order, is there any opportunity to be interactive with the regulator, can you get a sense along the way whether you are doing the things they want you to be doing, or do you have to kind of wait till the end to find out whether you are kind of on track with what their expectations are and yours are aligned?
John, it's a good question. I would say that we have a very active engagement model with all of our regulators. I think that's very important. And so, specifically if you're referring to the Consent Order with the Fed, we handed in our two plans. As they ask us to do [indiscernible] we would do. And we are having a lot of discussion about those plans, which is really good. It's good to be interactive because we both have the same goals. We want to improve compliance and we want to improve operational risk at the Company. So it's not a situation where we hand a new work and then you wait patiently at your desk for somebody to come back with the results.
And here is another example of bringing on high-quality leaders. Sarah Dahlgren, who had been in charge of supervision at the New York Fed, joined us this quarter and she is responsible for our engagement with our regulators and is doing a terrific job.
Okay, thank you.
Our next question will come from the line of Erika Najarian with Bank of America. Please go ahead.
Just wanted to follow up on Ken's question on your net interest income outlook, so as I think about, John, what you mentioned about the 59% efficiency ratio by year-end 2018 being pushed to 2019, does that mean that net interest income will not grow for the rest of the year?
It depends on the drivers that I mentioned. When we had previously been asked the question and responded to, could we see a 59 handle in 2018, it was before that last $300 million or $400 million worth of net interest income that we would attribute to actions that we expect that we would have to take to comply with the asset cap. And absent that $300 million to $400 million, that's a [indiscernible] number, not a revenue number, but it's interest income, it's easy to do the math. That would be the driver.
So, as I said to Ken, a variety of things could happen in loan growth, deposit growth, deposit pricing, shape of the curve, Fed moves, et cetera, they are all going to have an impact on where net interest income is. But based on the forecast that we have been operating with, that $300 million to $400 million was a difference maker between a calculated estimate of an efficiency ratio with a 59 handle at the end of the year versus one that's above that.
Okay. My follow up question is, in terms of – I heard you loud and clear in terms of your commitment to return more capital to shareholders, and the question I get a lot from your shareholders is, with the overhang of the outstanding signs, does that at all impact how you are thinking about your near-term buyback plans or dividends?
No, it doesn't, no. And I'm glad you're hearing the same things that we are, which is good. I mean, Erika, our plans, and John and I have reiterated this on a number of occasions over the last few months, is that we have an excess amount of capital to run and grow Wells Fargo and our plan is to reduce that excess over the next two to three years, and that's where we're going.
Yes, and the magnitude of the operating losses that we recently have been experiencing, while it's very different than what we had been experiencing previously, is provided for even in a base case capital plan because of industry results over the year. So, while we would rather not be experiencing it, it's not outsized.
And just to follow up on all this, and clearly this also comes into your conversations with your shareholders, but can you give us a little bit more insight on and as much as you can on the qualitative process? So clearly there has been some debate about whether or not your Consent Order will impact a non-objection or objection on a qualitative basis and I'm wondering if the qualitative process is really as broad as the market fears it is, or is the qualitative process really more grading Wells Fargo's process and grading your data? Any insight here would be helpful.
The qualitative process is far-reaching. It always has been. Everybody gets a little bit of feedback every year on how they can be better. We are no different and every year we strive to be better in the following year, and this year is no different. So, it's a horizontal process, there is every measure of the inputs into a capital plan that is subject to review, consideration, comparison, and grading, and that's the basis on which we have always been compared and we expect to be compared this year. And the question, explicit or implicit, as to what that means this year given other things that are going on is one that makes us work that much harder to make sure that we have submitted a very sound plan based on a very sound process, and that's where we think we are.
Your next question comes from the line of John Pancari with Evercore ISI. Please go ahead.
I want to just ask a couple of things on the expense side. For 2019, are you still confident that you could see a decline in overall operating expenses in 2019 versus 2018? And then also on the efficiency ratio side, do you expect that you could see a decline in the efficiency ratio over the full-year 2019 versus 2018?
Yes.
Double yes. And John, again, we'll provide a hard dollar number or a range like we did for this year at Investor Day, but assume that that's what you're going to hear.
That's a great question. Do you have any more like that?
No, it was kind of [indiscernible]. But I guess what I'm getting at is the 55% to 59% range that you had provided previously and before some of these issues, how long do you think it takes you to get towards that midpoint again, barring new issues on the regulatory front coming up?
To get to the midpoint is a little bit more complicated. I mean, we'll set out our target at Investor Day for the next couple of years. Unambiguously, that's the direction that we are heading. What we're doing on dollars of expense front, which we have been explicit about for this year, we'll be explicit about for next year and we'll talk about all of the drivers that are in place to cause that happen. And then separately, there is what's happening with revenue, which is going to reflect all the things that we just talked about in terms of net interest income and then a range of drivers in noninterest income, more of which we'll talk about in Investor Day.
But I sort of think about it as a distribution of potential outcomes based on what's happening with rates and interest income drivers, what's happening in all of our various businesses around noninterest income, and then what we're doing about total expense to deliver it. So, we'll try and be as transparent and helpful as we can at Investor Day, but overall, this notion of getting back to where we have historically operated or at some point through that given all the possibilities for automation, et cetera, that exist today that weren't as available a few years ago, that's our goal.
And let me just re-emphasize a point that John just made, and that's getting through that range. Our goal here is not to achieve the $4 billion in run rate savings that you will see in 2020 and then stop. Our goal is to have Wells Fargo be the most [efficient] [ph] company that we can be and I think that – I don't think, I know that means continuing investments but also continuing to improve the efficiency of the Company to get through that range over the next few years.
Got it. Okay, thanks Tim. And then on the capital side, regarding this TLAC proposal from the Fed, it looks like it creates I guess ballpark $25 billion to $30 billion in additional debt that can ultimately roll off, which could be a nice positive for you. So, could you just give us your thoughts on that and how you look at that?
I don't know that I would sign up for $25 billion-plus that could roll off. I mean we have got excess TLAC today just based on what's happened to our RWA and we will continue to optimize our debt stack to meet the minimum requirement, at least the minimum requirement, based on where we are and where we are going with RWA. But I didn't process a big step change positive into that. We were just probably even more focused on the stress capital buffer feedback this week and what that means for the right side of our balance sheet as it relates to proposed rulemakings.
Okay, all right. Thank you.
Your next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead.
Where do you guys stand in terms of derisking the loan book and some of the business pruning that you have done? You talked about auto growing next year and that you are largely done there. But just in aggregate, are you kind of through the process of reviewing the businesses on loan portfolios for [indiscernible]?
Matt, good question. In terms of the loan portfolio, I don't think there is any other significant derisking that we need to do. The auto portfolio continues to decline not because there is really derisking going on, it's just we just have more transformation that is going on in the business and we think that loan portfolio or that business will probably start growing again. First part of next year seems reasonable based upon what we are seeing. In fact we saw other than the reclassification of the Reliable portfolio, we saw a slight improvement in the decline.
But across the rest of the portfolio, I think you will continue to see a runoff of the legacy home equity book, which is performing quite well but it's pre-2009 type originations. But I wouldn't describe that as kind of running off riskier parts of that business. That's just a normal amortization.
And similarly, in the legacy mortgage book, the Pick-a-Pay portfolio, the sale that we did this quarter, I wouldn't describe it as a derisking sale, I would describe it more as an [indiscernible] sale because of the dearth of those types of assets in the market and there was a really attractive bid for it and so we moved on.
As it relates to the other businesses, and John may want to chime in too, but as it relates to other businesses, we are continuing to look through the entire Company to make sure that all the businesses that we've got are performing as well as they can. And if it means over time that we need to look at other businesses like insurance or Shareowner Service that could be worth more to others than they are worth to our shareholders, we'll go ahead and move forward. But I think that's going to be more of a continuing process that will take place over the next few years as opposed to one we complete by June or July or the end of the year.
Okay, it's helpful. And then just separately, your stock price continues to be under pressure and obviously some of it is going to be the Consent Order and the regulatory concern, some of it is fundamental. Just from your perspective, like is there kind of an increase in urgency in terms of whether it's trying to get more cost saves sooner or plus a little bit more on the revenue side, plus a little bit more on the buybacks? And again, I realize like market movements, they are hard to control and influence, and some of the stuff you can't control like on the regulatory side, but at the same time it has a lot of our attention, I'm sure it has your attention, and I'm just wondering if there's a little bit more that you can do a little bit faster?
A fair question. I mean we are clearly focused on return to our shareholders and current stock price is one measure of that. One way to think about our focus is that our focus is on the long term. As you point out, it's not on the day to day movement of the price. But clearly we have work to do. We have been very clear about the fact that we have work to do.
I don't know and I don't believe we can increase the sense of urgency at the Company. Folks have been sprinting now for about last year and a half and we are going to continue to sprint for probably the next 10 years. So, I don't know if we could move a whole lot faster. But Matt, we certainly appreciate the sense of urgency, and not only from our shareholders but all of our stake holders, which is why we are transforming the Company.
I'd like to point out that we are already focused on continuing to deliver the type of returns on the equity that we have. By doing that, we created the powder to return capital to shareholders. We are doing that through stock buybacks. We are doing that now in a low 50s context. So, if we continue to deliver ROEs north of 12%, ROTCEs in the close to 15% range, eventually the market is going to catch up with that.
Yes, I would agree on that last point. And if I could just squeeze in, I would suggest it seems like this year could be more of a transition year, maybe even into bleeding into next year as you deal with all these issues. And I just wonder, as you provide expense guidance for next year, there still could be some lumpiness I would think in the cost, you're not going to have all the cost saves. So, I realize 2020 is far out, but giving us a little visibility into what the cost might look like on a clean basis with the capital when you bleed it down might be helpful as well.
Matt, do you think if we gave you an indication of 2020, you'd want 2021?
No, but I think it seems like the legacy related costs could be elevated this year, the Consent Order is going to be a drag to earnings into next year. So, my guess is, next year on a full-year basis won't be 100% clean and we'll all be wondering how much cost will further abate as these issues are resolved. So, I'm not trying to be [indiscernible] lookout for five years, but…
No, Matt, I was just giving you a hard time. Listen, I absolutely appreciate your question. What you want to see from us, what our shareholders want to see from us, is better efficiency and better expense discipline. It's harder to see that this year because of the pace of the investments we are making with the [indiscernible] dollars that we are saving this year. I think it will be more apparent next year and it will be even more apparent in 2020 and 2021 and so on. But I understand your point, and candidly, it was your advice among others that led us to conclude that we needed to be more specific about this [indiscernible]. We listen to you.
Okay. Thank you for the time.
Your next question will come from the line of Marty Mosby with Vining Sparks. Please go ahead.
Marty, you did a good job on CNBC this morning. I was watching you.
Thanks, appreciate it. We had [Phil] [ph] appear, so got to do it twice. But wanted to know as you look at net interest margin, you've had a hard time getting the actual margin to start improving. This quarter we actually saw a nice pop in [indiscernible] plus no loss, a little bit [indiscernible] impact also a little bit and they count, but is this the first time that we're going to see those asset yields move up enough to offset and even pace faster than deposit rates and maybe start to see margin expansion from here?
Surely hope so. It depends what else is happening. So this quarter is the first time that you have seen the residual hedge ineffectiveness accounting item go through margin. That used to be entirely through noninterest income until the adoption of the new standard. So, that was another one of the things that contributed to the margin not reflecting the benefit of the increase at the short end of curve, and that is a result mostly of a big move up in long rates during the quarter, which gave rise to that accounting outcome.
So, if we end up in a flatter long rate environment, so you don't have that noise running through. And as you say, they count for every quarter, then certainly it's a possibility. But the big driver again is what happens to deposit cost as Fed funds or LIBOR or other market rates move up and our assets are pricing up. We have done as an industry or at least as a company done a good job at maintaining lower cost deposits while those other items, those other benchmarks have moved up. And if that continues to be true, then you should see that.
What was the basis point impact of that ineffectiveness?
It was $48 million. I'll do the math for you and we'll send you a note in terms of basis points.
That's fine, I can do it from there. That's perfect. I can calculate that. And then, Tim, I wanted to ask you, as you are doing all these transformations and you are moving to what's going to be the new Wells Fargo, what is the kind of overriding change? I mean, is it the change of getting out of maybe some riskier businesses that you are going to actually be now kind of looking at minimizing and now having much more just the core relationships? How would you kind of bring that so we can kind of [indiscernible] into this transformation, what you eventually want to see Wells Fargo look like once you come out of it?
Marty, I would really center yourself on our six goals. We have been very clear in each one of those six goals that we want to be the leader in the financial services industry and we have got work to do in all of them. But that's where I would focus. What the Company looks like as we achieve those goals is really going to be a function of who our customers are, what they want, and what the competition looks like. But I would really focus on those six goals.
Your next question will come from the line of Betsy Graseck with Morgan Stanley. Please go ahead.
I just had a couple of questions on the reserve release. I know you mentioned earlier that a lot of that was driven by the improvement in the [indiscernible] for hurricane related losses. Just wanted to see if that cleans that issue up or is there still more reserve release that could happen based on loan performance from the hurricane side? And then I had a follow up.
So, on the hurricane side, just for everyone's benefit, at the end of the third quarter, right after the hurricanes impacted Texas and Louisiana and then Puerto Rico had hit, we granted 90 day payment holidays to our consumer customers in those geographies so they could focus on getting their live together and not worrying about making a payment on their loans and becoming or become [indiscernible]. So, there was a ton of uncertainty because we couldn't measure delinquency or default because we had this payment holiday.
That came and went and our customers got back on their schedule, their plans, and so now we have real performance and a real understanding of home loss, auto loss, insurance claims, current versus delinquent, et cetera, which gave rise to an understanding that the loss has been negligible as a result of the hurricanes, and that's why now is the right time to take down that portion of the reserve.
I think that that's probably the last time you will hear us say that a reserve release or build has anything to do with hurricanes. I think it's pretty much cleared up. It's much more driven now by the size of loan book, the quality of the loan book, and what might be happening in other loan categories. And of course the most consistent, other than energy over the last couple of years, which has kind of run its course, it really has been the improvement in real estate secured related portfolios. It's been sort of the big driver at the margin I think of improvement in loan quality and the related appropriate amount of allowance.
Right. And then you mentioned that – did I hear you say correctly that all of your loan categories are in a net recovery position?
All of our real estate secured loan categories. So, commercial real estate, consumer real estate including second lien consumer real estate, are all in that recovery right now.
So does that drive more reserve release going forward?
Yes, at the margin. I mean it probably – it looks more to the path of loan price appreciation as a driver. I mean that's going to run its course because we haven't had losses in consumer real estate in a long time. So I don't think that's a big driver but it has been the driver.
Got it. And then just lastly, the outlook with, I know it's in a couple of years, but [indiscernible], and I know there's different folks that are running parallel starting this year on how reserve is likely to traject over [indiscernible] with implementation beginning in I know 2020, but next year CCAR, and I know it's a long way away from now, but next year CCAR includes [indiscernible]. So if you could just give us your sense as to how you're thinking about dealing with that?
So, right now we are focused first and foremost on the modelling necessary to understand what [indiscernible] looks like in business as usual. And there will be an impact, like there will be for everybody, that the required allowance for the loan portfolio will be somewhat bigger than it is today. I don't think it's a boxcar change and there is still refinement to do.
There is a reasonable question in terms of what it means in stress and our own version of stress and what it means to CCAR, and we are hoping that we have a lot of productive dialog with the regulatory community before next year's CCAR to understand how they are going to be thinking about its pro cyclicality and other things as we roll into CCAR 2019. But right now, the gap, business as usual, adjustment is something that's becoming better understood. We'll begin to talk more about it with the passage of quarters as it's really, really understood and refined, and it's not going to make for a gigantic change.
Right. And it's not impacting your decisioning today on reserve?
No, not reserving. And importantly, we have begun to think about it in terms of our thoughts about loan structure, loan price, the credit availability, that type of reserving because it can influence how we feel about certain types of specifically longer-term loans, and those are discussions that we are having, but it hasn't driven a big change in our approach to either pricing or availability yet.
Okay, all right. Thank you.
Your next question comes from the line of Nancy Bush with NAB Research. Please go ahead.
John, a question for you, just about the whole interest rate yield curve environment right now, because I'm trying to fit us all in with what you said about your sensitivity to long rates, et cetera, I mean how do you look at the flat yield curve, what do you do if it persists, can you just sort of address this whole weird rate environment that we seem to be in right now and the panic that seems to be building up around it?
So, if the curve gets flatter from here because the short end comes up and the long end remains anchored, then we actually do better, we make more and more asset sensitive to front end of the curve and we'll make more money as a result of it. We would make even more money if it was a parallel shift in the long and move up also. And I guess one nuance to that is, businesses like mortgage will do better on the origin nation front if longer rates remain at about where they are today versus be in the move about 3%, there is some question about affordability in some markets and so originations come down. But the reinvestment activity that we have in our investment portfolio at higher rates is something that we would miss if long and doesn't move up from where it is today. But very specifically, if it stays put and the short end keeps coming up, we are still improving in terms of our earnings profile as a result of that.
Are you building or thinking anything? I mean there has been apparently a slight inversion at the short end of the curve that's sending everybody into panic and it seemed money market related issue. Can you just give us a little bit more understanding around that?
Sure. So there is a lot more issuance going on at the front end, both by the government because they are issuing at the short end and they have got a lot to do because they are going to have even more financing as a result of depending on what happens with the tax related impact of tax reform, but therein as a big issuer you've got others in as big CP issuers and that's a result of money market reform. There are fewer takeouts for that to convert it into cash equivalents for retail and others. And so, investors at that point in the curve have a little bit more power. So, yields are up. Incidentally, that feels like the driver of a piece of the LIBOR-OIS disconnect that I think you are referring to. It's technical, it's supply driven from issuers in the short end.
Okay. But you are not concerned about the environment right now and don't see the flat yield curve as necessarily indicative of anything?
No, I mean I think if we didn't have some of the trade-related and other political dynamics that can allow people to imagine that there could be economic problems as a result of that, it's probably the longer end of the curve would have adjusted up even more than where it is today. But that's speculative, but that's my take.
All right, great. Thank you very much.
Your next question comes from the line of Saul Martinez with UBS. Please go ahead.
First, I just wanted to clarify a point on your expense guidance rate, so the 53.5 to 54.5. That includes I guess $600 million of typical operating losses and this quarter you had $668 million. So, effectively any incremental operating losses from here when I [indiscernible] to your guidance, we should basically exclude that. I just want to make sure I'm understanding puts and takes around the guidance.
That's right. Our sort of ambient run rate of operating losses for fraud and bank robberies and things like that is $150 million a quarter. And so, what we have in giving that guidance we have basically accounted for that. As you pointed out, we have achieved that in the first quarter as a result of litigation related costs.
Got it, okay. I guess a broader question, John, you mentioned your stock will take care of itself if you can continue to do 15% ROTCEs and 12% [indiscernible] 120 basis points ROAs, and I suspect we will hear more about this at your Investor Day, but this quarter also did have a lot of noise in it, maybe net-net been more positive than negative, but when we compare you to your peers, you are no longer sort of at the top of your peer group in number of performance metrics, and I guess the question is, how important is it to be in the top of your peer group and is it still something that is feasible and is it still something that is important or do you really need to get past your issues, all the issues that have risen that becomes a primary goal or should be a primary goal of the Company?
Yes, it's one of the six primary goals in terms of shareholder value in particular, and we absolutely expect, especially among G-SIB peers because of the capital structure that we all have that we would be at the high end of the performance range. So the north of 12.375% ROE this quarter and 14.75% of ROTCE with a 64% of business [indiscernible] ratio, and like we are as clear as we can be that our expenses should be substantially lower, will drive us to appreciably higher returns. Also, we are carrying 200 basis points of capital above what we think is appropriate for a company with our risk profile. So, both of those things as rectified should return us to the very high end of the range and we think that's appropriate given the scope of our business, the risk profile of our business, the scale we have in the business that we are in, and those are crystal-clear goals.
Okay, great. Thanks a lot.
Our final question will come from the line of Gerard Cassidy with RBC. Please go ahead.
Tim, can you give us maybe some color? Clearly we know about the sales practices and the problems that you guys are wrestling with, with these issues. Subsequent to the discovery of your sales practice issues, you discovered some other issues in different lines of businesses. And if I recall, Wealth Management is now under some sort of investigation. Are you comfortable, are you confident enough to be able to say that you guys have looked in every corner, nook and cranny that you are now – there shouldn't be any more incremental discoveries of issues that may bring regulators to look harder or is that just [indiscernible]?
We certainly had a thorough look in every nook and cranny in the Company and we are continuing on that process. And I think, Gerard, one of the lessons learnt for us candidly over the last few years is that we should have been doing a better job of that when we were performing quite well in the prior years, and we are not going to make that mistake again, so that we are going to continue to raise the bar on ourselves over time.
But in terms of declaring victory and walking ahead, we are not at that spot right now. I think we are going to know that when we [indiscernible] in 6 to 12 months after it happens. And we are making a lot of progress, but as I mentioned in my opening remarks, we have got some challenges that we are dealing with right now, including the reason that we described our results today as preliminary, and we take those issues very seriously.
But having said all that, we have made a tremendous amount of progress in terms of transforming the Company. And so, I think we are very far along in the journey, to answer your question specifically. But in terms of declaring victory and walking ahead, we are not quite there yet.
Okay, thank you. And I apologize if you addressed this, I jumped on the call a bit late. On your Slide 5 where you guys talk about the noninterest income being down in the quarter, you talk about the impact, the full quarter impact of the customer-friendly changes, including the Overdraft Rewind product. Can you give us some more color about what's going-on on the consumer deposit fees? And then second, you also talked about the higher earnings credit rate for commercial customers. Was that just interest-rate related as rates go higher, they get a higher credit, or was there something else in there?
In terms of the second part of your question, that's exactly right, that's just the way to pay commercial customers for their deposits by charging them less for treasury management services. And the first part of your question is really, it's a very big one. Part of the reason that our retail deposit franchise is as large as it is and as low-cost as it is, is because customers have a great experience with the whole range of capabilities and the whole experience. Part of that is what they pay for monthly checking, if anything, and most of them don't pay anything, and part of it is what happens if things go wrong. And so, we have made great strides.
Overdraft Rewind, for those of you who don't remember, is the capability where if somebody has direct deposit with us and they would overdraft on any given night, but on the next day their direct deposit hits and it covers it, then we don't charge them, we don't process what happened the night before as an overdraft.
Similarly, we have been sending out tens of millions of alerts to people to help to remind them before they would overdraft that they have got little balance so they can handle their affairs appropriately and not get charged. So, we lose revenue as a result of that. We lose overdraft fees. It costs us hundreds of millions of dollars. But as a result, [indiscernible] are happy with their relationship with Wells Fargo, we end up with a large and low-cost deposit base. I think of it as inseparable in terms of the value of deposits versus what we are missing in overdraft fees.
We are not going to grow our [indiscernible] greatness as the company that we are by charging people more for overdrafts, and if we can maintain and grow those relationships by helping them avoid them when they can, then that's probably better for us both in the long-term.
And that's a really important point that we are listening to our customers, and one of the themes that we hear from them is, and that is help us manage our finances better by helping us give them better information about how to manage their finances. And that's just fundamental to the long-term investments we have made in terms of specifically the two improvements that John mentioned for our consumer deposit customers. And in short run, it has an impact on revenues. On the long run, what we are seeing is we are seeing a growth in deposits, a growth in primary checking accounts and better customer service and loyalty scores, and I think that's a real indication of the progress that we're making across the entire platform. And again, it just reinforces how we are thinking about the long-term sustainability and the progress of the Company.
So, I want to thank you all for your questions. Again, I know it was a very busy day. I thought the questions were very good and we are going to continue to listen to all the advice that you provide to us, and for our team members that are mentioning today, I want to thank you for all of your hard work and effort as you continue to transform Wells Fargo. Have a good rest of your day.
And this concludes today's conference. Thank you all for participating. You may now disconnect.