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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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 Fourth 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, everyone. Thank you for joining our call today where our CEO and President, Charlie Scharf and our CFO, John Shrewsberry 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 release and quarterly supplements are available on our Web site at wellsfargo.com. I'd also like to caution you that, we may make forward-looking statements during today's call that are subject to risks and uncertainties.
Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings in the earnings release and in the quarterly supplement available on our Web site.
I will now turn the call over to Charlie Scharf.
Thank you, John and good morning everyone. It's good to be with you on my first earnings call. As I go through my remarks, I'd ask that you remember that I just joined Wells Fargo less than three months ago. It's been a busy time as I have been working to get to know the company, our opportunities and challenges and I've learned a lot. But as I discuss my observations, please recognize that it is still early days. I don't have all the answers yet, but I will share more as I learn more and as the year progresses.
John is going to cover the quarter in detail in a few minutes and we'll answer your questions. You can see that a series of legacy issues meaningfully impacted our results in the quarter. Even excluding these significant items, our results are not as strong as we aspire to. But the strength of the franchise is still evident. There are certainly some areas of success but the opportunity to improve our results is significant and attainable.
Let me first share some of my observations and thoughts before turning it over to John. First, I was honored to be chosen to lead Wells Fargo because I believe this is an extraordinary company that plays an important role in this country. We came out of the financial crisis as the most valuable and most respected bank in the U.S.
But as you know, we made some terrible mistakes and have not effectively addressed our shortcomings. These circumstances have led to financial underperformance, but we have one of the most enviable financial services franchises in the world and employees that want to do what's necessary to again be one of the most respected and successful banks in the U.S.
To fully capture this opportunity, we must have a strong foundation and move with an extreme sense of urgency to remediate our historical issues. We still have much more work to do to put these issues behind us, and our future depends on us doing this successfully so we can regain trust with all stakeholders, including our clients, regulators, lawmakers, as well as the broader American population. Ultimately, our actions will dictate when that trust is completely regained, not our words.
Given the importance of these issues, I want to say a few more words about our situation, particularly about the challenges that stand in the way of our success and importantly, the different approach we're taking to address these issues. Providing an honest assessment and clear priorities is critical. And I've given a clear message inside the company that we have not yet met our own expectations or the expectations of others. We must do what's necessary to put these issues behind us.
Our ability to maximize the value of this great franchise is dependent on us running the company with the highest standards of operational excellence and integrity beyond what we've done to-date. We are appropriately a highly regulated institution. And while we need to fulfill regulatory expectations, we recognize that what we want and what regulators want are not different. We are responsible for our actions and they're responsible for ensuring our actions are consistent with clearly defined standards. It's our job to run the company such that we fulfill their expectations, and those of the American public and other countries where we operate. Respect was earned in the past and we will earn it again.
As such, since joining I've been spending almost all of my time on these issues. I will say this several times, but you should know there's still much work to do. Many have focused on the Fed consent order but remember we have 12 public enforcement actions that require significant resource commitment. While I certainly wish more of this work was behind us, what's required of us is clear and we will get it done. It’s work that other banks have done already, so there's a clear roadmap for what we need to achieve.
We're making significant changes to our management structure and processes to accomplish our work, changes that will make us more effective. Like any other problems, recognition of the importance and severity is necessary first step, but this by itself is inadequate. We will take whatever actions are necessary. Our future success depends on resolving these issues. So we will act accordingly. The management team will be judged and held accountable for resolving these issues. To set us up for success, we will ensure we have the right people in place to both resolve these issues and be the stewards of this great company.
Importantly, I want to acknowledge that we have so many wonderful people at Wells Fargo that have done an amazing job serving our clients and customers in the face of the diversity for several years now. They've been through so much and have helped us sustain such a great franchise. So I do want to say thank you to them for all they've done. The warmth and support I've been greeted with, as I've discussed our shortcomings and work in front of us, tells a great deal about the character of many at the company.
They understand our lack of progress makes their jobs far more difficult, and they're looking to management to do more to move the company forward. To get the work done we must ensure that we have the right team. To that end, we've made some important changes to the senior team to complement the talent that's here at Wells.
Scott Powell joined us as Chief Operating Officer. When I arrived at the company, many on the senior management team made clear to me that they believed we needed stronger execution skills. After just several weeks at the company, I came to quickly agree. Scott will lead a transformation across the company where high quality execution, clear accountability and operational excellence, becomes part of our culture.
Bill Daley joined as Head of Public Affairs. He is a strong and experienced voice and brings perspectives from the public sector that we in business do not generally have but are critical for us as we make decisions. Allen Parker, who served both as General Counsel and Interim CEO, announced he will be leaving Wells in March. We are well into a search for the new General Counsel and excited about the quality of the candidates we've met. Avid Modjtabai has announced that she will be retiring after 26 years at Wells Fargo in March. We will be announcing a new organizational structure for these activities shortly.
Ray Fisher has also joined us to run our Card and Merchant Services Business. Our card business is important to our franchise and we have an opportunity to make it even more significant. Ray is an experienced card and Merchant Services executive who brings deep knowledge and a fresh perspective to our business. These changes are in addition to many other senior people who have joined the company over the past few years in important roles, such as Heads of Risk, HR, internal audits, and technology. These new additions complement the strong talent at the company. And I will continue to look at the structure and roles to ensure we are best positioned for success. We need and will have the best talent and strong leadership at the company.
We're also introducing a new set of disciplines in how we run the company which I'm confident will improve our performance. These changes are not only structural and procedural but also cultural. To that point, parts of our culture are wonderful and it would take decades to recreate. People who work here love it. It really is like a second family. We focus on teamwork not on the individual. People want to be successful and do what's right though we recognized we've fallen short of this goal. But our lack of progress and underperformance point to shortcomings.
Going forward, we will operate as one company, not a series of decentralized businesses. We will continue to foster a culture of partnership but we will move past the need for consensus and have open and direct fact-based discussions where we emerge with decisions. We will have a different level of management discipline than we've had in the past and we'll value and expect high quality execution. There will be clear responsibility and accountability. We will judge ourselves based upon our outcomes not our words. And we will ultimately judge ourselves versus the best as we believe that we should be the best.
As we begun to implement this new culture, the response has been overwhelmingly supportive. But I understand it's different and is a significant change for many. We will be respectful of our past and of those who have built this great franchise, which includes so many still with the company today, but we must move forward. I'm confident these changes will be highly impactful.
And though I understand you would like time frames around resolution, I cannot provide that today. Our job is to do the work that's necessary. Regulators and other stakeholders will determine when it's done to their satisfaction. My experience is that our regulators are clear, direct, tough, but fair. The work is on us at this point.
Let me now turn to our medium and longer term opportunities. Our franchises are world class and are in the sweet spot of providing necessary financial services for consumers, small businesses and middle market and large corporate companies. And importantly, we play an important role in helping our customers and clients prosper, as well as being an important enabler for U.S. economic growth.
While I've spoken at length of our mistakes and our commitments to fix them, the underlying franchise itself is as valuable as ever and our opportunities are greater than ever. The success of our business model is proven assuming we run the company with the appropriate controls and work as one company with the goal of delivering for all stakeholders.
All of our business segments, Community Banking, Wealth Investment Management and Wholesale, have the breadth and scale that gives us significant competitive advantage and allow us to deliver truly differentiated products and experiences for our customers and clients. Our opportunity to use technology to drive both automation and new solutions will only grow in importance. Our franchises, both individually and collectively, are the envy of many.
So while our resources and attention today are appropriately preoccupied with historical issues, as we move forward, we will be in a position to leverage our unique franchise and generate stronger financial results. And just to be clear, we are well aware that our expense levels are significantly too high. Part of this is driven by significant project expense related historical issues, part is due to the necessary investments in technology, part is due to significant inefficiencies that exist across the organization. But there is no reason why we shouldn't have best in class efficiency with these businesses at this scale and that ultimately will be our goal. And know we've had pockets of strong performance, we're also well aware that our rate of customer and revenue growth is too low. Given what we've been through, this isn't surprising.
There's certainly an opportunity cost due to the asset gap. Management time and resources have not been as focused on growth as they otherwise would have been. And we have an opportunity to think differently with different level of rigor about how to grow the franchise. All of this points to great opportunity. So again, I know you will want to know timeframes and targets, but please understand that it's too early after less than three months at the company. That said, we have just begun the process to rethink our plans for 2020 and beyond in a different level of detail.
While the opportunities for improvement are clear at the macro level, we need business-by-business plans. Accordingly, we have just begun conducting what are really both budget and broader business reviews where we look in detail at our plans. We will be reviewing over 10 businesses in detail, as well as all of our enterprise functions.
As you can imagine, technology is important theme. This isn't merely a review of the numbers, but one where we use the facts to form a basis to discuss strategy and potential actions. We are asking each business leader to show us what best-in-class efficiency looks like and what our path to achieve it is. We're reviewing revenue and return performance as well and what a path to best class looks like here as well. We're discussing our competitors large and small and we're thinking through our unique options given our special franchise. These are analytical and strategic discussions that I don't think have occurred consistently across the company in some time given what's occurred.
The output of this work will provide us roadmaps to not only improve our performance within each business, but also position us to understand our opportunities across the company and prioritize accordingly. First and foremost, this includes clarity around ensuring we're spending appropriately on historical issues. It's still very early in our process but I will say that every session thus far has reinforced that our opportunities are meaningful.
We intend to be detailed, thoughtful and complete to do this properly and given our priorities, it will take time much of this year, to complete our work. But in the interim, we will devote all necessary resources to risk, control and spend what's necessary. We will be as diligent as ever to drive efficiencies and control expenses, and we will begin to work through the business opportunities we have in front of us. I'm confident in our ability to realize our potential, one that again puts us at the top of the respective financials intuition list with a far more efficient organization and higher revenue growth than you see today.
While there is much to do and I know the path to success will be bumpy, I'm optimistic about our future and excited to be at a place with so many great people and such strong franchises doing incredibly important work. John, over to you.
Thanks Charlie. Good morning, everyone. We had a number of significant items in the fourth quarter that impacted our results, which we highlight on Page 2 of our supplement. We had $1.9 billion of operating losses, including $1.5 billion of litigation accruals for a variety of matters including previously disclosed retail sales practice matters.
The litigation accruals reduced EPS by $0.33 per share and a majority of them were not tax deductible. We had a $362 million gain from the sale of our commercial real estate brokerage business, Eastdil Secured. We had $166 million of expenses related to the strategic reassessment of technology projects in Wealth and Investment Management.
We had a $153 million linked-quarter decrease in low income housing tax credit investment income, reflecting a timing change of expected tax benefit recognition. We had a $134 million gain on loan sales, predominantly Junior Lien mortgages. And we had a $125 million loan loss reserve release. While our financial results in the fourth quarter were impacted by these items, as we show on Page 3, we continue to have positive business momentum with strong customer activity, which I'll highlight throughout the call.
On Page 4, we summarize the full year results. Compared with 2018, revenue declined as 4% growth in non-interest income was more than offset by a 6% decline in net interest income, driven by lower interest rates. Our expenses remained too high and increased 4% from a year ago, driven by higher personnel expense, which included $981 million of higher deferred comp expense, which is P&L neutral and higher operating losses.
Loans grew 1% and deposits increased 3% from a year ago. Our net charge-off rate remained near historic lows. And we returned a total of $30 billion to shareholders in 2019 through common stock dividends and net share repurchases, reducing common shares outstanding by 10%. I'll be highlighting most of the balance sheet drivers on Page 5 throughout the call. But I will note here that we were $20 billion below the asset cap at the end of the fourth quarter.
Turning to Page 6. I will be covering the income statement drivers throughout the call. But I want to highlight that our effective income tax rate was 19.1% in the fourth quarter, which included a net discrete income tax expense of $303 million, predominantly related to the non-tax-deductible treatment of certain litigation accruals.
Turning to Page 7. Average loans increased linked-quarter and year-over-year with growth in both consumer and commercial loans. Period end loans increased $9.2 billion from a year ago, even as we sold or moved to held for sale a total of $5.8 billion of consumer loans over the past year.
I'll highlight the drivers of the linked-quarter growth in loans starting on Page 9. Commercial loans increased $3.4 billion from the third quarter, driven by broad-based C&I growth in corporate and investment banking.
As we show on Page 10, Consumer Loans grew $4 billion from the third quarter. The first mortgage loan portfolio increased $3.2 billion from the prior quarter, driven by $17.8 billion of held for investment mortgage loan originations and the purchase of $2.3 billion of loans as a result of exercising service or cleanup calls. We're now substantially done with our cleanup call program for pre-2008 securitizations. Junior Lien mortgage loans were down $1.3 billion from the third quarter as pay downs continue to outpace new originations.
Credit card loans increased $1.4 billion, primarily due to seasonality. Our auto portfolio continued to grow with balances up $1.1 billion from the third quarter. Originations were down 1% linked quarter on seasonality but increased 45% from a year ago, reflecting a renewed emphasis on growing auto loans following the restructuring of the business.
Turning to deposits on Page 11. Average deposit cost increased 2% from the third quarter and 4% from a year ago. Our average deposit cost of 62 basis points increase 7 basis points from year ago, reflecting promotional pricing in retail banking for new deposits earlier in the year and the mix shift to higher costs deposit -- higher cost products across our consumer and commercial businesses.
Our average deposit cost declined 9 basis points from the third quarter, reflecting lower rates in wholesale banking and WIM. We did not run any broad based retail banking marketing promotions for deposits during the fourth quarter. However, retail banking deposits increased 2 basis points due to the continued impact from previous promotional campaigns and deposit gathering strategies over the past year when interest rates were higher.
While we continue to offer our customers competitive promotional savings and CD rates within our branches, retail Banking deposit costs are expected to start to decline in the first quarter as higher promotional rates expire.
On Page 12, we provide details on period end deposits, which grew 3% from a year ago and 1% from the third quarter. Wholesale banking deposits were up $15.9 billion from the third quarter, driven by seasonality and growth in existing and new customer balances. Consumer and small business banking deposits increased $16 billion from the third quarter, driven by higher retail banking deposits, including growth and high yield savings and interest bearing checking. Wealth and investment Management deposits grew as brokerage clients' reallocation of cash into higher yielding liquid alternatives moderated during the quarter. These increases were partially offset by lower corporate treasury and mortgage escrow deposits.
Net income declined $425 million from the third quarter, primarily due to balance sheet re-pricing, driven by the impact of the lower interest rate environment. $104 million of lower hedge and effectiveness accounting results, as well as $74 million of higher MBS premium amortization costs due to higher prepayment rates. We had $445 million of MBS premium amortization in the fourth quarter. And based on the current interest rate environment, we expect MBS premium amortization to be relatively stable in the first quarter and then start to decline. Although, we expect it to be higher in full year 2020 compared with full year 2019.
As expected, net income was down 6% in 2019 compared with 2018. And we continue to expect net income to decline in the low to mid single digits in 2020. However, as always, net interest income will be influenced by a number of factors, including loan and deposit growth rates, pricing spreads, the level of interest rates and the shape of the yield curve.
Turning to Page 14. Non-interest income declined $1.7 billion from the third quarter, which included $1.1 billion gain from the sale of our institutional retirement and trust business. Let me highlight a few of the other linked quarter trends. We completed the sale of Eastdil Secured on October 1st, resulting in $362 million gain that was reflected in other non-interest income. This sale reduced commercial real estate brokerage commissions by $168 million from the third quarter.
We provide a breakout of the revenue and direct expense related to this business on Page 27 in the appendix. We're assessing all of our businesses as part of the reviews we're having since Charlie joined WellsFargo and there maybe additional pruning going forward as we assess our strategic priorities.
Mortgage Banking revenues increased $317 million from the third quarter. Servicing income was up $165 million due to a negative MSR valuation adjustment in the third quarter, reflecting higher prepayment rates. Net gains on mortgage origination increased $152 million due to $4 billion increase in Residential Held for sale mortgage loan originations, while the production margin was flat at 121 basis points.
Net gains on mortgage loan originations also increased from higher gains associated with exercising service or clean up calls in the fourth quarter. We expect mortgage originations to be lower in the first quarter due to normal seasonality. Net gains from equity securities were down $505 million from the third quarter as lower gains from our affiliated venture capital and private equity partnerships were partially offset by $240 million increase in deferred comp plan investment results, which again are largely P&L neutral.
Turning to expenses on Page 15. Our expenses were too high and becoming more efficient remains a top priority. I will explain the drivers of the linked quarter and year-over-year increases in more detail starting on Page 16. Expenses increased $415 million from the third quarter, driven by higher personnel and equipment expense. The $320 million increase in compensation and benefits was driven by $258 million of higher deferred comp plan expense. We also had higher salaries expenses, primarily due to changes in staffing mix, which was partially offset by lower FTE.
As a reminder, we will have seasonally higher personnel expenses in the first quarter, reflecting incentive compensation and employee benefits expense. Infrastructure expense increased due to higher equipment expense, driven by the strategic reassessment of technology projects in WIM. Our operating losses remained elevated but were stable linked quarter.
As we show on Page 17, expenses increased $2.3 billion from a year ago, driven by higher personnel expense and operating losses. Comp and benefits expense increased $1.1 billion, which included $691 million of higher deferred comp expense, as well as higher salaries expense, primarily due to staffing mix changes and annual salary increase. Running the business non-discretionary expense increased by $1.5 billion of higher operating losses, partially offset by lower core deposit and other intangibles amortization expense.
On the earnings call last quarter, we said we expected our 2019 expenses to be approximately $53 billion, which was at the high end of our $52 billion to $53 billion target range. As we showed on Page 18, we came in above that as fourth quarter expenses were higher than expected, primarily in three areas. First, we had higher than forecasted outside professional services expense. These expenses were primarily related to legal, technology and risk management. Second, we had higher impairments and other right downs, including the strategic reassessment of technology projects in WIM that I previously mentioned, as well as impairments on rail cars. Finally, we had higher personnel related accruals, including severance.
Turning to our business segment, starting on Page 19. Community Banking earnings declined $570 million from the third quarter, primarily driven by lower net interest income and lower net gains from equity securities. On Page 20, we provide our Community Banking metrics. We have 30.3 million digital active customers in the fourth quarter, up 4% from a year ago, including 7% growth in mobile active customers from a year ago.
Primary consumer checking customers grew 2% from a year ago, the ninth consecutive quarter of year-over-year growth. Branch customer experience survey scores in December increased from a year ago, reflecting the fundamental changes we've made to improve the customer experience. The decline in branch customer experience survey scores from the third quarter was most likely due to changes in branch staffing levels.
We're pleased that the progress we've been making to improve customer satisfaction was reflected in the J.D. Power in 2019 national banking satisfaction study released in December. Our customer satisfaction scores improved by 9 points from last year study, the largest increase among our large bank peers. Improving the customer experience across Wells Fargo remains a priority. And as part of this focus, we're implementing the net promoter system to allow even more dynamic customer feedback in benchmarking. As a result of this implementation, we'll no longer be reporting branch customer experience survey scores. However, we will continue to share key business drivers that reflect the progress we're making to improve the customer experience and to drive loyalty.
Turning to Page 21. Teller and ATM transactions declined 6% from a year ago. As a result of our customers continuing to migrate to digital channels, we consolidated 174 branches in 2019. We had 5,352 branches at the end of 2019, down 12% over the past three years. We also continue to have strong card uses with linked quarter and year-over-year growth in both credit and debit card purchase volume.
Turning to Page 22. Wholesale banking earnings declined $151 million from the third quarter, driven by lower revenue. We are an industry leader in businesses that support low income housing and renewable energy investments, which both generate income tax credits. These income tax benefits do not get included in revenue. So as you can see in the table on this page, we're reporting both our consistent wholesale efficiency ratio and we're also providing our efficiency ratio adjusted for income tax credits in order to make this ratio more reflective of how we evaluate the business.
Wealth and Investment Management earnings declined $1 billion from the third quarter, which included $1.1 billion pretax gain from the sale of our institutional retirement and trust business. For the first time since the first quarter of 2017, WIM had linked quarter growth in average deposits, up 2% from the third quarter. And total client assets increased 10% from a year ago on higher market valuations, including 18% growth in retail brokerage advisory assets. Closed referred investment assets resulting from the partnership between WIM and Community Banking were up 18% in the fourth quarter compared with the year ago with December having over $1 billion in closed referrals our strongest month since June of 2017.
Turning to Page 24. We continue to have strong credit results with 32 basis points of net charge-offs in the fourth quarter. Commercial losses were 16 basis points, up 5 basis points from the third quarter, driven by lower recoveries and higher losses in lease financing, primarily related to railcars. Overall credit quality indicators in our commercial portfolio remained strong with our fourth quarter internal credit grades at their strongest levels in two years.
Consumer losses were 51 basis points, also up 5 basis points from the third quarter. Both of our consumer real estate portfolios were in a net recovery position in the fourth quarter. Our other consumer portfolios had slight increases in losses from the third quarter, primarily driven by seasonality. Both our credit card and auto portfolios had lower loss rates than a year ago.
Non-accrual loans declined $199 million from the third quarter with lower non-accruals in both the commercial and consumer portfolios. Non-accrual loans were 56 basis points of total loans in the fourth quarter, their lowest level in over 10 years. We adopted CECL on January 1st of this year and expect to recognize $1.3 billion reduction in our allowance and a corresponding increase in retained earnings.
This reduction predominantly reflects an expected $2.9 billion reduction in the allowance for commercial credit losses under CECL, reflecting shorter contractual maturities and the benign credit environment. While the allowance for consumer credit losses is expected to be $1.5 billion higher under CECL, reflecting longer or indeterminate maturities that have recoveries and collateral value predominantly related to residential mortgage loans, which have been written down significantly below current recovery value during the last credit cycle. As we've noted in prior quarters, we anticipate more volatility under CECL due to economically sensitive forecast and the impact of changes in the credit cycle.
Turning to capital on Page 25. Our CET1 ratio decreased to 11.1%, driven by returning $9 billion to shareholders through common stock dividends and net share repurchases in the fourth quarter. Our ratio was still well above both the regulatory minimum of 9% and our current internal target of 10%. As a reminder, we used approximately 65% of the gross repurchase capacity under our most recent capital plan in the second half of 2019, so repurchases will be lower during the first two quarters of 2020.
In summary, while we had a number of significant items that impacted our fourth quarter financial results and our expenses remain too high, we continue to have positive underlying business fundamentals, including growth in loans and deposits, increased customer activity and strong credit performance. We also had high capital returns. I'm excited about the opportunities ahead as we continue to do the work necessary to transform Wells Fargo. And Charlie and I will now take your questions.
[Operator Instructions] Our first question will come from the line of John McDonnell with Autonomous Research.
Charlie, I wanted to ask you maybe for some high level takeaways on Wells Fargo's technology. Where do you see it being up to par and best-in-class and what areas do you see the technology is behind and needing more investment?
Thanks John. It's a great question. Again, I'm certainly not in a position to be definitive across the board, given how I have been spending my time. I will say that in the time that I spent with Saul Van Beurden, who is our Head of Technology at the company, we have a really clear list of the work that we have to do, to both improve the underlying infrastructure of the institution, which will benefit our ability to grow at some point, because it really contributes to our ability to servicing all of our clients across all of our different segments, as well as we possibly can.
And so it's a robust list. There's a lot to do on it. And Saul clearly is working through with this team all the right prioritization and putting timeframes around it. At the same time, it's clear when I spent time with all of our folks that we are thinking about where we go next and how we use technology to create different experiences and we see it in terms of some of the things that we've done in the digital space on the consumer side.
And so, again, I'm not in a position to be extremely specific business-by-business of exactly where we're positioned and how we think about it. Other than it's really clear that it has been a top priority inside the company. And certainly all the business leaders understand the importance that technology will play going forward.
And then I wanted to ask John Shrewsberry in terms of expenses, totally getting Charlie's point about being too early to talk about expense improvement, but when we think about the jumping off point as we put our models for 2020 expenses, John, should we think about this 53.7 adjusted expenses that you did for '19? Is that a good starting point to think about 2020 expenses? The last you kind of said you'd trying to be flat in 2020. Is that the right ballpark we should be thinking about for the adjusted number?
So early on here while we're still going through this planning process, I wouldn't expect that much to change other than the -- some of the adjustments that we all make for deferred comp, for excess operating losses et cetera. And then we'll, as this processes ensues, we will come back with some more details.
But for now we're kind of thinking flattish to that number, or that's the right ballpark to start off with?
I would just take it period-by-period, not that much is going to change between Q4 and Q1, the same because of the shortness of the time frame. And as we get more clarity as a result of our process, we'll provide more clarity.
And then just one as a quick follow up on that. In terms of the $600 million of operating losses that you talk about, it really hasn't been that in many years, it's really average. It seems like more like $2 billion a year and I know it's hard to predict. But to worry about, I was anchoring too low on that $600 million. Should we kind of budget something higher than that just as a go forward?
It's a good point. So that we originally talked about the $600 million, it reflected the $150 million per quarter of fraud related losses and other run rate operating losses without regard for what's been elevated over the last couple of years. I do think that the $600 million has probably grown to be something a little bit more like, could be $700 million or $800 million. We'll try and give better guidance to that. But the higher run rate or the higher realized rate that we've had over the last two years reflects more of a combination of episodic things that are anticipated to be to recur at the same level.
And let me give you, just on your first question a little bit more clarity, because I'm reminded that the first quarter is the first quarter. I said this in my remarks. But there are seasonally elevated expenses in the first quarter that caused, that standout year-after-year as FICA resets, as retirement eligibility resets and a few other things that will cause that to stand out in any year.
Your next question comes from the line of Ken Usdin with Jefferies.
Charlie, to your points about just going after all the things to put the company on the right foot forward. How do you start to assess just if the right things are happening underneath? And coming back to the point just on related expenses, you've obviously had this build over time of compliance and risk and those functions. Are we even at the point yet where the hiring is done in that regard right where you're actually -- just you've got the people in place and it's more just about execution? How do you give us a sense of just kind of where you think you are on that story arc? Thanks.
Sure. So on the first question, I think when you're on the inside of the company and we're managing the work that has to get done the way that we are, we have clear reporting, we have clear goals, item by item by item. And so it's very, very easy for us to understand whether we're tracking to milestones and having reviewed the entire plan believe that those milestones will get us to eventual closure on issues. Quite honestly from the outside, you obviously don't have the ability to do that. That's not something that we can provide to you. So ultimately what you're going to have to look for are closure of these issues. And as time goes on that is what we hope to accomplish and that ultimately will be success as well.
On your second question about where are we I guess in terms of the build of expenses necessary to accomplish the work. Again, I would say on that one, we can’t sit here today and say I can't sit here today and say that the amount that we're spending and the people that we have is totally appropriate. And by the way, don't take that to mean it's too high. It's area-by-area. We've added a lot of resources. We need to understand whether we've added the right resources, whether we have people working together as well as we possibly can, understanding things that we've built manually to understand where we can go to automate those items, which will make us not only just far more efficient but far more effective.
And so again, when I say it's really too early to be definitive about where we think about the level of expenses and what's appropriate, I put this into the same bucket. But again, I just want to be really clear about this. We don't sit here and believe that we have carte blanche to spend whatever we possibly want on any issue. We are going to spend what's necessary on these historical issues. And you should assume that we will be extremely vigilant about ensuring that we're not only thinking about our future but thinking about our shareholders in terms of where it all nets out ultimately.
And just one follow up on your point that couple months in, you said you're going to look at like 10 business lines and just see where we should think about things from a bottom up. From what you at least see now, is the company what it needs to look like going forward, the company has been trimming out of some areas over the course of time? Do you think that all the businesses the company has today deserve to be inside the company from a go forward basis? Thanks.
I would say, as far as the big pieces of the company, absolutely. When we look at the benefits that our clients get from having the combination of consumer businesses, wealth businesses and wholesale businesses under one roof are significant today. And as we look to the future, we believe they should be even more significant. And so at that level, I would say, absolutely.
As John did mentioned in his remarks we have been pruning. And as we go through these reviews and talk about some of the smaller things that we do, it is a good opportunity to ask do we need to continue to do all of these things, will they make a difference first to our clients and ultimately to us. And so I would expect to have some things come out of that. But I put them in the category of pruning at this point.
Your next question comes from the line of Erika Najarian with Bank of America.
I wanted to follow up on the line of questioning, Ken just had Charlie. So it sounds like as we think about what you mentioned during your prepared remarks as you focus on remediation and investment, it sounds like you are also -- there is also room to focus on inefficiencies at the same time. In particular, a lot of your investors are pointing out that your headcount hasn't moved much over the past 10 years and your head count is similar to another peer that is producing about $40 billion more in revenue than you. So just want to -- I know that sounded more like a statement. But the question really is, is there room to also address some of the efficiencies as you think about remediation and investment?
I think, again, want I want to make sure that I was been clear about is that I think that we have -- we want to be able to think with this clean sheet as possible about how we should be spending our money. And so that goes to asking the question, are we spending appropriately on the historical issues and that number will be whatever we think it should be. Absolutely, we will focus on efficiency. And I want to give -- I haven't said this in my remarks, but it is important. It's not as if it's not something the company is focused on.
And so when we look at all the additional resources that have been added to support these activities, it's very difficult for you all to see what we have gained in terms of efficiency, because you should just assume that our expenses would be substantially higher if we hadn't been generating efficiencies in the rest of the company over last several years.
But having said that with fresh eyes, I get to show up and take a look and ask a whole series of questions as do some of the other new folks that have come in. And there are still big parts of the company where we are extraordinarily inefficient. And to be fair, it's not just my eyes and the new folks' eyes, but it's what the existing management team talks about as well. So we do believe there is significant opportunity.
And while the first priority is fixing the issues of the past, we should be able to continue to work towards both. And I do want to throw on the last category which is important, which is we are thinking about the future. And while time and conscious are weighted more times the past -- are weighted towards the past, we're not ignoring the future. And so we do see there are opportunities, which are meaningful we want to have the latitude to think about how we can spend wisely on that.
And so that's why were just being very, very careful about leading you to a specific number, because we're not sure where that all nets itself out and we want the time to be thoughtful about how to put it all together in a way that we certainly believe is the right long-term thing for the company. Again, very conscious of the fact that we're stewards of the company and their owners out there and other stakeholders that we have to answer to.
And my second question is as you mentioned that you will be announcing a new org structure shortly. Does that include the hires that you highlighted during your prepared remarks or could we anticipate more changes to the operating committee from here?
I think what I said is what I said, which is Avid is retiring. She is responsible for a whole series of things from deposits to treasury services, to card, to innovation, digital marketing, a very, very wide range of things and we're actively working through what the right way to structure the company is with her retirement. And when we've completed that, we will certainly make sure that you all know about what it looks like.
And just if I could squeeze in the third question, I hear you loud and clear that the closure of the issues is one way your investors and other stakeholders can measure progress at the company. As we think about the end of the year, what other measures of progress would you suggest your current and prospective shareholders could use to measure progress? Or is one year simply too short of the time given the transformation that you believe the company will go through?
I guess, let me say a couple of words and John could add anything that he'd like. Again, I think it's important, we have a lot going on and I have been here for a short time. And so we feel extremely optimistic about that medium and long-term, but we have a lot to figure out. And as I pointed out, some of it takes months and some of it will take a little bit longer than that. So I think answering the question of what that all looks like by the end of the year at this point is even premature. But just know that we're focus on outcomes here.
I think we will be talking about realized results and what drove them over the course of the year, including closure of issues to the extent that those are public items and then how we set ourselves up in our stakeholders up for what comes next. So as this process goes on and concludes and we have a better line of sight on what happens end of year next year, et cetera then we will begin to share that that will be progress.
And I just don't want to dwell on it, but I just want to be clear. I'm not suggesting year that any of these public issues will be closed this year. What I'm suggesting is that we are going to do all the work that's required. The timeframes will be driven by when we accomplish that work and when the regulators are satisfied by it. As I said, there is a great deal of it. Some have a certain level of complexity to them and we're focused on the work at this point.
Your next question comes from the line of Brian Kleinhanzl with KBW.
So another question on the regulatory side, I think one of the things regulators always had said is they wanted to see a change in the culture at the bank as the sign that things are improving. I mean, is that still an outstanding item that needs to be addressed, or has it been addressed already?
Well, I think you know addressed some of this in my remarks that were prepared. And I think as an outsider coming in, I do have the opportunity to make some observations of some of the things that we do versus some of the things that I've seen that could help to make the company successful, going through issues that are somewhat like this. And so, I do think that these changes that I spoke about are important to helping us be more successful at closing these issues in a way that has eluded us at this point.
And then second question just on the numbers themselves. I mean, if you look at, John, maybe on the commercial loans, you've seen decent growth now or I guess there's some growth year-over-year. And that portfolio looks, but pieces of that are coming from the non-U.S. also coming from this credit investment portfolio. Can you guys give us an update on the C&I lending side of it, what's this growth in the non-U.S., where is that coming from? And then how do you see these loan CLOs? Is that -- and what's the total of CLO exposure at this time?
So on the second part first, the total CLO exposure is about $38 billion, I think at this point, which hasn't changed much. This approach of investing in them in loan form is really just more accounting friendly approach it's the same risk reward otherwise. And so we've made the shift for part of our incremental investments. Still an asset class that we feel comfortable with the risk reward in, in spite of where we are in the cycle and for other reasons.
The bulk of the C&I loan growth overall did come from commercial or corporate investment banking related activity. So some of it's in the asset backed finance area things like CLOs and then also with major corporate customers, but on probably not permanent funding, its things -- we'll fund at activity or strategic activity that ultimately would likely get taken out in the capital market subsequently. So it's not so much coming from the funded term loan segment of Commercial Banking, for example. And I wouldn't agree too much with the growth in non-U.S. loans that will ebb and flow a little bit, but it's not likely to be a big driver of loan growth one way or the other in the foreseeable future.
Your next question comes from the line of Marty Mosby with Vining Sparks.
John, I want to ask you first, this $1.5 billion is a big number for this particular quarter. You've been addressing these issues. You can't talk specifically. But generally, was there some event what was the catalyst for all of sudden recognizing another significant or meaningful slug of onetime extraordinary costs?
Sure, I mean I can't talk too much about specific active litigation. But in general, these amounts get recorded when the items become both probable and estimable. So we've had elevated cost in this area for the last two quarters as a result of greater estimability of what outcomes might be.
And then, Charlie, when you're coming over now and your statement that you went through initially kind of forwardly said we haven't addressed, or Wells Fargo hasn't addressed these issues at the pace or in the way that they should have in order to make the progress. How do you look at assessing where some of these things went wrong? I mean, again just generally and maybe not specifically. But you would have thought over these years there would have been a lot of attention and a lot of progress, and it just doesn't seem like that's been the case. So your assessment of it seems pretty critical. So I was just trying to figure out how to put some context around that?
I guess the way I would -- the way to think about it is that I have the opportunity to come in and look at where we are, my judgments are based upon where we actually are. I haven't -- I don't think there's a whole lot of value in terms of when I have to figure out how to spend my time in going back and figuring out if I was here what I might have done differently. I'm not sure I would have done anything necessarily differently. I wasn't in the seat. I don't know what the priorities were. I don't know what else was going on. That is a very, very difficult thing to do and generally something that's very, very unfair to do.
So again, I think what's relevant is that I've been able to come in with this fresh set of eyes, believe that we have an opportunity to manage these blocks of work differently with both a different set of processes, some different people and a great deal of my time and attention, as well as the rest of the senior management team. And based upon the experience that I've had in executing operational things, as well as the other members of the team that we have in place now and understanding the work that we have to do, I do feel confident that we can get it done and that's been my focus.
And I guess maybe a different way to think about it is when you've seen these things happened in the past. Would you counted as that maybe there is a new standard in which Wells Fargo is going to be held accountable to kind of develop toward in order to set the new standard for the industry? So in other words when the regulators get in on a bank, they've been really begin to kind of figure out where they want everybody else to kind of head to. So it's not like you just catching up with everybody else, maybe there's surpassing and creating a more forward kind of model that they're wanting to get to. So I didn't know is that or that part of it as well, or is this just still catching up with everybody else?
I think I've got a lot to do to speak on behalf of Wells Fargo. And so it certainly wouldn't be right of me to speak for regulators. But I do think that we have the opportunity to raise the standard by which we view the importance of the work, the manner in which we go about doing it and the way we hold each other accountable for getting it done. And so again that is my focus.
Your next question comes from the line of Saul Martinez with UBS.
Speaking of things you need to do to get closure on some of these issues. I think in the past, you've talked about close to 10,000 processes. I think John mentioned high single digit thousands of processes where you're identifying individual risk controls and where needed remediating those risk and control functions. Can you just give us a sense of where you are in that process? What kind of progress you've made more recently? And I guess importantly, how is your relationship with your regulators evolving as you kind of go through this and work through a lot of these individual processes?
On the first part, so not all 9,000 plus processes are created equally. They're risk scored and/or importance scored for their impact. And we're ahead of where we anticipated being by the end of the year. I don't have the exact number in front of me. But of those that are most impactful, they will have been, as we've described, mapped risk ID'd, control ID'd, controls developed where controls didn't previously exist, testing over those controls put in place in the first half, by the end of the first half of this year, that's how that looks right now. And I think it's to the satisfaction of people who are watching us do it.
And so it feels like you're making good progress on the major -- on the more significant processes. So just changing gears a little bit, you took I think $166 million charge for reassessing technology projects in Wealth and Investment Management. Can you just give a sense of what drove that decision and whether we should be thinking that there could be other IT projects with that you're looking at reassessing and cutting going forward?
So Jon Weiss has substantially reconstituted the leadership team in WIM. And they've set their strategic priorities and direction, and they are different than what had been under development in terms of the technology to support different parts of the business over the past few years, which is what resulted in the impairment to capitalize software development costs.
I wouldn't anticipate seeing a lot more of that. And to be honest, we don't have an extraordinary amount of capitalized software development costs, so the risk isn't that great from an accounting perspective.
If I could just squeeze one more quick one in, John, just on fees, the core fee lines, time deposit, trust card, mortgages. In general, it seems like the momentum has improved a bit in recent quarters. But can you just give us a sense -- and I'm not asking for specific guidance. But can you just talk directionally about whether there is any reason to think you can't grow from fourth quarter levels. Obviously, recognizing there's seasonality in a lot of these businesses. But is this -- are these like good core run rates to use and do you feel good about your ability to grow some of these line items?
The trust and investment fees should step off at a high level, because they price off of the opening deck, which for the S&P looks good for the coming quarter, that leverage it creates cyclicality that works for us and against us. Mortgage, as we said, is probably going to be a lighter quarter in the first quarter just because of seasonality. It was stronger in the fourth quarter than it would have seasonally been expect it to be. But the pipeline suggests that it will be somewhat smaller on the origination side in the first quarter.
Card fees tick up because there's more consumer spending going on in the fourth quarter. So I'd expect that to be more seasonally appropriate in the first quarter. And then, it's hard to forecast trading activity, it certainly was stronger year-over-year in the fourth quarter because of the blood bath in the fourth quarter of 2018, but it was weaker third quarter to fourth quarter in 2019.
And historically, the first quarter is a stronger quarter as a result of asset managers reallocating and people getting invested in the first quarter. So we'll see what happens there and that is tougher to predict, but those are the types of things that are likely to implement, things that are a little bit more ratable like deposit service charges or loan fees, etc., I don't think it would be much change from quarter-to-quarter.
Your next question comes from the line of Gerard Cassidy with RBC.
John, can you share with us, I think you mentioned in your prepared remarks that you expected the net interest income to be down low to mid-single digits for 2020 over 2019. Can you compare for us, what's the driver of that vis-a-vis what drove the decline in 2019. Is it more having less higher yielding assets like to Pick-a-Pay loans on the books in 2020 or is it a margin compression issue, can you give us some color there?
So it's a handful of things. There was a bigger drop in 2019 because of I would say that, the original uptick in the premium amortization on the MBS portfolio that in, I'm not giving this to you in order of priority, but just in terms of inputs. The big leg down in LIBOR obviously had a big impact in 2019 that's expected to be a little flatter at this point as we're looking into 2020. We talked about retail deposits, pardon me, retail deposit pricing and how as rates were increasing we had put in place some promotions that have a little bit of a tail to them, that tail was fully in place during 2019 and will abate during 2020, all of those things. And it's -- but its rates right, they dropped in 2019, at least at the front end expect it to be relatively flattish in 2020.
Just one quick, the number of variables and the range of potential outcomes around those variables that goes into giving the low to mid-single digits is a lot can move, as we've talked about. We were, I think we were quite close on our estimation for 2019, but we'll keep you updated as we roll along in 2020, what is looking like based on what changes. You mentioned Pick-a-Pay. I guess I should also point out that, that was on a full year basis, it's probably $400 million worth of interest income coming off of the sold Pick-a-Pay loans that's worthy of mentioned that we don't have this year.
Could you also share with us, you pointed out that you grew the primary consumer checking account deposits 2% year-over-year, what are you using as the hook to get customers to come in. Is there some incentives, whether it's a higher upfront cash deposit or that you give them or is there gifts or how are you guys driving that growth?
So that metric is the number of accounts, not the deposits associated with the accounts which we've talked about separately. It's the branch network. It's the digital acquisition, the combination of those two things. I wouldn't say that it's specifically, there's nothing that's compelling people the offers that we use are more around dollars for additional -- capturing additional deposits from customers. But these account openings reflect the sort of everyday business model of Community Banking both in the branches and through digital activity.
And then just real quickly, you mentioned lower gains in the quarter from your venture capital private equity area. What's left in unrealized gains in those two categories for you folks?
So unrealized gains are harder to come by these days, because we tend to realize them on a faster basis since the accounting change. I guess, now a year and a half ago, but it used to be the case that we'd have to actually realize something to recognize the benefit something have to be sold or go public in order for us to take a gain and these days even with private companies doing subsequent private capital raises.
If I set a higher level of valuation, we recognize the gain from that as it goes along and so when the ultimate realization occurs that there is less of a pop because we've ratcheted up we've taken gains along the way. So that's led to more of a, call it, front-end loading over the last several quarters of benefit from that portfolio and it will increase the volatility if people have down capital raise rounds or things don't go as well when companies are actually sold or taken public. So it's been a great business, the returns are solid. But the accounting change has caused being revenue recognition to be a little bit more choppy. Although in the early quarters, it's actually been very strong.
Your next question comes from the line of Scott Siefers with Piper Sandler.
I was hoping to try to drill down into the cost side once again. I guess if you're looking at an uptick in core expenses in the first quarter, it implies a pretty substantial downdraft through the remainder of the year just to keep us in the ballpark of this year's adjusted $53.7 billion. I mean did the plan, indeed, call for such an absolute improvement in costs and what sort of the path to get there, especially at a time when there is so much discussion on investments, just curious to your thoughts there.
So we're not going to be that specific about the year as a whole. My comment earlier about the first quarter is like every first quarter, it tends to be the high tech for expenses because of the way personnel costs have first quarter uptick. And so, like any other year on an adjusted basis, you'd expect them to be higher in the first quarter and gravitate down over the course of the year, as Charlie mentioned, we're going through a second look at our planning process for the year. And so there is no fixed number at this point to.
Since we are in the first quarter -- since this happens every first quarter, I'm calling out the fact that those personnel costs will be higher, there won't be much more specificity around that until we've completed this process and made some conclusions, made some choices and come back and update people later in the year.
So even though I guess, the $53.7 billion is a sort of place to start -- it's not -- we shouldn't anticipate any sort of a flat trend or anything. It's basically TBD completely on what the expectations for the full year, is that correct?
I think that's appropriate, so that we don't mislead you. Yes.
Your next question comes from the line of Betsy Graseck with Morgan Stanley.
Just wanted to understand on the planning process that Charlie announced at the beginning, I know Charlie, you're not talking about time frames. But you've seen a lot of different types of institutions and a lot of different types of scenarios, and I'm wondering is this something that we should consider is, I get to best in class on a three to five-year time frame, or is this more of a one to three, just trying to understand broad strokes your thought process there?
I wish I could answer the question at this point, but for all the reasons that I've spoken about, I'm not in a position to do that. I don't want to be repetitive, so I apologize, but we've got to do the work to understand whether we're appropriately resourced against the historical activities. And then honestly, as we go through these discussions in terms of how you get to best-in-class.
I'm sure business-by-business will be very, very different in terms of what the time frame is. Some of them will be structural. Some of them will require some significant technology investment. Others could be burdened by just inefficiencies that we can get to quicker. So I'm not trying to be evasive. I can see there being several different answers when we look at different parts of the Company. It's what it will actually look like when we're done with the work.
And does the work potentially have a result of exiting some of the businesses or do you think that that's really not on the table at this stage?
Well, I think I'll repeat what I said before, Betsy, I think that when you look at our big business segments, there is tremendous sense because of the benefits our customers and clients get from them being under one roof. But like any other company, we should sit and ask the question, do we need to be doing absolutely everything and we have been pruning along the way. And there's probably still some more pruning that we should probably do.
Your next question comes from the line of Steven Chubak with Wolfe Research.
So John, I was hoping to drill into some of the fee trends that you had spoken to in response to an earlier question, certainly appreciate the detail you guys gave in Slide 27, helping us isolate some of the impacts from gains and other related sale impacts. As we think about trying to evaluate the core fee income generation power just of the franchise today, after adjusting for some of these sales. If I look at that $8.7 billion you guys produced this quarter, I adjust for about $600 million that you guys cited in the slide. And then on top of that adjust for deferred comp other investment income adjustments, we get to a run rate of roughly $8 billion a quarter in core fee income generation. I know you're going to have equity market tailwinds just from what happened in the fourth quarter as we enter the year in 2020, but I'm just hoping if you could frame whether that $32 billion annualized run rate is a reasonable jumping-off point after adjusting for some of those factors or anything else that you would cite for that matter?
Well, so it's not unreasonable in the sense that it captures the seasonal volatility of some of these things that tend to ebb and flow throughout the course of the year and if we've adjusted out things that we've sold in both from a gain perspective as well as the run rate perspective and it captures that where we do have elements as you'll note that ebb and flow relatively meaningfully from not just from quarter-to-quarter but from year-to-year. And so we have had equity market tailwinds as you mentioned that we might continue to but that will come and go.
I think sort of tend to look at a slightly longer time horizon on some of those line items and think about what the average has been over five quarters or so since we reported in five quarters, it's easy enough to. There's nothing unreasonable about that approach. There are some of these that we believe that even while we're doing our work we should be driving and growing and then some that will reflect the cycle of the market that we're in mortgage comes to mind in terms of where we are in the rate cycle and things like that.
And just one more follow-up for me, I just wanted to clarify some of your capital guidance. So I know that the last update that I can recall and I'm sorry if this is wrong or misguided you alluded to attending 10.25% to 10.5% CET1 target that you guys were managing to that always felt quite conservative. And in the earnings release, you actually referred to an internal target of 10%. I'm just wondering as we think about future buybacks in capital return plans. Has there been any change in the firm's internal capital targets that you guys are ultimately managing to or how are you guys trying to think about that as you start to implement some of these changes that Charlie was speaking to earlier?
What we've been waiting for specifically our internal guideline is 10% and that includes the buffer on top of the 9% regulatory requirement. We've been talking about something that could be 10.25% to 10.5% waiting for what CECL looks like in stress and what the stress capital buffer guidelines actually look like once they are implemented and it's a belief certainly because we are getting more CCAR clarity over the coming weeks that will start to know whether we're going to know the hit through to that this year. And then it's likely that the combination of those two things leads us to a slightly higher level could be conservative, but we'll know for sure once we are operating in the stress capital buffer world.
Your next question comes from the line of Matt O'Connor with Deutsche Bank.
I'm sure you're a little tired of all expense questions kind of near term. I do want to ask though longer term on costs. Charlie, you said about being best-in-class efficiency and I guess, just how do you define that and I think a lot of investors and analysts think of your direct peers is being like Bank of America, JPMorgan, maybe U.S. Bank as well, but are you kind of being literal like your efficiency ratio, it should be in the ballpark or better than theirs. And if it is, it's just a -- it's a bold comment given where you are coming from and obviously reflects, I assume optimism on both cost and revenue, but maybe you could just elaborate on some of those themes. Thank you.
We're going business by business and selecting the peer group that best represents either the products or the segments that had established what best-in-class looks like. So it could be the component pieces of our larger peers. It could be the component pieces of regional banks and it could be the component on what the business is.
And then for the Company as a whole, the weighted average -- the mix adjusted average of what those inputs are results in the outcome. That's part of this review process that Charlie had alluded to earlier, and it's definitely aspirational as we sit here today, but that is the direction that we are setting for ourselves as Charlie mentioned for every business that we're likely to be in over the long term. We've got all of the benefits of scale working for us. It's very mature in most of them and we should -- there may be specific reasons and we will address them if we find them why we can't compete effectively with the most efficient, but that's what we're setting our sights for.
And then without putting any specific numbers around it like as you think about improving efficiency, there are comments as it could be both kind of revenue and expenses, should we think about it being somewhat balanced or the vast majority coming from expenses or too early to know right now?
Too early to know. We know there's work to do on expenses, but it's too early to start attributing percentage driver for example.
Matt, it's Charlie. Let me just add one thing because I do think it's important. This isn't something that I would say that John and I sit here in a room and believe and then we get in a room with others and they argue with us. There is a clear understanding from our business leaders that this opportunity exists. And I would say quite frankly, there is very little conversation internally about the need to use revenue to improve the efficiency rate because we do understand that there are series of things that we do that are highly inefficient. That's not to say to get the best-in-class that we won't need some revenue growth to get there, but I just find it very encouraging the way people internally are thinking about it and what they're talking about as the types of things that'll be in the line of sight.
Your final question will come from the line of John Pancari with Evercore.
On the spread income guidance of down low to mid-single digits, I know you reiterated that, but you also indicated that you are still pruning. Does that guidance factor-in the pruning and accordingly any additional adjustments to your business base would not be all that meaningful to impact that guidance or would that guidance change if you did continue to prune?
If we continue to prune in ways that caused us to shed either loans or deposits then we would adjust the guidance. It contemplates the company as it exists today.
And then in terms of CECL day two impact. I just want to get your thoughts on the appetite to lend in certain longer duration consumer areas. Has that been impacted at all by the implications of the new methodology?
We've done the work product-by-product to consider what the return characteristics are. And at this point, it's not likely that we change our appetite for longer duration consumer loans, it's depending on where you are in the cycle, it can cause you to think differently about what your returns are, but it hasn't closed anything to drop below a hurdle level that says to us, we need to either meaningfully reprice it or where we think whether we're there in the business.
And then lastly, just back to the expense expectations. Again, I know it's too early to give a more accurate expense expectation, but I know you're going through your planning process, so what's the timing, when should we think we will get a more precise expectation when it comes to full year expenses, Charlie?
I guess there is nothing more that I can say that I haven't already said. I think what I've said is that we've got this process to go through. There is a lot to do and when we know something we'll tell you. I wish I could be more specific, I really do, but we have a lot to do to get to but we think the right answer should be.
Got it. Okay. Thanks.
All right. Listen, thank you very much for your patience and joining us this morning. I do hope that you just walk away with just a couple of important thoughts. We have work to do. It's clear what we have to do. We're committed to getting it done, and we will get it done. The quality of the franchise is still extraordinary. We have thousands and thousands of dedicated people across the Company that can come in every day to serve their clients. They are doing an extraordinary job, and we're going to do our part to help them do their job even better as time goes on, and we think our future is very bright. And so, we appreciate, again, the patients that you have and look forward to have more conversations in the future.
Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may all disconnect.