Wells Fargo & Company (NYSE:WFC) Q4 2022 Earnings Call Transcript

Wells Fargo & Company (NYSE:WFC) Q4 2022 Earnings Call Transcript January 13, 2023

Operator: Welcome, and thank you for joining the Wells Fargo Fourth Quarter 2022 Earnings Conference Call. Please note today’s call is being recorded. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

John Campbell: Thank you. Good morning. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, will discuss fourth quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our fourth quarter earnings materials, including the release, financial supplement and presentation deck are available on our website at wellsfargo.com. I’d also like to come that we may make forward-looking statements during today’s call that are subject to risks and uncertainties. Factors that may cause the actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings materials.

Information about any non-GAAP final measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings and the earnings materials available on our website. I will now turn the call over to Charlie.

Charles Scharf: Thanks, John. I’ll make some brief comments about our fourth-quarter results, and then update you on our priorities. I’ll then turn the call over to Mike to review fourth-quarter results in more detail and some of our expectations for 2023 before we take your questions. Let me start with fourth-quarter highlights. Our results were significantly impacted by previously disclosed operating losses, but our underlying performance reflected the continued progress we’re making to improve returns. Rising interest rates drove strong net interest income growth. Our continued progress and our efficiency initiatives helped to drive expenses lower excluding operating losses. Loans grew in both our commercial and consumer portfolios, and charge-offs have continued to increase but credit quality remains strong.

Our capital levels also remained very strong. And our CET1 ratio increased to 10.6%, well above our required minimum plus buffers. We also continue to make progress on putting legacy issues behind us. Our broad reaching agreement with the CFPB in December is an important step forward that helps us resolve multiple matters, the majority of which have been outstanding for several years. Over the past three years, we have made significant changes in the businesses referenced in the settlement, and many of the required actions were already substantially complete prior to this announcement. While our risk and regulatory work hasn’t always followed a straight line and we have more to do, we’ve made significant progress, and we will continue to prioritize our work here.

In addition to our risk and regulatory work, it’s also critical for us to continue to invest in the future as we build off the great market positions we have. We are confident our processes will enable us to continue to prioritize our risk and control work. At the same time, we invest in our future. And as I look back at ’22, I’m enthusiastic about the progress we’ve made this past year and feel even better about the opportunities ahead. Let me start with the changes we’ve made during the year to help millions of customers avoid overdraft fees and meet short-term cash needs. These efforts included the elimination of non-sufficient funds fees and transfer fees for customers enrolled in overdraft protection, early payday making eligible direct deposits available up to two days early, extra-day grace, giving eligible customers an extra business day to make deposits to avoid overdraft fees.

And in the fourth quarter, we launched Flex Loan, a new digital-only small dollar loan that provides eligible customers convenient and affordable access to funds. Teams from across the company came together to roll out this new product in record time. The rollout has been smooth and though it’s still early, customer response is exceeding our expectations. These actions build on services we’ve introduced over the past several years, including Clear Access Banking, our account with no overdraft fees. We now have over 1.7 million of those accounts, up 48% from a year ago. We continue to transform the way we serve our customers by offering innovative products and solutions. We continue to improve our credit card offerings including launching two new cards, Wells Fargo Autograph and BILT.

Our new products helped drive a 31% increase in new credit card accounts in 2022, while we continued to maintain strong credit profiles. We launched Wells Fargo Premier, our new offering dedicated to the financial needs of affluent clients by bringing together our branch-based and wealth-based businesses, to provide a more comprehensive, relevant and integrated offering for our clients. We continue to enhance our partnership within our Commercial business to bring Corporate and Investment Banking products such as foreign exchange and M&A advisory services to our middle-market clients. Our different approach to technology is helping us better serve our consumer and corporate clients. We rolled out our new mobile app with a simpler, more intuitive user experience, which has improved customer satisfaction.

In 2022, mobile active customers grew 4% from a year ago. We launched Intuitive Investor, making it easier for customers to invest with the streamlined account opening process and a lower minimum investment. And total active Intuitive Investor accounts increased 56% from a year ago. We completed the development of Fargo, our new AI-powered virtual assistant that provides a more personalized, convenient, and simple banking experience, which is currently live for eligible employees and set to begin rolling out to customers early this year. Last month, we announced Vantage, our new enhanced digital experience for our commercial and corporate clients. Vantage uses AI and machine learning to provide a tailored and intuitive platform based on our clients’ specific needs.

Over the past year, our industry-leading API platform team continued the development of payment APIs for commercial and corporate clients invested in solutions to support our financial institution clients, ramps up in group product offerings in consumer lending and began developing commercial lending solutions. We are investing heavily in modernizing the IT infrastructure and the way we develop code. We’re implementing a cloud-native operating model that allows us to innovate faster. We’ve also been investing in modernization in the areas of payments and corporate lending, taking out legacy applications and digitizing processes end to end. These enhanced digital capabilities are just the start of initiatives we have planned as part of our multiyear digital transformation.

We also continue to evaluate our existing businesses. As we announced earlier this week, we plan to create a more focused Home Lending business aimed at serving primarily bank customers as well as individuals and families and minority communities. This includes exiting the correspondent business and reducing the size of our servicing portfolio. I’m saying for some time that the mortgage business has changed dramatically since the financial crisis, and we’ve been adjusting our strategy accordingly. We’re focused on our customers, profitability, returns, and serving minority communities, not volume or market share. The mortgage product is important to our customer base and the communities we serve, so it will remain important to us, but we do not need to be one of the biggest originators or services — servicers in the industry to do this effectively.

Across all of our businesses, we must evolve as the market regulation and competition has evolved. And while it may seem counterintuitive, we believe the decision to reduce risk in the mortgage business by reducing size and narrowing our focus will actually — this will actually enable us to serve customers better and will also improve our returns in the long term. Changing gears now, I’m proud of all we did last year to make progress on our environmental, social, and governance work. We are balanced in our approach to these issues and believe that thinking broadly about our stakeholders will enhance returns to shareholders. And we provide many examples on Slide 2 of our presentation. So, let me just highlight two examples here. We published our first diversity, equity, and inclusion report, which highlights the progress that we’ve made on our DE&I initiatives.

We’ll continue to make progress in our commitment to integrating DE&I into every aspect of the company under the new leadership of Kristy Fercho, who joined Wells Fargo in 2023 to lead our Home Lending business and was named the company’s new head of diverse segments, representation, and inclusion in the fourth quarter. We’ve commissioned an external third-party racial equity audit, and we plan to publish the results of the assessment by the end of this year. 2022 is a turning point in the economic cycle. The Federal Reserve has made clear that reducing inflation is its priority, and it will continue to take actions necessary to achieve its goal. We are starting to see the impact on consumer spend, credit, housing, and demands for goods and services.

But at this point, the impact of consumers and businesses has been manageable. And though there will certainly be some industries and segments of consumers that are more impacted than others, the rate impact we see in our customer base is not materially — I’m sorry, the rate of impact we see in our customer base is not materially accelerating. This plus the strength with which consumers and businesses went into this slowing economy is a helpful set of facts as we look forward. Our customers have remained resilient with deposit balances, consumer spending and credit quality still stronger than pre-pandemic levels. As we look forward, we’re carefully watching the impact of higher rates on our customers and expect to see deposit balances and credit quality continue to return toward pre-pandemic levels.

While we’re not predicting a severe downturn, we must be prepared for one, and we are stronger company than one and two years ago. Our margins are wider, our returns are higher, we’re better managed, and our capital position is strong, so we feel prepared for a downside scenario if we see broader deterioration than we currently see or predict. We still have clear opportunities to improve our performance as we make progress on our efficiency initiatives and continue to make the investments necessary to grow the business through technology and product enhancements. Two years ago, we shared a path to higher ROTCE by returning capital to our shareholders and executing on our efficiency initiatives. While high levels of operating losses in the second half of ’22 impacted our results, our underlying business performance demonstrated our ability to improve our returns.

In a moment, Mike will highlight the key drivers of our path to a 15% ROTCE, which we believe is achievable based on the strength of our business model and our ability to execute. While we’re focused on improving our returns, making progress on building the appropriate risk and control and infrastructure for a company of our size and complexity will remain our top priority, and we will dedicate the time and resources necessary. I want to conclude by thanking our employees across the company who are working hard each day to continue to make progress in our transformation. I’m excited about all that we will accomplish in the year ahead. I’ll now turn the call over to Mike.

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Mike Santomassimo: Thank you, Charlie. And good morning, everyone. Slides 2 and 3 summarize how we helped our customers, communities and employees last year, some of which Charlie covered. So, I’m going to start with our fourth-quarter financial results on Slide 4. Net income for the fourth quarter was 2.9 billion, or $0.67, per diluted common share. Our fourth-quarter results included 3.3 billion, or $0.70, per share of operating losses primarily related to a variety of previously disclosed historical matters, including litigation, regulatory, and customer remediation. $1 billion of impairment of equity securities, or 749 million after noncontrolling interest, predominantly in our affiliated venture capital business, primarily driven by portfolio companies in the enterprise software sector.

Both, slowing revenue growth rates and lower public market valuations of enterprise software companies impact the valuations. It’s important to note that even after recognizing this impairment, the current value of these investments at the end of 2022 remained above the amount of the initial investment. $353 million of severance expense, primarily in Home Lending. While we’ve reduced headcount in this business throughout 2022, this charge includes the actions we plan to take in 2023 related to the mortgage announcement we made earlier this week. These reductions were partially offset by 510 million of discrete tax benefits related to interest and overpayments in prior years. We highlight capital on Slide 5. Our CET1 ratio was 10.6%, up approximately 30 basis points from the third quarter, reflecting the benefit from our fourth-quarter earnings, the annual share issuance for our 401(k) plan matching contribution, and an increase from AOCI.

Our CET1 ratio remained well above our required regulatory minimum plus buffers, which increased by 10 basis points to 9.2% at the start of the fourth quarter as our new stress capital buffer took effect. As a reminder, our G-SIB surcharge will not increase in 2023. While we have not repurchased any common stock since the first quarter of 2022, we currently expect to resume share repurchases in the first quarter of this year. Turning to credit quality on Slide 7. Credit performance remained strong with 23 basis points of net charge-offs in the fourth quarter. However, as expected, losses are slowly increasing from historical lows, and we expect them to continue to return toward pre-pandemic levels over time as the federal needs to take actions to combat high inflation.

Credit performance remains strong across our commercial businesses with only 6 basis points of net charge-offs in the fourth quarter. Total consumer net charge-offs increased 88 million from the third quarter to 48 basis points of average loans, driven by an increase in net charge-offs in the Credit Card portfolio but remained slightly below consumer net charge-off levels in the fourth quarter of 2019. Nonperforming assets increased 1% from the third quarter as lower residential mortgage nonaccrual loans were more than offset by higher commercial real estate nonaccrual loans. Our allowance for credit losses increased 397 million in the fourth quarter, primarily reflecting loan growth, as well as a less favorable economic environment. We are closely monitoring our portfolio for potential risk and are continuing to take some targeted actions to further tighten underwriting standards.

Let me highlight trends in two of our portfolios. The size of our Auto portfolios declined for three consecutive quarters, and balances were down 5% at the end of 2022 compared to year-end 2021. Meanwhile, originations were down 47% in the fourth quarter compared to a year ago which reflected credit tightening actions and continued price competition due to rising interest rates. Of note, our new vehicle originations surpassed used vehicles in the fourth quarter, reflecting a combination of credit tightening actions that we’ve implemented and the industry dynamic of higher new vehicle sales growth. Turning to the commercial real estate office portfolio. The office market is showing signs of weakness due to weak demand, driving higher vacancy rates and deteriorating operating performance, as well as challenging economic and capital market conditions.

While we haven’t seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure and being disciplined in our underwriting standards with both, outstanding balances and credits down compared to a year ago. On Slide 8, we highlight loans and deposits. Average loans grew 8% from a year ago and 3.1 billion from the third quarter. Period-end loans increased for the sixth consecutive quarter with growth across our commercial portfolios and higher consumer loans driven by credit card and residential loans, partially offset by continued declines in our Auto portfolio. I’ll highlight the specific growth drivers when discussing our operating segment results. Average loan yields increased 181 basis points from a year ago and 85 basis points from the third quarter, reflecting the higher rate environment.

Average deposits declined 6% from a year ago and 2% from the third quarter. Compared with the third quarter, we saw declines in each of our business. Lower consumer balances reflected customers continuing to reallocate cash in higher-yielding alternatives, particularly in Wealth and Investment Management and continued consumer spending. As expected, our average deposit cost increased 32 basis points from the third quarter to 46 basis points, driven by higher deposit costs across all operating segments in response to rising interest rates. Average deposit costs are up 44 basis points since the fourth quarter of 2021, while market rates have increased substantially more during that same time. As rates continue to rise, we would expect deposit betas to continue to increase in customer migration from lower yielding to higher yielding deposit products to continue.

Turning to net interest income on Slide 9. Fourth-quarter net interest income was 13.4 billion, which was 45% higher than a year ago, as we continue to benefit from the impact of higher rates. I’ll provide details on our 2023 expectations later on the call. Turning to expenses on Slide 10. The increase in noninterest expense from both, a year ago and from the third quarter was driven by higher operating losses. Excluding operating losses, other noninterest expense was flat from a year ago as higher severance expense was offset by lower revenue-related compensation and continued progress on our efficiency initiatives. Our operating losses in the fourth quarter included accruals related to the December 2022 CFPB consent order. As part of that settlement, we agreed to one incremental remediation and one new remediation related to overdraft fees.

The accrual related to these two remediations was approximately 350 million. Our operating losses in the fourth quarter also included accruals for other legal actions. And reflecting these accruals, our current estimate of the high end of the range of reasonably possible losses and accessible for legal actions as of December 31, 2022, is approximately 1.4 billion. This is down approximately 2.3 billion from September 30, 2022. While we still have outstanding litigation resolved, this estimate would be the lowest level since the second quarter of 2016, though, of course, new matters will arise and existing matters will develop over time. The estimate for December 31, 2022, will be updated at the time of our 10-K filing in February and may change.

While we acknowledge the elevated level of operating losses, the past two quarters has been significant. They are important steps in putting historical issues behind us as we’ve been able to absorb the cost while increasing our CET1 ratio as I highlighted earlier. Turning to our operating segments, starting with Consumer Banking and Lending on Slide 11. Consumer and Small Business Banking revenue increased 36% from a year ago, driven by the impact of higher interest rates. Deposit-related fees continued to decline as we completed the rollout of the overdraft fee reductions and new product enhancements that we announced early last year to help customers avoid overdraft fees. The majority of the revenue impact of these changes was reflected in the fourth-quarter run rate.

We continue to focus on branch rationalization as digital adoption and usage among our customers have steadily increased. In 2022, we reduced branches by 179 and branch staffing levels by 10%, and we expect to continue to optimize our branches and staffing levels in response to changing customer needs. While industry mortgage rates declined in the fourth quarter, they were still up over 330 basis points since the beginning of the year, and weekly mortgage applications as measured by the Mortgage Bankers Association were at a 26-year low at quarter end. The economic incentive to refinance is extremely limited. And refinance applications for the industry were down 87% in December compared to a year ago. Reflecting these market conditions, our Home Lending revenue declined 57% from a year ago, driven by lower mortgage originations and gain-on sale margins, as well as lower revenue from the resecuritization of loans purchased from securitization pools.

We expect the mortgage origination market will continue to be challenging and gain-on sale margin or remain under pressure until excess capacity industry has been removed. As we announced this week, we will be exiting our correspondent business, which we expect to be substantially complete by the end of the first quarter. We don’t expect this action to have a significant impact on our 2023 financial results. Credit Card revenue was up 6% from a year ago due to higher loan balances driven by higher point of sale volume and new product launches. Auto revenue declined 12% from the year ago driven by continued loan spread compression from rising rates and credit tightening actions in certain areas, as well as lower loan balances. Personal Lending was up 9% from a year ago due to higher loan balances, partially offset by lower spread compression.

While originations grew 19% from the year ago driven by strong consumer demand in investments and the business, we have remained disciplined in our underwriting. Turning to key business drivers on Slide 12. Mortgage originations declined 70% from a year ago and 32% from the third quarter, with both declines in correspondent and retail and originations. Refinances as a percentage of total originations were over half of our volume a year ago to — declined to 13% in the fourth quarter of 2022. I already highlighted the drivers of the decline in Auto originations. So, turning to debit card. Spending was up 1% compared to a year ago. Holiday spend for debit card was flat compared to the 2021 season with lower transaction volume, offset by higher average ticket size.

Entertainment was the only category with double-digit spending while growth — while categories such as home improvement, general retail goods, and fuel were all down compared to 2021. Credit Card spending increased 17% from a year ago, and while the year-over-year growth rate slowed from the third quarter. Almost all categories continue to have double-digit growth. Average balances were up 22% from a year ago. Payment rates have started to moderate, but we’re still well above pre-pandemic levels. Turning to Commercial Banking results on Slide 13. Middle market banking revenue increased 78% from a year ago, driven by higher net interest income due to the impact of higher rates and higher loan balances. Asset-based lending and leasing revenue declined 4% from a year ago, driven by lower net gains from equity securities, partially offset by loan growth.

Average loan balances were up 18% in the fourth quarter compared to a year ago, while growth in the first half of 2022 was driven by higher realization. Utilization rates stabilized in the second half of the year. Average loan balances have grown for six consecutive quarters and were up 5% in the third quarter, with growth in asset-based lending and leasing driven by continued growth in client inventory, which are still below pre-pandemic levels. Growth in middle market banking was driven by larger clients, including both, new and existing relationships, which more than offset declines from our smaller customers. Turning to Corporate and Investment Banking on Slide 14. Banking revenue increased 22% from a year ago driven by stronger treasury management results due to the impact of higher interest rates, as well as improved lending results.

Investment banking fees declined from a year ago, reflecting lower market activity with declines across all products and industries. Commercial real estate revenue grew 16% from a year ago driven by stronger lending results to a higher loan balances and the impact of higher interest rates. Markets revenues increased 17% from a year ago, driven by higher trading revenue in equities, rates and commodities, foreign exchange, and municipal products. Average loans grew 10% from a year ago after growing for seventh consecutive quarter, average loans declined from the third quarter as utilization rates stabilized across most portfolios. On Slide 15, Wealth and Investment Management revenue was up 1% compared to a year ago, as the increase in net interest income driven by the impact of higher rates was partially offset by lower asset-based fees due to the decrease in market valuations.

The majority of win in advisory assets are priced at the beginning of the quarter, so asset-based increased slightly in the first quarter, reflecting the higher market valuations at the end of the year. Expenses decreased 6% from a year ago, driven by lower revenue-related compensation and the impact of efficiency initiatives. Even as loan growth in securities-based lending moderated due to demand caused by market volatility in the interest rate environment, average loans grew 1% from a year ago. Slide 16 highlights our corporate results. Both revenue and expenses were impacted by the divestitures last year of our Corporate Trust business in Wells Fargo Asset Management. We sold these businesses in the fourth quarter of 2021, which resulted in a net gain of 943 million.

Revenue also declined from a year ago due to lower results in our affiliated venture capital and private equity businesses, including the impairments in equity securities I highlighted earlier. The increase in expenses from a year ago was driven by higher operating losses. Turning to our expectations for ’23, starting with Slide 17. Let me start by highlighting our expectations for net interest income. We are assuming that — we are assuming the asset cap will remain in place throughout the year. Moving from left to right on the waterfall, based on the current forward rate curve, we expect our net interest income will continue to benefit from the impact of higher rates, even with deposits repricing faster than they did in 2022. However, this benefit is expected to be partially offset by continued deposit runoff and mix shift to higher-yielding products with these declines, partially offset by modest loan growth.

We also expect a headwind for lower CIB Markets net interest income due to higher funding costs. This reduction is expected to be partially offset by an increase in trading gains and noninterest income, so the impact to revenue is currently expected to be small. Putting this all together, we currently expect net interest income to grow by approximately 10% in 2023 versus 2022. Ultimately, the amount of net interest income we earned in 2023 will depend on a variety of factors, many of which are uncertain, including the absolute level of interest rates, the shape of the yield curve, deposit balances, mix, and pricing in the loan demand. Turning to our 2023 expense outlook on Slide 18. Following the waterfall from left to right, we reported 57.3 billion in noninterest expense in 2022, which included 7 billion of operating losses.

Excluding operating losses, expenses would have been 50.3 billion, which is — which was in line with the guidance we provided at the beginning of last year. If you also exclude operating losses from the guidance, our 2022 expenses were impacted by inflation and higher severance expense. However, revenue-related expenses were lower than expected by market conditions. So, we believe a good starting point for discussion of 2023 expenses was 50.3 billion, which excludes operating losses. We expect expenses in 2023 to increase by approximately $1 billion due to both, merit increases, including inflationary pressures and an approximately $250 million increase in FDIC expense related to the previously announced surcharge. These increases are expected to be partially offset by approximately 100 million of lower revenue-related expense, primarily driven by decreases in loan lending.

Based on current market levels, we expect revenue-related expense in Wealth and Investment Management for 2023 to be similar to 2022. We’ve successfully delivered on our commitment of approximately 7.5 billion of gross expense saves over the past two years. And through our efficiency initiatives, we expect to realize an additional 3.2 billion of gross expense reductions in 2023. A piece of this is related to the announcement we made earlier this week to create a more focused Home Lending business, but expense savings from reducing our servicing business will take more time to be realized. We highlighted on this slide the largest opportunities for additional savings this year, and we believe we’ll have more opportunities beyond 2023. Similar to prior years, the resources needed to address our risk and control work separate from our efficiency initiatives.

And we will continue to add resources as necessary to complete this important work. And while we continue to focus on executing our efficiency initiatives, we’re also continuing to invest and expect approximately 1.7 billion of incremental investments in our businesses in 2023. As Charlie discussed, investing in our businesses is critical to our growth across the company and better serve our customers, but we’ll also continue to be thoughtful and evaluate the level of investments throughout the year. So, putting this all together, expenses, excluding operating losses, are expected to be relatively flat in 2023 compared with 2022, even with inflationary pressures, a higher FDI surcharge, and increase incremental investments in our businesses.

As 2022 demonstrated, operating losses can be significant and hard to predict, and therefore, we have not included them in our expense outlook for 2023. However, we currently anticipate ongoing business-related operating losses, such as fraud, theft, and other business-as-usual losses to be approximately 1.3 billion this year, which is the same assumption we provided last year. As previously disclosed, we had an outstanding litigation — have outstanding litigation, regulatory, and customer remediation matters that could impact the amount of operating losses. It’s important to note that while we made substantial progress executing on our efficiency initiatives, we still have a significant opportunity to get more efficient across the company.

This remains a multiyear process with the goal of achieving an efficiency ratio along with our peers based on our business mix. Given how critical continuing to invest to our — continue to invest in our story, on Slide 19, we provide details on our primary areas of focus for 2023. As we’ve highlighted, continuing to build the right risk and control of infrastructure remains our top priority, and we will continue to invest in this important work. Charlie discussed many of the investments we started to make in digital payments, and we plan to continue to invest in these areas this year to make improvements for both our consumer and commercial customers. We also plan to continue to invest to expand our client coverage and investment banking, Commercial Banking, and Wealth and Investment Management and to continue to transform our technology platforms, including moving more applications to cloud, consolidating our data centers, and increasing investments in cyber.

Finally, by investing in our operations and branches, we expect not only to improve the customer experience, but also improve efficiency, reduce operational risk, and drive and account growth. As we show on Slide 20, in the fourth quarter, we reported an 8% ROTCE. But as I highlighted at the start of the call, our fourth-quarter results were impacted by several notable items, including higher operating losses, elevated impairments of equity securities, severance, and discrete tax benefits. As we show on this slide, you will — if you exclude these notable items, our fourth-quarter ROTCE would have been approximately 16%. However, we don’t believe this accurately reflects our longer-term expectations for the following reasons. Net interest income was higher than our long-term expectations due to interest rates, funding, penalties, mix, and pricing, Also, net loan charge-offs were at historically low levels.

If rates, funding balances, mix, and pricing were closer to our long-term expectations and charge-offs were higher, our ROTCE would be lower. Depending on what adjustments you make here, we may all get to a slightly different answer. So, to be clear, because the interest rates are higher and freight costs are lower than our longer-term expectations, we believe we have more work to do to improve our returns. On Slide 21, we highlight our path to higher returns. Since we first discussed our ROTCE goal in the earnings call for the fourth quarter of 2020, we have executed on a number of important items. We executed a $20 billion of gross common stock repurchases, 16 billion in net issuances, including our 401(k) plan. We increased our common stock dividend from $0.10 to $0.30 per share.

We delivered approximately 7.5 billion of gross expense saves and reduced headcount by 11% since the end of 2020. So, we’ve made good progress over the past two years on things that we can control, and we believe we have a clear line of sight to a sustainable ROTCE of approximately 15% in the medium term. In order to achieve that, we need to continue to optimize our capital, including returning capital to shareholders and redeploying capital to higher-returning products and businesses. Adding more focus on our Home Lending business should also be a positive contributor to higher returns. We also have additional opportunities to execute on efficiency initiatives. Additionally, we expect to benefit from the investments we are planning in our businesses, which I highlighted earlier.

While some of these investments will be dependent on the market environment, we expect them to increase ROTCE. At the same time, we will continue to prioritize building our risk and control infrastructure. In the longer term, we believe that running a company in a more controlled and disciplined manner will continue to benefit returns. And our goal is for our four operating segments to produce returns comparable to our best peers. In summary, although the high level of operating losses we had in the fourth quarter significantly impacted our results, the underlying results in the quarter continue to reflect an improvement in our earnings capacity. As we look forward, we expect to continue to grow net interest income. And our expenses, excluding operating losses, are expected to be relatively flat even after inflation and incremental investments in our businesses to drive growth.

Both our credit performance and capital levels remained strong in the fourth quarter. And we expect to resume share repurchases in the first quarter. We will now take your questions.

Q&A Session

Operator: Please stand by for our first question. Our first question of today will come from Ken Usdin of Jefferies.

Kenneth Usdin : Hi. Good morning. Good afternoon, I should say. Mike, just a follow-up on the NII outlook for the year. So, you obviously had a good high end to the year at 13.5% FTE. And just looking at what the guide implies a step down — a little bit of a step down from thereafter, can you just kind of walk us through just how you expect the betas to move through and then like what doesn’t necessarily follow through from here in terms of some of the moving parts? Thanks.

Mike Santomassimo : Yes. Sure, Ken. Thanks for the question. I’ll just kind of walk you through some of the drivers there. And then, obviously, also the timing of when we expect to realize some of those matters as well. And so, as you look at the key things, you look at stick loan growth, we’ve got — we’re expecting kind of low to mid-single-digit loan growth throughout the year. So, not superfast pace, but at a moderate pace of loan growth. We are expecting some moderate declines across the deposit base stabilizing later in the year, but some moderate declines as we look over the next few quarters. And then we would expect the betas to continue to move up a little from here. And then when you think about the pacing of it, the first half of the year will certainly be higher than the second half of the year if all of these things play out.

And so, you shouldn’t expect a really big step down in the first quarter for sure. And then I think that provides the opportunity potentially in the second half of the year if things — if we don’t see that step down in deposits or the betas are a little bit better than what we expected. And then I’d just point out is even as we looked at the fourth quarter, betas were a little bit better than what we had modeled. And so, we’re all in a little bit of uncharted territory here, but I do think that there’s some opportunity potentially in the second half of the year as we look at the forecast, but it will be dependent upon how we fare over the next quarter or two.

Kenneth Usdin : Okay. Got it. And so, second question, I heard your commentary about the 1.3 billion of op losses and the fact that the RPO is down to way down to 1.4 billion. Just how do you kind of help us understand your range of confidence? Obviously, last year, op losses ended at 7 billion as you made progress. So, how wide the range of expectations around your confidence on that level of op loss for the year?

Mike Santomassimo : Well, I think if you look at what we’ve said over the last quarter or two, there’s been roughly in the third and fourth quarter 200, 250 just BAU op losses that have happened, just broad normal stuff that you should expect to continue. So, that gives you sort of a bottom end. And then I think the rest of it is — will be a little dependent upon how we work through the rest of the issues that we’ve got to work through for next year. But I think as you look at the RPL going from 3.7 billion to 1.4 billion, as those big items have moved to be more probable and estimable for us, we booked them. And hopefully, that gives you confidence that we’re putting some of the big things behind us. But we still have stuff to work through, and there’ll be more over time, I’m sure. But we’ve put a lot of big things behind us.

Operator: Thank you. The next question will come from Scott Siefers of Piper Sandler. Your line is open.