Wells Fargo & Company (WFC) — Q1 2020 Earnings Call Transcript

Thank you, Katherine. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf, and our CFO, John Shrewsberry, will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings release and quarterly supplements are available on our website at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our 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 website. I will now turn the call over to Charlie Scharf.

Good morning. I'm going to open the call with comments on the current environment, the actions we're taking, our business performance, and ongoing work to transform the company. Then John will provide more details on the first quarter results before we take your questions. Let me start with some remarks about the current environment. I want to first say that our thoughts are with those directly impacted by COVID-19. This includes those who have contracted the virus, healthcare workers who are on the frontlines helping those directly impacted, and all of those who provide essential services to ensure the country continues to function. As difficult as this is, the response by government, companies, and individuals has been extraordinary. We understand that Wells Fargo plays an important role in providing stability to the financial system and the economy more broadly. And while there is still much to do, I'm incredibly proud of the efforts across the entire company, particularly those on the front lines. First, I'll start with our customers. We've been aggressive in our actions to ensure we can best serve customers while also prioritizing employee and customer safety. We've temporarily closed approximately 1,400 branches, which is about one fourth of our network nationwide, choosing locations to close based on historical branch traffic and the physical design of each branch that allows appropriate social distancing. Consumer and small business contact centers remain open in all other US locations to serve our customers, though wait times are higher. We've deployed social distancing and safety measures in all sites to ensure we keep our employees safe. We've rapidly expanded digital access and deployed new tools, including limits for mobile deposits and wires, new digital mortgage deferment tools, and expanded e-signature support. Customers are adopting these new tools, as demonstrated by a 52% increase in dollar volume of mobile deposits in March 2020 versus March 2019. We're providing significant credit to our clients. In the month of March alone, our commercial customers utilized over $80 billion of their loan commitments, and we're providing accommodations for clients in need. Through April 10, we helped more than 1.3 million consumers and small business customers by deferring payments and waiving fees, deferring over 1 million payments representing almost $2.8 billion of principal and interest payments and providing over 900,000 fee waivers exceeding $30 million. We suspended residential property foreclosure sales, evictions, and involuntary auto repossessions. We continue to work with HUD, trade groups, others in the industry, as well as government officials and non-profits to identify other ways to assist customers facing financial challenges in the current environment. We expanded our participation in the PPP program and hope to provide significant relief for our small business customers. We're rapidly increasing our processing capacity to respond to the significant demand we've seen. Through April 10, we've received more than 370,000 indications of interest from our customers. We're working with industry groups and the US Treasury to prepare to distribute millions of economic impact payments to Americans as quickly as possible. For those receiving checks, we've implemented changes to our ATMs and mobile app to make it more convenient to use those depository options instead of going into a branch. Now turning to how we're operating the company and our employees, we've enabled approximately 180,000 employees to work remotely. For jobs that cannot be done from home, in addition to modifying branch formats, we took significant actions to ensure safety, including enhancing social distancing measures, staggering staff and shifts, and implementing an enhanced cleaning program. We continue to pay all employees, and we made a onetime cash award to approximately 165,000 employees who make less than $100,000. Additionally, as a way of recognizing the unique contributions of our employees working on the frontline, we're making additional payments to those employees. We've made changes to our benefit plan to support those who are being tested or those who have the virus. To assist our employees who need childcare, we granted eligible employees up to five paid business days off for necessary arrangements. We're also providing financial support to eligible employees seeking childcare through their personal networks. We made a $10 million grant to the WE Care Employee Relief Fund, available to employees affected by Coronavirus, especially those with limited resources to help them acquire basic necessities. We're also supporting our communities by directing $175 million in charitable donations from the Wells Fargo Foundation to help address food, shelter, small business, and housing stability, as well as providing assistance to public health organizations fighting to contain the spread of COVID-19. Regarding the markets over the past month, the health crisis had a swift and severe impact. However, banks, including Wells Fargo, are financially strong and have done a great job providing continued service while many of our employees have been unable to access their offices. Additionally, we navigated huge disruptions in liquidity across most asset classes for several weeks. HQLA bid-ask spreads, daily volatility, and credit spreads increased 100% to 500% versus normalized levels prior to the crisis. While activity remains reasonably ordered in HQLA, remote credit assets, and high-quality corporate primary issuance, most other markets experienced forced selling, high intraday volatility, and widening bid-ask spreads. Fed programs designed to support smooth market functioning and effective transmission of monetary policy improved risk pricing, increased dealer balance sheet capacity, decreased market volatility, and lowered transaction costs. Large scale asset purchases in treasuries and agency MBS improved secondary trading flows, though credit-sensitive assets lagged the recovery. All of this, along with the effects of the economy's shutdown, directly impacted our results. Over the quarter, results were materially impacted by loan loss reserves, impairment of securities, and the redemption of deferred securities. This quarter included a reserve build of $3.1 billion for loans and debt securities, $950 million of securities impairment predominantly related to equity securities, and a negative $0.06 impact related to the redemption of Series K Preferred Stock. Within our community bank, as expected, branch traffic significantly slowed through March. We've had approximately half the teller volume at the end of March compared with the same period a year ago. ATM transactions decreased significantly, down approximately 17% in March compared to a year ago. On the lending side, we originated $48 billion of residential mortgage loans, with 52% for refinancing. Auto originations declined 5% from the fourth quarter, with a strong originations early in the quarter more than offset by the slowdown in March. Credit card purchase volume is down 30% from the fourth quarter and down 1% from a year ago, with strong volumes early in the quarter offset by declines in March. In wealth and investment management, period and deposit balances increased 30% during the quarter, driven by higher retail brokerage sweeps reflecting higher client cash allocations. Retail broker transaction revenue increased 12% from the prior quarter, and despite market declines, Wells Fargo Asset Management AUM still grew 2% during the quarter due to strong inflows into money market funds. I’ll turn to our wholesale businesses now. In trading markets, businesses were up nicely year-over-year in the first two months of the quarter, though performance was mixed in March. We had strong performance in macro trading and equities due to volatility and increased flows; however, our performance in spread products suffered due to market dislocation. Commercial loans grew $52 billion, or 10%, from the fourth quarter, and overall global debt capital markets activity was the strongest on record, driven by high-grade offerings from US issuers, whose volumes increased 63% compared to a year ago. Wells Fargo's high-grade debt capital markets lead table rankings improved from fourth to third, with 9.2% fee-based market share during the quarter. While focused on our efforts around COVID-19, we continue to make significant internal changes. We are adding talent to our senior leadership team. Ellen Patterson joined us several weeks ago as our General Counsel, and we expect several more additions to the team in the coming quarter. Despite the significant amount of time devoted to our COVID-19 response, we are not reducing our efforts on our regulatory commitments, and we continue to improve the processes and cultural changes necessary to complete the necessary work. As a reminder, during the quarter, we announced a new organizational structure with five lines of business reporting directly to me. I've also spoken about our business reviews, which have now been reoriented towards issues related to operating in the current stressed environment. As we settle into this environment and see a path to recovery, we will reengage with the work I discussed last quarter and return to the asset cap. John will provide more details on how we are managing in this environment, but here are some highlights. We are focused on doing all we can for our clients while satisfying regulatory requirements. To achieve this, we make daily decisions on balance sheet allocation. The asset cap is measured on a two-quarter daily average basis and must remain below $1.952 trillion at the end of the quarter. On March 31, that calculation was an estimated $1.943 trillion. As crises unfolded in mid-March, we first saw slow increases in deposits and drawdowns on committed lending facilities, both of which accelerated as the crisis deepened. By the end of the quarter, we had $1.981 trillion in assets. John will discuss this in more detail, but we are taking numerous actions to ensure we stay below the cap. We began the quarter with a strong capital position, including a CET1 ratio of 11.1%. Due to strong growth in assets during the quarter, wider spreads, and lower earnings, our CET1 ratio declined to 10.7%, still above the regulatory minimum of 9% and our current internal target of 10%. As you know, we suspended our share buyback to focus on helping our customers through these challenging times. You may want to discuss our capital plans going forward. We've submitted our 2020 capital plan earlier this month, and results will be published by the Federal Reserve Board in June. As for future expectations, we've entered a world we haven't seen before. Much of the economy is essentially closed; consumer spending is down over 25% year-over-year this past week, with food and drug spending increasing and other spending categories down significantly. New auto sales in March were down 32%, while February manufacturing showed declines, with the ISM reading in March at 49.1%, as businesses cut back on orders. Commodity prices are down 24%, suggesting weakness in global demand. Unemployment is growing beyond our traditional models. While we hope that this situation is bound by shelter-in-place orders, we don't know the exact timeframe or how quickly the economy will recover once these orders are lifted. What we do know is that the contraction is real, and we must ensure we do our part to help recover as quickly as possible. It's equally important to note the response has surpassed anything we've seen before. Banks provided significant amounts of credit liquidity, deferred loan payments, waived fees, and made numerous accommodations for customers in need. The response from the Federal Reserve has been rapid, comprehensive in scope, and significant in size, and the actions of Congress have been equally impressive, with many interventions still coming. The question remains about the implications for our future. What's important is controlling the spread of the virus so the economy can reopen. We are hopeful that our actions, those of others, and government support will provide needed relief and help many customers through this difficult period. However, the shutdown's length will ultimately determine the severity of the impacts. Our strong capital and liquidity levels enable us to support our customers and the broader US economy. We will closely evaluate our assumptions regarding our allowance for credit losses. The actual level of losses will depend on how long this period lasts and the effectiveness of government and private sector support. Today, many unknowns exist, and the year will differ significantly from what we expected when we last spoke. However, we remain focused on delivering for our customers and communities as we navigate these unprecedented times, while also committed to financial and performance improvements as we move beyond this crisis. Thanks to all my partners at Wells Fargo for their tireless work. I'll pass it on to John.

Thanks, Charlie, and good morning everyone. Charlie covered the information provided in the initial pages of the supplement related to the actions we're taking to support our customers, employees, and communities during the pandemic, so I'm going to start on Page 6. As we highlight on this page, we had a number of significant items in the first quarter that impacted our results. We had $4 billion of provision expense for credit losses, reflecting the expected impact these unprecedented times could have on our customers' creditworthiness. We had $950 million of securities impairment, predominantly related to equity securities reflecting lower market valuations. While deferred compensation plan investment results did not meaningfully impact the bottom line, they increased net losses from equity securities by $621 million and reduced employee benefits expense by $598 million. We had $464 million of operating losses, which were down $1.5 billion from the fourth quarter that included elevated litigation accruals. We had a $463 million gain on the sale of residential mortgage loans that had previously been designated as held for sale. Mortgage banking income declined $404 million from the fourth quarter driven by mark-to-market losses on loans held for sale and higher MSR asset valuation losses primarily due to updated prepayment estimates. Finally, we redeemed our Series K Preferred Stock, which reduced EPS by $0.06 per share as a result of the elimination of the purchase accounting discount recorded on these shares at the time of the Wachovia acquisition. Even after factoring in the COVID-19 related impacts experienced during the first quarter, as we highlight on Page 7, our CET1 ratio remained 170 basis points above the regulatory minimum, and our LCR was 21% above the regulatory minimum. These surpluses are noteworthy given the regulatory minimums are designed to ensure financial institutions maintain sufficient resources to withstand severely adverse economic conditions. Turning to Page 8, I'll be covering the income statement drivers throughout the call, but I wanted to highlight that our effective income tax rate was 19.5% in the first quarter, which included net discrete income tax expense of $141 million. I'll highlight most of the balance sheet drivers on Page 9 throughout the call, but I will note here that the economic environment our customers are facing due to COVID-19 caused our balance sheet to expand as loan demand and deposit inflows significantly increased late in the first quarter. On Page 10, we highlight how we're helping our customers while managing under the asset cap that's been in place since early 2018. Driven by strong loan demand in March, our total assets grew $53.8 billion from year-end to $1.981 trillion. As Charlie highlighted, even with this growth, we continue to operate in compliance with the asset cap of $1.952 trillion, as compliance is measured at each quarter-end based on the two-quarter daily average. As of March 31, the two-quarter daily average for our assets was $1.943 trillion. During these challenging times, we expect loan and deposit growth to continue, but cannot provide guidance on the level of growth, and we're actively working to create balance sheet capacity to help our customers. It's worth noting that the high rate of growth in line utilization by our commercial clients has slowed since credit markets have reopened. We appreciate the targeted action the Federal Reserve took last week, providing additional flexibility for us to make small business loans as part of the Paycheck Protection Program and the forthcoming Main Street Business Lending Program. We will continue to take actions to manage the size of our balance sheet. For example, we've exited correspondent non-conforming mortgage originations, enabling us to better meet the mortgage financing needs of our existing customers. Similar to actions taken in early 2018, we're reducing low liquidity value deposits, particularly deposits from other financial institutions, and we've also reduced our securities financing footprint. On Page 11, starting with average loans, average loans increased $8.5 billion from the fourth quarter driven by commercial loans, given significant growth that occurred late in the quarter related to a change in borrowing behavior caused by the COVID-19 pandemic. I’ll describe trend movements starting on Page 12. Period-end loans increased $61.6 billion, or 6%, from a year ago, and $47.6 billion, or 5%, from the fourth quarter. Commercial loans grew $52 billion, or 10%, from the fourth quarter as balance sheet declines earlier in the first quarter were offset by strong growth late in the quarter. The growth in commercial loans in the first quarter included more than $80 billion in borrower draw activity in March on commercial banking and corporate investment banking loans. Revolving loan utilization in wholesale banking was 48.6% in March, up 860 basis points from December. As I mentioned, during the first two weeks of April, we’ve seen these draws slow. Consumer loans were down $4.4 billion, or 1% from the fourth quarter, as declines in credit card loans, consumer real estate loans, and other revolving loans were partially offset by growth in auto loans. I highlight the drivers of linked quarter trends in more detail starting on Page 13. The first mortgage loan portfolio decreased $927 million from the prior quarter as refinancing led paydowns more than offset $14.3 billion of held-for-investment mortgage loan originations. Junior lien mortgage loans were down $982 million from the fourth quarter as continued paydowns more than offset new originations and $1.8 billion of draws on existing lines, which increased significantly late in the first quarter. Credit card loans declined $2.4 billion from the fourth quarter, driven by seasonality and fewer new account openings. Our auto portfolio continued to grow while maintaining credit discipline with balances of $695 million from the fourth quarter. However, as Charlie highlighted, originations declined 5% from the fourth quarter, with strong originations early in the first quarter more than offset by a slowdown in March due to the pandemic. Turning to commercial loans on Page 14, C&I loans were up $50.9 billion from the fourth quarter, with broad-based growth across business lines, largely driven by draws of revolving lines from clients reacting to the economic slowdown related to the pandemic. Commercial real estate loans were up $1.8 billion from the fourth quarter, with growth in both CRE mortgage and construction loans. Given the focus on commercial loan draws, we’re providing more details on certain of our industry exposures starting on Page 15. We typically disclose the industry breakdown of our C&I and lease financing portfolio in our quarterly SEC filings, and we're also providing the industry breakdown of our total commitments on this slide. Please note that not all unfunded loan commitments are unilaterally exercisable by borrowers, as certain revolvers contain requirements that necessitate borrowers to post additional collateral to access the full amount of the commitment. Many areas of the economy are being impacted by the pandemic, and the following slides provide details on the industries under escalated monitoring. Starting with oil and gas on Page 16, as of March 31, we had $14.3 billion of loans outstanding to that sector. The size of our portfolio was down 20% from $17.8 billion at the end of the first quarter of 2016, when oil prices were also low. As of the end of the first quarter, 47% of our portfolio was lent to the exploration and production sector, 41% to midstream, and 12% to services operators. On Page 17, in the entertainment and recreation industry, we had a total of $16.2 billion of loans outstanding at the end of the first quarter, with less than 1% to cruise lines. In transportation as of March 31, we had $11.9 billion of loans outstanding, including $2.4 billion in air transportation. We are closely monitoring our commercial real estate portfolio, delineated on Page 18. At the end of the first quarter, we had $14.1 billion of loans outstanding to retail, excluding shopping centers, within the commercial real estate mortgage portfolio, and $10.6 billion in loans outstanding for the hotel and motel industry. Within our $20.8 billion construction portfolio, we had $7.1 billion of loans outstanding for apartments. On Page 19, average deposits increased 6% from a year ago and 1% from the fourth quarter. Typically, we experience seasonal declines in average deposits in our wholesale banking and WIM businesses, but all deposit-gathering businesses grew in the first quarter. This growth included late-quarter impacts largely due to flight-to-quality deposits across all business lines following the emergence of COVID-19 and inflow of deposits associated with corporate and commercial loan draws. Our average deposit costs declined to 10 basis points from the fourth quarter, with declines across all of our lines of business. The largest declines were seen in wholesale banking and WIM, while our retail banking deposit costs declined at a slower pace, given they were lower to begin with and still impacted from promotional pricing in early 2019, most of which will expire in the second quarter. On Page 20, we provide details on period-end deposits, which better reflect the strong growth we had at the end of the first quarter, with total deposits up $53.9 billion, or 4%, from year-end. Additionally, banking deposits increased $13.5 billion from the fourth quarter, driven by commercial banking and commercial real estate revolving line draws, partially offset by lower financial institutions deposits reflecting actions taken to manage the asset cap. Consumer and small business banking deposits increased $41.1 billion, or 5% from the fourth quarter, including higher retail banking deposits that exceeded growth in high-yield savings and interest-bearing checking. Wealth and investment management deposit growth was driven by greater cash balances from brokerage clients. Net interest income increased $112 million from the fourth quarter, reflecting $356 million higher hedge ineffectiveness accounting results attributable to market rate levels and discrepancies in notional and swaps hedging our long-term debt. $84 million worth of lower MBS premium amortization resulting from lower realized prepayments was partially offset by balance sheet repricing due to the impact of the lower interest rate environment, as our assets repriced down faster than our liabilities. The low-rate environment could continue to pressure our net interest income, but we're managing our interest rate exposure to minimize the impact as much as possible. Given the current market volatility and uncertainty, we are withdrawing our prior 2020 net interest income guidance. While we are not providing guidance on expectations for it this year, we will offer more insights regarding developments throughout the year. Turning to Page 22, noninterest income declined $2.3 billion from the fourth quarter, driven by a $1.9 billion decline in net gains from equity securities and $404 million lower mortgage banking income. Let me explain these declines in more detail, starting with mortgage banking. Lower mortgage banking income reflected unrealized losses of approximately $143 million on residential loans and $62 million on commercial loans held for sale due to illiquid market conditions and a widening of credit spreads. This impact is recorded in the net gain on mortgage loan originations, and the $143 million loss reduced the production margin reported in residential held for sale originations. Absent this impact, our production margin would have increased as origination demand exceeded capacity during the first quarter. Mortgage banking results reflected $192 million of higher losses on the valuation of our MSR asset, due to assumption updates, primarily prepayment estimates. I would note that we ended the first quarter with a $62 billion mortgage loan application pipeline, which was up $29 billion, or 80%, from the fourth quarter. We provided details on the net losses from equity securities on Page 23. We had $1.4 billion of net losses from equity securities in the quarter, which included $621 million of largely P&L neutral comp plan investment losses. Net losses from equity securities also included $935 million of impairments, reflecting lower market valuation. The impairments on venture capital, private equity, and certain wholesale businesses represented 17% of the carrying values of these businesses’ portfolio investments under impairment assessment. Turning to expenses on Page 24, our expenses declined $2.6 billion from the fourth quarter. Operating losses declined $1.5 billion from the fourth quarter, which included elevated litigation accruals. Personnel expenses, typically seasonally elevated in the first quarter, declined $494 million from the fourth quarter due to lower employee benefits expense. The decline in employee benefits expense was driven by $861 million of lower deferred comp expense, which was partially offset by $544 million of seasonally higher payroll taxes and 401(k) matching expenses. We also had lower expenses in various areas, including commission and incentive comp, outside professional services, technology, and equipment, as well as travel and entertainment. The enhanced benefits and payments we provided to employees in March as part of our response to COVID-19 did not significantly impact our expenses in the first quarter, but we currently expect that they will have a greater impact beginning in the second quarter and through the remainder of this year. While these costs will add to our expense base, the actions we took were the right thing to do to support our employees. Before discussing our business segments, starting on Page 25, I want to note that as a result of the new flatter organizational structure announced in February, we will be updating our operating segments when we complete the transition and manage under the new five business segment structure. Community banking earnings declined $274 million from the fourth quarter reflecting higher provision expense as well as net losses from equity securities. On Page 26, we provide our community banking metrics. I'll note that as always, our digital, mobile, and primary consumer checking customers are reported on a one-month lag. So the numbers reported here for the first quarter do not capture the changes in customer behavior we experienced in March due to COVID-19. For example, our customers have shifted to depositing checks through our mobile app, and the dollar volume of mobile checks deposited increased over 40% in March compared with February. Turning to Page 27, teller and ATM transactions are reported through March, which was when we reduced our branch hours and temporarily closed about one fourth of our branches due to COVID-19. This resulted in approximately a 50% decline in teller volume during the final weeks of the first quarter compared with the previous year. Our customers also significantly reduced their card spending late in the first quarter due to pandemic impacts. During the first two months of the year, credit card volumes were up year-over-year while March 2020 volumes declined approximately 15% from March 2019, resulting in first quarter credit card purchase volumes being down 1% from a year ago. We also witnessed significant shifts in customer spending habits in March with grocery and pharmacy spending increasing while all other categories were down compared to the previous year. Debit card spending trends were similarly affected, but the changes in spending were less significant with year-over-year growth in January and February and a 5% decline in year-over-year volumes in March. Turning to Page 28, wholesale banking earnings declined $2.2 billion from the fourth quarter, reflecting a $2.2 billion increase in provision expense. I've already highlighted the strong loan and deposit growth from our commercial customers in the first quarter. Moreover, we raised $47 billion of debt capital for our clients. Wealth and investment management earnings increased $209 million from the fourth quarter. During the first quarter, WIM experienced strong demand from clients for liquid products. Period-end deposit balances increased 13% from the fourth quarter, reflecting higher cash allocation and brokerage client assets. Wells Fargo Asset Management saw significant growth in AUM driven by over $34 billion of inflows into our money market funds. Despite market volatility, closed referral investment assets in WIM from the consumer bank partnership increased on a linked quarter and year-over-year basis, and flows into our retail brokerage advisory business remained positive over the first quarter. As a reminder, retail brokerage advisory assets are priced at the beginning of the quarter. So first quarter results reflected market valuations as of January 1, and second quarter results will reflect market valuations as of April 1. Turning to Page 30, our net charge-off rate increased six basis points from the fourth quarter to 38 basis points, predominantly driven by higher C&I losses, primarily concerning the oil and gas portfolio due to significant declines in oil prices. We saw net recoveries in all commercial and consumer real estate portfolios and lower losses in our auto portfolio. The increase in credit card losses from the fourth quarter included seasonal effects. Nonaccrual loans increased $810 million from the fourth quarter to 61 basis points of total loans, up five basis points from the previous quarter and down 12 basis points from a year ago. Commercial nonaccruals increased $621 million, predominantly driven by the economic impact of the pandemic. Consumer nonaccrual increased $189 million, primarily due to higher nonaccruals in the real estate 1-4 family first mortgage loan portfolio as the implementation of CECL required PCI loans to be classified as non-accruing based on performance. On Page 31, we provide detail on the performance of our oil and gas portfolio. Oil and gas loans outstanding increased 5% linked quarter and 7% from a year ago, reflecting increased utilization rates driven by the impact of COVID-19 and the decline in oil prices. Total commitments declined reflecting a weaker credit environment. A significant decline in oil prices during the first quarter triggered early signs of credit deterioration, particularly in the E&P sector. Total oil and gas net charge-offs increased $112 million in the first quarter to $186 million. Nonaccruals decreased $66 million from the fourth quarter due to higher net charge-offs as well as paydowns, which were partially offset by new downgrades to nonaccrual status in the first quarter. Approximately 84% of nonaccrual loans were current on payments during the quarter. Criticized loans increased 23% from the fourth quarter, predominantly reflecting increases in the E&P sector. On Page 32, we highlight our adoption of CECL. At the end of the first quarter, the allowance for loans and debt securities was $12.2 billion. $12 billion of this allowance was for loans and unfunded commitments, and our allowance coverage ratio was 1.19% of loans. We added $3.1 billion to our allowance for credit losses since the adoption of CECL on January 1. This increase was driven by several factors including economic sensitivity due to the COVID-19 pandemic, the estimated impact on industries most adversely affected, our exposure to the oil and gas industry, draws on loan commitments during the quarter, which were the primary driver of commercial loan growth, along with a $141 million reserve build for debt securities reflecting economic and market conditions. Turning to capital on Page 33, even after a multiyear program to return excess capital to shareholders, our CET1 ratio was 10.7% at the end of the first quarter, which remains above the regulatory minimum of 9% and our current internal target of 10%. Our period-end common shares outstanding decreased by 38 million shares from the fourth quarter. Additionally, on March 15, along with other financial services forum members, we suspended share repurchases through the end of the second quarter. In summary, while our results in the first quarter were impacted by the economic and market uncertainty caused by the pandemic, we maintain strong liquidity and capital. Our priority is to continue to use our financial strength to support the US economy by serving our customers, supporting our employees, and donating to our communities. Charlie and I will now take your questions. Operator, do you want to open it up for questions?

Operator, how are we doing?

Hi, Ken.

Hi, good morning, guys. Thanks a lot for the color in the deck today. Can I just ask you, John, can you elaborate a little bit more in terms of – it was good to see the Fed giving you some flexibility to participate in the programs on lending, but can you elaborate a little bit more on – are you truly able to provide all the help that your customers are asking for? And how are you balancing that demand function on behalf of clients with the magnitude that you have to dial back and the effects that that might have on the company from an income statement perspective? Thanks.

Sure. Thank you. So on the PPP front, which was the targeted action where the Fed provided us with a little extra flexibility. There, I would describe this as unconstrained and indicate that we are in a position to help everybody who approaches us, subject to the program, of course, having sufficient funding from a legislative perspective, but no constraints at Wells Fargo. Regarding other trade-offs, as I mentioned, the first places we will create more capacity to help customers are by reducing non-operational deposits, principally in the financial institutions area, where this is relatively easy to substitute and it's a low-value use of our capital balance sheet because there is a high runoff factor on these types of deposits. We have tens of billions of these to continue to work down. Secondly, we are dialing back our securities financing footprint. We did this in 2018 when the cap was originally put in place, but we’ve dialed back some of the repo financing and other securities financing that we provide and our own utilization of external repo as a financing source to create more room for lending to our customers. It should be noted that even with some of those activities aimed at keeping us below the cap, we are still focused primarily on meeting the needs of our existing customers.

Hi, Ken, this is Charlie. I want to ensure this is clear for everyone, and I know you didn't mean it this way. We have no restrictions on participating in these programs. What the Fed did was allow us to go above the existing balance sheet cap so that we could participate in a more holistic way without having to adjust other items, which, as you know, is difficult to do in a short period of time. So this provided us with the flexibility to do far more than we had previously chosen to do based on our capacity.

Yeah, exactly, thank you, Charlie. And for the second question, John, I understand fully that you're pulling away from giving full-year guidance. Is there a way you can help us understand on the NII front, just how you’d expect the trajectory at least to go from the first to second quarter, given the changes and all the moving pieces in this quarter's results? Thanks.

Yeah, it's a fair question, but not quite yet. I think we're all forecasting something like zero at the front end, depending on where LIBOR moves over time, and some number between roughly 70 and 100 basis points at the long end. How deposit pricing reacts to that, given that it came down in this quarter, and we anticipate it continuing to decrease rapidly over the remainder of the year, will be a significant driver. Also, how much of these recent balances that we just booked remain versus those that dial back down will be important, so I am not looking for NII growth. It's certain it will be down to some extent. However, we won't have more precise guidance until the end of the second quarter.

I appreciate that. Thanks, guys.

Hi, good morning. A couple of questions. One, just on the outlook for CECL and CECL charges, I mean, you obviously went through in detail what you did this most recent quarter, but trying to understand what kind of unemployment level you're assuming in that. So if we see a trajectory that differs from your assumptions, we know how to perceive reserve builds from here.

Yeah, so it’s a combination of things including unemployment levels, but also the duration of that unemployment and for how long, along with GDP. Obviously, other considerations will include what this stimulus means at the personal level and the business level, and whether that effectively offsets the impact on consumer credit from unemployment. So our scenarios – and we have a few scenarios that we’re relying on with different weighting – are generally high single digits on sustained down GDP and sustained unemployment through 2021, while GDP could be flat with not much growth in 2021. Hopefully, that's informative. We'll update as we go along. Our focus is less on sharp spikes and sharp recoveries and thinking about this as a long, slow burn over the next couple of years for risk management purposes.

Got it. And if I could drill down just on the oil side, I mean, obviously, we experienced an oil event several years ago in 2016. You had some workouts around that and managed to reduce oil and gas exposure since then. Can you provide color on how you're handling this portfolio now and what expectations you have?

Yes, the book does look different. So on the one hand, it has shrunk, but it is proportionately more senior. We had a bigger weight on lower capital structure activity before going into the 2015-2016 downturn. We expect higher losses, given the resource price levels, so losses given default are likely to be substantially worse this time. In terms of migration from performing to non-performing, our own credit loss analysis assumes essentially full notch downgrades across the board for our estimations of default probability. We are approaching this situation soberly, and we’ve got a solid analysis in place now for both specific and qualitative reserves. We will continue to enhance disclosure around it, as we did in 2015-2016 as we navigate through this.

Okay, but that’s already embedded within your CECL estimate today, right? So if things pan out as expected, we are not expecting any more reserve build in that specific asset class?

Yes and no. We typically reserve more than we charge off, and when thinking about the through-cycle charge-off, we have a sense of how we expect it to perform. So we include it in our CECL estimates, but we cannot discount the element of uncertainty and the possibility of exceeding our assumptions as we progress.

Hey, John, Charlie, I was wondering if you could provide more insight into the base case economic scenario you baked into the first quarter reserve build. Given that perspective, what macro scenario would you need to see in the second quarter for provisioning levels to match previous highs.

As previously mentioned, based on the anticipation of moved, we’re taking a longer view. We see this playing out as high to mid-single digit growth over 2021. In contrast to what we've historically seen, our own CCAR severely adverse scenarios indicate peak quarterly loss rates expressed on an annualized basis of around 1.7% - 1.75%. That's a significant downward revision against a much higher rate during the prior financial crisis.

Listen, I think we all recognize that we haven’t encountered an environment like this before, and we can't rely on situations we've seen historically. Each downturn is unique, and as such, this poses unique uncertainties that make our predictive ability more difficult. Despite this, we feel our portfolios are better positioned than past downturns, especially given the uncertainty around the length of shutdowns and the overall impact on the economy.

Thanks for your comments, John and Charlie. Just a quick topic as it relates to the consumer side of your business as it relates to the loans. If the economic projections are met, what kind of default levels can we expect relative to what you’ve seen historically? How do you see this impacting the ability for individuals to maintain payments?

From what we see, controlling the virus's spread is crucial so the economy can reopen. It’s extremely challenging right now, and subsequent to this crisis, we must be prepared to lend our support to meet the needs for credit, which we believe will continue to be high. There remains great uncertainty about what will happen next, and we need to see how government interventions, stimulus programs, and forbearance actions play out in the near term.

Understood. Thank you. And John, can you confirm total criticized loans in the quarter and the drawdowns from exposed C&I loans? I'm trying to ascertain how much we can expect this to impact the credit cycle moving forward.

Criticized loans increased by approximately $4 billion during the quarter, mainly attributed to March. Most of it came from industries we've mentioned, including oil, gas, and transportation. We're expecting to see more movement here in the upcoming quarter, and we’ll provide numbers in the 10-Q soon.

Thank you, everybody. We appreciate your understanding as we traverse this new landscape and will continue working to provide you with the necessary updates. Take care.