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 customer's 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 which 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 as a result of assumption updates primarily 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 with 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 ratio was 21% above the regulatory minimum.
These surpluses are noteworthy given the regulatory minimums they're based upon are established to ensure financial institutions maintain sufficient resources to withstand severely adverse economic end market 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, and included net discrete income tax expense of $141 million.
I'll be highlighting 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 increased significantly 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 – loan growth 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 load and deposit growth could 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 is backed off since credit markets have reopened.
We appreciate the targeted action that Federal Reserve took last week which will provide 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 have and will continue to take actions to manage the size of our balance sheet.
For example, we've exited correspondent non-conforming mortgage originations which gives us the ability to better meet the mortgage financing needs of our existing customers. And similar to the actions we took in early 2018, we're reducing low liquidity value deposits, particularly deposits from other financial institutions. And we've also reduced our securities finance footprint.
Let's look at the drivers with the balance sheet growth we had in the first quarter starting with average loans on Page 11. Average loans increased $8.5 billion from the fourth quarter driven by commercial loans.
Given the significant growth that occurred late in the quarter related to a change in borrowing behavior caused by the COVID-19 pandemic. I'm going to spend more time describing period end trends 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 more than 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 the month of March on commercial banking and corporate investment banking loans. Revolving loan utilization and wholesale banking was 48.6% in March, up 860 basis points from December. And 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 the linked quarter trends in more detail starting on Page 13.
The first mortgage loan portfolio decreased $927 million from the prior quarter as refinancing lead pay downs 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 pay downs more than offset new originations and $1.8 billion of draws on existing lines, which was up meaningfully 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 we maintained our 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 in the first quarter – 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 of clients reacting to the economic slowdown associated with a 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 and exposure to industries that have been particularly hard hit as a result of the pandemic, 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, but are also providing the industry breakdown of our total commitments on this slide. I'd note that not all unfunded loan commitments are unilaterally exercisable by borrowers.
For example, certain revolvers contain features that require the customer to post additional collateral in order to access the full amount of the commitment.
While many areas of the economy are being impacted by pandemic, the next few slides provide details on the industries with escalated monitoring. Starting with oil and gas on Page 16, as far as 31, we had $14.3 billion of loans outstanding to the oil and gas industry. The size of our portfolio was down 20% from $17.8 billion in the first quarter of 2016, which was also when oil prices were low.
As of the end of the first quarter, 47% of our portfolio were loans to the exploration and production sector, 41% to midstream and 12% to services. I'll provide more detail on the performance of this portfolio later on the call.
We had $27.8 billion of retail loans outstanding at the end of the first quarter, which included $5.8 billion to restaurants. This includes $3.9 billion to limited service restaurants commonly referred to as fast food restaurants, typically with a drive-through, which have largely remained open across the country while other restaurant formats have been more impacted with service limited to delivery or pickup.
Turning to the entertainment and recreation industry on Slide 17, 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. We had $11.9 billion of loans outstanding to the transportation industry as of March 31, which included $2.4 billion to air transportation.
We're closely monitoring our commercial real estate portfolio, which we highlight on Slide 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, motel industry. Within our $20.8 billion construction portfolio, we had $7.1 billion of loans outstanding in apartments.
Turning to deposits on Page 19, average deposits increased 6% from a year ago and 1% from the fourth quarter. Typically we experienced linked quarter seasonal declines in the average deposits in our wholesale banking and WIM businesses, but all of our deposit gathering businesses grew in the first quarter.
This growth included the late quarter impacts of flight to quality deposits across all business lines following the emergence of COVID-19 as well as the 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.
We had largely declines in wholesale banking and WIM while our retail banking deposit costs declined at a slower pace, since they were lower to begin with and continue to be 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. Also, banking deposits were up $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 largely driven by growth in high yield savings and interest bearing checking. Wealth and investment management deposit growth was driven by higher 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 the level of market rates and differences in basis in notional and swaps hedging our long term debt. $84 million of lower MBS premium amortization resulting from lower realized prepays partially offset by balance sheet re-pricing, including the impact of lower interest rate environment as our assets re-priced down faster than our liabilities and from one fewer day of the quarter.
The low rate environment could continue to put pressure on 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're withdrawing our prior 2020 net interest income guidance.
While, we're currently not providing guidance on our expectations for net interest income for this year, we will provide more insights regarding developments throughout the year.
Turning to Page 22, noninterest income declines $2.3 billion from the fourth quarter, driven by a $1.9 billion decline in net gains from equity securities, and $404 million of 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 net gain on mortgage loan originations and the $143 million loss reduced the production margin we report on 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 also reflected $192 million of higher losses on the valuation of our MSR asset as a result of 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 provide 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 subject to the impairment assessment.
Turning to expenses on Page 24, our expenses declined $2.6 billion from fourth quarter. Operating losses declined $1.5 billion from the fourth quarter, which included elevated litigation accruals.
Personnel expense, which is typically seasonally elevated in the first quarter, declined $494 million from the fourth quarter driven by lower employee benefits expense. The decline and employee benefits expense was driven by $861 million of lower deferred comp expense, which is partially offset by $544 million of seasonally higher payroll taxes and 401(k) matching expenses.
We also had lower expenses in a variety of other areas including commission and incentive comp, outside professional services, technology and equipment and as you would expect, travel and entertainment.
The enhanced benefits and payments we provided to employees in March, as part of our response to COVID-19 did not meaningfully 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 for employees.
Before discussing our business segments, starting on Page 25, I want to note that as a result of the new flatter organizational structure that was announced in February, we will be updating our operating segments when we complete the transition and are managed in accordance with 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 start by noting that as always, our digital, mobile and primary consumer checking customers are reported on a one month lag.
So the numbers reported here for first quarter do not capture the change 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 is when we reduced our branch hours and temporarily closed approximately one fourth of our branches as a result of COVID-19, which resulted in approximate 50% decline in teller volume during the final weeks in the first quarter compared with a year ago.
Our customers also meaningfully reading use their card spending late in the first quarter due to the impacts of the pandemic.
During the first two months of the year, credit card volumes were up from a year ago 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 had meaningful shifts in customer spending in March with grocery and pharmacy spending increasing while all other categories were down from a year ago.
Debit Card spending trends were similarly impacted, but the change in spend was less significant with year-over-year growth in January and February and a 5% decline in year-over-year volumes in March. Similar to credit card debit card spending shifted significantly to grocery in March, but the growth in this category started to slow in the last week of the month.
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. And we also 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 and assets under management and our Wells Fargo Asset Management business grew significantly driven by over $34 billion of inflows into our money market funds.
Despite the market volatility closed referred investment assets into WIM from the consumer bank partnership increased on a linked quarter and year-over-year basis and flows into our retail brokerage advisory business remain positive in 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 was up six basis points from the fourth quarter to 38 basis points, predominantly driven by higher C&I losses primarily related to higher losses in our oil and gas portfolio, reflecting significant declines in oil prices. We had net recoveries in all of our commercial and consumer real estate portfolios and lower losses in our auto portfolio. The increase in credit card losses from the fourth quarter included seasonality.
Nonaccrual loans increased $810 million from the fourth quarter to 61 basis points of total loans, which was up five basis points from the fourth 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 predominantly, driven by 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 in the first quarter resulted in 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 declined $66 million from the fourth quarter due to the higher net charge-offs as well as pay downs, 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 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 a number of factors including economic sensitivity due to the COVID-19 pandemic, the estimated impact to industries most adversely affected by the pandemic, our exposure to the oil and gas industry, draws on loan commitments during the quarter, which were the primary driver of commercial loan growth, and 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 continued to be above the regulatory minimum of 9% and our current internal target of 10%.
Our period-end common shares outstanding were down 38 million shares from the fourth quarter. On March 15, we along with the other members of the financial services forum, 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 help the US economy by serving our customers, supporting our employees and donating to our communities.
And Charlie and I will now take your questions. Operator, do you want to open it up for questions.