Wells Fargo & Company

Good morning. Thank you for joining our call today where our CEO, Charlie Sharp, and our CFO, Mike Santamassimo, 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 materials, including the release, financial supplement, and presentation deck, 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 materials. 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 and the earnings materials available on our website. I will now turn the call over to Charlie.

Thanks, John. I'll make some brief comments about our first quarter results and update you on our priorities. I'll then turn the call over to Mike to review first quarter results in more detail before we take your questions. Let me start with some first quarter highlights. Our results in the quarter were strong and reflected the continued progress we're making to improve returns. We grew revenue from both the fourth quarter and a year ago. We continue to make progress on our efficiency initiatives, and expenses declined from both the fourth quarter and a year ago, driven by lower operating losses. But we continue to be focused on controlling other expenses as well. The consumer and majority of our businesses remain strong. Delinquencies and net charge-offs have continued to slowly increase as expected. We're looking for signs of accelerated deterioration in asset classes or segments of our customers. And broadly speaking, we saw little change in the trends from the prior quarter. However, weakness continues to develop in commercial real estate office. And Mike will discuss this in more detail. Given what we're seeing, we're taking incremental actions to tighten credit on higher risk segments, but continue to lend broadly. We increased our allowance for credit losses for the fourth consecutive quarter. Our economic expectations used to support the allowance have not changed meaningfully, but we do continue to look at specific asset classes, such as commercial real estate, to appropriately assess the adequacy of the allowance. We will continue to monitor the trends in each of our loan portfolios to determine if future action is warranted. Both commercial and consumer average loans were up from a year ago, but were relatively stable from the fourth quarter. Consumer spending remained strong with growth in both debit and credit card spend, but spending began to soften late in the quarter. The decline in average deposits that started a year ago continued in the first quarter, primarily driven by customers seeking higher yielding alternatives and continued growth in consumer spending. We did see some moderate inflows from the few specific banks that have been highlighted in the press, but those inflows have abated. Our CET1 ratio, which was already strong, increased to 10.8% even as we resumed common stock repurchases in the first quarter, buying back $4 billion in common stock. Let me share some thoughts on the recent market events impacting the banking industry. We're glad that the work we have completed over the last several years has put us in a position to help support the U.S. financial system. Along with 10 other large banks, we utilized our strength and liquidity and we made a $5 billion uninsured deposit into First Republic Bank, reflecting our confidence in the country's banking system and to help provide First Republic with liquidity to continue serving its customers. I'm proud of everything our employees have done during this historic period to be there for our customers. We believe banks of all sizes are an important part of our financial system as each is uniquely positioned to serve their customers and communities. It's important to recognize that banks have different operating models and that the banks that failed in the first quarter were quite different from what people think of when they think about the typical regional bank. These particular banks had concentrated business models with heavy reliance on uninsured deposits. Our franchise and those of many other banks operate with a broader business model and more diversified funding sources. It is times like these that the many benefits of our own franchise become even more clear. Our diversified business model provides opportunities to serve our customers broadly, which reduces concentration risk across the different elements of risk. Most importantly, our customers benefit from our size and the range of banking services we provide, which helps us build a full relationship with individuals and companies. We also have strong capital and liquidity positions, which include a mix of deposits and access to multiple funding sources. And our continued focus on financial and credit risk management allows us to support our customers throughout economic cycles. Now, let me update you on the progress we've made on our strategic priorities our top priority remains building out our risk and control framework appropriate for our company. I spend time in my recent annual letter highlighting why you remain confident in our ability to complete this work. Including having much more effective reporting and processes in place to provide appropriate oversight. adding close to 10,000 people across numerous risk and control related groups as part of our commitment to make the investments needed to complete the work, and building the management disciplines and culture to govern and execute the work, which includes the operating committee reviewing risk and regulatory progress and escalations on a weekly basis. I also summarized the actions we've taken to simplify the way we operate. This work continued in the first quarter as we largely completed the exit of the correspondent home lending business as part of our plans to simplify that business. We're also narrowing our retail mortgage business to focus on predominantly bank customers and underserved communities. Our strategy includes broadening our existing investment from the Special Purpose Credit Program to include purchase loans, investing an additional $100 million to advance racial equity in home ownership, and deploying additional home mortgage consultants in local minority communities. We continue to transform the way we serve our customers by offering innovative products and solutions. We announced a multi-year agreement with Choice Hotels to launch the new co-branded credit card this month, creating a best-in-class credit card program designed to enhance our customers' experience and bring them more value. We rolled out early payday late last year, which makes eligible direct deposits available up to two days early. In the first quarter, this enhancement provided customers early access to over $200 billion in direct deposits. We launched FlexLoan in the fourth quarter, a digital-only small-dollar loan that provides eligible customers convenient and affordable access to phones. Customer response continues to exceed our expectations, and we've originated over 100,000 loans since November. Digital adoption and usage among our consumer customers continued to increase. We added over 500,000 mobile active customers in the first quarter, and digital logins increased 6% from a year ago. Since rolling out Vantage, our new enhanced digital experience for our commercial and corporate clients late last year, we've received overwhelmingly positive feedback on the new user experience. Vantage uses AI and machine learning to provide a tailored and intuitive platform based on our clients' specific needs. We also continue to make progress on our environmental, social, and governance work. We announced a $50 million grant to the NAACP to support efforts to advance racial equity in America. This is the single largest donation the NAACP has ever received from a corporation and builds on our longstanding relationship with the NAACP that spans more than 20 years. The Wells Fargo Foundation expanded its commitment to housing affordability through another $20 million housing affordability breakthrough challenge to advance ideas to help meet the need for more affordable homes across the country. We also announced a $20 million commitment to advance economic opportunities in Native American communities, including addressing housing, small business, financial health, and sustainability. Before concluding, I wanted to highlight the management changes we announced yesterday. Mary Mack, the CEO of Consumer and Small Business Banking, is retiring this summer She spent her entire career at Wells Fargo and has led consumer and small business banking for the past seven years through a significant amount of change, including defining a new path forward in the business. I can think of few Wells Fargo colleagues who have done as much for our company and have been as visible in the communities that we serve over such a long period of time. We also announced that Sol Van Verden, head of technology at Wells Fargo, will succeed Mary. Saul is a strong leader, a technologist, and he knows how to run a business. This makes him the ideal person to lead consumer and small business banking into the future. Our branch network will continue to be the key to the business, but our customers expect us to provide them with increasingly digitized and seamless banking experiences across all channels. Saul understands this deeply and has consistently proven his ability services across Wells Fargo. Finally, Tracy Cairns, currently head of consumer technology, will become head of technology for the company, reporting to me. Tracy has worked in the technology and finance industry for more than 20 years and has led a series of business critical initiatives to modernize our technology platforms across our consumer businesses. She's a strong results driven leader. It's always great when we can tap our own leaders for roles within the company, and I want to thank Mary for everything she's done during her tenure at Wells Fargo. It's truly been a pleasure working with her. As we look forward, we're carefully watching customer behavior for clues on how the economic environment is changing. Customer activity is still relatively strong and delinquencies remain low, though they are increasing. There are pockets of risk, such as commercial office real estate, which will likely impact institutions differently, and we're proactively managing our own exposures. We continue to expect economic growth to slow, and we are prepared for a range of scenarios. We will continue to monitor both the markets and our customers and will react accordingly. Our diversified business model should enable us to support our customers throughout economic cycles.

I will now turn the call over to Mike. Thank you, Charlie, and good morning, everyone. Net income for the first quarter was $5 billion, or $1.23, for diluted common share. While there was a lot going on in the banking industry around us, we continued to focus on our priorities, and our results reflected the progress we were making, which I'll highlight throughout the call. Starting with capital and liquidity on slide three, Our CET-1 ratio is 10.8%, up approximately 20 basis points from the fourth quarter, reflecting our earnings in the quarter and lower risk-weighted assets. After pausing share repurchases for the prior three quarters, we repurchased $4 billion of common stock in the first quarter. Our CET-1 ratio remained well above our required regulatory minimum plus buffers, and we expect to continue to prudently return excess capital shareholders in the coming quarters. In the first quarter, our liquidity coverage ratio is approximately 22 percentage points above the regulatory minimum. We continue to benefit from a diversified deposit base with over 60% of our deposits in our consumer banking and lending segment as of the first quarter, which is a higher percentage than before the pandemic. Turning to credit quality on slide five, net loan charge-offs continue to slow Commercial net loan charge-offs decreased $16 million from the fourth quarter to five basis points. However, while loss has improved, we continue to see some gradual weakening in underlying credit performance, including higher non-performing assets. We are proactively monitoring our clients' sensitivity to inflation and higher rates and are taking appropriate actions when warranted. We are also closely monitoring our commercial real estate office portfolio, and I'll share some more details on our exposure on the next slide. As expected, we've seen consumer delinquencies and losses gradually increase. Total consumer net loan charge-offs increased 60 million from the fourth quarter to 56 basis points of average loans, driven by an increase in the credit card portfolio. While most consumers remain resilient, we've seen some consumer financial health trends gradually weakening from a year ago, and we've continued to take credit tightening actions to position the portfolio for a slowing economy. Non-performing assets increased 7% from the fourth quarter, driven by higher commercial real estate non-cruel loans, but were down 12% from a year ago due to lower residential mortgage non-cruel loans. Of note, 87% of the non-cruel loans in our commercial real estate portfolio were current on interest, and 75% were current on both principal and interest as of the end of the first quarter. Our allowance for credit losses increased $643 million in the first quarter, reflecting an increase for commercial real estate loans, primarily office loans, as well as an increase for credit card and auto loans. Given the increased focus on commercial real estate loans, especially office, we provided more detail than our portfolio on slide six. We had 154.7 billion of commercial real estate loans outstanding at the end of the first quarter, with 35.7 of office loans, which represented 4% of our total loans outstanding. The office market continues to show signs of weakness due to lower demand, higher financing costs, and challenging capital market conditions. While we haven't seen this translate to meaningful loss content yet, we expect to see more stress over time. As you would expect, we have been de-risking the office portfolio, which resulted in commitments declining 5% from a year ago, and we continue to proactively work with borrowers to manage our exposure, including structural enhancements and paydowns as warranted. As you can see in the slide, we've provided some additional data on the office portfolio, Approximately 12% is owner-occupied. Therefore, the loan performance is mostly tied to the cash flow of the owner's operating business rather than rents paid by tenants. Nearly one-third had recourse to a guarantor, typically through a repayment guarantee. The portfolio is geographically diverse, and as you'd expect, the largest concentrations are in California and New York. Over two-thirds of our office loans are in the corporate investment banking business, and the vast majority of this portfolio is institutional quality real estate with high-caliber sponsors. While approximately 80% of it is Class A, keep in mind that this is a single measure that is hard to evaluate in isolation. For example, newer or refurbished properties may perform better regardless of whether they are Class A or B. We are providing this data to give you more insight into the portfolio, but as is usually the case in commercial real estate, each property situation is different and a myriad of other variables such as leasing rates, loan-to-value, and debt yields can determine performance. which is why we regularly review the portfolio on a loan-by-loan basis. As a result of market conditions and recent increases in credit side assets and non-accrual loans, we've increased our allowance for credit losses for office loans for the past four quarters. The allowance for credit losses coverage ratio at the end of the first quarter for the office portfolio in the corporate investment bank was 5.7%. We will continue to closely monitor this portfolio, but as has been the case in prior cycles, this will likely play out over an extended period of time as we actively work with borrowers to help resolve issues they may be facing. On slide seven, we highlight loans and deposits. Average loans grew 6% from a year ago and were relatively stable from the fourth quarter, while period end loans declined 1% from the fourth quarter, with lower balances across our consumer and commercial portfolios. I'll highlight specific drivers when discussing our operating segment results. Average loan yields increased 244 basis points from a year ago and 56 basis points from the fourth quarter, reflecting the higher interest rate environment. Average deposits declined 7% from a year ago and 2% from the fourth quarter due to the consumer deposit outflows as customers continued to reallocate cash into higher yielding alternatives and continued spending. During the market stress last month, we experienced a brief increase in deposit inflows that has since abated, and while our period end deposit balances were slightly higher than we expected at the beginning of the quarter, they're still down 2% from the fourth quarter. As expected, our average deposit cost increased 37 basis points from the fourth quarter to 83 basis points, with higher deposit costs across all operating segments in response to rising interest rates. Our mix of non-interest-bearing deposits declined from 35% in the fourth quarter to 32% in the first quarter, but remained above pre-pandemic levels. Turning to net interest income on slide 8. First quarter net interest income was $13.3 billion, which was 45% higher than a year ago, as we continue to benefit from the impact of higher rates. The $97 million decline for the fourth quarter was due to two fewer business days. Our full year net interest income guidance has not changed from last quarter, as we still expect 2023 net interest income to grow by approximately 10% compared with 2022. Ultimately, the amount of net interest income we earn this year 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 repricing, and loan demand. Turning to expenses on slide nine. Non-interest expense declined 1% from a year ago, driven by lower operating losses and the impact of efficiency initiatives. The increase in personnel expense from the fourth quarter was driven by approximately $650 million of seasonally higher expenses in the first quarter, including payroll taxes, restricted stock expense for retirement-eligible employees, and 401 matching contributions. Our full year 2023 non-interest expense, excluding operating losses, change from the guidance we provided last quarter. As a reminder, we have outstanding litigation, regulatory, and customer remediation matters that could impact operating losses. Turning to our operating segments, starting with consumer banking and lending on slide 10. Consumer and small business banking revenue increased 28% from a year ago as higher net interest income driven by the impact of higher interest rates was partially offset by lower deposit related fees driven by the overdraft policy changes we rolled out last year. We are continuing to make investments in this business. We're beginning to increase marketing spend. We're accelerating the efforts to renovate and refurbish our branches. For our bankers, we're investing in new tools and capabilities to provide better and more personalized advice to customers. We're continuing to enhance our mobile app and mobile active users are up 4% year over year. And we're also seeing increased activity and positive initial indicators after our rollout of Wells Fargo Premier last year. It's early on for all of these initiatives, but we're starting to see some green shoots. At the same time, we continue to execute on our efficiency initiatives. Teller transactions continued to decline. We reduced headcount by 9%, and total branches were down 4% from a year ago. In home lending, mortgage rates remain elevated, and the mortgage market continued to decline. Our home lending revenue declined 42% from a year ago, Correspondent Channel and lower revenue from the re-securitization of loans purchased from securitization pools. We continue to reduce headcount in the first quarter, and we expect staffing levels will continue to decline due to the strategic changes we announced earlier this year. We stopped accepting applications from the Correspondent Channel as announced in January and began to reduce the complexity and the size of the servicing book. During the first quarter, we successfully marketed mortgage servicing rights for approximately $50 billion of loans serviced for others that we expect to close later this year. We will continue to look for additional opportunities to simplify and reduce the size of our servicing business. Credit card revenue increased 3% from a year ago due to higher loan balances driven by higher point of sale volume. Auto revenue declined 12% from a year ago due to my lower loan balances and continued loan spread compression from credit tightening actions and continued price competition due to rising interest rates. Personal lending revenues up 9% from a year ago due to higher loan balances. Turning to some key business drivers in slide 11. Mortgage originations declined 83% from a year ago and 55% from the fourth quarter, with declines in both correspondent and retail originations. As I mentioned, we stopped accepting correspondent applications in January, so going forward, our originations will be focused on serving Wells Fargo customers and underserved communities. The size of our auto portfolio has declined for four consecutive quarters, and the balances were down 8% at the end of the first quarter. Origination volume declined 32% from a year ago, reflecting credit tightening actions and continued price competition. Debit card spending increased 2% in the first quarter compared to a year ago, an increase from the 1% year-over-year growth in the fourth quarter. Discretionary spending drove the growth, with non-discretionary spending stable from the fourth quarter levels. Credit card spending increased 16% from a year ago, in line with the year-over-year growth in the fourth quarter, with sustained growth in both discretionary and non-discretionary spending. Spending growth slowed throughout the quarter, but was still at double digit levels in March. We continue to see some slight moderation in payment rates in the first quarter, but they were still well above pre-pandemic levels. Turning to commercial banking results in slide 12. Middle market banking revenue grew by 73% from a year ago due to the impact of higher interest rates and higher loan balances, while deposit-related fees were lower, reflecting higher earnings credit rates on non-interest-bearing deposits. After base lending and leasing revenue increased 7% year-over-year driven by loan growth, which was partially offset by lower net gains from equity securities. Average loan balances were up 15% in the first quarter compared to a year ago, driven by new customer growth and higher line utilization. After being stable in the second half of last year, line utilization increased slightly in the first quarter. Average loan balances have grown for seven consecutive quarters, and we're up 2% from the fourth quarter with the growth in asset-based lending and leasing driven by continued growth in client inventory. Growth in middle market banking was once again driven by larger clients, including both new and existing relationships, which more than offset declines from our smaller clients. Turning to corporate investment banking on slide 13, banking revenue increased 37% from a year ago, driven by stronger treasury management results, reflecting the impact of higher interest rates. Investment banking fees declined from a year ago, reflecting lower market activity with clients across all major products in nearly all industries. While commercial real estate market transactions are down across the industry, our commercial real estate revenue grew 32% from a year ago, driven by the impact of higher interest rates and higher loan balances. Markets revenue increased 53% from a year ago, driven by higher trading results across all asset classes. Average loans grew 4% from a year ago, but were down from the fourth quarter. Lower balances in banking reflected a combination of slow demand, increased payoffs, and relatively stable line utilization. Declining commercial real estate balances were driven by the higher rate environment and lower commercial real estate sales lines. On slide 14, wealth and investment management revenue was down 2% compared to a year ago, driven by lower asset base fees due to lower market valuations. Growth in net interest income was driven by the impact of higher rates, which was partially offset by lower deposit balances as customers continued to reallocate cash into higher-yielding alternatives. At the end of the first quarter, cash alternatives were approximately 12% of total client assets, up from approximately 4% a year ago. Rich Kedzior, Expenses decrease 4% from your go to my lower revenue related compensation and the impact of efficiency initiatives. Rich Kedzior, Average loans were down 1% from a year ago, primarily due to a decline in securities based lending. Rich Kedzior, By 15 highlights our corporate results revenue decline 103 million or 83% from a year ago as higher than interest income was more than offset by lower results in our affiliated venture capital and private equity businesses. Results in the first quarter included 342 million of net losses on equity securities or 223 million pre-tax and net of non-controlling interests. In summary, our results in the first quarter reflected an improvement in our earnings capacity. We grew revenue and reduced expenses and had strong growth in pre-tax free provisioned profits. As expected, our net charge offs have continued to slowly increase from historical lows and we are closely Our capital levels grew even as we resume common stock repurchases and we expect repurchases to continue. And the guidance we provided last quarter for full year 2023 net interest income expenses excluding operating losses has not changed. We will now take your questions.