Q1 2020 Earnings Call

April 15, 2020

Operator: Good morning. My name is Dina, and I will be your conference operator for today. At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the one followed by the four on your telephone keypad. If you would like to withdraw your question, please press the one, then the number three on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the call over to Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.

At this time I would like to welcome everyone to the PMC Financial Services Group earnings Conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply pressed the one followed by the foreign your telephone keypad.

If he would like to withdraw your question. Please press the one done the number three on your telephone keypad.

As a reminder, this conference is being recorded.

I'll now turn the call over to director of Investor Relations Mr., Brian Gill Sir. Please go ahead.

Oh, Thank you and good morning, everyone welcome to todays conference call for the PNC financial services group.

Bryan K. Gill: Oh, thank you, and good morning, everyone. Welcome to today's Conference Call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President, and CEO, Bill Demchak, and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of 15 April 2020, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Bryan Gill: Oh, thank you, and good morning, everyone. Welcome to today's Conference Call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President, and CEO, Bill Demchak, and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of 15 April 2020, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Spending on this call or PNC is chairman, President and CEO, Bill Demchak, and Rob Reilly Executive Vice President and CFO.

Today's presentation contains forward looking information cautionary statements about this information as well as reconciliations of non-GAAP measures are included in todays earnings release materials, as well as or FCC filings and other investor materials.

These materials are all available on our corporate web site PMT Dot com under Investor Relations. These statements speak only as of April 15th 2020, and PNC undertakes no obligation to update them no I'd like to turn the call over to Bill.

Thanks, Ryan good morning, everybody.

William S. Demchak: Thanks, Bryan. Good morning, everybody. As you've seen this morning, our results for the quarter were solid on a pre-provision basis, but the extraordinary changes in the economic backdrop occurring in March and the implications of the broad-based response to the COVID-19 breakout had a material impact on our provision for credit losses. Before we go into the financials, however, I want to acknowledge the current environment. Obviously, this pandemic is having a profound impact on the global economy and on people's lives, and the challenges we face as a country are unprecedented. PNC, through this period, is navigating these challenges from a position of strength. We have nearly 52,000 employees who are working incredibly hard to serve our customers.

As you've seen this morning, our results for the quarter were solid on a pre provision basis, but the extraordinary changes any economic backdrop occurring in March and the implications.

Oh, the broad base response to the Cobot 19 breakout had a material impact on our provision for credit losses.

Before we go into the financials over I want to acknowledge the current environment.

Obviously, a this pandemic is having a profound impact on the global economy. It on People's lives and the challenges we face as a country are unprecedented.

The p. and see through this period as navigating these challenges from a position of strength. We have nearly 52000 employees, who are working incredibly hard to serve our customers. We immediately mobilize to mitigate the risks to our front line employees and implemented enhance pay provisions for those enrolls that cannot be performed remote.

William S. Demchak: We immediately mobilized to mitigate the risks to our frontline employees and implemented enhanced pay provisions for those in roles that cannot be performed remotely. Our technology, in which we've invested heavily over time, allowed us to quickly transition to a remote work model for more than 30,000 of our employees, including those from our call center, who are managing a very high call volume from the safety of their homes. Our technology also allowed us to quickly prepare for and respond to the federal government's economic stimulus package, which we are supporting through loans and other relief to consumer and business customers.

We immediately mobilized to mitigate the risks to our frontline employees and implemented enhanced pay provisions for those in roles that cannot be performed remotely. Our technology, in which we've invested heavily over time, allowed us to quickly transition to a remote work model for more than 30,000 of our employees, including those from our call center, who are managing a very high call volume from the safety of their homes. Our technology also allowed us to quickly prepare for and respond to the federal government's economic stimulus package, which we are supporting through loans and other relief to consumer and business customers.

Our and our technology in which we've invested heavily over time allowed us to quickly transitioned over remote work model for more than 30000 of our employees, including those from our call Center, who are managing a very high call volume from the safety of their homes.

Our technology also allowed us to quickly prepare for and respond to the federal governments economic stimulus package, which we're supporting through loans and other relief to consumer and business customers.

William S. Demchak: As an aside, since launching our online Paycheck Protection Program portal on 3 April, we've received over 75,000 applications, and we have thousands of people working tirelessly to process these loan requests in accordance with the SBA's requirements, including documentation, and have registered at this point, actually, as of this morning, something over $6 billion worth of these loans. Also, the convenience and security of our mobile and online banking tools are allowing us to continue to provide critical banking services with minimal disruption. Despite the current economic challenges, we are confident in our ability to continue to withstand strong environmental headwinds. We have solid liquidity and capital positions. We grew loans by $25 billion, and deposits by $17 billion compared to the end of Q4.

As an aside, since launching our online Paycheck Protection Program portal on 3 April, we've received over 75,000 applications, and we have thousands of people working tirelessly to process these loan requests in accordance with the SBA's requirements, including documentation, and have registered at this point, actually, as of this morning, something over $6 billion worth of these loans. Also, the convenience and security of our mobile and online banking tools are allowing us to continue to provide critical banking services with minimal disruption. Despite the current economic challenges, we are confident in our ability to continue to withstand strong environmental headwinds. We have solid liquidity and capital positions. We grew loans by $25 billion, and deposits by $17 billion compared to the end of Q4.

As an aside since launching our online paycheck protection program portal on April 3rd we've received over 75000 applications.

And we have thousands of people working tirelessly to processes loan <unk> loan requests in accordance with the Sps requirements, including documentation and have registered at this point actually as of this morning, something over 6 billion dollars'.

Worth of these loans.

Also the convenience and security of our mobile and online banking tools are allowing us to continue to provide critical banking services with minimal disruption.

Despite the current economic challenges, we are confident in our ability to continue to withstand strong environmental headwinds, we have solid liquidity and capital positions. We grew loans by 25 billion in deposits by 17 billion compared to the ended the fourth quarter well. This was largely driven by draws on commercial.

William S. Demchak: While this was largely driven by draws on commercial lines of credit, as Rob's going to take you through, we have provided new loans to support key industries in our country since the COVID outbreak, including over $2 billion in new loans to hospitals and other healthcare entities, and $1 billion in new loans to municipalities. As an aside, over the last few weeks and into April, we've seen the rate of loan draws normalize. In addition, we've seen a meaningful increase in deposits, with the growth in dollars now equal to the loan growth since the outbreak of COVID-19. We're processing thousands of forbearance and loan modification requests for consumers. To date, consumer modifications, we've had 41,000 processed... Sorry, as of 12 April.

While this was largely driven by draws on commercial lines of credit, as Rob's going to take you through, we have provided new loans to support key industries in our country since the COVID outbreak, including over $2 billion in new loans to hospitals and other healthcare entities, and $1 billion in new loans to municipalities. As an aside, over the last few weeks and into April, we've seen the rate of loan draws normalize. In addition, we've seen a meaningful increase in deposits, with the growth in dollars now equal to the loan growth since the outbreak of COVID-19. We're processing thousands of forbearance and loan modification requests for consumers. To date, consumer modifications, we've had 41,000 processed... Sorry, as of 12 April.

Ends of credit as Rob is going to take you through we have provided new loans to support key industries in our country sense, the cobot outbreak, including over 2 billion, a new loans to hospitals and other health care entities, and a 1 billion a new logos to municipalities.

As an aside over the last few weeks and into April we've seen the rate of loan draws normalize. In addition, we've seen a meaningful increase in deposits with the growth in dollars now equal to the loan growth since the outbreak of cobot 19.

We're processing thousands of forbearance and loan modification request for consumers.

Today.

Consumer modifications, we've had 41000 process sorry as of April 12.

William S. Demchak: Importantly, of the 41,000, 20,000 of these are bank-owned, with the remainder being for loans that we service for others. This may be the greatest challenge that many in our country have ever experienced. Many of our clients have experienced financial hardship, and despite their uncertainties, our commitment to them is, is as certain as it has ever been. Now, our results for the Q1 are shown on slide 4, and while pre-provision earnings increased 7%, the provision for credit losses of $914 million increased $693 million, reflecting the new CECL standard. While we developed our economic scenarios to account for COVID-19, I want to say that the economy has worsened since we closed the books on these numbers.

Importantly, of the 41,000, 20,000 of these are bank-owned, with the remainder being for loans that we service for others. This may be the greatest challenge that many in our country have ever experienced. Many of our clients have experienced financial hardship, and despite their uncertainties, our commitment to them is, is as certain as it has ever been. Now, our results for the Q1 are shown on slide 4, and while pre-provision earnings increased 7%, the provision for credit losses of $914 million increased $693 million, reflecting the new CECL standard. While we developed our economic scenarios to account for COVID-19, I want to say that the economy has worsened since we closed the books on these numbers.

Importantly, the 41000 20000 of these are banked owned with the remainder of being for loans that we service for others.

This may be the greatest challenges at many in our country of ever experienced many of our clients are experienced financial hardship.

And despite their uncertainties, our commitment to them as a certain as it has ever been.

Our results for the first quarter are shown on slide four and while pre provision earnings increased 7% the provision for credit losses of $914 million increased 693 million, reflecting the new Cecil standard.

While we developed our economic scenarios to account for co bid 19, I want to say that the economy has worsened since we closed the book Sean These numbers, though Rob will provide insight on how our scenarios had been impacted by recent developments and how we would fair if the situation goes to become more severe and that instance, we would still be.

William S. Demchak: Now, Rob will provide insight on how our scenarios have been impacted by recent developments and how we would fare if the situation was to become more severe. In that instance, we would still be well-capitalized, highly liquid, and be able to maintain our dividend while complying with capital standards. Rob's going to take you through the income statement, but one thing I wanted to point out inside of our non-interest income is our security gains, which were higher than usual this quarter. And we realized these gains by taking advantage of some of the disruption in the fixed income markets that occurred before the Fed stepped in, and we still managed to increase our book yield on securities quarter-over-quarter.

Now, Rob will provide insight on how our scenarios have been impacted by recent developments and how we would fare if the situation was to become more severe. In that instance, we would still be well-capitalized, highly liquid, and be able to maintain our dividend while complying with capital standards. Rob's going to take you through the income statement, but one thing I wanted to point out inside of our non-interest income is our security gains, which were higher than usual this quarter. And we realized these gains by taking advantage of some of the disruption in the fixed income markets that occurred before the Fed stepped in, and we still managed to increase our book yield on securities quarter-over-quarter.

Well capitalized highly liquid and be able to maintain our dividend while complying capital standards.

Thats going to take you through the income statement, but one thing I wanted to point out.

Inside of our noninterest income as our security gains which were higher than usual this quarter.

And we realize these gains by taking advantage of some of the disruption in the fixed income markets that occurred before this the fed stepped in and we still managed to increase our book yield on securities quarter over quarter. So think about normal you sell some securities and your tenure.

William S. Demchak: So if you think about it, normally, you sell securities, and you replace them, and your book yield goes down. In this instance, we actually increased our book yield in securities. Now, before I turn it over to Rob, I want to recognize and thank our employees who are going above and beyond every day to help our customers address the many challenges that they are facing. Additionally, our regional presidents, together with the PNC Foundation, are playing a critical role in upholding our commitment to the communities we serve by allocating critical funds to coronavirus relief efforts across our markets. And with that, with that, I'll turn it over to Rob for a closer look at our Q1 results, and then we'll be happy to take your questions.

So if you think about it, normally, you sell securities, and you replace them, and your book yield goes down. In this instance, we actually increased our book yield in securities. Now, before I turn it over to Rob, I want to recognize and thank our employees who are going above and beyond every day to help our customers address the many challenges that they are facing. Additionally, our regional presidents, together with the PNC Foundation, are playing a critical role in upholding our commitment to the communities we serve by allocating critical funds to coronavirus relief efforts across our markets. And with that, with that, I'll turn it over to Rob for a closer look at our Q1 results, and then we'll be happy to take your questions.

Replace them in your book yield goes down in this instance, we actually increased our book yield in securities and before I turn it over to Rob I want to recognize and thank our employees, who are going above and beyond everyday to help our customers address the many challenges that they are facing additionally, our regional presidents together with a PNC foundation or playing a critical role.

Upholding our commitment to the communities we serve by allocating critical funds.

On a virus relief efforts across our markets and will that with that I'll turn it over to Rob for a closer look at our first quarter results and that will be happy to take your questions.

Robert Q. Reilly: Great. Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 5 and is presented on a spot basis. While we typically cover our average balance sheet, we're going to focus on our spot balances this quarter due to the substantial increased activity late in the quarter related to the economic impact of COVID-19. On the asset side, loan balances of $265 billion at 31 March were up $25 billion or 10% compared to 31 December 2019. This growth reflected an increase in commercial loan balances of approximately $24 billion, primarily driven by higher utilization of loan commitments. Investment securities of $91 billion increased $3.7 billion or 4% linked quarter.

Great. Thanks, Bill and good morning, everyone.

Our balance sheet is on slide five in as presented on a spot basis.

While we typically cover our average balance sheet, we're going to focus on our spot balances this quarter due to the substantial increase activity late in the quarter related to the economic impact.

At 19.

On the asset side loan balances of $265 billion at March 31st we're at $25 billion or 10%.

Prior to December 31st 2019, this growth reflected an increase in commercial loan balances up approximately $24 billion, primarily driven by higher utilization of loan commitments.

Investment securities of $91 billion increased $3.7 billion or 4% linked quarter.

Robert Q. Reilly: Also, our cash balances at the Federal Reserve as of 31 March 2020 were $20 billion, down $3.6 billion from year-end, in part due to the benefits from the regulatory tailoring rules on our liquidity, effective 1 January 2020. On the liability side, deposit balances of $305 billion at 31 March 2020 were up $17 billion, or 6% compared to 31 December 2019. A high proportion of the commercial loan draws were placed back with us in the form of deposits, and as a result, non-interest bearing deposits grew $8.8 billion or 12% linked quarter. Total borrowed funds increased $13 billion due to higher FHLB borrowing and increased debt issuance activity during the quarter.

Also, our cash balances at the Federal Reserve as of 31 March 2020 were $20 billion, down $3.6 billion from year-end, in part due to the benefits from the regulatory tailoring rules on our liquidity, effective 1 January 2020. On the liability side, deposit balances of $305 billion at 31 March 2020 were up $17 billion, or 6% compared to 31 December 2019. A high proportion of the commercial loan draws were placed back with us in the form of deposits, and as a result, non-interest bearing deposits grew $8.8 billion or 12% linked quarter. Total borrowed funds increased $13 billion due to higher FHLB borrowing and increased debt issuance activity during the quarter.

Also our cash balances at the Federal reserve as of March 31st 2020, or $20 billion down $3.6 billion from year end in part due to the benefits from the regulatory tailoring rules on our liquidity effective January Onest 2020.

On a liability side deposit balances a $305 billion at March 30, Onest were up $17 billion or 6% compared to December 30, Onest 2019.

High proportion of the commercial loan draws replace back but thats in the form of deposit.

And as a result, noninterest bearing deposits grew $8.8 billion or 12% linked quarter.

Total borrowed funds increased $13 billion due to higher FHLB borrowing and increased debt issuance activity during the quarter.

Robert Q. Reilly: As of 31 March 2020, our Basel III Common Equity Tier 1 ratio was estimated to be 9.4%, which reflected the impact of the tailoring rules, including our decision to opt out of AOCI, as well as our election to phase in CECL's impact on our estimated regulatory capital. While our capital ratios remain strong, on 16 March 2020, we announced the temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve's effort to support the US economy during this time. It did not impact PNC's dividend policy. Our tangible book value was $84.93 per common share as of 31 March, an increase of 9% compared to a year ago. Our loan-to-deposit ratio was 87% at 31 March, and importantly, our liquidity coverage ratio exceeded the regulatory minimum requirement.

As of 31 March 2020, our Basel III Common Equity Tier 1 ratio was estimated to be 9.4%, which reflected the impact of the tailoring rules, including our decision to opt out of AOCI, as well as our election to phase in CECL's impact on our estimated regulatory capital. While our capital ratios remain strong, on 16 March 2020, we announced the temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve's effort to support the US economy during this time. It did not impact PNC's dividend policy. Our tangible book value was $84.93 per common share as of 31 March, an increase of 9% compared to a year ago. Our loan-to-deposit ratio was 87% at 31 March, and importantly, our liquidity coverage ratio exceeded the regulatory minimum requirement.

As of March 31st 2020, our Basel three common equity tier one ratio was estimated to be 9.4%, which reflected the impact of the tailoring roles, including our decision to opt out of AOCI.

As well as our election to faith in Cecil's impact on our estimated regulatory capital.

Our capital ratios remain strong on March 16th 2020, we announced the temporary suspension of our common stock repurchase program in conjunction with the federal reserves effort to support the U.S. economy. During this time it did not impact pncs dividend policy.

Tangible book value with $84 to 93 cents per common share as of March 30, Onest, an increase of 9% compared to a year ago.

Our loan to deposit ratio was 87% at March 30, Onest and importantly, our liquidity coverage ratio exceeded the regulatory minimum requirement.

As you can see on slide six commercial loan unfunded commitments declined by approximately $16 billion as customers through down lines to bolster their liquidity or replace alternative funding channels. As a result, our utilization rate increased from 55% to 61%.

Robert Q. Reilly: As you can see on Slide 6, commercial loan unfunded commitments declined by approximately $16 billion as customers drew down lines to bolster their liquidity or replace alternative funding channels. As a result, our utilization rate increased from 55% to 61%. The drawdowns we've experienced are diversified across industries, and more than two-thirds of the increased utilization is from investment-grade borrowers. While drawdowns were well above normal in mid-March, we saw activity begin to slow at the end of the quarter, and that's remained the case so far during Q2. That said, we do expect loan balances to be elevated for some time. Importantly, PNC is well positioned with strong capital and liquidity, and we're committed to putting our resources to work to support our customers and the broader financial system at this critical time.

As you can see on Slide 6, commercial loan unfunded commitments declined by approximately $16 billion as customers drew down lines to bolster their liquidity or replace alternative funding channels. As a result, our utilization rate increased from 55% to 61%. The drawdowns we've experienced are diversified across industries, and more than two-thirds of the increased utilization is from investment-grade borrowers. While drawdowns were well above normal in mid-March, we saw activity begin to slow at the end of the quarter, and that's remained the case so far during Q2. That said, we do expect loan balances to be elevated for some time. Importantly, PNC is well positioned with strong capital and liquidity, and we're committed to putting our resources to work to support our customers and the broader financial system at this critical time.

The drawdowns weve experience, our diversified across industries and more than two thirds of the increased utilization is from investment grade borrowers.

While drawdowns for well above normal in mid March we saw activity began to slow at the end of the quarter.

Thats remain the case so far during the second quarter that said, we do expect loan balances to be elevated for some time.

Importantly, PNC is well positioned with strong capital and liquidity and we're committed to putting our resources to work to support our customers in the broader financial system at this critical time.

Robert Q. Reilly: As you can see on the slide, as of 31 March, we had approximately $140 billion of readily available liquidity from diverse sources. These sources, along with substantially more availability from the Fed discount window, should it be necessary, provide ample funding to meet the potential needs of our customers. Turning to Slide 7, we're working to provide relief and flexibility to our customers through a variety of solutions during this time. On the commercial side, we're offering emergency relief for small and medium-sized business loans, including those being provided through the federally enacted CARES Act. We have received thousands of applications through the Paycheck Protection Program and have begun to fund those loans successfully, as Bill just mentioned. Additionally, we're granting loan modifications to commercial clients, primarily in the form of principal and/or interest deferrals.

As you can see on the slide, as of 31 March, we had approximately $140 billion of readily available liquidity from diverse sources. These sources, along with substantially more availability from the Fed discount window, should it be necessary, provide ample funding to meet the potential needs of our customers. Turning to Slide 7, we're working to provide relief and flexibility to our customers through a variety of solutions during this time. On the commercial side, we're offering emergency relief for small and medium-sized business loans, including those being provided through the federally enacted CARES Act. We have received thousands of applications through the Paycheck Protection Program and have begun to fund those loans successfully, as Bill just mentioned. Additionally, we're granting loan modifications to commercial clients, primarily in the form of principal and/or interest deferrals.

As you can see on the slide as of March 30, Onest, we had approximately a $140 billion of readily available liquidity from diverse sources.

Resources, along with substantially more availability from the fed discount window should it be necessary provide ample funding to meet the potential needs of our customers.

Turning to slide seven.

We're working to provide relief and flexibility to our customers through a variety of solutions. During this time.

On the commercial side, we're offering emergency relief for small and medium sized business loans, including those being provided through the federally enacted cares Act.

We have received thousands of applications through the paycheck protection program and have begun to fund those loans successfully as bill just mentioned.

Additionally, we are granting loan modifications to commercial clients, primarily in the form of principal and or interest referrals were analyzing and making decisions on these modifications based on each individual borrowers situation.

Robert Q. Reilly: We're analyzing and making decisions on these modifications based on each individual borrower's situation. With our consumer customers, we're also granting loan modifications through extensions, deferrals, and forbearance. As of 13 April, we had completed over 41,000 consumer loan modifications, primarily related to COVID-19. In addition, we're offering relief in the form of extended grace periods and halting all foreclosures while waiving certain fees and charges. As you can see on Slide 8, Q1 total revenue was $4.5 billion, down $92 million linked quarter or 2%. Net interest income of $2.5 billion was up $23 million or 1% compared to the Q4, as lower funding costs, as well as higher loan and security balances, were partially offset by lower loan yields and one less day in the quarter.

We're analyzing and making decisions on these modifications based on each individual borrower's situation. With our consumer customers, we're also granting loan modifications through extensions, deferrals, and forbearance. As of 13 April, we had completed over 41,000 consumer loan modifications, primarily related to COVID-19. In addition, we're offering relief in the form of extended grace periods and halting all foreclosures while waiving certain fees and charges. As you can see on Slide 8, Q1 total revenue was $4.5 billion, down $92 million linked quarter or 2%. Net interest income of $2.5 billion was up $23 million or 1% compared to the Q4, as lower funding costs, as well as higher loan and security balances, were partially offset by lower loan yields and one less day in the quarter.

With our consumer customers were also granting loan modifications through extensions deferrals and forbearance as of April 13th we have completed over 41000 consumer loan modifications primarily related to covert 19.

And in addition, we're offering relief in the form of extended Grace periods in halting all foreclosures waving certain fees and charges.

As you can see on slide eight first quarter total revenue was $4.5 billion down $92 million linked quarter or 2%.

Net interest income of $2.5 billion was up $23 million or 1%.

Fair to the fourth quarter as lower funding costs as well as higher loan and security balances were partially offset by lower loan yields and one less day in the quarter.

Robert Q. Reilly: Our net interest margin increased to 2.84%, up 6 basis points linked quarter, in large part due to lower rates paid on deposits. Non-interest income declined $115 million or 5% linked quarter, reflecting stable fee revenue that was offset by lower other non-interest income. Non-interest expense declined $219 million or 8% compared to Q4, with all categories essentially flat to down. Our efficiency ratio was 56% in Q1, improving from 60% in the previous quarter. Provision for credit losses in Q1 was $914 million, reflecting the adoption of the CECL methodology, including the economic effects of COVID-19 and loan growth. Our effective tax rate in Q1 was 13.7%.

Our net interest margin increased to 2.84%, up 6 basis points linked quarter, in large part due to lower rates paid on deposits. Non-interest income declined $115 million or 5% linked quarter, reflecting stable fee revenue that was offset by lower other non-interest income. Non-interest expense declined $219 million or 8% compared to Q4, with all categories essentially flat to down. Our efficiency ratio was 56% in Q1, improving from 60% in the previous quarter. Provision for credit losses in Q1 was $914 million, reflecting the adoption of the CECL methodology, including the economic effects of COVID-19 and loan growth. Our effective tax rate in Q1 was 13.7%.

Our net interest margin increased to 2.84% up six basis points linked quarter in large part due to lower rates paid on deposit.

Noninterest income declined $115 million or 5% linked quarter, reflecting stable fee revenue that was offset by lower other noninterest income.

Noninterest expense declined $219 million or 8% compared to the fourth quarter with all categories essentially flat to down.

Our efficiency ratio was 56% in the first quarter improving from 60% in the previous quarter.

Provision for credit losses in the first quarter was $914 million, reflecting the adoption of the Cecil methodology, including the economic effects of covert 19 and loan growth and our effective tax rate in the first quarter was 13.7%.

In light of the current economic circumstances related to covert 19 naturally we're evaluating and monitoring our entire loan portfolio. However, we believe the industry sectors likely to be most impacted our on slide nine.

Robert Q. Reilly: In light of the current economic circumstances related to COVID-19, naturally, we're evaluating and monitoring our entire loan portfolio. However, we believe the industry sectors likely to be most impacted are on slide 9. Our outstanding loan balances as of March 31 to these industries are $19.3 billion and represent 7% of our total loan portfolio. Corporate loan balances in these industries total $10.6 billion. Within this group, we're most focused on our exposures to retail, restaurants, and certain parts of leisure travel. In retail, total loans outstanding are $2.5 billion, 60% of which are asset-based. Restaurant loan outstandings are $1.2 billion, and cruise lines and commercial airlines together total less than $600 million.

In light of the current economic circumstances related to COVID-19, naturally, we're evaluating and monitoring our entire loan portfolio. However, we believe the industry sectors likely to be most impacted are on slide 9. Our outstanding loan balances as of March 31 to these industries are $19.3 billion and represent 7% of our total loan portfolio. Corporate loan balances in these industries total $10.6 billion. Within this group, we're most focused on our exposures to retail, restaurants, and certain parts of leisure travel. In retail, total loans outstanding are $2.5 billion, 60% of which are asset-based. Restaurant loan outstandings are $1.2 billion, and cruise lines and commercial airlines together total less than $600 million.

Our outstanding loan balances as of March 31 to these industries or $19.3 billion and represents 7% of our total loan portfolio.

Corporate loan balances and these industries totaled $10.6 billion within this group were most focus on our exposures to retail restaurants in certain parts of leisure travel and retail total loans outstanding our two and a half billion dollars, 60% of which are asset based restaurant loan outstandings are $1.2 billion and cruise lines and come.

Actual airlines together totaled less than $600 million.

And our commercial real estate portfolio, we have $8.7 billion and outstanding and areas most likely to be impacted by coven 19. This includes CRT properties of $5.1 billion, 60% of which are stabilized and 40% under construction.

Robert Q. Reilly: In our commercial real estate portfolio, we have $8.7 billion in outstandings in areas most likely to be impacted by COVID-19. This includes CRE properties of $5.1 billion, 60% of which are stabilized and 40% under construction, all with a portfolio LTV of 55%. The remaining $3.5 billion of exposure is to REITs, approximately 2/3 of which are investment grade. Turning to slide 10. This is an update on our oil and gas portfolio, given the continued pressures on the energy industry. At the end of Q1, we had total outstandings of $4.6 billion in oil and gas loans, or just less than 2% of our total outstanding loans. We last updated you on this portfolio in Q4 of 2016.

In our commercial real estate portfolio, we have $8.7 billion in outstandings in areas most likely to be impacted by COVID-19. This includes CRE properties of $5.1 billion, 60% of which are stabilized and 40% under construction, all with a portfolio LTV of 55%. The remaining $3.5 billion of exposure is to REITs, approximately 2/3 of which are investment grade. Turning to slide 10. This is an update on our oil and gas portfolio, given the continued pressures on the energy industry. At the end of Q1, we had total outstandings of $4.6 billion in oil and gas loans, or just less than 2% of our total outstanding loans. We last updated you on this portfolio in Q4 of 2016.

All with a portfolio LTV, 55%.

The remaining three and a half billion dollars of exposure is to reach approximately two thirds of which are investment grade.

Turning to slide 10.

This is an update on our oil and gas portfolio given the continued pressures on the energy industry.

At the end of the first quarter, we had total outstandings at $4.6 billion in oil and gas loans.

Less than 2% of our total outstanding loans, we last updated you on this portfolio in the fourth quarter at 2016.

Robert Q. Reilly: We were relatively pleased with the performance of this portfolio through the last oil and gas downturn of 2016, especially with respect to reserve-based lending structures. Accordingly, the growth in our portfolio since 2016 has been primarily in the upstream segments, which carry these structures, as well as the midstream segments, which tend to perform relatively well under stress. Nearly all of our losses from the 2016 downturn occurred in our services book, which has declined as a percentage of total loans from the Q4 of 2016, and notably, approximately $900 million, or 74% of the $1.2 billion of this sector, is asset-based. We will continue to monitor market conditions and actively manage our energy portfolio. Our credit quality metrics are presented on slide 11.

We were relatively pleased with the performance of this portfolio through the last oil and gas downturn of 2016, especially with respect to reserve-based lending structures. Accordingly, the growth in our portfolio since 2016 has been primarily in the upstream segments, which carry these structures, as well as the midstream segments, which tend to perform relatively well under stress. Nearly all of our losses from the 2016 downturn occurred in our services book, which has declined as a percentage of total loans from the Q4 of 2016, and notably, approximately $900 million, or 74% of the $1.2 billion of this sector, is asset-based. We will continue to monitor market conditions and actively manage our energy portfolio. Our credit quality metrics are presented on slide 11.

We were relatively pleased with the performance of this portfolio through the last oil and gas downturn of 2015, especially with respect to reserve based lending structures.

Accordingly, the growth in our portfolio since 2016 has been primarily in the upstream segment, which carry these structures as well as the midstream segment, which tend to perform relatively well under stress.

Nearly all of our losses from the 2016 downturn occurred in our services book, which has declined as a percentage of total loans from the fourth quarter, 2016, and notably approximately $900 million or 74% or the $1.2 billion of the sector is asset base.

We will continue to monitor market conditions and actively manage our energy portfolio.

Our credit quality metrics are presented on slide 11.

Robert Q. Reilly: Net Charge-Offs for loans and leases were stable, with the fourth quarter increasing slightly by $3 million. Annualized Net Charge-Offs to total loans was also stable, with the fourth quarter at 35 basis points. Non-Performing Loans increased $9 million, or 1% compared to December 31, 2019, and total delinquencies declined $21 million linked quarter, or 1%. The ratios for both Non-Performing Loans to total loans and delinquencies to total loans decreased in the quarter. As you can see, our provision for first quarter 2020 increased substantially to $914 million, reflecting the adoption of the CECL methodology, including the economic effects of COVID-19 and loan growth. Since the adoption of CECL on January 1, 2020, we've increased our reserves by approximately $1.3 billion.

Net Charge-Offs for loans and leases were stable, with the fourth quarter increasing slightly by $3 million. Annualized Net Charge-Offs to total loans was also stable, with the fourth quarter at 35 basis points. Non-Performing Loans increased $9 million, or 1% compared to December 31, 2019, and total delinquencies declined $21 million linked quarter, or 1%. The ratios for both Non-Performing Loans to total loans and delinquencies to total loans decreased in the quarter. As you can see, our provision for first quarter 2020 increased substantially to $914 million, reflecting the adoption of the CECL methodology, including the economic effects of COVID-19 and loan growth. Since the adoption of CECL on January 1, 2020, we've increased our reserves by approximately $1.3 billion.

Net charge offs for loans and leases were stable with the fourth quarter, increasing slightly by $3 million annualized net charge offs to total loans was also stable with the fourth quarter at 35 basis points.

Nonperforming loans increased $9 million or 1% compared to December 30, Onest 2019, and total delinquencies declined $21 million linked quarter or 1%.

Ratios for both nonperforming loans to total loans and delinquencies to total loans decreased in the quarter.

As you can see our provision for first quarter 2020 increase substantially to $914 million, reflecting the adoption of the seasonal methodology, including the economic effects of covert 19 and loan growth.

Since the adoption of Cecil on January Onest 2020, we've increased our reserves by approximately $1.3 billion. As a result at March 30, Onest, our allowance for credit losses, including unfunded balances to total loans was 1.66% and our allowance to nonperforming loans was 240%.

Robert Q. Reilly: As a result, at March 31, our allowance for credit losses, including unfunded balances to total loans, was 1.66%, and our allowance to non-performing loans was 240%. Slide 12 shows the drivers of the increase to our allowance for credit losses and ultimately our provision under CECL. Our attribution shows the increase in reserves for the CECL day one transition adjustment of $642 million, as well as portfolio changes and economic factors. Portfolio changes represent the impact of shifts in loan balances, age, and mix, as well as credit quality and net charge-off activity. These factors accounted for $196 million of the change in our reserves for the first quarter of 2020. Economic factors represent our evaluation and determination of an economic forecast applied to our loan portfolios.

As a result, at March 31, our allowance for credit losses, including unfunded balances to total loans, was 1.66%, and our allowance to non-performing loans was 240%. Slide 12 shows the drivers of the increase to our allowance for credit losses and ultimately our provision under CECL. Our attribution shows the increase in reserves for the CECL day one transition adjustment of $642 million, as well as portfolio changes and economic factors. Portfolio changes represent the impact of shifts in loan balances, age, and mix, as well as credit quality and net charge-off activity. These factors accounted for $196 million of the change in our reserves for the first quarter of 2020. Economic factors represent our evaluation and determination of an economic forecast applied to our loan portfolios.

Slide 12 shows the drivers of the increase to our allowance for credit losses, and ultimately our provision under Cecil.

Our attribution shows the increase in reserves for the seasonal day, one transition adjustment of $642 million as well as portfolio changes in economic factors.

Portfolio changes represent the impact of shifts in loan balances Asian mix as well as credit quality and net charge off activity. These factors accounted for $196 million of the change in our reserves for the first quarter at 2020.

Economic factors represent our evaluation and determination of an economic forecasts applied to our loan portfolios to accomplish this we use a three year reasonable unsupportable forecast period, and a weighted average of four different economic scenarios at quarter end importantly, each of these scenarios for designed to address at the time the emerging covert 19 crises.

Robert Q. Reilly: To accomplish this, we use a 3-year reasonable and supportable forecast period and a weighted average of 4 different economic scenarios at quarter end. Importantly, each of these scenarios were designed to address, at the time, the emerging COVID-19 crises. This approach provided a blended scenario as of March 31, which, when compared to the scenarios used for our transition calculation, resulted in an increase in reserves of $496 million for the quarter, for the Q1. For this blended approach, we used a number of economic variables, with the largest driver being GDP. In this scenario, annualized GDP contracts 11.2% in the Q2 2020 and finishes the year down 2.3%, with recovery of the pre-recession peak levels occurring by the Q4 2021.

To accomplish this, we use a 3-year reasonable and supportable forecast period and a weighted average of 4 different economic scenarios at quarter end. Importantly, each of these scenarios were designed to address, at the time, the emerging COVID-19 crises. This approach provided a blended scenario as of March 31, which, when compared to the scenarios used for our transition calculation, resulted in an increase in reserves of $496 million for the quarter, for the Q1. For this blended approach, we used a number of economic variables, with the largest driver being GDP. In this scenario, annualized GDP contracts 11.2% in the Q2 2020 and finishes the year down 2.3%, with recovery of the pre-recession peak levels occurring by the Q4 2021.

This approach provided a blended scenario as of March 31st, which when compare to the scenarios use for our transition calculation resulted in increase in reserves of $496 million for the quarter for the first quarter.

For the blended approach, we used a number of economic variables with the largest driver being GDP in this scenario annualized GDP contract, 11.2% in the second quarter of 2020 and finished the year down 2.3% with recovery of the pre recession peak levels occurring by the fourth quarter at 2021.

Since the end of the first quarter, when we finalized our Cecil estimate the macroeconomic backdrop has worsened, suggesting a deeper decline in GDP and other economic factors and what our March 30, Onest scenario contemplated.

Robert Q. Reilly: Since the end of Q1, when we finalized our CECL estimate, the macroeconomic backdrop has worsened, suggesting a deeper decline in GDP and other economic factors than what our March 31 scenario contemplated. Should these macroeconomic factors persist, we'll adjust our blended scenario accordingly, which would likely result in a material build to our reserves during Q2. Additionally, for our own stress informational purposes, we considered our most extreme adverse scenario in isolation to determine a hypothetical year-end 2020 capital and liquidity impact. This scenario is even more severe than the 2020 CCAR severely adverse scenario. It assumes a 30% annualized contraction in GDP in Q2 of 2020, followed by another 20% annualized contraction in Q3, leading to a peak-to-trough decline of 14%.

Since the end of Q1, when we finalized our CECL estimate, the macroeconomic backdrop has worsened, suggesting a deeper decline in GDP and other economic factors than what our March 31 scenario contemplated. Should these macroeconomic factors persist, we'll adjust our blended scenario accordingly, which would likely result in a material build to our reserves during Q2. Additionally, for our own stress informational purposes, we considered our most extreme adverse scenario in isolation to determine a hypothetical year-end 2020 capital and liquidity impact. This scenario is even more severe than the 2020 CCAR severely adverse scenario. It assumes a 30% annualized contraction in GDP in Q2 of 2020, followed by another 20% annualized contraction in Q3, leading to a peak-to-trough decline of 14%.

So these macroeconomic factors persist well adjust our blended scenario accordingly, which would likely result in a material build to our reserves during the second quarter.

Additionally for our own stress informational purposes, we considered our most extreme adverse scenario in isolation to determine a hypothetical year end 2020 capital and liquidity impact.

This scenario is even more severe than the 2020 see car severely adverse scenario. It assumes a 30% annualized contraction and GDP in the second quarter of 2020, followed by another 20% annualized contraction in the third quarter, leading to a peak to trough decline of 14%.

Robert Q. Reilly: This compares to the CCAR severely adverse scenario peak-to-trough decline of 8.5%. To be clear, this scenario is not our expectation, nor does this exercise attempt to capture all the potential unknown variables that would likely arise, but simply provides an approximation of outcome under these circumstances. This results in an approximately 8.5% CET1 ratio at year-end 2020, and we believe would allow us to continue to support our current dividend. In summary, looking at the remainder of the year, we expect a challenging environment as a result of the COVID-19 pandemic.

This compares to the CCAR severely adverse scenario peak-to-trough decline of 8.5%. To be clear, this scenario is not our expectation, nor does this exercise attempt to capture all the potential unknown variables that would likely arise, but simply provides an approximation of outcome under these circumstances. This results in an approximately 8.5% CET1 ratio at year-end 2020, and we believe would allow us to continue to support our current dividend. In summary, looking at the remainder of the year, we expect a challenging environment as a result of the COVID-19 pandemic.

This compares to the car severely adverse scenario peak to trough decline of 8.5%.

To be clear the scenario is not our expectation nor does this exercise attempt to capture all the potential unknown variables that would likely arrive but.

But simply provides an approximation of outcome under these circumstances.

This resulted in approximately 8.5% 81 ratio at year end 2020, and we believe would allow us to continue to support our current dividend.

In summary, looking at the remainder of the year, we expect a challenging environment as a result.

The covert 19 pandemic, we expect a significant contraction in GDP and we expect the fed funds rate to remain in its current range of zero to 25 basis points throughout 2020.

William S. Demchak: ... we expect a significant contraction in GDP, and we expect the Fed funds rate to remain in its current range of 0 to 25 basis points throughout 2020. Clearly, the biggest variables impacting the economy will be the length of the crisis and the efficacy of the massive US government support, and stimulus programs. While we're hopeful the duration will be short and the government programs prove highly effective, at this time, we naturally have no way of knowing these outcomes. Accordingly, our visibility is low. However, based on what we think now, what we think now, we can provide Q2 guidance and some directional thoughts for the full year.

... we expect a significant contraction in GDP, and we expect the Fed funds rate to remain in its current range of 0 to 25 basis points throughout 2020. Clearly, the biggest variables impacting the economy will be the length of the crisis and the efficacy of the massive US government support, and stimulus programs. While we're hopeful the duration will be short and the government programs prove highly effective, at this time, we naturally have no way of knowing these outcomes. Accordingly, our visibility is low. However, based on what we think now, what we think now, we can provide Q2 guidance and some directional thoughts for the full year.

Clearly the biggest variables impacting the economy will be the length of the crisis and the efficacy of the massive U.S. government support and stimulus programs. While we're hopeful the duration will be short and the government programs through highly effective at this time, we naturally have no way of knowing these outcomes.

Accordingly, our visibility as low however, based on what we think now what we think now we can provide a second quarter guidance and some directional thoughts for the full year.

For the second quarter 2020 compare to the first quarter 2020, we expect growth an average loans to be in high single digit range. As a result of the increased spot level at quarter end as well as additional anticipated funding needs of our commercial and consumer customers.

William S. Demchak: For Q2 2020 compared to Q1 2020, we expect growth in average loans to be in the high single-digit range as a result of the increased spot level at quarter end, as well as additional anticipated funding needs of our commercial and consumer customers. We expect NII to be stable. We expect total non-interest income to be down approximately 15% to 20%, mostly reflecting the elevated MSRs and security gains that we generated amidst the volatility during the first quarter. We also expect some general softening in fee categories as well, particularly service charges on deposits, while we continue to waive fees for our customers during this crisis. We expect total non-interest expense to be flat to down.

For Q2 2020 compared to Q1 2020, we expect growth in average loans to be in the high single-digit range as a result of the increased spot level at quarter end, as well as additional anticipated funding needs of our commercial and consumer customers. We expect NII to be stable. We expect total non-interest income to be down approximately 15% to 20%, mostly reflecting the elevated MSRs and security gains that we generated amidst the volatility during the first quarter. We also expect some general softening in fee categories as well, particularly service charges on deposits, while we continue to waive fees for our customers during this crisis. We expect total non-interest expense to be flat to down.

We expect eni to be stable.

We expect total noninterest income to be down approximately 15% to 20%, mostly reflecting the elevated MSR us and security gains that we generated amidst the volatility during the first quarter.

We also expect some general softening and fee categories as well, particularly service charges on deposits, while we continue to weigh fees for our customers. During this crisis.

We expect total noninterest expense to be flat to down.

William S. Demchak: In regard to net charge-offs, we expect Q2 levels to be between $250 million and $350 million, up quarter-over-quarter, as we begin to experience the economic effects of the crisis. For the full year and for the reasons previously stated, our visibility is substantially limited. But with that in mind, we now expect both full year revenue and non-interest expense to each be down between 5% and 10%. With that, Bill and I are ready to take your questions.

In regard to net charge-offs, we expect Q2 levels to be between $250 million and $350 million, up quarter-over-quarter, as we begin to experience the economic effects of the crisis. For the full year and for the reasons previously stated, our visibility is substantially limited. But with that in mind, we now expect both full year revenue and non-interest expense to each be down between 5% and 10%. With that, Bill and I are ready to take your questions.

In regard to net charge offs, we expect second quarter levels to be between $250 million $350 million up quarter over quarter as we begin to experience the economic effects of the crises.

For the full year and for the reasons previously stated our visibility a substantially limited, but with that in mind. We now expect so full year revenue and noninterest expense to each be down between five and 10%.

With that Phil and I are ready to take your question.

Thank you at this time, if he would like to ask a question. Please press that number one followed by they prefer for on your telephone keypad. Please hold while we compile the Q and a roster.

Operator: Thank you. At this time, if you would like to ask a question, please press the number one followed by the number four on your telephone keypad. Please hold while we compile the Q&A roster. Your first question comes from the line of Erika Najarian with Bank of America. Please go ahead.

[music].

Your first question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Hi, good morning.

Erika Najarian: Hi, good morning.

Hi, good morning area.

William S. Demchak: Hey, good morning, Erika.

Very much appreciate the comments on the extremely adverse scenario as we as we think about the.

Erika Najarian: Very much appreciate the comments on the extremely adverse scenario as we, as we think about the, the dividend. I'm wondering, as you think about your company-run test in a severely adverse scenario, I think last year, over nine quarters, you estimated losses of 4.2%. And I'm wondering, you clearly pointed out the difference in unemployment rate. You know, what's different from a negative, obviously, from that scenario, of this economic outlook that we're staring down at versus the severely adverse, and what's better?

The dividend I'm wondering as you think about your company run test in a severely adverse scenario I think last year over nine quarters, you estimated losses of 4.2%.

And I'm wondering clearance.

Frinton unemployment rate what different from a from negative obviously from that scenario of this.

Economic outlook that were staring down at versus the severely adverse and whats better.

Yeah.

William S. Demchak: Huh.

Robert Q. Reilly: Huh.

Erika Najarian: How could the cumulative losses, yeah, compare to that 4.2%?

Simulative losses compared to that 4.2 solar farm.

Well just.

William S. Demchak: Well, just on cumulative losses, the scenario we ran, and jump in here where you want, Rob.

Cumulative losses.

The scenario, we ran and jump in here, where you are basically had us coming up with.

Robert Q. Reilly: Yep.

William S. Demchak: Basically had us coming up with losses of $10 billion in 2020, whereas the severely adverse in CCAR had roughly $10 billion over the nine quarters.

Basically had us coming up with losses of $10 billion in 2020, whereas the severely adverse in CCAR had roughly $10 billion over the nine quarters.

Losses of 10 billion in Twentytwenty, whereas the severe severely adverse and see car had roughly 10 billion over the nine core R&D. So it's it's much worse.

Robert Q. Reilly: In our defense.

In our defense.

William S. Demchak: So it's much worse. You know, maybe that's a simple soundbite to it.

Maybe this is simple soundbites not America that thats exactly right. So it's more severe in the sense that we front end those losses into the next nine months, whereas seek R&D fast contemplated that over nine quarters and the peak to trough, what do we do and 14% versus versus eight.

Robert Q. Reilly: Yeah, no, Erika, that's, that's exactly right. So it's, it's more severe in the sense that we front-end those losses into the next nine months.

William S. Demchak: Yeah.

Robert Q. Reilly: Yeah.

Robert Q. Reilly: Whereas CCAR and DFAST contemplated that over 9 quarters.

William S. Demchak: And the peak to trough, what did we do on GDP?

Robert Q. Reilly: About 14%.

William S. Demchak: Yeah, versus 8 on,

Robert Q. Reilly: 8.5, yeah, on-

Yes on.

William S. Demchak: Early first.

Robert Q. Reilly: That's right. So much sharper and faster.

That's right so much sharper and faster.

William S. Demchak: Yeah.

Just to clarify the question I'm wondering.

Erika Najarian: Just to clarify the question, I'm wondering what you think your cumulative losses could actually be? So there's that extremely adverse scenario with that $10 billion shock-

What do you think your Q losses could actually be so theres that extremely adverse scenario with that 10 billion shop in 2020, and then we have the other data point of severely adverse so wondering what the.

William S. Demchak: Yeah

Erika Najarian: ... in 2020, and then we have that other data point of severely adverse. So, wondering what, based on what you know now, cumulative losses could look like.

What based on what you know now cumulative losses could look like.

That's a that's an unanswerable question. So what we've tried to do as barbell. It for you.

William S. Demchak: You know, that's a, that's an unanswerable question. So what we tried to do was barbell it for you. We would tell you, and I had this in my script, that since we closed the books, you know, we saw claims be higher than we had assumed. We changed from thinking that a V-shaped recovery was gonna happen fast into more of a U-shaped recovery. So that's why we kind of put comments out there that we're gonna have a reserve build likely into the second quarter. You know, if we had perfect foresight here, we ... You know, the reserve true-up we would have taken in Q1 would have effectively marked our book to current economy, and future provision would simply be based on growth, so it would go way down.

We would tell you and I had this in my script since we closed the books.

We saw claims the higher than we had assumed we changed from thinking that a V shaped recovery.

Was going to happen fast into more of a U shaped recovery. So that's why we kind of put comments out there that we're going to have a reserve build likely.

Into the second quarter.

If we had perfect.

Foresight here.

The reserve true up we would have taken in the first quarter would have effectively marked our book to current economy in there and future provision would simply be based on growth. So it would go way down in practice, given we're seeing the economy worsen from our assumptions again sort of dragging out further.

William S. Demchak: In practice, given we're seeing the economy worsen from, you know, our assumptions, again, sort of dragging out further, unemployment a little bit higher, we'll see reserve build into Q2. That doesn't mean it's gonna be necessarily higher than Q1. It doesn't mean that it's gonna be lower than Q1.

In practice, given we're seeing the economy worsen from, you know, our assumptions, again, sort of dragging out further, unemployment a little bit higher, we'll see reserve build into Q2. That doesn't mean it's gonna be necessarily higher than Q1. It doesn't mean that it's gonna be lower than Q1.

Our unemployment a little bit higher.

We'll see reserve build into the second quarter.

It doesn't mean, it's going to be necessarily higher than the first quarter. It doesn't mean that is going to be lower that Fresno comment on the magnitude.

Robert Q. Reilly: Yeah, no comment on the magnitude-

William S. Demchak: Yeah

Robert Q. Reilly: ... but the fluidity of where we are.

At the fluidity.

Where we are so so you know trying to give you some precise science with all of these unknowns out there I just I don't think is useful exercise what I did think was useful was simply make it is ugly as we can make it and show that we are still highly liquid.

William S. Demchak: Yeah. So, you know, trying to give you some precise science with all of these unknowns out there, I just don't think is a useful exercise. What I did think was useful was simply make it as ugly as we can make it and show that we are still highly liquid, and, you know-

At that point 150 basis points over the regulatory minimums. So we can operate in this environment.

Robert Q. Reilly: Well capitalized

William S. Demchak: ... at that point, 150 basis points over the regulatory minimum, so we can operate in this environment.

And that's the primary point.

Robert Q. Reilly: And that's the primary point.

Understood.

Erika Najarian: ... Understood. And the follow-up question is probably equally unanswerable, but as I said, this is our first recession, obviously, in a CECL construct, and many management teams have noted that CECL is pro-cyclical by nature. And, you know, I'm wondering if, you know, again, we could have some sort of guardrails in terms of where reserve to loans could build to. And I guess the big investor question is that, you know, given the amount of PP and R strength and capital levels banks have, there seems to be an opportunity to anticipate the, you know, future provisions ahead of when charge-offs are recognized. So, you know, is there something in CECL that would allow you to recognize those ahead of charge-offs?

My question is probably equally unanswerable, but.

This is our first recession, obviously in a steep hill construct and many management teams have noted this seasonal is pro cyclical by nature and I'm wondering if you know again, we could have some sort of guard rails in terms of where reserve to loans could could build too and I guess the.

Investor question is is that given the amount of PPNR strength and capital levels banks have there seems to be an opportunity to anticipate.

The future provisions ahead of when charge offs are.

Our recognized so.

Is there something in the in C., so that would allow you to.

Recognized those ahead of charge offs and perhaps in the charge offs actually hit.

Erika Najarian: And perhaps when the charge-offs actually hit the draw on your provision costs-

The draw on your priorities in cost will be as painful that all right.

William S. Demchak: All right.

Erika Najarian: It won't be as painful. That question is best.

William S. Demchak: All right. Let me... Yeah, so that's a CECL 101 question. But basically, CECL itself, in its perfect form, if you know, if our economic predictions were correct, today, our reserve would cover the entire portfolio as it runs down, including charge-offs. And any change in provision would come from the rundown of the portfolio, upgrades and downgrades of the portfolio, and then additions to the portfolio. So, CECL by its very nature, is ahead of the charge-offs.

So that's a that's a c. so one of the one question, let me [laughter] basically Cecil itself in its perfect form if.

Our economic predictions were correct today.

Our reserve would cover the entire portfolio is it runs out runs down including charge offs and any change.

In provision would be would come from the rundown of the portfolio upgrades and downgrades of the portfolio and then additions to the portfolio.

So so cecil by its very nature is ahead of the charge like Tesla.

Robert Q. Reilly: By design.

William S. Demchak: Yeah, it has those embedded in that. So again, if our assumptions were correct in the first quarter, and we think that they weren't conservative enough, but if they were, and we just quit lending, we're covered. That's what CECL is designed to do. You know, and in theory, if that were correct, our provision would decline through here, you know, from the print in the first quarter through the rest of the year. In practice, we're saying we think the economy's worse, and therefore, the provision will be elevated beyond what we would provide for simple loan growth. And beyond that, you know, we can't get any more exact.

It's it has those embedded in that so.

Again as far assumptions were correct in the first quarter, and we think that they weren't conservative enough, but if they were and we just quit lending were covered.

That's what Cecil is designed to do.

In in theory, if that were correct our provision would decline through here from the footprint in the first quarter through the rest of year in practice, we're saying we think the economy's worse and therefore, the provision will be elevated beyond what we would provide for simple loan growth and beyond that.

We can't get anymore exact that's right that's right.

Robert Q. Reilly: That's right. That's right.

No that's helpful. I appreciate it thank you.

Erika Najarian: No, that's helpful. I appreciate it. Thank you.

William S. Demchak: Yeah.

Bill.

Your next question comes from the line of John Pancari with Evercore. Please go ahead.

Operator: Your next question comes from the line of John Pancari with Evercore. Please go ahead.

Morning.

John G. Pancari: Morning.

John Pancari: Morning.

Robert Q. Reilly: Hey, good morning, John.

Hey, good morning, John John.

William S. Demchak: Hey, John.

John G. Pancari: Yeah, so back to your point around the, that you can't rule out an incremental material addition to the reserve in Q2. I know you just said it's tough to size it up. I guess I'm trying to figure out how we could think about the magnitude. Like, how much would the potential addition in the second quarter, how much would that have differed under your base scenario that you embedded in the first quarter provision versus that more severe scenario? Can you give us a little bit of color that way?

Yes, so not to your point around.

John Pancari: Yeah, so back to your point around the, that you can't rule out an incremental material addition to the reserve in Q2. I know you just said it's tough to size it up. I guess I'm trying to figure out how we could think about the magnitude. Like, how much would the potential addition in the second quarter, how much would that have differed under your base scenario that you embedded in the first quarter provision versus that more severe scenario? Can you give us a little bit of color that way?

Rollout.

Hi, incremental material addition to the reserve into Q I know you just said, it's tough to size it up I guess.

I'm trying to figure out how we could think about.

The magnitude like how much would the potential addition in the second quarter, how much would that have deferred under your base scenario that you embedded in the first quarter provision first since that more severe scenario can you give us a little bit of color that way.

Well well versus the.

William S. Demchak: Well, well, versus the-

Robert Q. Reilly: Yeah

William S. Demchak: ... severely adverse we talked about by-

Nearly adverse we've talked about.

Robert Q. Reilly: Yeah.

William S. Demchak: Yeah, by $9.5 billion, but that's not the one we expect. But, you know, versus, you know, what's happened in the economy, put it into context from what I've seen other people do, just against charge-offs.

$9.5 billion, but thats not the one we expect.

So ill versus what's happened in the economy.

Put it into context from what I've seen other people do just against charge offs go back to kind of basics I think we provided for 4.2 times or something like that our charge offs that duration quarter Thats pretty similar to what everybody is done JP was a little bit higher than that.

John G. Pancari: Right.

John Pancari: Right.

William S. Demchak: You know, go back to kind of basics. I think we provided for 4.2 times or something like that, our charge-offs-

Robert Q. Reilly: That's the ratio.

William S. Demchak: ... in the quarter.

Robert Q. Reilly: Correct.

William S. Demchak: That's pretty similar to what everybody's done. JP was a little bit higher than that. I think, you know, but people are kind of right around that number. Should it have been five times? Yeah, maybe.

[music].

But people are kind of right around that number.

Should have been five times, yeah, maybe.

Robert Q. Reilly: Can I?

William S. Demchak: Yeah. But you know, in context against what we know, if we were light, it's not orders of magnitude light. It's you know, we're supposed to have, we should have been $200 million more. And I'm, again, making up a number here, and by the way, a week from now, I could give you a different number.

Yes, but but you know in context against what we know if we were if we were light it's not orders of magnitude light. It's we're supposed to have we should have been a couple of hundred million more and I'm again.

Making up a number here and by the way.

A week from now I could give you that better and that supply.

Robert Q. Reilly: That's, that's-

William S. Demchak: That's the challenge.

Robert Q. Reilly: That's the primary point.

William S. Demchak: Yeah.

Robert Q. Reilly: The fluidity of the situation, John, as, as you know, is moving so fast. On any given day, the scenarios can change, you know? We felt good about our estimate at 31 March. It's deteriorated from then. You know, for the second quarter, it, it could move around a lot over the next couple of months, and when we go to do our CECL estimates for the second quarter, we'll factor all that in.

Fluidity of the situation John as you know is moving so fast on any given day adverse scenarios can change you know we felt good about our estimate at March 31st size deteriorated from then.

For the second quarter, Eric you can move around a lot over the next couple of months than when we go to do our seasonal estimates for the second quarter, we'll factor all that in the and notwithstanding I actually notwithstanding all the.

William S. Demchak: Yeah, and notwithstanding... You know, I actually, notwithstanding all the-

Robert Q. Reilly: CARES Act

On the.

William S. Demchak: ... all, all the magic that goes into the CECL models, I did gain some amount of comfort from the fact that, at least for the big banks that have reported to date, that, that the numbers are kind of similar as a function of multiples of charge-offs.

Magic that goes into the Cecil models.

Gain some amount of comfort from the fact that at least for the big banks that have reported to date. The numbers are kind of similar as a function of multiples of charge offs and reserves are increasing substantially.

Robert Q. Reilly: Reserves are increasing substantially.

William S. Demchak: Yeah.

Got it okay alright.

John G. Pancari: Got it. Okay. All right, and then in terms of the, in terms of your loan modifications, I appreciate the color you gave us on the consumer modifications, but are you starting to see restructurings and, or modifications on the commercial side? And, if you are, you know, what amount or, or balances have you restructured, on the, on the commercial end?

John Pancari: Got it. Okay. All right, and then in terms of the, in terms of your loan modifications, I appreciate the color you gave us on the consumer modifications, but are you starting to see restructurings and, or modifications on the commercial side? And, if you are, you know, what amount or, or balances have you restructured, on the, on the commercial end?

And then and Thomas of the.

In terms of low modifications. We appreciate the color you give us on the consumer modifications, but are you starting to see restructurings.

Modifications on the commercial side and.

If you are what amount.

Or balances have you restructured.

On the on the commercial end.

Yes, yes.

Robert Q. Reilly: Yeah. Yeah, just, that's been slower, and as I mentioned in my comments, John, you know, we handle that on an individual basis with customers. So, you know, it's, there's been some of it, but nowhere near the volume on the consumer side.

Thats been that's been slower and as I mentioned in my comments John.

We handle that on an individual basis with customers. So yes.

Has been some of it.

But nowhere near the volume on the consumer side.

William S. Demchak: Yeah. I think, you know, what's happening, think about it occurring with smaller commercial, small business clients. A lot of it, real estate related, not surprised, you know, where we're kind of deferring interest for, for 90 days or something. Much of it, when we do it, as an aside, isn't actually changing the rating of the credit.

I think what's happening to think about it occurring with smaller commercial small business clients a lot of it.

Real estate related not surprise, you know, where we're kind of deferring interest for for 90 days or something.

Much of it when we do it as an aside isn't actually changing the rating of the credit.

Robert Q. Reilly: Right.

William S. Demchak: So they were good credits. They got a cash flow crunch. We're waiving interest or a payment or something, and it doesn't necessarily trigger an outright downgrade. So it's kind of case by case. It's building-

So there they were good credits they got to cash flow crunch, where wave in interest or payment or something and that doesn't necessarily trigger an outright downgrades. So it's kinda case by case, it's building and ultimately it's going to I know, it's going to result in losses and that's what we're pennants something that we've got our eye on for the second quarter, so, but it's sad.

Robert Q. Reilly: Yeah.

William S. Demchak: -and ultimately-

Robert Q. Reilly: That's it.

William S. Demchak: -it's gonna re-

Robert Q. Reilly: Yeah.

William S. Demchak: You know, it's gonna result in losses, and that's what we're preserving for.

Robert Q. Reilly: It's something that we've got our eye on-

William S. Demchak: Yeah

Robert Q. Reilly: ... for the second quarter. So, but it's, you know, it's nowhere near the volume of the consumer.

William S. Demchak: Yeah

Robert Q. Reilly: ... for the second quarter. So, but it's, you know, it's nowhere near the volume of the consumer.

No it's nowhere near the volume of that consumer.

Okay. Thank you appreciate your.

William S. Demchak: Okay, thank you. Appreciate it.

Robert Q. Reilly: Sure.

Your next question comes from the line of Scott safer with Piper Sandler. Please go ahead.

Operator: Your next question comes from the line of Scott Siefers with Piper Sandler. Please go ahead.

Do you.

Scott Siefers: Thank you. Was hoping to ask another question on the modifications, so specifically in the $5.1 billion of consumer mods you guys have done. How does that break down between, you know, I'm guessing it's mostly mortgages, but among the various consumer categories, what-- where are you-

I was hoping to ask another question on the modification. So specifically in the 5.1 billion of consumer Mods, you guys have done hubs that breakdown between.

Hey, I'm guessing, it's mostly mortgages, but among the.

As consumer categories, what where are you seeing what I guess, what's your sense for where that ultimately could go.

Robert Q. Reilly: Yeah.

Scott Siefers: Seeing? And what, what-- I guess, what's your sense for where that ultimately could go?

Yes, right now right now it is.

Robert Q. Reilly: Yeah, right now, right now it is, you know, 80/20, you know, investor versus bank-owned, and the vast majority of that being mortgage. The other significant category is auto, but mortgage is the largest.

80, 80 20.

Investor versus bank on the pen the vast majority that being mortgage.

The other significant categories auto mortgages.

Scott Siefers: Yeah.

William S. Demchak: Yeah, and the other... I'm just looking at some numbers here. The other thing on auto is, you know, for example, we have about $300 million in auto where we've had mods, but if memory serves, we on any given day have half of that in the normal course.

The other im just looking at some numbers here the other thing on auto.

For example, we have about 300 million in auto where we've had modest but if memory serves we on any given day have half of that and the normal course, so yes.

Robert Q. Reilly: Okay, yeah.

William S. Demchak: So yeah,

Robert Q. Reilly: Okay.

William S. Demchak: So some of these totals, you know, you know, we're close to $5 billion. A big chunk of that is kind of in the ordinary course of what you see in consumer. And to be honest with you, we struggled a little bit to break out how much of this is really COVID related versus how much of this is basic churn in the consumer book.

Robert Q. Reilly: Okay.

So that's some of these totals.

No.

We're close to 5 billion a big chunk of that is kind of in the ordinary course of what you see in consumer then to be honest with you we struggled a little bit to break out how much of this is really covered related versus how much of this basic churn in the consumer book, but the majority is that mortgage and majority is.

Robert Q. Reilly: But, but the majority is mortgage-

William S. Demchak: Yeah

Robert Q. Reilly: -and the majority is, investor-owned.

Thats around.

Okay, Alright, perfect. Thank you and then.

Scott Siefers: Okay. All right, perfect. Thank you. And then, one, I guess, a little more piggyback just in the, in your other fees. I mean, a lot, a lot of private equity marks, and, you know, presumably, those aren't the kind of things that will, will persist. Do you, do you guys have a sense for where that, that other line ends up going, as we look forward?

One I guess, a little more to Utac just in the.

In your other fees I mean lot lot of private equity marks presumably those aren't the kind of things that will will persist.

You guys have a sense for where that other line ends up going as we look forward.

Well, that's why I for that for the second quarter at least.

Robert Q. Reilly: Well, that's why, for the second quarter, at least, you know, I combined other with fee income, and we have the total being down 15% to 20%. So that's about as precise as I can get.

I combine together with that fee income and we have to total being down 15% 20%.

So that's that's about as precise as I can get.

Scott Siefers: Yeah.

Robert Q. Reilly: You know, hopefully-

Hopefully hopefully we won't see we won't see the private equity.

Scott Siefers: Yeah

Robert Q. Reilly: ... hopefully, we won't see, we won't see the private equity, you know, valuation marks that we saw in the first quarter, but, you know, who knows?

Valuation marks that we saw and the first quarter, but who knows.

Scott Siefers: Yep, exactly. Okay. Sounds perfect. Thank you, guys, very much.

Yeah exactly okay sounds perfect. Thank you guys very much sir.

Robert Q. Reilly: Sure.

And as a reminder, if you would like to ask a question. Please press the number one followed by the number four on your telephone keypad.

Operator: As a reminder, if you would like to ask a question, please press the number one followed by the number four on your telephone keypad. Your next question comes from the line of Bill Carcache with Nomura. Please go ahead.

Your next question comes from the line of car cash with Nomura. Please go ahead.

Hi, Good morning, Bill and Rob I had a clarification question on your Cecil methodology comments it sounds like you're basing the allowance on economic forecasts available through 331 and to the extent there was deterioration in the outlook as we got into early April with expectations for unemployment and GDP growth further deteriorating you would not.

Bill Carcache: Hi, good morning. Bill and Rob, I had a clarification question on your CECL methodology comments.

William S. Demchak: Mm-hmm.

Bill Carcache: It sounds like you're basing the allowance on economic forecasts available through 3/31, and to the extent there was deterioration in the outlook as we got into early April with expectations for unemployment and GDP growth further deteriorating, you would not be factoring in that incremental deterioration into your 3/31 allowance, even though that deterioration arguably existed at the balance sheet date because you didn't find out about it until April. Is that right?

Be factoring in that incremental deterioration in two or 301 allowance, even though that deterioration arguably existed at the balance sheet date, because you didnt find out about it until April is that right.

No because the.

William S. Demchak: Uh, no-

Robert Q. Reilly: Yeah

William S. Demchak: ... because the thing that changed the most, right, was the shock that the market had on unemployment claims, the two weeks in a row where they kind of went-

Robert Q. Reilly: Yeah

William S. Demchak: ... because the thing that changed the most, right, was the shock that the market had on unemployment claims, the two weeks in a row where they kind of went-

That change the most probably was was the shock that the market had on unemployment claims, but the two weeks a row, where they kind of went right. So smart.

Bill Carcache: Right

William S. Demchak: $6 million a week, and that was-

Bill Carcache: Gotcha.

William S. Demchak: That was close to close.

That was close to close path. So that's the the biggest change we saw the other the other thing.

Bill Carcache: Yeah.

William S. Demchak: So that's the biggest change we saw. The other thing that's impacting how we think of this, the GDP decline is probably right. The unemployment decline, we need to think through how to model correctly because of the amount of government dollars that are going into unemployed pockets. So the normal impact you'd see from this spike in unemployment that would drive GDP further down doesn't feel right. And it's more than you want to know, but that's what we have to sort of model-

That's impacting how we think of this.

The GDP decline is probably right the unemployment decline.

We need to think through how to model correctly because of the amount of government dollars that are going into unemployed pockets. So the normal impact you'd see from that spike and unemployment that would drive GDP further down doesn't feel right and as more than you want to know, but thats, what we have to sort of muscle challenge for us on a second quarter.

Robert Q. Reilly: That's a challenge for us in Q2.

William S. Demchak: ... yeah, as we get into Q2.

As we have their share of second quarter.

Yes, I guess I'm, just trying to see if theres any implication that.

Bill Carcache: Yeah, I guess I was just trying to see if there's any implication that, you know, as long as the delta and expectations were to continue to deteriorate post-balance sheet dates as we go forward from here, whether we can expect there to be incremental reserve building, you know, continuing, even though CECL, in theory, should already be capturing lifetime losses, setting aside, of course, you know, any growth that you'd have to reserve for.

Long as the Delta and expectations were to continue to deteriorate post balance sheet dates as we go forward from here or whether we can expect there to be incremental reserve building continuing even though it sees when theory should already be capturing lifetime losses, setting aside of course shiny any growth.

Okay.

William S. Demchak: Well, yeah, but you know, the basic notion is that that reserve gets marked to your best expectations of economic outcome when you close the books.

But even though the basic notion is that that reserve gets marked to your best expectations of economic outcome. When you close the books, which is what we did which is what we did and what we will do.

Robert Q. Reilly: Which is what we did.

William S. Demchak: Which is what we did and what we will do.

Bill Carcache: Yeah.

William S. Demchak: And what we're saying, all we're saying today is, all else equal, what I know now, you know, a couple of weeks post is, you know, the economy is a little bit worse than what we assumed when we closed the books, and we'll capture that in Q2.

And what we're saying all we're saying today is all else equal what I know you know a couple of weeks post as the economy, So a little bit worse than what we assume we closed the books and webcast will capture that second quarter, we're mindful of that and if we get it right in the second quarter, then there wouldn't be anymore build in the third quarter.

Robert Q. Reilly: Yeah, we're mindful of that.

William S. Demchak: If we get it right in Q2, then there wouldn't be any more build in Q3.

Robert Q. Reilly: Right.

William S. Demchak: And that, you know, it, it's as simple as that. We're not trying to... You know, don't confuse that with orders of magnitude, you know, to my, to my point. I mean, things could just get horrific, and we've shown you the horrific number.

[music].

It's as simple as that we're not trying to.

Don't confuse that with orders of magnitude in order to month to my point I mean things could just get horrific and we've shown you the horrific number.

Yeah, and right into the only thing that I would add to that is and you know it bill is just the fluidity of all this.

Robert Q. Reilly: Yeah, and the only thing that I would add to that is, you know it, Bill, is just the fluidity of all this. It moves fast daily, and, you know, we'll continue to monitor it and build it into our scenarios.

It's in those fast daily.

And we'll continue to monitored and build that into our scenarios.

William S. Demchak: Yeah.

Got it thanks, Rob So that's helpful. Bill if I may just one last follow up on the the.

Bill Carcache: Got it. Thanks, Rob. That, that's helpful, that's helpful.

Robert Q. Reilly: Yeah.

Bill Carcache: And Bill, if I may, just one last follow-up on the, I guess, the fee income growth opportunity. In the period leading up to the Great Recession, you guys stood out for slowing loan growth and stepping on the gas to grow fee income, the fee income side of the business. As we look back to this recession several years from now, what do you think will stand out about the way that PNC handled itself, both in the period leading up to and during the recession?

I guess the fee income growth opportunity in the period, leading up to the great recession, you guys stood out for slowing loan growth and stepping on the gas to grow fee income fee income side of the business.

We look back to this recession several years from now what do you think will stand out about the way that PNC.

Handle itself, both in the period, leading up to and during the recession.

Well I think without question.

William S. Demchak: ... Well, I think without question, our loan book is going to stand out. We've said this forever. We haven't changed our credit box. You know, we're going to have losses, but they're going to be losses that you would otherwise expect for the way we talk about our credit. And I think, you know, in an environment like this, I always say, you know, the cost of, the cost of goods sold actually becomes known to people.

Our loan book is going to stand out.

We've said this forever, we haven't changed our credit box, we're going to have losses, but they're going to be losses that you would otherwise expect for the way we talk about our credit.

I think.

Environment like this I always say.

You know the cost will be the cost of goods sold actually becomes known to be right right.

Rachel Smith: Yes, right.

William S. Demchak: So I think that stands out. I think our willingness to extend capital intelligently to clients is going to stand out as it did in the crisis. We have an opportunity to grow good clients and support existing clients with our liquidity and capital. We are going to do that. We do have, as you know, some very stable fee streams, you know, in particular, our treasury management business, which is doing fantastically well and is very stable and will support us through this. We have, you know, for the quarter and probably, you know, for the next quarter or so, our capital markets activity-

So I think that stands out I think our willingness to extend capital intelligently.

To clients is going to stand out as it and the crisis, we have an opportunity to grow good clients and support existing clients with our liquidity and capital.

And we're going to do that we do have as you know.

Some very stable fee streams.

Particular, our Treasury management business, which is doing fantastically well that is very stable and will support us through this.

We have.

For the quarter and probably.

For the next quarter, so our capital markets activity has been very strong. So I think we're in a really good position and.

Rachel Smith: Yeah.

William S. Demchak: has been very strong. So I, I think we're in a really good position. And, you know, we, we, we sit as a management team here working tirelessly to support our clients and with mixed emotions in the sense that, you know, these are, this is the environment we run our company for, right? Our, our, our company is built around being able to support people and grow when everybody else falters. And, and-

You know, we sit as a management team here working tirelessly to support our clients and with mixed emotions in the sense that these are this is the environment, we run our company for.

Our company is built around being able to support people and grow when everybody else falters.

And that's super helpful. Thanks, Bill.

Rachel Smith: That's super helpful. Thanks, Bill. Thanks. Thanks, Bill, Rob. That's super helpful. Yep. Yep. Thanks, Bill.

Thanks, Thanks, Bill Rob that's Super helpful. Yep Yep. Thanks Bill.

There are no further questions.

Operator: There are no further questions.

Okay, all right well, thank you everybody stay safe.

Rachel Smith: Okay.

William S. Demchak: All right. Well, thank you, everybody. Stay safe.

This concludes today's conference call you may now disconnect.

Operator: This concludes today's conference call. You may now disconnect.

[music].

Yes.

[music].

Q1 2020 Earnings Call

Request a DemoDemo

PNC

PNC Financial Services

Earnings