Q1 2020 Earnings Call

Good morning, My name is Kathryn and I'll be your conference operator today.

This time I'd like to welcome everyone to the Wells Fargo first quarter 2020 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.

Like I pay question during that time, Please press star and then the number one on your telephone keypad.

She would like to withdraw your question press the pound cake.

Please note that today's conference is being recorded.

Thank you I would now like to turn the call over to John Campbell Director of Investor Relations. Sir you may begin the conference.

Thank you Catherine good morning, everyone.

Thank you for joining our call today, where our CEO, Charlie sharp and our CFO, John Shrewsberry will discuss first quarter results going to answer your question.

This call is being recorded.

Before we get started I would like to remind you that our first quarter earnings release in quarterly supplement are available on our website at Wells Fargo Dot com.

I'd also like to caution you that we may make forward looking statements during today's call that are subject to risks and uncertainties.

Factors that may cause actual results could differ materially from expectations are detailed in our sep filings, including the form 8-K filed today containing our earnings release and quarterly supplement.

Information about any non-GAAP financial measures reference, including a reconciliation of those measures to GAAP measures.

Also be found in our SEC filings in the earnings release, and then the quarterly supplement available on our website I.

Well now I'll turn the call over to try to chart.

Good morning, I'm going to open the call with comments on the current environment. The actions, we're taking a business performance.

Going work to transform the company and John will provide more details in the first quarter results before we take your questions.

Let me start some remarks about the current environment like worsening start by saying that our watch.

Are you at those directly impacted by Cobot 19. This includes go to contracted the buyers healthcare workers, who are on the pipeline scoping goes directly impacted and all of those with the by the central services to ensure the country continues to function as difficult. As this is the response by government companies individual since with extraordinary.

We understand at Wells Fargo plays an important role providing stability substantially system and the economy more broadly and while there's still much to do I'm incredibly proud to be efforts across the entire companies, particularly those on someone's.

Let me start by discussing that Wells Fargo, good stuff personal start with our customers you've been aggressive actions to ensure that serve customers. While also prioritizing.

<unk> and customer safety.

On access we temporarily closed approximately 1400 branches, which is about one sports bar network nationwide choosing locations to close based on historical branch traffic and the fiscal inside of each branch that would allow appropriate centric distance.

Consumer and small business contact centers remain open and all other U.S. locations to serve customers, they wait times or higher and we've deployed sanctions system segment safety measures and all sites to ensure you keep some please say he'd been rapidly expanding digital access and deploying new tools.

Limits, the mobile deposits wires, new digital mortgage deployment tools and expanded E signature support customers are adopting these new tools as demonstrated by 52% increase dollar volume of mobile deposits in March 2020 versus March 29 team.

Look providing significant credit to work lines.

March alone.

Commercial customers utilize <unk> $80 billion every month.

And we're providing accommodations for clients in need through April 10th and he helped more than 1.3 million consumers and small business customers like if the repayment waiving fees.

Third over 1 million payments, representing almost $2.8 billion of principal and interest payments and provided over 900000 fee waivers exceeding $39. We've suspended residential property for claims yourselves addictions and involuntary auto let's sessions and we continue to.

Hi, good geographies for trade groups, others in the industry as well as government officials and not for profits to identify other ways to assist customers leasing national challenges in the current environment.

We've extended our participation.

BP program and hope to provide significant relief for small business customers were quickly wrapping up the processing capacity to respond to the significant demand. We've seen through April two we've received more than 370000 indication indications of interest kind of customers, you're working with industry groups and the U.S.

Treasury preparations to be millions of economic impact payments to Americans as quickly as possible, but those that we see checks we've implemented changes to our ATM and mobile app to make it more convenient to use those depository options instead of going and Trubridge now turning to how operating the company.

Our employees.

We have enabled approximately 180000 employees to work for both the jobs that cannot be done people. In addition to modifying branch formats, you've taken significant actions to ensure safety, including enhancing social distancing measures staggering staff and ships and implementing an enhanced leading program.

We continue to pay all employees, we made a one time cash work to approximately 165000 employees make less than $100000. Additionally, as a way of recognizing you need contributions of our employees that work on the front line, we're making additional payments to those employees, we've made changes to their benefit plan.

Support those who are.

Being tested four days you have the virus to start toys could be childcare regretted eligible employees up to five paid business states. All so they can find childcare. We're also providing financial support to eligible employees for those seeking childcare their own personal networks.

They 10 million dollar grant to the we care. So we're really fund which is available to employees affected by client of ours, especially those with limited resources to help and get back on the seats with basic necessities.

And we're supporting our communities by directing $175 million charitable donations from the Wells Fargo Foundation help address food shelter small business and housing stability as rose providing called the public.

Organizations fighting to keep saying the spread of Cobras 19.

Turning to what we've seen over the last month in the markets. As you all know health crisis has had a swift and severe impact on National Park.

But the banks, including Wells Fargo financially strong and have done a great job.

Other industries have and providing to meet service, while many of our employees have been unable to access the offices.

He also has navigated huge disruptions we saw its liquidity most asset classes for several weeks, it's too early bid ask spreads daily volatility in credit spreads increased 100% to 500% versus normalized levels. Prior to crisis activity that made recently ordered h. to allay other loss that makes sense.

Assets and high quality corporate primary issuance, but most other markets so forced selling high intraday volatility and bid asks whitening meeting.

And programs designed to support sleep market functioning and effective trends mission of monetary policy immediately improved risk pricing increased dealer balance sheet capacity decreased market volatility and lower transaction costs.

Scale asset purchases in treasuries and agency MBS improved secondary trading floats and HQ really low credit sensitive assets lagging the recovery all of this as well as the effective shutdown of economy directly impacted our results.

Turning to the quarter.

You can see that results will materially impacted by loan loss reserves impairment of securities redemption of preferred securities. Our results included the reserve build a $3.1 billion for loans and debt Securities 950 million of securities impairment predominantly related I couldn't securities.

And they make it a six cents impact related to the redemption of our series K preferred stock.

In our community bank as you'd be expected branch traffic significantly slowed as much progressed.

Had approximately half the teller volume at the end of March compared with the same period, a year ago. ATM transactions were also down significantly down approximately 72% March compared to year ago on the lending side, you originated $48 billion of residential mortgage loans, 52% for refinancing auto origination.

Has declined 5% since the fourth quarter with strong originations early in the quarter more than offset play slowdown in March credit card purchase volume is down 30% from the fourth quarter and down 1% from a year ago strong volume really the quarter this more than offset by declines in March.

Within wealth and investment management greed and deposit balances increased 13% during the quarter driven by higher retail brokerage suites, reflecting higher client cash allocations retail brokerage transaction revenue increased 12% from the prior quarter Despite market declines Wells Fargo asset management.

Still grew 2% during the quarter driven by strong inflows into money market funds altered 12 wholesale businesses now and trading markets businesses, but nice were up nicely year over year in the first too much of the quarter performance was mixed March you had strong performance in macro trading as well.

These do the volatility an increase flows.

Our performance and spread products suffered due to the market dislocation.

Commercial loans grew $52 billion were 10% from fourth quarter and overall global debt capital markets activity was the strongest on record driven my high grade offerings from U.S. issuance was volumes of 63% or two years ago Wells Fargo's high grade debt capital markets.

The table rankings improve what's a third.

9.2% based market share during the quarter.

Well focused on our efforts around pulled that you continue to make significant changes inside the company. We continue to add talent to the senior leadership team selling Patterson joined US several weeks ago was our general counsel. We expect several more addition to the team in the coming quarter, even with the significant amount of time being voted to hold the response.

Since we're not producing their efforts on a regulatory commitments and we continue to move forward on attribute the processes structure and cultural change necessary to get the work done as a reminder, during the quarter, we announce new organization structure of the five lines of business reporting directly to me.

Also spoken of our business reviews, we've had.

Put in place those agenda is it changed and are now oriented towards the shoes related to operating in the current stressed environment as we settle into this environment. If some line of sight to the recovery.

Engage with the work I discussed last quarter.

You turn to the asset, though John will provide more details on how we're managing in this environment given strengths, but here are some pilots you're focused on doing all we can work clients, while satisfying to requirements and to do this we make decisions each day on balance sheet allocation.

As a reminder, the asset test is measured on a two quarter daily average basis I must be below 1.952 trillion dollars ended the quarter.

March 31st that calculation was an estimated 1.94 retreat trillion.

Mid March as the crisis began to evolve we first off slow increases in deposits and draws drawdowns and committed lending facilities both of those accelerated as the crisis deepens.

At the end of the quarter, we had 1.981 trillion in assets John will discuss this in more detail, but we're taking a number of actions to show you stay below the cap.

We started the quarter strong capital position, including a CPT one ratio of 11.1%.

With the strong growth in assets during the quarter material wider spreads as well as lower earnings our seat in tier one ratio declined 10.7% still above the regulatory minimum 9% and our current internal target of 10% as you know we suspended our share buyback as we focused on hold.

And our customers you have to these challenging times.

Sure you still you want to discuss our capital plans going forward, but as you know submitted our 2020 capital plan earlier this month and the results will be published by the Federal Reserve for June.

I think about the future holds here are few thoughts you entered into world. We haven't seen before much of the economy is essentially closed super spend is down over 25%. You every year this past week with food and drug increasing and other spend down significantly.

New auto sales in the month of March were down 32% February manufacturing has turned downward I assume March reading of 49.1% as businesses cutback on quarters, Bobby prices are down 24% speaking to the weakness global demand.

It's grown beyond what the tradition model.

And while there is hope that this is time bound by shelter in place orders, we don't know what the timeframe is how quickly economy will recover when these orders for lifted.

We do know is the contraction is real must do all we can to be safe and to ensure we do our partner to help recover as quickly as possible, but equally important to note to the sponsor is also beyond what we've historically seen banks have provided significant amounts of credit liquidity, thanks of deferred payments on loans.

He's made numerous other accommodations for customers need.

Response from the Federal Reserve has been fast comprehensive in scope and significant in size and the response Congress has been equally impressive and actions are just beginning to provide the sport necessary for many Willem quickly. The question remains what this means for our future.

What's important is controlling the spread of the virus that economy can reopen.

Well that our actions those of others and especially government support should provide you didn't really you can help many customers reached this difficult period, but the late the shutdown that will ultimately determine the severity, but we do know it has a strong levels of capital and liquidity position.

Enable us to support our customers and the broader U.S. economy.

Closely evaluating or assumptions regarding our allowance for credit losses, as we move forward.

The actual level of losses incurred will be driven like how long the scurried left and the effectiveness of the sport government and private industry.

Sitting here today, there are many unknowns and be year, we'll look quite different than we expected. The desktop we spoke but as I said, we're focused on delivering for our customers communities to get through these unprecedented times and we remain committed to the financial and performance improvements we discussed as we get beyond this crisis. Thanks against all my.

Partners at Wells Fargo, they've been working tirelessly and I'll pass it on for John.

Thanks, Charlie and good morning, everyone.

Partly covered the information provided in the initial pages of the supplement related to the actions, we're taking to support our customers employees and communities during the period done it so I'm going to start on page six as we highlight on this page we had a number of significant items during the first quarter that impacted our results.

$4 billion, a provision expense for credit losses, reflecting expected impact of these unprecedented times could have on our customers credit worthiness.

We had $950 million of securities impairment predominantly related to equity securities, reflecting lower market valuations.

Well deferred compensation plan investment results.

Did not meaningfully impact the bottom line they increased that losses from equity securities by $621 billion.

And reduced employee benefits expense by $598 million.

We had $464 billion of operating losses, which were down $1.5 billion from a fourth quarter that included elevated litigation accruals.

We had 460, we had a $463 million gain on the sale of residential mortgage loans, which had previously been designated as held for sale.

Mortgage banking income declined $404 billion from the fourth quarter, driven by Mark to market losses on loans held for sale and higher MSR asset valuation losses as a result of assumption updates primarily prepayment estimates.

Finally, we redeemed our series K preferred stock, which reduced EPS by six cents per share as a result of the elimination of the purchase accounting just count recorded on new shares at the time, a whole lot Copia acquisition.

Even after factoring in the coated 19 related impacts experienced during the first quarter as we highlighted on page seven RCT one ratio remains 170 basis points above the regulatory minimum at our LCR ratio was 21% above the regulatory bit about these surpluses are noteworthy given the regulatory.

Hey, minimums that based upon our established to ensure financial institutions maintain sufficient resources to extend severely adverse economic and market conditions.

Turning to page eight I'll be covering the income statement drivers throughout the call, but I wanted to highlight that our effective income tax rate was 19.5% in the first quarter and included net discrete income tax expense of $141 billion.

I'll be highlighting most of the balance sheet drivers on page nine throughout the call, but at a little note here that the economic environment. Our customers are facing to decode 19 caused our balance sheet to expand as loan demand and deposit inflows increased significantly late in the first quarter.

On page 10, we highlight how we're helping our customers while managing under the asset cap it's been in place since early 2018.

Driven by fall by strong loan demand growth loan growth in March our total assets grew $53.8 billion from your Ed.

To 1.981 trillion dollars as Charlie highlighted even with this growth we continue to operate in compliance with the asset cap of 1.952 trillion dollars has compliance as measured at each quarter and based on the two quarter daily average.

As of March 31st the two quarter Daily average for assets was 1.943 trillion dollars.

During this challenging times, we expect loan to deposit growth could continue.

But cannot provide guidance on the level of growth and we're actively working to create balance sheet capacity to help our customers. It's worth noting that the high rate of growth could line utilization by our commercial clients is backed off since credit markets of reopened.

We appreciate the targeted action the Federal Reserve took last week, which will provide additional flexibility for us to make small business loans as part of the paycheck protection program and the forthcoming main street business lending program.

We have and will continue to take actions to manage the size of our balance sheet. For example, we've actually been correspondents non conforming mortgage originations, which gives us the ability to better meet the mortgage financing needs of our existing customers and similar to the actions. We took in early 2018 were reducing LOE liquidity value deposits, particularly deposit.

It's from other financial institutions.

We've also reduced our securities for niche footprint.

Let's look at the drivers of the balance sheet growth, we had in the first quarter, starting with average loans on page 11.

Average loans increased $8.5 billion from the fourth quarter, driven by commercial loans, given the significant growth that occurred late in the quarter related to a change in borrowing behavior caused by the coping 19 pandemic I'm going to spend more time, describing period end trend starting on page 12.

Period end loans increased $61.6 billion or 6% from a year ago, and $47.6 billion or 5% from the fourth quarter.

Commercial loans grew $52 billion or 10% from the fourth quarter its balance sheet declines early in the first quarter were more than offset by strong growth late in the quarter.

The growth in commercial loans in the first quarter included more than $80 billion from far Overdraw activity in the month of March on commercial commercial banking and corporate investment banking loads.

Evolving low utilization in wholesale banking was 48.6% in March up 860 basis points from December and as I mentioned during the first two weeks of April weeks, we've seen these drugs slow.

Consumer loans were down $4.4 billion or 1% from the fourth quarter.

As declines and credit card loans consumer real estate loans and other revolving loans were partially offset by growth in auto loans Aholic. The drivers of the linked quarter trends in more detail starting on page 13.

The first mortgage loan portfolio decreased $927 million from the prior quarter as refinancing led paydowns more than offset $14.3 billion have held for investment mortgage loan originations.

Generally mortgage loans were down $982 billion from the fourth quarter as continued paydowns more than offset new originations and $1.8 billion of draws on existing lines, which was up meaningfully late in the first quarter.

Card loans declined $2.4 billion from the fourth quarter, driven by seasonal seasonality and fewer new account openings.

Our auto portfolio continued to grow while we maintained our credit discipline with balances up $695 million from the fourth quarter, However, as Charlie highlighted.

Originations declined 5% from the fourth quarter with strong originations in the first quarter early in the first quarter more than offset by slowdown in March due to the pandemic.

Turning to commercial loans on page 14, she and I loans were up $50.9 billion from the fourth quarter with broad based growth across business lines, largely driven by draws of revolving lines as clients reacted to the economic slowdown associated with the pandemic commercial real estate loans were up $1.8 billion from before.

Quarter.

With growth in both CRB mortgage and construction loans.

Given the focus on commercial loan draws an exposure to industries that have been particularly hard hit as a result of the pandemic, we're providing more details on certain of our industry exposure starting on page 15.

We typically disclose the industry breakdown diversity and I at least financing portfolio in our quarterly FCC filings, but are also providing.

The industry breakdown of our total commitments on the slide I.

I'd note that not all unfunded loan commitments are unilaterally exercisable by borrowers for example, certain revolvers contained features that require the customer to post additional collateral in order to access the full amount of the commitment.

While many areas of the economy are being impacted by the pin debit and that's few slides provide details on the industries with escalated monitoring.

Starting with oil and gas on page 16 as of March 31st we had $14.3 billion of loans outstanding could the oil and gas industry. The size of our portfolio was down 20% from $17.8 billion in the first quarter of 2016, which was also when oil prices were low.

As of the under the first quarter, 47% of our portfolio were loads to the exploration and production sector, 41% to midstream and 12% to services I'll provide more detail on the performance of this portfolio later on the call.

The $27.8 billion of retail loans outstanding at the ended the first quarter, which included $5.8 billion to restaurants. This includes $3.9 billion to limited service restaurants, commonly referred to as fast food restaurants.

Typically what could drive through which have been <unk>, which have largely remained open across the country. While other restaurant formats had been more impacted with service limited to delivery or pick up.

Turning to be entertainment recreation industry on Slide 17, you had a total of $16.2 billion of loans outstanding at the ended the first quarter with less than 1% to cruise lines.

We had $11.9 billion of loans outstanding to the transportation industry as of March 31st which included $2.4 billion to air transportation.

We're also closely monitoring our commercial real estate cool portfolio, which we highlighted on slide 18 at the end of the first quarter, we had $14.1 billion of loans outstanding to retail excluding shopping centers.

With our commercial real estate mortgage within the commercial real estate mortgage portfolio and $10.6 billion in loans outstanding because the hotel motel industry.

Within our 20.8 billion dollar construction portfolio, we had $7.1 billion with loans outstanding in apartments.

Turning to deposits on page 19 average deposits increased 6% from a year ago and 1% from the fourth quarter typically we experienced linked quarter seasonal declines in average deposits at our wholesale banking and went businesses, but all of our deposit gathering businesses grew in the first quarter. This growth included the late quarter impacts of flight.

Quality deposits across all business lines. Following the emergence of coated my team as well as the inflow of deposits associated with corporate and commercial loan draws our average deposit costs declined 10 basis points from the fourth quarter with declines across all of our major all the lines of business largely declines in wholesale banking Midwest, while our retail banking.

Deposit costs declined at a slower pace because they were lowered to begin with and continued to be impacted from promotional pricing in early 2019, most of which will expire in the second quarter.

On page 20, we provide details on period end deposits, which better reflects the strong growth. We had if you ended the first quarter with total deposits up $53.9 billion or 4% from year end.

Wholesale banking deposits were up $13.5 billion from the fourth quarter driven by commercial banking in commercial real estate revolving line draws partially offset by lower financial institutions deposits.

Reflecting actions taken to manage the ethic up.

Consumer and small business banking deposits increased $41.1 billion or 5% from the fourth quarter, including higher retail banking deposits largely driven by growth in high yield savings and interest bearing checking wealth and investment management deposit growth was driven by higher cash balances from brokerage clients.

Net interest income increased $112 million from the fourth quarter, reflecting $356 million higher hedge ineffectiveness accounting results attributable to the level of market rates and differences in basis and notional on swaps hedging our long term debt.

Maybe $4 billion with lower MBS premium amortization, resulting from lower realized prepays.

Partially offset by balance sheet repricing, including the impact of lower interest rate environment, as our assets reprice down faster than our liabilities and from one fewer day of a quarter.

The low rate environment could continue to put pressure on our net interest income, but we're managing or interest rate exposure to minimize the impact as much as possible.

Given the current market volatility and uncertainty will withdrawing our prior 2020 net interest income guidance.

While we're currently not providing guidance on your expectations for net interest income for this year, we will provide more insights regarding developments throughout the year.

Turning to page 22, non interest income declined $2.3 billion for the fourth quarter, driven by a $1.9 billion decline in decades from equity securities and $404 million of lower mortgage banking income.

He explained these declines in more details starting with mortgage banking.

Lower mortgage banking income reflected unrealized losses of approximately $143 million on residential loans and $62 million on commercial loans held for sale do the illiquid market conditions and the widening of credit spreads. This impact was recorded net gain on mortgage loan originations and the 143.

The million dollar loss reduced the production margins, we report on residential held for sale originations.

Absent this impact or production margin would have increased as origination demand exceeded capacity during the first quarter.

Mortgage banking results also reflected a $192 million of higher losses on the valuation of our MSR asset as a result of assumption updates primarily prepayment estimates.

I would note that we ended the first quarter with $62 billion mortgage loan application pipeline, which was up $29 billion or 80% from the fourth quarter.

We provide details on the on the net losses from equity Securities on page 23.

We had $1.4 billion have got losses from equity securities in the quarter, which included $621 million of largely P.L. neutral deferred comp plan investment losses.

Net losses from equity Securities also included $935 million of impairments, reflecting lower market valuation impairments on venture capital private equity and certain wholesale businesses represented 17% of the carrying values of these businesses portfolio investments subject to the impairment assessment.

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Turning to expenses on page 24, our expenses declined $2.6 billion from fourth quarter.

Operating losses declined $1.5 billion from the fourth quarter, which included elevation elevated litigation accruals.

Personnel expense, which is typically seasonally elevated in the first quarter declined $494 billion for the fourth quarter driven by lower employee benefits expense. The decline in employee benefits expense was driven by $861 million of lower deferred comp expense, which was partially offset by $544 million if seasonally higher.

Payroll taxes, and coral and say matching expenses.

We also had lower expenses in a variety of other areas, including commission and incentive comp outside professional services technology and equipment and as you would expect travel and entertainment.

The enhanced benefits and payments, we provided to employees in March.

As part of our response to cope with 19 did not meaningfully impact our expenses in the first quarter, but we we currently expect that they will have the greater impact beginning in the second quarter and through the remainder of this year. While these costs will add to our expense base. The actions, we took with the right thing to do to support our employees.

Before discussing our business segments, starting on page 25, I want to know that as a result of the new flatter organizational structure that was announced in February.

We will be updating our operating segments will be complete the transition to our and our manish in accordance with a new the new five business segment structure.

Community banking earnings declined $274 million from the fourth quarter, reflecting higher provision expense as well as net losses from equity securities.

On page 26, we provide our community banking metrics I'll I'll start by noting that as always our digital mobile and fibria consuming checking customer consumer checking customers are reported on a one month lag. So the numbers reported here for first quarter did I captured the changing customer behavior, we experienced in March due to cope with 18.

For example, our customers have shifted to deposit in check through our mobile App and the dollar volume of mobile checks deposited increased over 40% in March compared with February.

Turning to page 27 tolerant ATM transactions are reported through March which is when we reduced our branch hours and temporarily closed approximately one fourth of our branches as a result with covered my team, which resulted in the profit and approximate 50% decline and teller volume during the final leaks in the first quarter compared with a year ago.

Our customers also meaningfully reduce their card spending late first quarter due to the impacts of the pandemic. During the first two months of the credit card volumes were up from a year ago, while barge 2020 volumes declined approximately 15% from March 2019, resulting in first quarter credit card purchase volumes being down 1% for.

A year ago, we also had meaningful shifts in customer spending in March with grocery in pharmacy spending increasing while all other categories were down from a year ago.

Debit card spending trends were similarly impacted.

But the change in spend with less significant with year over year growth in January and February and a 5% decline year over year volumes in March similar to credit card debit card spend being shifted significantly the grocery in March but the growth in this category started to slow in the last week with a bug.

Turning to page 28 wholesale banking earnings declined $2.2 billion from the fourth quarter, reflecting a 2.2 billion dollar increase in provision expense.

I've already highlighted the strong loan and deposit growth from our commercial customers in the first quarter and we also raised $47 billion of debt capital for our clients.

Wealth and investment management earnings increased $209 billion from the fourth quarter during the first quarter web experience strong demand from clients for liquid products.

Period, and deposit balances increased 13% from the fourth quarter, reflecting higher cash allocation and brokerage client assets and assets under management or Wells Fargo asset management business grew significantly driven by over $34 billion inflows into our money market funds.

Despite the market volatility close referred investment assets into win from the consumer Bank partnership increase on a linked quarter and year over year basis and flows into our retail brokerage advisory business remained positive in the first quarter.

As a reminder, retail brokerage advisory assets are priced at the beginning of the quarter. So first quarter results reflected reflected market valuations as of January 1st and second quarter results will reflect market valuations as of April 1st.

Turning to page 30, our net charge off rate was up six basis points from the fourth quarter to 38 basis points predominantly driven by higher she and I losses, primarily related to higher losses in our oil and gas portfolio, reflecting significant declines in oil prices.

Net recoveries and all of our commercial and consumer real estate portfolios and lower losses in our auto portfolio. The increase in credit card losses from the fourth quarter included seasonality.

Non accrual loans increased $810 million from the fourth quarter to 61 basis points with total loans, which was up five basis points from the fourth quarter and down 12 basis points from a year ago commercial non accruals increased $621 million predominantly driven by the economic impact depend downtick.

Consumer non accrual increased $189 million predominantly driven by higher non accruals in the real estate one to four family first mortgage loan portfolio. It's the implementation of Cecil required PCR loads to be classified.

It's really based on performance.

On page 31, we provide detail on the performance of our oil and gas portfolio oil and gas loans outstanding increased 5% linked quarter and 7% from a year ago.

Reflecting increased utilization rates driven by the the impact of Coca 19 of the decline in oil prices total commitments declined reflecting a weaker credit environment. The significant decline in oil prices in the first quarter resulted in early signs of credit deterioration, particularly in the MP sector total oil and gas net charge offs.

Increased $112 million and the first quarter two $186 million.

Non accruals declined $66 million from the fourth quarter due to the higher net charge offs as well as paydowns, partially offset by new downgrades to nonaccrual status in the first quarter.

Approximately 84% of non accrual loans recurrent on payments during the quarter.

Criticized loans increased 23% from the fourth quarter predominantly reflecting increases in the S&P sector.

On page 32, we highlight or adoption of C. So at the end of the first quarter the allowance for loans and debt Securities was $12.2 billion $12 billion should this allowance was for loans and unfunded commitments at our allowance coverage ratio was 1.19% of lows we added.

$3.1 billion to our allowance for credit losses since the adoption of C. So on January 1st this increase was driven by a number of factors, including economic sensitivity due to the code at 19 pandemic the estimated impact industry's most adversely affected by the pandemic our exposure to the oil and gas industry.

Draws on loan commitments during the quarter, which were the primary driver of commercial loan growth at a $141 billion reserve build for debt securities, reflecting economic and market conditions.

Turning to capital on page 33, even after a multiyear program to return excess capital to shareholders. Our CE tier one ratio was 10.7% at the end of the first quarter, which continued to be above the regulatory minimum up 9% and our current internal target of 10% or.

Our period on common shares outstanding were down 38 million shares from the fourth quarter on March 15th we along with the other members of the financial services Forum suspended share repurchases through the ended the second quarter.

In summary, while the results in the first quarter were impacted by the economic and market uncertainty caused by the pandemic, we maintain strong liquidity and capital our priority is to continue to use our financial strength to help us economy by serving our customers supporting our employees and donating to our communities.

And Charlie and I will now take your questions.

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Operator, I would just your first question comes from the line.

Skin with Jefferies.

Okay.

Hi, Good morning, guys. Thanks, a lot further color and that and the deck today I'm Kinda just ask you I.

John can you elaborate a little bit more in terms of it was good to see the fed giving you some flexibility to participate and programs on lending.

But can you elaborate a little bit more on are you truly able to provide all the help that your customers are asking for and how are you balancing that you know demand function on behalf of clients with the magnitude that you have to dial back and the effects that that might have on the company from an income statement perspective.

Thanks sure. Thank you so on the on the PPP front, which was to the a targeted actions where the feds gave us a little extra flexibility there I would describe it says unconstrained it in a position to to help everybody who approaches are subject to the program of course, having sufficient.

Funding from a from a legislative perspective, but no constraints at Wells Fargo.

With respect to the other tradeoffs as I mentioned, the first places that were going to be able to.

To create more capacity to help customers are to reduce non operational deposits principally in the financial institutions area.

Where were relatively easily substitute double when it's a it's a low value use of I've got balance sheet found because it's a high run our factor on those types of deposits and there are tens of billions of dollars or those types of deposits to continue to to worked out and then secondly, our securities financing footprint or I would describe that is.

Is that plus a different sources in wholesale funding.

There's you know.

We did this in 2018, where the cap was originally put in place that we've dialed back.

Some of the sort of a repo financing and other securities financing that we provide into their own utilization of external repo as a as a financing source to create more room, then that whether some of those activities is a first and foremost good sustainable at a cap on the spot basis, but that will create some amount of room.

For for us to make choices about how to help our customers and and it starts with existing customers and making sure that we can meet their needs.

And that's what we're focused on right now.

It can this is Charlie I, just I know you didn't mean it this way and I just want to make sure that it's clear for everyone else is that.

We have no restrictions on participating in these programs what the.

But the.

It is they allowed us to go above the existing balance sheet cap. So that we could participate in a more holistic way.

Without having to adjust.

Other items, which as you know is difficult to do in a shorter period of time. So we provided us the flexibility to do far more than we had chosen to do ourselves based upon our capacity.

Yes, exactly thank you Charlie and second question, John understanding fully the pulling away from giving full year guidance is there where you can help us understand on the Eni front, just how you'd expect the directory at least to go from first to second given the changes and all the moving parts that were in this quarter's results. Thanks, Yeah. It's a it's it's a fair.

A question, but but not quite yet we've got to.

The you I think we're all forecasting something like zero in the front end or with the depending on where LIBOR moves overtime and then you know some some number between you know color 70, and 100 basis points at the long end well, how the deposit pricing react to that and it had it came down in this quarter, we anticipate a coming down rapidly.

Over the course of the remainder of the year.

We will be a big big driver.

One of these recent balances that we just book stick versus those that are the dial back down I think we'll we'll be a big driver so not looking for and I I growth I'm sure. It will be down by some of them out, but we're not without putting any more precise and hopefully by the time to get to either bid or at the end of the second quarter will be in a position to to be a little bit more declared of about that.

Yeah I appreciate that thanks, guys.

Thank you.

Thanks.

Your next question comes from the line as Betsy Graseck with Morgan Stanley.

Hi, Good morning, Hi, good morning.

Couple of questions. One just on the outlook for Ses on the Cecil charges. I mean, you obviously went through in detail. What you did this most recent corner, but I'm just trying to understand what kind of.

Unemployment level, you're assuming and that just so you know if we see interject differently from your assumptions, we know how to think about you know reserve builds from here.

Yeah, So it's a combination of things including unemployment good.

To what level and then for how long and then the same with GDP obviously.

Other things that are going to matter or what this stimulus means that the personal level and at the business level and whether that's a.

And effective offset to the impact on consumer credit from from unemployment. So.

You know our scenarios to this a few of them wherever like harder we have different weights on or aren't each basically are sort of high single digits.

James Judy down GDP and sustained or a unemployment really through.

2021, why ticket backward, we get flat to GDP and 2021, but really not much growth. So so quite.

Elongated in terms of U shape.

Hopefully that's helpful and we'll update as we go along we're a little less relying on.

Shark spikes and sharp recoveries and thinking about there's so little bit more as a there's a there's a long slow burn.

Over the next couple of years for risk management purposes.

Got it and then if I could drill down just on the oil side I mean, obviously, we went through an oil event several years ago was like 2016.

And you had some workouts around that brought down the oil exposure of the gas exposure. Since then you know maybe you can give us offenses too.

On how you're thinking about this go around I mean, the prices, obviously, a little bit lower but I'm thinking that your your book has changed a bit maybe give us some color on how you're dealing with that portfolio and what your expectations are there facts and the book does look different so on the one into smaller on the other hand.

It's a little bit it's more senior we had a bigger weight and a lower in the capital structure activity before going into the 2015 2016 downturn you know were imagining because of the of the levels of the resource price that a that losses, given defaulter substantially worse. This.

I'm through [laughter].

In terms of the migration of performing to nonperforming I'd say at our own and our own credit loss analysis, we're assuming basically across the board full notch downgrade type of thing our own estimation of.

Fault probability and I think we're approaching it in a pretty soaker basis. We've got a is that a good number on it now book specifically into our qualitative reserve and a and we'll continue working to up our disclosure around it like we did in 2015 26 team as we work through that.

Okay, that's embedded within your Cecil estimate today already so if the pans out as expected we wouldn't expect to see anymore reserve build on that specific asset class.

So, yes, or no we always end up reserving Morgan, we end up charging off.

So what I'm thinking about that through the cycle charge off my sensors, we have a line of sight on now what we expect it to perform but for any number of reasons, we do see so it's different than than than the prior methodology, but I'm not surprised when we when we leaned in a little hard and it turns out that cumulative losses were last and allocated.

Number it just seems sort out that way.

Thanks.

Your next question comes from the liner John Mcdonald.

Gentlemen, three cents.

Hey, John Charlie John I was wondering if you could.

Give any more color on a kind of base case economic scenario that you've baked into the first quarter reserve build and given that like what kind of macro scenario would have to materialize.

In the second quarter.

For you to how to similar sized provision or to be adding more than you added in the first quarter and then maybe Charlie could just add some thoughts on the potential passes he is for this credit cycle relative to what you've seen in your career trolley what are some of the similarities and differences you think about how this might play out relative to great financial crisis or stress test scenarios.

Thank you.

I'll go first.

And John It's still autonomous research right not anonymous research, yes. Thank you for sure Yeah make sure we get that right. So so as I mentioned to Betsy, where we're taking kind of a longer window approach rather than to quickly or even a quick you and thinking about about growth through the rest of year and into next year being.

And you know mid to high single digits negative this year and flattening out, but not growing really next year.

And then unemployment and the in the into long and sustained high single digit range. They may vary they're already have been perhaps spikes that go beyond that but we're thinking about this as it plays out quarter after quarter.

So just two dimensional compared to two other scenarios thinking about both our performance in that in the in the financial crisis as well as our own see car severely adverse scenarios.

Ah Ah at this point, we see this stage not generating that level of loss in our own see car severely adverse scenarios I think we produced nine quarter credit losses of about two and three quarter percent in total with peak quarterly loss rates expressed on an annualized basis of about one point.

Seven 1.75% and an average of about 1.2%.

That's got a steeper drop in GDP in a steep decline and ER and unemployment and importantly, no stimulus baked into the severely adverse case. It's you know doesn't anticipate the types of interventions that we've had we've already seen and we're waiting to.

To see materialize and with respect to to the financial crisis as a benchmark importantly at least for wells Fargo they'd be true for other banks as well, but loan portfolios were very different than the.

The quality of loans, particularly on the on the single family side was worse I think our auto portfolio was worse than to and so there we didn't produce higher somewhat higher loss rates, even higher luxury thing, we do today and our own she car analysis, because the content of the portfolio is different but I guess I would describe that we're currently imagining now to be.

To be.

I'll call it half fish have an annualized loss rate of the severely adverse version of a of our own stress test and so if things play out a substantially worse then there's certainly the possibility that we end up we end up or you know building more or experiencing more charge offs or both but but we feel good about the approach that we've taken in march developing or scenario.

I was with our governance around it and coming into the quarter end.

Charlie you may have comments on the comparability.

Listen I think as I said in my remarks, I think it's you know we all know we haven't seen anything like this.

Before there's no clear path to with a with any narrow range at outcomes for what unemployment or GDP will be I mean, when we think about different people to estimates I mean, you can see.

GDP differences and 20 points across you know very smart people, who do this for a living simply with unemployment 510 points differences.

And so making.

An analogy of with this.

Environment is to other environments I just have a very hard time doing.

Anything having said that I think we feel like the portfolios that we have or stronger than they were at other downturns as I think they certainly are in many banks out there. The real question will ultimately be how long a this shutdown actually continue.

Yes.

Which again, none of US no, but in addition to that how our actions whether its forbearance plans that we have or the fee waivers the things that we're doing.

Very actively to help our clients and the huge amount of government intervention intervention.

Whether those things will actually be able to bridge individuals and small businesses and larger corporations to the other side of this I personally wouldn't be surprised that as the earnings cycle continues and as we start to see these numbers, even though people are talking about big numbers, though potentially continued to be so.

Price by the size of them.

That will create additional volatility in the environment that we live in and it wouldn't surprise me to continue to have to add to reserves is those things impact confidence and ultimately what economic looks like.

But as I said I think it different and again, what we know is were strong and the industry strong handled.

Great and get a quick follow up to that Charlie the idea of banks maintaining dividend payment is a big debate right now not just for wells Fargo, but for the industry overall and you've cut the majority of distributions you any other banks and two thirds of it has been buybacks and folks talk about the importance of dividends is signaling can you talk about the pros and cons.

Keeping the dividends for for yourself in the industry.

Well listen I think.

Certainly the dividends or.

Our certainly important for all those but on the stock and ultimately you know those that winds of benefiting from stock ownership or individuals and one way or another whether its direct holdings or whether its pension plans and things like that.

I think the income stream that people come to rely on especially in times like this.

It is important but there has to be an underlying.

Ability for companies.

To be able to pay and so to the extent that they have that ability to pass I certainly think is.

Right thing to do for them.

I just said we have strong capital ratios, we do all the stress tests and whatnot that John referred to and.

You know determine our ability to return capital and.

Severely stressed environment.

Also remind you that for US we were slightly different than others because of the balance sheet cap. So our balance sheet cat does limit our ability to deploy capital <unk>.

Capital internally.

And so based on that.

You know that's why we sit here and look and say that we think the dividends certainly that we're paying a makes sense, but as I alluded in my prior comments, we don't know what the keys.

Based on the assumptions that we've laid out in these very stressed environment as we do feel good about ultimately the timing and the pace of recoveries going to determine earnings capacity for everyone to be able to continue to support.

The level of dividends.

Thanks.

Your next question comes from the line at Kinda Chan with Bank of America.

Good morning aircraft Hi, Good morning, I just wanted to ask a clarifying question on you know John.

Question on the dividend because it is a question that investors are asking a lot about wells Fargo, specifically to buffer before you reported earnings consensus was at 235 for this year versus dividends of Q4, and I just want to make sure I'm taking away the right message and that's the market shouldn't really look at the payout and in.

Said given that the bright line on capital distribution would be breaking that 9% P.T. wine. We would continue can monitor where your capital levels are relative to the minimum and because of the balance sheet restriction. Unlike some peers you are less able to eat through your capital through.

Or give you a crowd is that the right. We just think about dividend going forward.

I think that's right I'd also I'd add Charlie's view, though that that.

As quarters unfolding, we figure out how long were going to be in this in this economic skate and what the path forward looks like and we use that to interpret and a an estimate what our go forward earnings trajectory looks like that that's the context for her understanding what the steady state dividend.

Should look like so in terms of.

What this year's dividend looks like versus this years consensus or estimated earnings during a time of stress. There's no question and I think there and then a the fact that we start with with ample capital and B, what we think our run rate more steady state earnings are under way out of this and reflect what the dividends in light of that.

So if that's helpful, but but yes, the point that Charlie was making about the fact that we're not really in a position to go out and generate.

A substantial incremental R.W. way through through outsize loan origination is an important one in a distinguishing one versus others, who may be doing that right now and expanding their balance sheet intentionally.

Got it and my second question and on Forbearance and the clarification question also it doesn't it you said John So if that's possible could you give us some updates on now how many of your client you know if you could give it to last night.

Mortgage by auto are in 90 day, or 60 day forbearance period.

April 1st payment behavior was light and also just clarifying what you said, Johnny said that potentially the losses. The cumulative losses. This cycle would be 50% of the severely adverse which I think for nine quarter dismissed 26 billion.

No what I said was that a that the current loss rates that are that are in the scenario that we're talking through.

Are in the neighborhood of half of a of our current severely adverse I think you're probably looking at last year.

So I'm not making a call on the cumulative level of losses, I'm, just making the point that that as a benchmark and answer in response to John's question for contextually like what is bad really look like.

In that instance over nine quarters.

We generated a calculated two and three quarter percent.

Aggregate credit loss and <unk> and for context in terms of where we are now these loss rates are.

There are lower than that by by more than half roughly half.

Oh, but I'm not predicting that we're going to we're going to go through a cycle like our own severely adverse to stress test cycle that last for nine quarters and goes that deep et cetera, just providing a a benchmark.

With respect to two deferrals I think we're I think where it and I'm I'm now and deferrals.

Including both lows on our own books as well as.

Loans that we serviced for others because the customers don't distinguish when they call Wells Fargo and I think at this point, we've we've had request for deferring over a million payments, it's about $3 billion worth opinion, I think about 20% to that relates to loans on our own books and 80% of it as loans serviced for others.

It's disproportionately auto and mortgage the dollars of course or mortgage because the p. It eyes figure there than it is auto loans.

I don't have the specifics in front of moved beyond that but that's what it amounts to and then it's probably it's worth mentioning that at least with respect to the loans on our own books that we would be.

We would be a deferring a interest into the future and recognizing interest revenue.

On an effective interest space, it basis, which would which would reduce the amount of interest income in the current period by some of them out it's not at this point doesn't seem to be a large amount will give updates on that as this number.

Flattens out at some point and ER and we calculate all of the piano effective yield, but I don't think it's going to be a huge difference maker in terms of our our interest income recognition for the year.

Got it thank you thanks Erica.

Your next question comes from line of Scott Siefers with Piper Sandler.

Good morning, guys. Thanks for taking my question done I think you you mentioned a one point during the call the as perhaps than a little bit of in Beijing abating and the pace of line of credit caused wonder. If you can just talk to what you've been seeing since the quarter and I guess it stands to reason that with the the quarter ending and you know your customers maybe doing.

Some window dressing there would be less need for line of credit draws but how is that actually trending and where you know how would you expect those balances to behave that cash actually getting used are you seeing it just indeed rebid redeposit back into the bank what what are the phenomenon work there.

Yeah. So those those didn't we monitor those daily drugs, just to understand whats happening by industry by customer by customer type et cetera, and they really have flattened out and I have been negligible or for the last several days more than a week or so they peak, but probably at the if he ended the third.

<unk>.

We can April and then pardon me in March and then and then and then came right back down so so not growing at anything like that pace. So that related question of how long do they stick.

It's a good one and it gets it depends on the reason for the draw to begin with wet weather. It was window dressing whether it was a need to access a credit markets.

Which some of which had been closed in some of which are more or less open.

Hi, great market wide open obviously, but for people who need to go into the syndicated loan market at a high yield market its a little bit more by appointment depending on their story.

There were people who drew.

Because of a just a hard core liquidity preference and they wanted to have feel quick access to their cash regardless of the messaging that they were sending to their external stakeholders and they may continue to have that preference for liquidity until till people know when the economy, it's going to open back up.

And depending on the nature of the borrower or what it means for there for their sales forecast and so I don't think we've seen a meaningful paydowns, yet and as I mentioned in response to the question about and I guidance.

Whether or not that those balances remained outstanding will have an impact on this quarter, one way or the other and currently there are sticking so, but they're not but they're not really growing.

Okay perfect. Thank him and I think not the second question just in the I'm on Slide 15, we go through this season islands by bucket can you talk a little bit about the financials, except thanks portfolio I know you've discussed in the past the just given all the turmoil there has been in some in the non bank areas, just maybe a little color and.

What we should be thinking about that.

So the the buckets of activity there there's.

There's a COO related activity, so credit managers their subscription finance, where we're providing leverage to alternative asset managers against the commitments of their limited partners to fund when called.

Theres leasing there's auto there's card there's mortgage there's commercial mortgage et cetera, I'm sure, we'll see a little bit more stress in the system as it relates to the loan balances they buy a large tend to be the.

As quality loan balances on the ratings basis are among the highest quality that we have because they're they're generally credit enhanced pools of cross collateralized receivables of water form or another and Ah and that's a huge benefit to us compared to the average portfolio of whole loans, where you have the first dollar of lots or something goes bad and alone.

Having said that these types of customers will have stress it often in there in their origination function, if they're an originator or in there and a in their ongoing capital accumulation affair it asset manager.

There can be stress on the servicing side of this to the <unk> you know for those that are or residential mortgage oriented there are likely going to be a little bit harder.

Presumably as servicing servicing advances default servicing things like that.

Pop up.

So we're managing them in that way on the CLL front, which is a big distinguishing portfolio from Wells Fargo.

In addition to whats here, there's a little bit of overlap, but also in our securities portfolio.

We have thirtyish billion dollars' worth of CLL exposure disproportionately top of the capital structure AAA double a. that can withstand.

An extraordinary almost a complete level of a cumulative default with varying levels of loss given default and where we feel very comfortable with that at 80% to that portfolios is externally rated AAA, which I think because it's a it's a plus so.

Hi, there havent done meaningful signs of stress here, we will we will talk about it if it if it if it becomes so we actively manage it in our and our allowance calculations and these are very actively managed borrower relationships as I mentioned.

Okay. That's perfect I appreciate all the color. So thank you for attending the question Yeah you bet.

Your next question comes from the line of Saul Martinez like either.

Hi, so.

Hey, how are you guys.

Thanks for taking my questions wanted to tackle a couple of things really quickly first the interplay of credit in seasonal so you trued up your ticked up your reserves, obviously in your Hcl ratio.

It's roughly about 120 basis points and this is probably oversimplifying it but one way to think about that ratio under csos. It's a it's an estimate of what you think you're going to lose on the entirety of your loan book over the life of alone I'm at any given point time and that number.

Is lower than what it is for for all for any other large bank even as of January 1st So I kind of want to to get your perspective on how much of that you think is a reflection of just you know you guys have the lower loss content loans.

Better risk profile, a bit as opposed to maybe some other eightys more idiosyncratic things as they seem to recall that you know you've marching loans in the past that recovery positions and stuff like that so and I ask also just because they do get that question occasionally front from investors sick asking if you're under reserve drilled to your pure.

As which I.

Thank you as the case, but I could kind of wanted to get your perspective on this.

Yeah, I think it's a good question I think a loan mix has a lot to do with it. They the question about marked loans historically would have been true, but with the adoption of Cecil most of those marks had to be reversed which was the source of a portion of our of our the are.

Our day, one adoption or negative number.

So so we don't Ah, we don't have that to rely on although used to I think the biggest difference is probably the the wage that we have on jumbo mortgage versus the weight that we have like credit card or you have a heads up basis versus other other peers.

And that's true of both outstanding as well as Undrawn.

And the allowance is there to serves both.

Our credit card portfolio, which under most conditions, we wish was a bigger.

Capability for Wells Fargo at times like this.

As a little bit of the saving grace because the expected loss content, both in what's outstanding as well as what might be expected to come through from from Undrawn is more manageable in the size of our balance sheet, it's still as you'd expect the be higher loss content higher loss rate exposure, because its consumer unsecured and.

Unemployment will be a big driver of of of losses in this cycle or any cycle, but on the on the personally in mortgage fraud, because that business is change so much in between borrower capacity to repay reserves ltvs et cetera.

Even in stress, our our loss estimation for that portfolio are really quite low and so as you as your run down different categories of C and I are commercial real estate.

For.

The various consumer categories or credit cards, the highest and and first lien mortgages the lowest and there we have the biggest weight on mortgage and probably the lowest weight on card.

Okay, and I presume in your Q and your why Ninetys, you'll be giving loan loss allowance by lending category. So we can compare you do your peers by segment right Yep.

And just one final one do you have do you have a sense or have you disclosed how much you've actually reserved.

Or would you disclose your epicentral much you've actually Richard for oil and gas and and you know entertainment and and all that all of the higher risk sectors on slide 20 to 30, just to get a sense of where you stand in terms of reserve levels in those categories. You know, we haven't yet because most of that is still.

It's still at a part of this qualitative topped off of the reserve, which is how the big build for this quarter went down.

This is all estimation and and as a result is not specifically allocated by loan grade and by portfolio.

It will get there those are the.

The industry's set a imentioned into the categories that I mentioned are the ones where we.

We leaned in the hardest and on a qualitative basis assumed a certain levels of downgrade, which lead to the higher reserve factor being attached to him, but it hasn't run through the process yet that way because we haven't had was downgrade. So so we will start to provide a more.

Information I'm not sure if it will be an acute but certainly as the cycle unfolds and and these things actually start to appear in the calculated a rated reserve for she and I categories in particular.

Excellent.

Thank you.

Our next question comes from the liner Tom can tie with Evercore ISI.

Good.

Good morning.

Back to the through cycle last number you are two and three quarter number I know you just indicated that cards would.

Would be the highest not assumption do you have what those what those through cycle numbers are that you have by bucket for for example, commercial real estate in card in Cnine that make up to 2.75 right. So the 2.75 is the she car severely adverse.

Through the cycle cumulative loss level. So it's not our through the cycle off level I know I'm not sure whether I wasn't clear I don't want anybody to walk away thinking that that's what we anticipate experiencing through the average cycle.

We have not laid all of that out we I guess I would look to the.

To the categories of loan loss disclosure with our last.

The last stress test those come from the fed it'll come from look if you get two wells fargo's, but we haven't gone category by category laid it out.

I can't tell you that a on the commercial side, it's about two and a half percentage than on the retail side, it's about 3%, but in terms of the individual components. We haven't they haven't went through that with folks.

Okay got it got it and then regarding to the loan loss reserve from here I believe Charlie you indicated in one of your previous cancers that.

You could see incremental loan loss reserve builds from here is that a fair assumption.

At this point given the she given your expectation for the ongoing stress on borrowers et cetera, then we could have incremental builds or do you think the where an adequate level given the recast of the back book and what you put on this.

Current quarter in terms of where are you reserve scans at this point.

Yeah, I guess I.

Yes, let me just.

I'm not an economist.

So I don't pretend to know anymore about the future than anything.

What else is in my position.

And I see them when they said was I think it's clear that economists are having stroke or having a difficult on trying to figure out what the trajectory.

Of unemployment in GDP will be what I was what I'm, saying was it just it wouldn't surprise me.

People will continue to be surprised by.

The downside in the numbers.

We've not seen anything in our own portfolios to suggest that we will be adding in the future but yeah.

But as those deteriorate.

And the shelter in place orders stay on the for longer which is possible.

Then it wouldn't surprise me that loss estimates.

Would have to go up on this point.

Again, I just it's not based on something that we've seen we don't know the impact of all the programs that are out there, which you've never seen it seems like this seen anything like this before but there's probably I think it's fair to say at least in my mind. There's more downside then there is upside to this point just given the uncertainty of the environment today.

Got it that's helpful. If I can ask just one more on the draw down a point I know you had implied that you're seeing a little bit of stability. There on the draws have draw down from a commercial side trended as you had expected or would you have thought that they could have exceeded the current level, but today.

So some near term leveling off.

Yeah. So.

They came out with a gate or fast and furious before borrowers actually experience.

A meaningful stress so I would say that was a little faster than we probably would have imagined.

In terms of how things have leveled off you know the prior question about whether there was window dressing going on through the quarter end, where our borrowers one of the have cash on their balance sheet certainly possible that that was a part of it the high grade well the the CP market being an accessible for for many users tend to high grade market.

Being expensive or close for a little bit.

Certainly contributed to it to both of those things are functioning better known these balances are still maintain so it's not crystal clear.

Whether that was a contributor to it but it seemed a little faster. The fact that it I think that folks are ah or like Charlie mentioned with respect to our own results are trying to understand how long there.

There to the <unk> if they are meaningfully affected from a sales perspective, how long sell through in place is going to change the nature of their business and they're going to make their their liquidity determinations, along the way it feels like many people many business leaders made the determination relatively quickly.

In the early trust, but it's as I said, it's it's flattened out.

The only on as the tiny.

Yeah. This is not as big say over and over again this isn't something that we've seen before and so you know did you know we thought that the number of industries and businesses would be shut down.

As quickly as the same time.

No does that increase through all levels and the speed at which they draw absolutely.

So, but the fact that we're seeing some stability.

Those numbers and reductions in terms of will be our says an awful lot about the actions certainly that that has taken to stabilize the markets and give people the confidence.

But the markets will function well when they need to access.

Got it alright, thanks Charlie.

Our next question comes from line of Matt O'connor with Deutsche Bank.

Hi, Matt good morning.

It seems like expenses that first quarter came in at the lower than expected, even if we adjust for the deferred comp or noise.

Any outlook. So you could provide on cost for the year.

No not meaningful you know we instituted a few programs for our employees in the first quarter that didn't cost so much in the first quarter that will probably contribute a little extra throughout the course of year on the other hanmis. There's a range of revenue related costs, it will probably be a or b lower with commissions and.

Entercom types of things, if the depending on business conditions of course, and and and our ongoing level of performance Genie is pretty much down to zero because people are not traveling or sheltering in place.

We will have a different technology costs, the probably got a little bit more expensive as we've enabled a 180000 people to work from home that all has to get factored in.

And then of course, we've got you know certain types of a of expense that are levered to to where the stock prices et cetera.

In this environment will probably be cheaper, but it was a year ago, but but not or anything.

Targeted or or meaningful in this moments during the public health crisis beyond that.

The only thing that I would add is you know as we think about what the future as we were very clear on the last call about her views on our efficiency and the work we had to do.

And given the environment that we're in this is not the kind of environment where.

We are able to realize any meaningful savings.

So we need to see light line of sight.

Pass this crisis in order to continue to get back.

The work that we have to do to drive that number down which we still completely believe is.

Yes, they are doable and the right thing, it's just going to take over time at this point.

Okay, Perfect and then you've made some comments in terms of the regulatory initiatives and obviously the flexibility.

How small business customers, but I need that's kind of broader update on a dropped from a regulatory issues and yeah. There were from headlines that you're missing from deadline.

In the media weight doesn't seem surprising.

A lot things are shut down, but because anything you want to add from.

I can try perspective, you're able to comment on.

You know I'm not going to talk about anything.

Specific it's not thats not the right thing to do I'll, just reiterate we have a lot of work to do everything that very very consistently and our ability to get beyond some of these regulatory actions is based upon our doing the work properly.

There is there is a bunch of it we're continuing to devote all the necessary resources towards it.

Even during this crisis.

And that's really what I can say at this point.

Okay. Thank you.

Your next question comes from the line and Steven Chubak with Wolfe Research.

Hi, good morning.

So John I'm, a just wanted to ask a question about how you're managing the securities, but I recognize you guys called <unk> guidance. So I'm just trying to understand given the significant declines at the long ended the code.

I was hoping you could help us frame, where you're reinvesting today versus a roughly 2.8% yield on the securities book and maybe just bigger picture, what's your appetite to reinvest in other asset classes outside of agency MBS and treasuries to maybe mitigate some of those reinvestment pressures.

Yeah. So good question, so where we're investing today and I think where we've got six to $6 billion to $9 billion, a month of expected a prepayment and maturity that needs to get redeployed.

We have band and will likely continue to redeploy it into HQ L.A. there or is there are certainly interesting opportunities in a in credit sensitive securities et cetera. They were really interesting in March, but there's still interesting today, but but for low liquidity value you know more risk weighted types of investment.

We're more likely to use our dry powder to for our customers so for loan growth rather than on the securities French even though historically would have done both.

And and a portion of that is related to to the existence of the asset cap.

So it's still likely to be a treasuries.

Ginnies and agency mortgages, as we redeploy that that $69 billion per month.

Or for the rest of the here.

I just might for my follow up I, just wanted to try to engage the near term outlook for fee income I know, there's a lot of moving pieces. This quarter. It looked like if we adjust for all of this not shows it was about a $1.3 billion drag, suggesting maybe a core fee run rate somewhere around 7.7 deli them.

I'm just wondering as we look ahead just given some of the pressures you cited on service charges spend volume contracting at lower fees, and while giving leg quarter pricing I guess will have an offset some mortgage I just wanted to try and saying how we should be thinking about the right jumping off point the core fee income in QQ, maybe to speak to your outlook for the remainder of either.

Yeah.

Some that's complicated for all the reasons, there's been describing I would say that you're right about the stepping off 0.44, a wealth and investment management that will be lower I expect mortgage to be stronger, we have $60 billion pipeline and stronger gain on sale or on a on a per pound basis.

The second quarter should be good in that respect.

The market's businesses are actually doing really well right now although investment banking is quieter hi, graders open, but there isn't quite as much going on in.

And.

In ER and non investment grade or equity issuance.

Or card for you should be lower because transactional volumes are lower.

Deposit service charges, my sense would be lower because of actions that we're taking a targeted basis to a two reversed fees where its appropriate.

And and Ah, It's it's never never works to add it all up and get a starting a given give a core number but those are probably the bigger influences on fee income or going into Q2.

That's great very helpful color. Thanks for taking my questions Yeah, you're welcome. Thank you.

Your next question comes from the line of Charles Peabody with mortality.

Hello Charles.

Hi, It's my guess that tail risk events are not over for this economic cycle. So I was wondering if you could address two different tail risk.

They relate to managing your interest rate sensitivity and the impact on your P. now the first is if we go into.

Multi quarter period of negative rate.

What are the actions you can take to manage that and how do you see that impacting your European now and then the second is if PON vigilantes ever do come back and we got a steeper yield curve.

100, 825 basis point spread between 2010.

What impact does that have on European now as it relates to Eni mortgage banking and equity securities or did that security.

Sure and then finally like this when I look at this 0.1 Federative Yeah. I know you would yeah, but also did you take any material actions in the month to March to hedge your interest rate risk when in the second quarter that those are three separate question sorry, yeah that serve so well go in reverse order.

There are in the month of March I would say getting longer duration, not much longer, but but continuing to to replace and add to duration. In this investment portfolio is the most visible activity to defend against going lower in rates.

In any size or on the the second question about what happens if we get a steepener obviously, there's a hit to capital for Moshe I when that happens because our bond portfolio loses value, but with the amount that we have regularly to ah to reinvest with deposits at levels that they.

Our et cetera, we Ah we are sensitive to the you know call. It that seven to 10, your point and ER and without putting a specific number on it it's probably the it's among the biggest drivers in terms of the way we're positioned for increasing net interest income and.

And the reverse is true as well.

And then with respect to negative rates, just a handful of things I mean, it's obviously looking at looking at Europe are looking to Japan. There's plenty of examples of why that's not a cut terrific environment to be in for banking, but on the on the LIBOR based lending side I'd make the point that I think substantially all of our see an eye loans that are LIBOR based have floors.

And.

So that you know, we're not worried about eating through margins still earn attractive place to be but but we've protected ourselves in in that way.

I think there are a range of deposit related activities that we have where we wouldn't begin to institute.

Charging for holding cash you know given our.

The existence of the asset cap, we can't overpay for deposits because we are we're in the business are sending low liquidity value deposits back to bank customers and alike. So we would probably be pretty quick to be managing what we pay for deposits to a two.

So that we didn't have an incremental influx that we that we didn't have an appetite for [noise].

And then as I mentioned, adding or maintaining a ah ah some fixed rate posture duration long duration posture on that investment portfolios away too to abate you know, earning a negative rates as a as as rates go below zero I know I don't think you're suggesting is a high probability of.

I think that's been pretty clear could have been some instances where bills went negative just because of technical factors, but I don't think it's at least currently part of the playbook for the fed and then the other jurisdictions around the world where it has occurred out the curve. It started with the policy decision to do it at the front end so.

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I like the steeper curve better than the better the negative rates among your questions.

Thank you.

Your next question comes from the line, Brian Kleinhanzl with KBW.

Hey.

Good morning, I'm just a quick question first maybe the a mortgage banking and kind of walk through the decision to exit on the nonconforming correspondent I mean, you heard that trading loss rates below residential mortgage was especially with the after cap or just credit risk more broadly.

It's really a.

Shelf space, and and putting our own retail customers at the front line.

As one of the levers that we're using to manage living under the asset cap.

No not at risk, particularly.

Okay, and then separate question and there was lot of kind of one off items in the quarter that were due just where markets were at the end of the quarter or I'm more spreads were another with the reserve for debt Securities equity Paramounts.

I'm going off on had to ineffectiveness <unk> or any of those expected to reverse given where markets are at this point in time or where rates are for the hedging activity.

On hedging effectiveness I wouldn't expect that to reverse order persisted sort of a they a confluence of events that gave rise to a for the quarter. So that probably goes back to it that expectation of.

You know call it a net zero expectation and it can drift up or down depending on what happens in the library, Oh, I asked basis or or for some other reasons.

In terms of equity impairments.

Those general up there are some measurement alternative activities that actually do get written back up when Ah when the situation warrants it but I wouldn't expect that to happen in in the early stages of a recession. If that's where we are the in the next few quarters, obviously there.

There are lots of ways to earn their back over the life of those investments, but if it'll it'll take awhile for that to reveal itself.

And what was the last one every couple of different examples the reserve for debt Securities.

Oh yeah.

I don't anticipate that it will a you know those are that relates to both fs and held held for a held to maturity securities. So presumably there are some may affect securities that might get sold at mature that you know that that released some of that but I don't think it just comes right back.

That's the nature of <unk> <unk>.

Okay.

Your next question comes on line.

Kenya June chat with JP Morgan.

Hi.

Thanks for taking my question of shortly and John.

Couple of things Firstly, how to total criticized loans are still in the quarter I know you mentioned oil and gas.

[laughter] have we seen any oh I see any numbers on have you seen any impact of any of those other industries, where there's concern.

And any as you look at your commercial loan book you broke down the.

Draw downs into C.I.B. commercial banking commercial capital left theory.

Any color on the Outstandings on those and also the breakdown of how criticized did and those full categories.

So criticized loan balances increased about $4 billion in the quarter almost all of it in March.

Uh huh.

Try to do the math here.

A big piece of it or for those that a that or are in the interest that are in the industries that we mentioned earlier.

Airlines for example.

The you'll see it you'll see it and energy for sure are there have been there's some commercial real estate that has already come through it's just it's so early because this all occurred in size in the you know in the mid to late March that we'll probably see more of that are realizing itself in Q.

Two which is part of why our allowance build is really so much from a qualitative perspective I mean, it's it's it's based in math, but it's not driven by by loan gradings et cetera, which drive the the quantitative approach.

So I think you'll see it coming from the.

From the usual places we'll have we'll have more specifics in the 10-Q only file it and then of course, you will see the behavior in actual receipt oversee financials will will will administer loews hotels on the other loan by loan basis through the second quarter and that will.

That will update to the quantitative model and the disclosures.

In Q2.

And how do you how does your commercial loan book break down between or see I'd be commercial banking commercial capital. It really doesn't get free biggest category going I guess as a little bit of CRT encoded in C. N <unk> any color on Bakken.

[noise].

They will be when we publish a those segments you could that be what we have in the deck today that shows total she and I outstandings and commitments is superset of those businesses. So you can see the total that where we draw the lines between what is in which segments we haven't.

Haven't added up and disclosed it that way, but you are you will begin to see it that way in Q2.

Okay.

Another question you mentioned on the page on deposits that you grew deposits in consumer through high yield savings.

Kevin or any color on why you're growing high yield savings that you know you're really not try I didn't think it we're trying to grow deposits any color on Buck.

What's behind that.

Yeah, well high yield doesn't isn't the same today as it was [laughter] once a year ago.

You know some of where are we grow is that is the preference of the customer choosing where they're going to put their money and thus the label of high yield savings means something different as I said, a little bit earlier, where we're forecasting our deposit costs to come down or a substantially throughout the remainder of 2020.

Reflecting what you're suggesting which is.

In a flight to quality timeframe with illiquidity preference by our customers of the deposits are rolling through the door and we are not overpaying for them. If you will see in Q2, I think substantially all of the incentives from last year as we were building deposits set up slightly more expensive timeframe to to finally roll off.

And then Q2 or so through Q2, three and four as we currently forecasted you know, we're going to getting back to deposit costs of the.

The 2014 15 era.

Okay. Thank you yep.

Ladies and gentlemen, we do have time for one more question and that last question comes from Gerard Cassidy with RBC.

Thank you good morning, gentlemen.

John can you share with us on slide 15.

You gave us the total outstandings in the total commitments I think it's about 50% outstanding which could commit.

It was that number at the end of the fourth quarter 2019, and within those categories. You gave us who had the biggest drawdowns.

Wow, that's a very specific question, you're asking me [laughter] saved the worse or less yeah, yeah, yeah yeah.

So so.

I don't have the information right in front of me I can't tell you that as a as a category and this was on slide 12 in the same deck, our utilization rate jumped up almost 9%.

To 49% so for the whole for the whole universe of wholesale commitments.

We had been at a high Thirtys and now we're in the high Fortys of utilization.

I'm going to have our IR folks follow up if you'd because we do we have been tracking utilization or I should say draw requests by by industry and and that might be useful but I.

But I don't have it I don't have that right in front of it.

No. That's good thank you, Mike and if someone else complemented you guys. The breakout on the portfolios for oil and gas retail transportation Entertainment was very helpful. If you could provide them in a suggestion for the next time for the financial you know, except banks I think that would be helpful.

One last question for you. It's a technical question. If your assumptions Enciso are correct on the economy that you guys used to build up the seafood reserve this quarter.

If you're correct in the second quarter do we see the provision being primarily into covered net charge offs and loan growth and no more seen some reserve build up the same correct is that the way we should look I'm in theory. If you had perfect for site, but you also have to kind of know our to do a growth in.

Same timeframe because of the minimum you'd be capturing allowance for the change and the loan portfolio from one quarter took an expert so but.

I would I would discourage anyone from imagining that at this point in time that any bank has got perfect clairvoyance about what the future holds and whether it gets better gets worse I'm sure we'll be able to different.

No no no doubt I appreciate that thinking with the Gander.

Terrific terrific well. Thank you everybody that was our last call and.

The first step out a journey as we go as we go into this cycle, we've been saying for some time that were late in the cycle, we're going to stop saying that because now we're early in the cycle and and we'll be working with each of you to help understand a your answer your questions, where we can and.

Look forward to talking to next quarter. Thank you very much.

Everyone.

Ladies and gentlemen.

Today's conference call. Thank keeping your participation you may now disconnect.

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