Q2 2020 Bank of America Corp Earnings Call

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Standby program, it's about began.

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Good day, everyone and welcome but he's bank of America earnings announcement. After his time, all participants are going to listen only mode. Later, you'll have the opportunity. That's question. During the question answer session. You made registered ask your question I'd anytime by pressing the star and one on your Touchtone phone, Ukraine moved yourself by pressing alky. Please.

Today's call is being recorded its my pleasure now to Trump or where do we Mcintyre. Please go ahead.

Good morning.

Thanks for joining the call to review our second quarter results I Trust everybody has had a chance to review our earnings release documents that are available on the Investor Relations section of the Bank of America Dot Com website.

The first turn the call over to our CEO, Brian Moynihan for some opening comments and then ask holding out for you our CFO to cover some other elements of the quarter.

Before I turn the call over to Brian just let me remind you that we may make forward looking statements during the call.

And for further information older is forward looking comments, please refer to either our earnings release documents, our website or our FCC falling.

So with that let me turn it over to you Brian Thanks.

Thank you Lee and thank all be for joining us for our resolve.

As I step back and thought about talking to this quarter I thought back to our discussion of last quarter's results in mid April as we were talking.

The depth of the cobot nice increases.

We thought were seeing a rise in virus cases, we completed a massive move in our company in companies around the world to work from home.

Closing branches that for safety and other facilities.

We had a million customers are already approaches by mid April asking for assistance and in terms of paying their loans, we see the massive amount of commercial line draws in mid March to mid April.

And let me close out of panic and the need to Craig instant liquidity and is that we saw flooded deposits looking for a safe Haven at the same time.

Yeah. It at that time, the core economic projections, we're still catching up to the worsening predictions of future.

And the reality of the health officials projections of the virus Pat in reality shutdown. It stayed on motors and.

And now we're a quarter later.

In some areas. The cases are still rising in some areas are rising was economic perdition predictions had been revised and afford Pat has deteriorated from last quarter.

Based on projections now extending the length of recessionary environment into 2022.

Deep into 2022, we provide substantial additional reserves for expected future credit losses this quarter to reflect that it does impact that earnings I.

Another hands, there's been some encouraging signs consumer spending activity is vastly improved since they.

Spending by Bank of America customers consumers. During 2019 was a total of three trillion dollars. So it's a sizable sample of U.S. activity.

For the month of April that spending was down 26% compared to April 2019.

However for the month of doing that spending was relatively flat to 2019 and so far. So the first couple of weeks of July we're seeing that total spending actually be above what it was last year.

Customer isn't businesses have adapted to a new environment somewhat reopened and yes summit also been re closed or limited again, we expect to start stop to be the base case as we look ahead.

At present core operating assumptions for making our credit card projections and our reserving by the unemployment stays elevated and ends this year at around 10%.

Means at 9% in the first half of 2021 and seven at present.

At the end of 21 and.

And that provision setting scenario mix. It takes some time until late 2022 or early 2023 for the aggregate GDP level to get to the same size. It was heading into 2020, so it'll be a bit of work to get out get back to that level.

The central banks around the world led by actions are the fed provide unprecedented liquidity in the financial system. U.S. government has also provide direct payments through unemployment supplements VIP PPP pro than many other things to help American citizens weathered the storm.

Still do.

Due to all that number things are in fact different from our last quarter a conversation.

Panic borrowing has dissipated as of March to provide a financing source of many companies extending maturities.

Most companies have stabilizer operations draw rates and middle market lines of credit or back to levels that they weren't mid last year.

In the smaller business segment, there are actually down as a companies do not need to liquidity, but many companies may not like where they are in terms of runner growth. They have stabilized consumers are benefiting from direct stimulus and deferrals on loan payments from bags.

Such that delinquencies are far lower than what it would be predicted an 11% unemployment scenario.

Consumers have more money in our accounts for those that we see the P.P.P. The small business. If we see the that beat that bank of America. We we estimate that the money has been spent out of the TPP proceeds at only 35% level. So far so 65% left to be distributed from those companies to their employees and other other vendors.

The virus assistance request a follow on.

<unk> the consumer will be called Cat program. The week of across the last few weeks are down 98%, where they were in mid April.

The question, we all get asked that is when will the storm. It that is no has always been health care question not an economical.

So I got continues to be prepared for whatever the economic scenario. It brings.

And how do you get prepared well, it's too late to start in the second quarter 2000 2020.

We did that through our adamant teen decade long effort to drive responsible growth in our company portfolio is in great shape heading into this year and then the second quarter, we reviewed our commercial loan portfolios at a customer level across our businesses.

This range up to date, we're living credits quickly to criticize or MPL designations.

We've also gone through every credit this that's the needs that they'll have to borrow in near term for liquidity in business prospects.

Consumer books, we also benefit from the decade long improvement or underwriting standards. We have remained consistent at since the bias of rising unemployment related matters, we paired up consumer risk appetite.

A key difference not company now versus the last crisis is the unsecured card portfolio is basically half of what it was going into great recession.

Better Asacol. Another example differences our commercial real estate, especially the <unk> far less exposure, especially in the construction area.

We saw recent stress test proved this out again as we had the lowest losses and among the large firms for the seventh of the pet a strip the 7008 past eight stress test the fed is right.

We've also improved a fortress balance sheet <unk>, even from your answer today.

All this admit this crisis, we have built liquidity our liquidity at the end of the quarter was up 800 billion on average is significantly up from Europe, we've doubled our credit reserves the $21 billion from where they stood at your it we've built our capital levels, resulting in the common equity tier one ratio at the ended the quarter of 11.4% versus 11.2 per se.

Your it.

190 basis points above a regulatory minimum and as we disclosed to you. After the stress test we have room with even with this stress capital buffer as were Florida, 2.5% level does but despite the 2% actual calculation.

We earned $7 billion year to date, even as we built those reserves and we returned $10 billion a capital to you in the first half.

By the way charge offs the quarter were stable in the ratio remained low at 45 basis points this quarter and our npls on increased modestly innocent by despite a scouring the portfolio for radian changes.

Quarterly expenses of 30.4 billion remain in a tight for year long range searching to 13 that billion little exception, even as we continued our investments over the period and incurred higher cobot operating expenses.

During the crisis, we also have at Wassa away on a strategic programs. During the first half we have driven our promises digital leader across all our businesses our cable capabilities enable smooth transitions for our company isn't our and our institutional investors and our people who we work with its customers whether the working for home and sharing place to transact the financial business.

Whatever way they want to.

Where this goes we will see a rod day does provide some signs of cautious.

Optimism.

We emphasized cautious here.

We aren't going to react mistake here, we are being diligent and what is making sure. We keep our company strong. It any guard we are ready for whatever happens because the last decade of hard work on responsible growth. Most importantly, we are ready because we have 212000 town the teammates or work in the everyday coming to a great job for the customers communities our shareholders.

So let's drop into quarter two results that were going to slide two in slide three together and I'd ask you to refer that combination the commentary on three talks about the charts on slide two.

This quarter, we showed the balance in our company or more credit sensitive businesses saw lower earnings due to provisions and lower rates. It impacted our fast growing deposit types of businesses, our position as a top capital markets platform for issues and institutional investors.

Allows us to produce solid overall results.

Market served as an anchor to win for the company and the second quarter, we produced $3.5 billion and net income.

This conclude a building our loan loss reserve by $4 billion.

Due to a total provision expense of 5.1 billion earnings were 37 cents per share.

Earnings were down 3.8 billion from the second quarter of last year, driven primarily by our reserve Bill.

As I did last quarter I think it's useful to draw your attention to the pretax pre provision income number.

We believe that number helps assess the earnings power of the company's for credit cost in a downturn.

We produced 8.9 billion, a pretax pre provision income, which was down 9% some quarter to 19.

Given the changes in interest rates and the growth of deposits in the an impact it has not company.

The forgiveness and fees, we've made to help accommodate a consumer customers and time to stress and the overall lower economic activity at record drops in this quarter.

It shows for pretty remarkable resilience in fact, it's just below the average of pretax pre provision income for the level of past four quarters.

The 3% year over year decline in revenue was driven by lower at <unk> and I felt 11 billion this quarter.

Bearing the brunt of the significant first quarter rate cuts for the entire quarter.

Mitigating the revenue Klein from and I was strong global markets results sales and trading revenues, excluding deviate of 4.4 billion were up 35% year over year.

Investment banking fees of 2.2 billion or a record in grew 57% year on year in aggregate, we saw $1.9 billion improvement sales and trading ADESA banking year over year.

Most importantly, we we think about profit in this company our global markets.

Im produced $1.9 billion, an after tax profit as a separate segment.

Our non interest expense was 13.4 billion as I said earlier is <unk> include roughly $400 million in that impacted expenses and savings related to the 19th.

A return on tangible common equity was 8%.

Let's go to slide four.

Yeah, we know the continuation that expansion the programs to support our teammates and clients initiated last quarter.

In quarter, one we established broad measures to promote the health and safety, our teammates and help limit their exposure to carve it <unk> quarter to be continued expanded those efforts and have remain mostly in the work from home posture with less than 15% of employees and offices or financial centers a call centers around the world.

We continue to provide ongoing access a comprehensive benefits and resources such as enhanced backup childcare and adult care services. Among many other supplements incentives for frontline associates at all those costs are in the numbers, you're seeing this quarter and water commitments to hire the 2800 students for summer jobs and permanent jobs coming out of college.

Taking care of employees the right thing to do and enables each of them to play the important role they must as providers a critical services for the U.S. economy in the worldwide economy.

In addition to keep our financial centers open to serve clients continuously through the crisis. We consider you offer assistance in our commercial consumer small business clients affected by cobot.

These actions include payment deferrals refund of certain consumer fees pausing certain foreclosure sales in that repossessions, a cars addictions and other matters.

One one noteworthy Pat was the P.P.P. the Paycheck protection program. We also we originated a large number of loans in that program at 334000, plus small business clients receiving alone providing funding of 25 billion.

We also supported the communities we live it.

After announcement of in quarter, one to donate $100 million to fight the immediate effects of the pandemic.

We we announced a new initiative quarter to recognize their communities and certain people them a disproportionately impacted by this healthcare crisis and it and in the elevated racial tensions existed for years in this country, we announced a 1 billion for your dollar for your commitment to dance issues embrace the quality economic opportunity in health care initiatives.

Our market presents another leaders throughout the country.

Busy working to play there vital role in helping US plan, how we deploy those critical funds. These critical actions.

I'm proud of how my teammates or the customers and clients during this.

Well the crisis, but im even potter, how they're playing a part but more generally to help.

On page five we discuss the deferrals.

Assistance program. The customers. This is program as we call it cap for our clients that provide easy access to because <unk> loan deferrals knees are immediate financial burdens the Chris built.

Quickly, peaking in the first week April 415000, requesting a single work they started dropping from that point and have continued to drop by mid may the request fell in the last few weeks, we've been consistently 98% below that Pete and totally process 1.8 million cuts consumer deferrals, but about 1.7 those remaining.

As we enter July.

<unk> this represents $30 billion, a consumer balanced with payments on deferral.

The number large numbers of process deferrals as you can see your credit card holders another area that concert tradable quest as the practice solutions group and small business.

Let me provide a little deeper insight into these categories you can see it on the lower right in part of the slide.

Credit card card at 85% of deferrals were initiated late March early April and has died down since that 95% that initiated were current underpayments. When the deferral was a question more than 60% of the active card deferrals have made at least one payments since going on deferral. One third of made every payment every month.

As we look forward if there are no other major changes the consumer spending habits are major macro deterioration, we'd expect car deferrals declined significantly in quarter three given the exploration and these payment observations.

Importantly, our credit reserving that you're seeing a CNL today reflects the individual credit corsetry.

Characteristics of all these deferred borrowers in a high risk they propose.

Small businesses, where we saw the highest percentage accounts requesting assistance estimate call last quarter. We talked about this these request came from our business practice solutions group. There is it mostly Dennis and doctors, who were shut down during the crisis, but now are open.

That's that they reopened our internal survey shows 80% of these borrowers as of a few weeks ago Raul back to work with steady revenue.

Contacts the accounts, 90% indicated no elevated level continue distress and important to still need not to continue their referral.

Well not in this charter deferrals commercial accounts, some added roughly 2% of alone studying 1% of those are unsecured it through and through conversations. These bars, we not expect many of you used to request a second deferral.

Now moving on to page slide six for consumer spending.

After significant slowdown in consumer spending in April we began to see signs of improvement beginning in may.

And most early we have seen momentum in early July.

Chart on slide six shows a seven day moving average of payments in Korea is at the same week last year.

There are three lines, representing credit debit and total spending.

Again credit is about 12% debits about the same amount and total spending it's obviously the three children I talked about before overall in the first couple of months of the year in a healthier U.S. ekati payments were running as high single digit percentage, Hey says the same period in 2019.

That change the pandemic spread an economy shut down.

Saw a superior to fine across all payment types, but particularly in discretionary spending on categories like travel leisure and entertainment, which drives credit card spending to lower levels than other forms of payment, including debit card.

<unk> followed by large increases in payments are necessities around groceries and staples like Hell supplies, but you can see those payments are made darcy with debit cards or cash.

As states began to reopen of the past couple of months, we saw an improvement in spending levels as customers. It became more active buying fuel and spending on home projects and eating out.

Such that from isn't pay through debit usage as customers stimulus payments and other assistance in a checking accounts.

On a monthly basis, comparing tending spending to the prior years month April 20 was down 26% from April 19th May was down 13% from May 19th and I said early June returned to basically flat.

Well, yet seen us some spending leveling off on a weekly basis, just covered kit cases rose recently in hot spots around the country.

<unk> municipalities and states to pause further and further phases of reopening or impart impose more restrictions, but even with that july's actually running ahead of last year as much higher during the shutdown periods of early April may.

It appears consumers of demonstrating that quickly adapting to the environment by changing shopping habits, and moving back and forth between physical an online as needed and are doing the same delivery and take out restaurants as restrictions Tang change.

We continue to monitor behavior everyday and except.

And expect that there'll be starts and stops as you see the ebbs and flows of cases and people's up and governments reactions to them and and also until we learned to operate in this new norm.

Let's go to lending activity on page seven slide seven.

Here, we see that the barring credit shows modest growth.

On the commercial activity involving loans and pay that we've seen some modest recovery and some consumerlab.

Loan applications.

Which all Troughed in April.

As you can see during the quarter total loans declined 52 billion for the end of quarter, one, but there are several dynamics' worth mentioning including the sale of $9 billion a mortgage loans.

Within commercial excluding P.P.I.P. activity.

Loans grew $5 billion year to date as clients pay down 62 billion, the $67 billion loan growth in quarter one.

Well this isn't good for the balance sheet and loan growth is a good side as many borrowers in quarter, one accessed emergency or they're paying it borrowing or to get liquidity, but since paid those funds back.

Or they have access the capital markets and turned out that financing.

Many of which we were able to assisted helping them do.

As I said earlier <unk> revolver usage has returned to levels in our middle market business about where it was last year. It is lower than those levels and our business banking business.

Consumer lending show solid residential mortgage bill gross but a decline in credit card doing the spending levels I described earlier.

The point is there a lot of cobot related activity, but I need that will stop there were some online demands for loans in the first half the year.

Mortgage has continued to be solid despite a conservative pricing credit at bank of America, We've all seen auto loan apps fight the way back to two that levels. They were at pre crisis as dealers of opening and people about cars.

And last I would note that we continue to supply capital. These customers. Our total commitments have been consistent to our commercial customers. They remained above a trillion dollars throughout all these periods and year to date, we've approved nearly $160 billion, a new expanded commercial commitments for our customers to help them whether the store.

[noise] on deposits.

We've talked about those and slide eight.

We see an impressive client activity and that activities continued during the quarter across every single line of business.

Since the end of 2019 total deposits have risen $284 billion to more than 1.7 trillion.

It's also worth noting that the disciplined pricing with rates paid move from 44 basis points paid to the customer to nine basis points, a short rates decline consumer deposits grew $123 billion or 17%.

69% of that growth has been checking for this cementing our position is leading poor transactional back for American consumers go banking deposits, there isn't $118 billion for 31%.

Managed deposits are up $29 billion, 11%.

We continue to.

Customers continue to evaluate companies of course partner.

Importantly, and on slide nine we'll talk about this.

It's the last thing I've mentioned before I turn over to politics and more in depth and numbers is our clients digital usage.

Our customers value the years, a continuous investment innovation as they found an ever increasing need for a digital capabilities and covered environment.

Writing this through is once again that we are digital bank and the physical bank in consumer there are many examples and I'll touch on a few digital log ins were 2.3 billion the log ins in the quarter and increased 20% in the past 12 months the average log ins for years, there's also up 14%.

<unk> demonstrate engagement quantity of users ankle depth of used by those users.

More customers discovered these convenience and safety at opening accounts digitally as a number of units sold digitally.

Increased 20% since last year, representing 47% of sales.

We added over a million new mobile check deposit users, whether it's surprising 22% of those being baby boomers their seniors who have been traditionally hard to engage digital.

Disengagement effort to keeping our physical centers and call center is running have our customer satisfaction money at all times I at Bank of America.

Commercial side, we've seen an equally impressive growth in our users and usage as commercial users at the need for similar convenience as well I don't know work from home mode and wealth manager. In addition to convenient online banking capability increase engagement, we utilize webex and other methods to F. Secure video conference applications engage the clients, which result in household growth.

In our wealth manager business, even during the crisis.

Digital loggins across Merrell clients were up more than 100% year over year, and 39% of checks deposited digitally versus less than 25% last year.

If you look on slide 10 this.

Looks at the more active consumer segment.

A lot of you focus on.

Single purpose payment rise I want to draw your attention to top right chart, Brazil to luminaire, how much money is moving through our customers through that system. We now have 11 million customers actually using so every month, adding 3 million in just the past 12 months loan and you've seen the chart. We nearly doubled the volume of transactions every year for the past four years to now them more than 117 million transit.

Actions in the quarter.

And that volume as a result near doubling the dollars use to $32 billion that transfers during this quarter.

That's impressive gains given the fact that total payment volumes have dropped as those freed or industries clients and benefits our shareholders through lower cost above all it's better for our customers with that let me turn it over to Paul.

Thank you, Brian I'm going to start on slide 11, with the balance sheet.

Our balance sheet ended the quarter at 2.7 trillion and total assets, increasing 122 billion since the end of Q1, driven by a surge in deposits.

During Q2 deposits grew by 135 billion, while loans declined by 52 billion as commercial borrowers repaid much of their lines.

Excess liquidity continues to be invested predominantly in cash and cash equivalents.

Shareholders' equity increased modestly as earnings exceeded distributions to shareholders.

With respect of regulatory ratios for the past two years RC T. One ratio under the standardized approach has been binding.

But this quarter the ratio under the advanced approach is lower and therefore binding.

Our see tier one ratio under the standardized approach improved 80 basis point linked quarter.

To 11.6%, primarily driven by an 86 billion dollar decline and RW way.

This RW a decline was mainly driven by commercial loan pay downs as well as lower credit card balances.

In addition.

We early adopted the standardized approach for counterparty credit risk aka soccer for derivatives.

RCT one ratio under the advanced approach improved to 11.4% as RW way under advanced declined modestly.

Also this quarter, we received our preliminary stress capital buffer buffer or SCB.

From the Federal reserve pursuant to our secret results.

Our stress depletion was approximately 150 basis points.

And including the dividend add on.

Our SCB was a little under 2%.

However, as you know.

<unk>, our floored at 2.5%.

So our minimum standardizing events each one requirement is minus <unk> percent and remained unchanged.

The capital cushion above or 9% see two on minimum with $28 billion at quarter end.

The C tier one ratio under the advanced approach became our binding ratio primarily due to the impact on RW way of the migration of corporate credit risk ratings under the advanced approach.

Our t. like ratio increased and remain comfortably above our minimum requirements.

Turning to slide 12, and net interest income on.

On a GAAP and non up two basis and I in Q2 was 10.8 billion 11 billion on an F T basis.

Net interest income declined 1.2 billion for both Q1 20 as well as Q2 19.

As we noted on our Q1 call and experience this quarter.

Oh, I fell roughly 11 billion this quarter as variable rate assets repriced lower.

Following a more than 100 basis points decline.

On average one month LIBOR from Q1.

Other notable and I headwinds in the quarter include roughly 300 million of higher premium amortization on our asset backed securities given the lower rate environment.

And a decline in higher yielding credit card balances.

These negative impacts were partially offset by deposit growth coupled with lower deposit pricing.

The addition of PPP loans in the quarter wasn't marginally it also marginally aided and I.

As did lower global markets funding costs.

Given the sharp decline and then I, coupled with the increase in the balance sheet driven by deposit growth.

Net interest yield decline, notably quarter over quarter by 46 basis points.

Looking at the bottom by chart the largest driver of that decline was lower interest rates quarter over quarter.

Another large impact was the increase in deposits.

Which is modestly helping and <unk>, but diluting net.

Net interest yield.

Given that most of the excess funding Q2 was invested in cash cash equivalents running only 10 or 15 basis points.

We continue to.

Uncertainty with respect to the duration of these deposits.

Two other elements diluted net interest yield.

They are the higher level of premium amortization.

The lower balances of high yielding credit cards.

In terms of forward guidance.

We believe the largest impact from the interest rates declines occurred in Q2 as expected.

As we enter Q3, we face.

Headwind from the pay downs of commercial loans, which could reduce and I buy a couple of hundred million dollar.

And as a reminder, and I will be impacted by the long end of the occur as our securities portfolio continues to repriced lower.

Beyond Q3.

Now I stability absent material changes from the economic conditions.

We'll be dependent on asset growth and or redeployment of deposits into higher yielding securities rather than cash.

Yes, hi, as Brian mentioned, the balance and diversity of our revenue streams combined with strong expense management.

Supported pretax pre provision income despite the unprecedented decline and interest rates.

I would also just remind you that short term rates were near zero in 2014 and 2015.

Before I before rates rose.

In those years.

We produced solid profits.

Plus today, we have 150 billion and higher loan balances.

And 500 billion and higher deposit balances, with which which which will benefit.

Hi versus those periods.

Turning to slide 13 and expenses.

13.4 billion this quarter expenses were modestly lower than Q1 20.

For three years now.

Despite investments in areas, such as technology sales professionals marketing philanthropy, new or renovated financial centres expanded benefits increase minimum wage.

We have managed expenses well have operated in a tight range of 13 to 13.5 billion expense each quarter.

Outside of the impairment charge taken in Q3 19.

This quarter was no exception.

Even with the added costs related to covert 19.

In Q2.

We estimate.

That cobot related spending.

Versus covert related savings netted to an increase in expense totaling 400 million.

We will be working hard to reduces costs as we move through this crisis well the same time, ensuring that our customers and employees are safe.

The higher cost of covered with mostly offset by the absence of elevated payroll tax when comparing total noninterest expense to Q1.

With respect to expenses beyond Q2.

Please note that on July 1st.

We began accounting for merchant services provided directly to our customers.

Versus through a joint venture.

Accordingly.

Beginning in Q3.

We will record revenue and expense for these operations separately as opposed to netting them under the equity method of accounting.

As a result, we expect the expense for this business to add roughly 200 million per quarter to our expense run rate.

Additional revenue from America services in the near term should be roughly a 100 million a quarter.

Proving as the economy recovers and operations become even more fully integrated driving increased value for clients.

We are excited to integrate merchant services into our lines of business merchant services is an important product for many of our clients from small businesses large multinationals, who rely on accepting credit and debit cards for significant portions of their revenue.

It is core to transactional banking and working capital management.

Because our hello, bees enjoy leading market share across both consumers and businesses.

We can innovate connect and provide services that add value across the spectrum a payment users.

Including offering innovations and expedited settlement enhanced authorization lease cost routing. According the management credit FX data analytics and many other products.

Our new proprietary platform is flexible resilient and enables us to grow and facilitate the evolution of the payment ecosystem as the marketplace evolves.

Turning to asset quality on slide 14.

Our underwriting standards have been responsible and strong for many years now.

And we expect this back to benefit us as we advance through this health crisis.

One independent indicator of the relative quality of our balance sheet is the federal reserve annual see CCAR stress tests.

Our net charge off ratio under this year's stress test was once again, the lowest of our peers and has been the lowest in seven of the last eight years.

Total net charge off this quarter were 1.1 billion or 45 basis points of average loans.

Net charge off rose 24 million from Q1 with an uptick in commercial losses, mostly offset by lower.

Consumer losses.

Provision expense was 5.1 billion.

Our reserve build a 4 billion, reflecting weaker economic outlook since the end of Q1.

Impacted expected future losses.

While we thought increases.

In commercial <unk> Reservable criticized exposure is impacted by the virus.

Overall.

Credit thus far has been better than expected as NPL only rose modestly.

Whereas our expectations as the economy reopened we saw lower deferral requests better payment trends from the stress bars, a slower pace of commercial downgrades towards the end of the quarter and faster payments of line draws than we anticipated.

On slide 15.

We break out our credit quality metrics for both our consumer and commercial portfolios.

On the consumer front cobot effects on asset quality remained benign.

This is driven by deferral extended to consumer borrowers coupled with government stimulus for individuals and small businesses.

Consumer net charge off the Cline.

Hundred 38 million, which is partially attributable to a deferral.

What should be <unk>, which should provide a better chance of recovery with stimulus and other assistance.

In commercial we saw 162 million increase in net charge offs with concentration in commercial real estate and energy.

Our commercial loan book, excluding small business ended the quarter at 88% investment grade or collateralized.

One could see cobot impact more clearly and Reservable criticized exposure, which increased 9 billion from Q1.

This increase was driven not surprisingly by exposures to cruise lines restaurants real estate.

And retailing.

Turning to slide 16. This table provides a full picture of our long spelled since yearend 2019, as you can see our allowance.

Including reserve for unfunded commitment was $10 billion at year end.

Doubled to more than 21 billion, while our overall loan balances are relatively flat.

[noise] note that we ended Q2 with an allowance to loans and leases up 2%.

I would also note the coverage ratio for credit card increased to 11%.

Total commercial loans increased to 1.6% and see our E rose to 11.5 per excuse me three point.

5%.

These ratios reflect our loan mix.

Tumor concentrated and secured loans with consistent high underwriting standards.

Which for the past 10 years has focused on high FICO borrowers with whom we have strong relationships.

It also reflects the investment grade nature of our commercial portfolio with strong payment and debt servicing characteristics.

Our increase in reserve from Q1 reflect an outlook based upon the most recent economic consensus estimates.

In addition, we continue to include downside scenarios.

A waiting of these new scenarios produced a recessionary outlook with a deeper decline and gap to return to positive GDP.

It is worth noting that if one looks at the feds stress credit losses, and the latest see car and just assumed that we have pushed all those losses into reserves today.

Our see tier one ratio would still be above 10.25%.

Versus our minimum of 9.5%.

Obviously.

There remain many unknowns, including how government fiscal and monetary actions will impact the outcome.

And our own deferral programs will impact losses.

Perhaps the biggest uncertainty is how long economic activity and conditions will be significantly impacted by the virus.

Okay, turning to the business segments, starting with consumer banking on slide 17.

Despite the enormous financial challenges of various impacts impact a corporate related impacts.

Including dramatically lower rates.

Fee reductions higher provision and increased expense.

The business remained a profitable in the quarter and as Brian discussed this health crisis has proven the value of our high Tech and high Tech strategy.

The significant investments in innovation in our digital capabilities.

Had been a valuable resource for our customers complementing investments in our financial centres and differentiating us from peers.

Provision expense reflected higher expected future losses from the worse and economic conditions.

And note that net charge offs in the period actually declined.

So much of the financial burden of expected future losses were incurred in the first half.

Well this year.

And because [noise] and because of deferral.

Significant charge offs in this segment are not likely until the end of this year or later.

Revenue in this business absorbed the brunt of the companies and a decline.

Segment has the bulk of our deposits.

And this segment also bore the brunt of the fee waivers negatively impacting revenue.

Card fees were down as a result of lower spending activity as well as fee waivers service charges were down as well due to fee waivers and fewer overdraft and related fees as a result of increased balances and customers account.

With respect to expenses as you know banking is considered in the central service and across the country. We have managed to keep 60% about financial centers open.

The team work to enormous challenges and the first half of the year.

Sure sure ongoing service, which has been a daily balance between.

The service our customers need.

And the safety of our employees as well as customers.

Our costs reflect this balancing act.

We've had a role so service calls and manage digital interactions.

Not only for existing products and services, but also for small business applications to the pay Tech Paycheck protection program.

Many of these additional personnel work from home.

We also continue to invest in the franchise. We added salespeople. In addition to the associates to handle customer calls I just mentioned.

We renovated and added financial centers, and we increase minimum wages.

The expense from these investments.

Continued to be mitigated at least in part by process improvements digitalization and technology improvements.

Hi momentum continued as we saw average deposits rise 104 billion or 15% from Q2 19.

Even more impressive was the fact that 70% of this growth was in checking accounts.

As clients, we see stimulus.

Delayed their tax payments and slowly are wrapping up spending.

Average loans increased 8% driven by mortgage demand in this low rate environment.

Mortgage growth was mitigated by a decline in credit card and other consumer balances. We continue to add <unk> consumer investment account and see strong flows into our Merrill edge platform.

In Q2, we added 9% more.

Customer investment accounts this year than last year with more than 30% of those added digitally and U.M. rose, 17% driven by flows and market valuation.

Let's skip slide 18, and move to wealth management as as I think we've covered most of the trends already.

So referring to wealth management and to wealth or the global wealth and investment management.

On slide 19 and 20.

[noise] here again, you saw lower rates as covert related credit costs.

Impact and otherwise solid quarter with good AOL flows as long as strong deposit loan growth.

Merrill Lynch in the private bank, both continue to grow clients.

As we remained a provider of choice for affluent clients. Despite our sales force working from home in Q2, we added nearly 6000 net new household and Merrill Lynch and nearly 500, new relationships in the private bank.

Total client balances rose to 2.9 trillion from Q1.

Driven by the rebound and equity markets.

Compared to a year ago, they are up 1% driven by strong growth in deposits and you I'm flows and loans.

Net income of 624 million was down 42% driven by 10% decline in revenue as well as higher provision expense.

The revenue decline was driven equally by lower and <unk> as well as fees.

Non interest income.

<unk> decreased.

7%.

Driven by lower transactional Robert revenues, and lower asset management fees driven by market valuations.

Partially offset by the benefit of am flows.

<unk> expenses were stable year over year as investments made in the past 12 month and sales professional and technology were offset by lower revenue related incentive and net savings associated with cobot.

Provision expense increased from reserves built for future covert related net charge offs, while current net charge offs remained low.

Moving to global banking on slide 21 and 22.

As noted earlier.

Global banking saw strong average loan growth from Q1 line draws.

Record deposit levels and record investment banking fees.

But those benefits were not enough to offset the impact of low rates and higher provision expense as a result of covered.

The business earned 726 million.

Falling 1.2 billion from from Q2 19, but this included adding 1.5 billion to the allowance for credit losses this quarter.

On a pretax.

Pre provision basis results improved 4% year over year, driven by record investment banking results.

In Q2, we were able to improve notably both our investment banking revenue and market share for the second straight quarter investment banking fees of 2.2, excuse me 2.2 billion were up 57% year over year.

This record result included records in both investment grade as well as equity capital markets.

While average loans were up 14% from Q2 19, I would note that repayment of Q1 draws built significantly as the quarter progressed, which will be and an headwind to high in Q3.

I would also note that new loan origination spreads increased quarter over quarter and year over year.

But the same time, we continue to see strong growth in deposits, which were up 131 billion or 36% even as the rate paid decline following the decline in LIBOR rates.

Rates paid are now back to levels seen at the end of 2015.

Just before rates began to rise.

Growth in investment banking fees loans and deposits reflect not only what we believed to be a flight to quality.

But also the addition of hundreds of bankers over the past few years.

Increasing and improving our client coverage.

Turning to digital on slide 23.

We have already covered most of the important points around loan and deposit activity on 22.

As in consumer and U.M., our digital capabilities are more important and useful than ever and this health crisis, enabling clients to work from home and seamlessly manage their treasury needs.

And it's no surprise that in this environment, we would continue to see increased use of these capabilities.

Switching to go or markets on slide 24.

Our teams performed well in an unusual environment producing the best quarter of revenue since the first quarter of 2012.

We saw the fixed income market, mostly strengthened through the quarter and prices recover from Q1 with particular strength and credit products.

I, usually do I will talk about results excluding DVA.

This quarter net D.V. was a loss of 261 million.

Global markets produced 2.1 billion of earnings in Q2, nearly doubling the prior years period and increased 42% from solid Q1 results.

Year over year revenue was up 34% from higher sales and trading results and improved investment banking fees, partially offset by the absence of a gain on an equity investment which occurred in Q2 19.

<unk> expenses were well control and flat compared to Q2 19.

Within sales and trading [laughter] excuse me within revenue.

Sales and trading improved 35% year over year, driven by 50% improvement in FICC and a 7% improvement in equities.

Compared to Q1.

Sales and trading revenue also improved as growth in FICC linked quarter overcame a decline in equities from a record in Q1.

Trading comparisons to Q2 19, perfect reflected better trading performance across all products, both macro and credit.

Results benefited from improved client flows.

Credit spread tightening lower funding costs and asset prices rallied through the quarter.

Equity revenue was driven by stronger performance in cash and client financing, partially offset by a weaker performance and derivatives.

On slide 25 note they have to comparisons would show sales and trading up 28% year over year, but otherwise pretty stable over the past several years at around 7 billion.

Finally on slide 26, we show all other which reported a profit up 216 million.

Revenue benefited from a gain of 704 million from the sale of 9 billion in mortgage loans, which drove the improvement in revenue from Q1.

Our effective tax rate this quarter was 7%, reflecting the 11% tax rate expected for the rest of 2020 due to the greater impact of tax credits related to tax advantages investments on lower pretax income as well as the related adjustment to the year.

To date tax rate.

Okay with that.

Let's open it up for questions.

And at this time, if you would like to ask a question press the star and one on your Touchtone telephone star in one on your Touchtone phone.

We'll go first to Glenn Schorr with Evercore. Please go ahead. Your line is open.

Hi, Thanks very much.

Two quick clarifications on your net interest income comments have down a couple hundred million.

I'm, assuming that is lost the current pace and then do we stabilize from there I heard your comments about depending on how we assess.

Duration of and sticking accepted deposits. So maybe you could talk about how do you assess the jury it sounds good but I don't know how you its clients Ken Ken.

Can help you assess that but how you how do you assess the duration sticking it says deposits and what would you redeploy into if you thought that they were a somewhat sticky.

Yeah. So.

Just to be clear, we're talking about a couple of hundred million off of.

From Q2 to Q3.

I won't repeat all that kind of drivers of that.

You don't beyond Q3.

Hi, it's really kind of the growth of in house can be dependent upon sort of asset growth and redeployment of deposits.

Into higher yielding securities. We've added 284 billion in deposits since year end.

All of that.

Has gone into cash.

Earning 10 basis points so.

You know as we.

The assessed the future of this pandemic.

As we kind of assess how much of that is going to stick around.

And we got a little bit more confident.

On the on those two elements.

That can be were deployed into securities or a portion of it lets say can be deployed.

Into Securities and you know that's [noise].

Big difference even in these rates between what you can earn on the mortgage backed security or our treasury bond and 10 basis points. So there's some there's some opportunity there, but it has to I think [noise] thoughtful about it and it's one of those things I think you know when you see it.

Got it.

Maybe a similar question on expenses.

The 400 million and co bids.

Related expense I'm, assuming that's a combination of PPP and work from home related things.

Two does does that roll off starting now let's take a look around I want to get to the core number that we're adding the 200 of merchant servicing expenses on top thanks.

Yeah sure so.

As we said sort of estimating that if you take all the increases from you know covert related spending and all the decreases your at a net 400 million. If you think about all those increases it's not just ERP either supplemental pay there's childcare, there's masters food, there's more financial guards and our financial centers you got all the PPP related expenses, you, but don't tell.

<unk> expenses moving people now first of all our employees moving from all moving to work from home.

You got some offsets and sort of travel and other employee expenses in terms of meeting that all kinda nets down this quarter to 400 million.

Were going to work on that I don't think you can say, it's all going to go away and Q3, but we're going to work on those expenses as we move forward, but of course, we're going to make sure anything we do we're not jeopardizing the safety of our customers and employees. So we think there's some you know opportunity there.

Okay last one.

The wealth management reserve build I Wonder if you could talk about the profile of those loans.

You know how much of that is two things like.

A building for a wealthy individuals that extra corporation, just curious on what in wealth management, we require that delta.

[noise] [noise] most of its mortgages.

And there's some commercial lending in there, but it's all very high quality and personal.

Well he people's loans and some are.

Yeah.

There was 30% of mortgage originations this quarter or eight of the 20.

And so you know, it's a significant mortgage book and that picks up some of the just the estimates whether it happens or not to separate question, but we feel good about that portfolio, but it's just the same factors applied to the rest of the portfolio is applied in that business [laughter].

Okay pretty sure when we look at things like real estate exposure, we look at things like real estate exposure, we consider real estate exposure in that business that people have buildings and things just I was there is going back late into the many years, there's no hidden sort us.

Real estate exposure on wealth management business, that's it's it sandal does real estate.

Understood. Thanks right.

Next question from Mike Mayo with Wells Fargo. Please go ahead.

Hey, Brian You mentioned July a activity I, it's above last year is that right. So I just little bit more colour on the green shoots seems like you know trends are all in your favor, but I'm just wondering if that's backward looking and many.

Your markets like Florida.

Our taxes or California, I mean, that's where are your big you're seeing an increase in koby cases, and I guess that leads to death from that leads to shut down so.

Somebody on the ground perspective, you know do you expect these green shoots to continue what did based you give you know the Governor's no states how does it all shakeout.

Yeah, the first twice because everybody is.

Try to be safe the faster you can.

Good.

By the tip over as you've seen in some of that.

Hi spots, we talked about last.

You know last April.

You can see activity pick up but just to be very precise <unk>. If the data through the 14th of July. So that's about as recent as you might be able to get is up over last year. If you look in the first two weeks of July.

It fell a little bit in Texas in places like that but it's still 25% higher.

The aggregate than where they were in.

In it and the shutdown phase so it'll it'll plateau little bit, Mike I think and you'll see that ebb and flow, but there are other activities that just overwhelmed you know that the debt what you see it terms of the bars closings stuff just the general activities. The Approvement People's homes spending on homes and you saw some of the data today that supports it and the.

Retail sales numbers, so I, yes, its flatten a little bit because it you know flattening credit card, you'll see that more dramatically because the credit card spend it goes on the restaurants, and and travel and stuff, but it it just in the last couple of weeks it felt.

Yep.

Mid single digit percentages I think in some of those that Texas, and Florida, but it's still 25% compared that week to week US you know that.

The weeks before the reopening is 25% up so well see it play out it's it's hard to be anymore down to date in July 14th.

And then a separate question I guess, you, adding more to your reserves, what 8 billion added to your reserves. The last two quarters. Another 4 billion this quarter, a pretty pretty remarkable.

And your net charge off ratio was flat quarter to quarter [laughter] I talk about a disconnect have or maybe it's not just an x. I guess, it's a tough question, but what would your charge offs be what your N.P.H.B.

He didn't have before back in place like that it's the end it tomorrow and you had to recognize the for extended the problems.

In a.

Sensing order or order magnitude would it be a 5% higher temperature and higher 50% higher what.

Just to give you the simple answer if you.

Little bit Mike will always depending on timing because you think about credit cards, and there's a roll rate to them as you all know, but just for the second quarter I think the number would have been yeah. Another 40 million higher if you took all this stuff and assume.

The payment behavior took place, but there was no deferral and says 40 million on what six 700 million Bucks. So it's it's it's something small interesting enough for the non deferred customers the delinquency quarter to quarter actually went down 15, or 20 basis points or the non deferred customer excuse me not to for customers and 90% of people in car that didnt defer their delivery.

Delinquency went down quarter to quarter and so as you think about that you know it's a it's a mixed bag <unk>. The other thing that's inherent in your question is all of us getting used to see so versus the old methods of providing which is you provide for lifetime and then the losses are going to come down later down the road by definition or else you haven't I see.

Supervision, so you'll you'll see the actual losses. This come in later than later quarters, but you're right right now we're seeing nothing that is consistent with another 11% unemployment rate any actual consumer payment behavior.

And that has to do the stimulus and things that that it's helping that the margins quite substantially so.

It's hard to predict because a lot of factors in it but that's kind of the data points I'd give you to give you a sensitive.

And just last follow up I mean, clearly the stock market based on your stock price doesn't believe you I didn't think your customers are lot weaker.

Yeah, we are just not seeing it yet I mean, I know you know two or three quarters generic say odd lot worse than we expected or do you think that's going to play out and that like actually the barge in better shape and people realize.

I think.

Part of this will play out in terms of.

How the path forward on phase four stimulus and everything that occurs but even on the commercial side. If you look.

Our.

The Npls went up you know.

350 million or something on a commercial npls the quarter at 40 basis points. So even on the commercial side. If we went through we asked her team to go through every commercial bar and our business banking or middle market segment, which is yep.

Tens of thousands of borrowers and assess every one of them rebate and make sure. They're all up to date makes together you just really go worked on it when that they were at home and not able to do as much in you know they've gone through that book and Yeah. What you see criticized moved up and that's expected you know the actual up Nonperformers art and so.

Yeah, there those commercial customers are adapting.

You are seeing it so I I think.

The yeah, we base they have.

Looked at the assessment that provision setting.

Methodology is as we said, 10% unemployment your and 9% first half of next year gets down to seven <unk> percent. So it's not a rosy picture and a lot of ways, but.

And the proof is yeah, we give all the state of the fed as Paul said and they do a stress testing under those scenarios I lost as a run.

I don't know, 4% for 4.7% you know.

And and we're sitting at 2% reserves today and it will not and that's in there in terms of actual payment behavior by customers are delinquencies are in cash and that has to do with it. The stimulus is different than this crisis than it's ever done it was given directly to consumers to sustain their ability to carry their their day to day expenses.

Alright. Thank you, it's obviously, yeah, hey, Mike, it's obviously hard to to see data yet right but.

There are some crews out there and you can start looking at those clues across the industry.

And you know I would you mentioned one of them, let let's just look at losses.

You can look at NPL growth.

You can look and reserve critical.

And then as Brian just said I mean, it's not like this is one time, where our or our loss ratios in the fed stress tests have been the lowest among peers.

They've done eight exams every one of those exams, it's kinda different they did this thing and that one stress. This thing more on that on the one and change something else in the next one seven out of eight of them no matter, what they change no matter what they did.

We had the lowest lost right. So there is there is some evidence out there if you're if you look carefully at it.

Alright, Thanks again.

Next question from Jim Mitchell with Seaport Global Please go ahead.

Hey, good morning, maybe Brian just a follow up on that Youre, a corporate credit comedy <unk> <unk>. If you look at your Mpls you absolutely had the least amount of increase.

Quarter over quarter versus your peers and appreciate your comments. So you did really a real micro as opposed to macro look at every individual loan. So when we think about that do you think it's.

Your performance is more to do with the fact that you took a micro look rather than some peers, maybe doing a macro look or is it really just youre a higher exposure investment grade your your industry mix and and how do you think about the massive amount of capital raising in the second quarter and <unk> and the liquidity that provides to corporate borrowers and how you factored that just.

That's it thanks.

I'm not sure where it isn't that sequence, but the latter part of which is that basically the quality portfolio. So our commercial real estate exposure as Paul said earlier is Ah Ah.

Much.

Yes, it's not going into last crisis, we had $14 billion or something of construction related for housing strike, we have like 400 million or something like that you know very little so the kinds of exposure to get you get pulled on pretty quickly and remember we took a lot charge offs in the first quarter.

For gas company exposure, a couple hundred million, Paul and you know those you know so we've been taking care of the portfolio. So it's not a master micro it's actually just the quality of what we have done and client selection across a less decade gets us there and so and that's why you see differences in that in a rates in the stress test knows things, but that's responsible growth when we built.

At this company so to be adamant tight time, 18, and all times and fortress and that's how we build it and we'll see where it.

Yeah, we'll see where the so it goes but remember that our FCB is under the floor, if they'd losses and there's a lot of objective third party evidence that shows and that has lots to do with our mix of businesses and how we build them.

Yeah, absolutely and then then maybe on the deposit growth.

It continues to be I think surprisingly strong.

Appreciate the comments I'm not sure how it holds up and and you're holding it in and cash for now, but when you think about or is there any kind of trends throughout the quarter.

As the stimulus money got paid do you see deposit growth slowing or are you seeing it turned negative Oh, a lately how do we think about.

The ability for those to at least near term Wonder what are you seeing in terms of deposits over the last month.

But.

I'll, let Paul talked a bit about this isn't a commercial side, especially because he used to run that business for us a long time ago before we got him to be CFO, but but you know the reality is the place run certain is isn't the large cash inflows from corporate customers.

That you're not sure when they're going to start using the money and redeploy the money and you want it to frankly, we should want him to redeploy that money into the economy as opposed to having drawn or raise money in the markets and have it sitting on the balance sheet. So that that's the real volatility question is when do they want to those companies you have moves the money out for higher yield because.

Ah, yes on the money market for settlement hand, with a little more yield to him and things like that in a stability allows them to take you think about putting it off a bank balance sheet. So that's that's the volatility question in terms of deposits is around that but we look at consumer just to give you a sense.

The yeah linked quarter growth and consumer checking was 50 billion. We had 108000 net new checking accounts you ever hear up almost a 900000 those numbers that are normal quarter sort of net production I, we might have been to 50 or something like that in a quarter. Like this you know it's so what's happened is we still are building up that core consumer base.

Any averaged a mountain accounts were up 12, 20%. Some of that's been spent down we think all the P type stimulus is largely out of People's accounts, it's been gone through the system. Obviously, the unemployment supplements for the limited number of customers. We have yeah. That's a small but in any group that's 10% of population so it's smaller than the whole but.

Yeah, you're seeing that stimulus was that that 1200 dollar type stimulus what came in one out of People's accounts pretty much.

On a small business you're seeing the P. P. P. 65% to be spent which is also good because that's future stimulus to be deployed and so if you think about all those pieces I would focus more on this paul's comments about understanding whether its deposits going to stick is more of a commercial question and a large corporate question that it is a wealth manager.

Consumer question, because what's going on behind this is weak round out another even though it would have yeah, 40% for branches shutdown due to the environment. We have drowned out you know digital digital sales and digital growth and even.

Non digital growth to the tune of 108000, new core checking accounts with average balance moving up and 92% core that stick your ribs money and we'll we'll deploy that over time, but yes, you had to make sure that like all of you were worried about where we go next and that's why we're trying to keep liquidity position that might run out of here for the clients purposes or or whatever.

So Paul I'd, you know that all the volatility comments really on the institutional side.

Yeah, I'm not trying to add anything Brian I'm, maybe just a macro point of.

Obviously, if the money supply grows.

More our deposit balances are going to go up and.

You know you when you look at it.

In addition, when you look at the Treasuries Bank account at the fed.

It's got an enormous balanced way higher than usual and you know my guess is some of that's kind of end up in the private sector as well.

So there was some perhaps a macro flows forces that would suggest that deposit balances are gonna grow with banks and we're gonna get our fair share.

A couple of little this tiny things about the third quarter, that's worth reminding people.

You know.

Tax payments were delayed and they're gonna get paid and the third quarter plus we're all hoping as Brian says it spending continues to increase.

And so some of that excess money, that's sitting people to count me.

It's been both on the corporate and consumer side and then in G. When you've just got a lot of deposits came out of the market and went into deposit accounts in the markets continue to feel good people you expect to see some of that come out of deposits I go back into the market.

Oh, that's that's all really helpful. Thanks.

Our next question from Betsy Graseck with Morgan Stanley. Please go ahead.

Hi, good morning.

[noise] couple of follow up there one on the [noise].

20, you are making about the deposits interesting that you had all those draw downs and pay backs, but the deposits didn't leave that that's basically what you're referring to Iran.

Yeah. That's yes, that's interesting point you'd expect if they pay them back you've just seen it but the other cash came into those companies and it came on the books and I think we grab more than our fair share, but nothing do with the consumer side, but an institutional side. It's been interesting is our predictions would've been up we've just seen the deposits Klein already in a habit.

So my two questions ones on just the forbearance and the waiver is can you give us an update as to how you're dealing with those do they roll off automatically are you going person by person you know how should I be modeling this fee waiver, stating is it you now.

It's going to come back to you can't get backend.

And he didn't mean to stop the fee waivers in Threeq here or is it going to be more of a.

A phase in through 2021, just help us understand how you're dealing with.

I think leave aside mortgage has different aspects because it statutes and stuff the rest of the lending side stuff begins to especially like to small business as I said earlier really runs off as we speak and then somebody other products run through you know, we're always gonna help consumers in distress. So somebody calls up and says you I'm unemployed and I can't work.

Stuff, we're going to work with them and we're going to work on both on the fee side and on the collection side for lack of better term, but but our view from the start what we want to have that dialogue with consumer to help figure out where they stand and so that activity starts to pick up the waivers by definition were 90 days and things they roll off but it but you'll get away.

From as people, who did it out to panic, which when you see somebody paid every every month, obviously they didn't need the waiver yeah. Those people roll off in disappear and you get down to the people that you need to actually help there are unemployed and struggling and will help you know will work with them like we always do not collection efforts. So that's the sort of credit side of the thing and.

In the Big numbers will move you know the numbers of request I said have dropped 98% says really nothing if you'd look at our percentages relative to industry and mortgage were lower across the board 200 basis points under 50 basis points in terms of request and stuff. So we feel good about that when you get to the fees.

This is really going to come down to this.

We all we went into thinking about it as a bit of a natural disaster type approach Betsy So that's going to come down to where where the could where the consumer lives the market condition, what's going on and in that market, whether they're able to work and things like that so well see that play out if there's another round of stimulus payments, we waived fees. So people wouldn't have the fees we held.

Off on the fees that they had that could have been negative head count to make sure. They got the whole 1200 in the case last payment we will do that again, because that's the right thing to do to make sure they get the benefits of that those payments.

But you know those things or sorta eat through the third quarter, depending on really US specific question and then as you get towards next year the normalized.

And then as we go through this pandemic, obviously, we've got flashpoints building again in certain locations. Like you were asked certainly on the call you've got a big footprint of branches in these locations. So.

Yeah, I would think to your programs are open obviously for folks who are coming back you know into that second wave.

I just want to confirm that and then and then how are you thinking about the branch footprint. Just generally I mean, you mentioned earlier about opportunities to improve efficiencies to claw back to 400 million you know natco bid or cost increase the experience this quarter.

But a little bit longer term you know given the increase in digital.

Fast ramp that we've seen in the most recent couple of months.

Does that make you think hey, we can pull back on our branches you know even more than we had been thinking before giving an update there. Thanks.

Yeah I.

I think that time to figure that out will be a little bit later, Betsy not because we don't work at all times, even year over year, I think were down 30, or 40 branches or something like that in terms of branch count Yep.

Last year second quarter. This you're saying that we're always working as dynamic they might be bigger and replaced two or three small ones. They might be places that we just had too many whatever but we'll always be working that sort of 6100 4300 branches continue work it and we're doing that by falling customer behavior. So if this summer's behavior change to stick to the ribs you'll.

CST fine tuning our system.

By the way the cost of deposits now with all the operating costs in consumer over the pauses actually went down year over year.

Again to by about seven basis points or something like that we continue to manage that overall operating cost down and it's not just the branches. It's all of the call centers and all things around it. So let us play that out <unk> I don't think and then by the way remember, we're deploying and and we opened branches in the Middle This thing and places in Ohio and stuff we did.

Happened, so that that replaces some account, but a much different execution, then something that may have been left over from years ago. So well it'll play out I don't think they'll get they'll go one way or the other way dramatically, but what will happen as some of the count will leave will be consolidated markets as we've always been doing and and deployed in markets, where you don't have.

Reach.

I think on a given day, we're still getting a half million business. The branches. So is an important part of what we do the teammates in those branches have done incredible work being opened everyday during this crisis. Despite what was going on in environment around them. So I. Yeah. There will always be importantly, incredibly important part, which makes us different where big digital company would have been physical coming.

And that combination provides superior customer reach and result.

Thanks.

Well go next to Matt O'connor with Deutsche Bank. Please go ahead.

Morning.

Let's talk about the small business PPP in terms of the timing of when you think a it'll be repaid or forgiven and and remind us the accounting there and is that included here now interest income.

Thanks.

When I start with the accounting.

So.

The.

If you look at this quarter, there's about little under $100 million it'll be a little more than that next quarter in and I API for P. P. P.

It's a function of you know, 1% interest rate plus under Fas 91, you've got to amortize [noise].

The.

The fees.

Into you know anti over the life all belongs.

In terms of the overall program.

You know what were we did about 335000 loans and then a few weeks.

That was quite expensive in terms of.

So all that we had to do to do that well and so I would not expect.

Much if any profitability out of PPP.

Okay and that include the fees that you got it celebrated from a forbearance I think there was some.

Articles out there that you're doing it any profits, but obviously.

There's just a focus on the revenue and to your point there was a cost as well so.

Yeah, one if once there's forbearance did extend we were amortizing those you know fees into Eni. Once a loan is forgiven then you have to accelerate the remaining piece that haven't been amortized couldn't be a spike in a quarter or too if we start seeing a lot of four baron.

Yes.

But again you know as you know we've we've we said we're going to donate profits, but I wouldn't expect a lot of profits program. It you know 335000 loans and a quarter is probably I don't know I think somebody consumer told me it was like.

10 years of loans and small business.

As a massive effort that involved people outside the company in the company.

To get to do it well.

Okay, and then just separately on the criticized commercial alone.

It's helpful that you do disclose that I'm not sure everybody guys I appreciate that but.

How would you think about the law content on that obviously, it's a much bigger buckets and say non performers and.

Our loans that you're watching but how should we.

Think about the risk of loans that are kind of criticized versus say nonperforming or how much might flow nonperforming.

Yeah, I think that that's that depends on the alone there largely secured the collateralized, what's sort of <unk> coverage, but but remember the criticized as you know the ratings driven as a loss yep, probably the default loss given default and under the collateral structure. So that's all built into the reserving methodology that.

That results in the reserve build so it's not something that you have to think of separately than anybody else. It's just you know they're different stages in the process of getting through the system, but so it's really you have to say if it's you know we for example, we have a lot of retailers have gone through bankruptcy over last several years, we haven't lost anyway because of the method of securing your.

South and things like that and that's that's a business we've had for.

Decades that has done a great job there, whereas you know, it's an unsecured line and somebody you have a falling somebody falls quickly that can be more problematic, but its just.

Just rest assured it's all built into.

The methodology produces a loss content, which versus the reserves, which but in this area as we use.

Okay. Thank you.

Next question is from can you seem with Jefferies. Please go ahead.

Thanks, Good morning, a couple of questions on a on the JV dissolution. So I'm just wondering Paul relative to your 100 million fees first of all words, it located kind of where we could see in its second of all can you help us give perspective of what it was maybe at its peak and you mentioned it could get better as the <unk>.

Jimmy improves what's the best metric, we can watch over your disclosures to track that progress.

You know, it's a portion of that really is going to be in consumer portion of its going to be and global banking.

I think about how to help you you know seen it because it's never certainly on net basis. It's never was a big number in terms of net profits coming out of that JV.

[noise], we expected you know now that we can integrate it.

We went our way really leverage our customer relationships, but you know our full salesforce more directly behind it.

And innovate we think this is incredibly important to our customers and we can grow it but right now. It's you know we gave you I think we gave you some.

Some perspective its.

It's about you know I would expect revenues there to be about 100 million in the near term.

But we would expect them to grow as we ramp up that some of their our investments start to bear fruit.

Again, I don't know how to answer your question on how you can see it out to think about that or whether or something appropriate for the supplement or.

<unk>.

Okay and I'm just in terms of a you know fees other categories wealth management. The asset management part was was down was that because of the averaging effect and should should that improved given the period and.

Market levels that we saw.

Yeah, you have to remember the U.N. fees are on a one.

Month lag so you're picking up there.

What happened at the end of the first quarter.

Yep.

And lastly, just any comments about the investment banking pipeline given the relative strength that we saw in the second quarter. Thanks Paul.

Yes, sure the you know.

Investment banking had a great great quarter.

And we know we picked up significant market share we've been picking up set up in market share for many quarters now I think all of you sort of recognize that there was a record.

I think our market share is above 8% at this point and I'm like a churn and middle market investment banking is also rising given our emphasis there on the bankers we had I think we're up to over 9% there.

[noise] plot of activity as we help clients.

You know raise capital to address their their needs.

You know you can't really expect I don't we don't know the answer, but we're already sort of seen a little bit of a slowdown in activity in the first couple of weeks of this quarter. So I don't think you can expect that the third quarter is gonna be as robust as the second quarters then.

But what I want to emphasize we feel really good about.

The progress we have made with with our clients in terms of market share both for large companies around the world and the middle market companies.

Thank you we'll go next to Saul Martinez. Please go ahead your line is open.

Hi, good morning, guys.

I wanted to start off on <unk>.

<unk> <unk> of a clarification, you said and I wouldn't be gale 400 million quarter on quarter on commercial pay downs.

You also said long and would also weigh on on and I. Just can you give us a sense.

What the order magnitude could be in terms of additional pressure.

The third quarter from from long and.

I would assume that the redeployment of of cash into into securities is something that.

You know helps but it'll be over longer period of time.

I know Kong pass you talked about reinvestment risk.

Kind of sized up the impact of long and rates on securities Cashless <unk>, you can understand substantial impact on third quarter. It how to think about it beyond that.

[noise] <unk> I will say in terms, our 200 million always [laughter] factors being down quarter over quarter.

Twoq to Threeq, you were kind of putting all that stuff in there right.

You got loans being potentially down you've got Abbott Libre coming down you've got the securities portfolio, it's kind of all in there.

HM.

Securities portfolio, you know about 20 25 billion matures every quarter and you know reinvestment yields right now are significantly below where that where that.

For the portfolio is so that's just kind of slowly delude overtime.

We can offset some of that if we decide to take you know these deposits that are now sitting at you know in cash and and put them into securities. We can get up sort of an eye on a natural offset but we have to sort of just see how that all plays out.

Okay, I think I mean, I misunderstood I thought the.

So 200 million.

So not not simply from from the impact of commercial came down from.

A number of things I guess.

I just wanted to go back and follow up on on Matts question on on P.P.P., and and and get a little bit better sense for what the order of magnitude it impacts the baby and you have 25 billion P. loans and you know it was I think it's fair to assume that pretty sizable portion.

Those will be forgiven and you know given the fee rates on those I mean, we're not talking about small numbers even relative to your size.

Good to easily over a billion dollars. So I guess my first question why shouldn't we see a pretty significant spiking and <unk> for Q1 Q is as those loans start to get forgiven and the items recognized and I guess related b.

On the expenses I guess I'm trying to understand.

Going to make a lot of money on that as they choose that sort of in the expense base already and you better ratchet up expenses or is it that is revenues are recognized from an accounting standpoint Youre. Tony you know those those are county that accounting revenue ways. It's one of your competitors, who is doing I guess I'm trying to under.

And you know the order of magnitude timing and geography.

So they don't seem to be small.

But we we announced in April I think it was that we go away. The net profits from this activity there's lot of cost internal cost obviously allocation of 10000 people. We had working on the origination some form of this at the high point the forgiveness, what we've got 3000 people lined up to work on forgiveness.

We're already working on it and built for business and a couple of weeks and then we had in Florida. We also had a higher third parties come and do some work and.

Implemented <unk>, yeah. So there's a lot of elements. So we're shows up in revenue and expense will well.

To deal with it but it's just that you know.

Well the revenue, you're saying as you know not insignificant the issues there's lot of cost against it.

Somewhere in the PNM and some are gonna be next quarter spin out because on the forgiveness side. We have these teammates are working on it so.

Well reconciled off worry, but the basic commitments to give way to net profits that was.

Something we we committed in April this is not new news.

Okay, but am I thinking about.

You're not going to see.

Into your part of the revenue you're not going to see.

In the revenue until the loan start to get preeminent.

Yeah.

Which we would assume anymore.

Oh.

We don't know when it's going to be.

In other ways in phase for their talk about extending and doing more loans and you go there's a bunch of proposal so a little bit is hard to predict because if they.

So you can do loan a and into another alone or extended yeah. That's even even in the last quarter. We went from eight week eight weeks to.

12 weeks 20 performance and things like that so.

It's it's so.

Well, there's no mystery here with US we just don't know until we get through what exactly is going to happen because of rules change so much.

Yeah.

Alright fair enough I appreciate it.

Sure.

Your next question from Civic Junaid joke with JP Morgan. Please go ahead.

Hey, Brian Paul.

A question that I wanted just to clarify.

The consumer loans that been to have that I've been deferred.

I'm presuming instead of late June early July you started to see some of those stopped too.

True then deferred appearances deferrals 190 days and so what are you seeing in the wireless where deferrals I've done.

Pitch Uh huh.

Yeah thing and asking for deferred to continue versus how many I'm going off and off those going off what are you seeing [noise].

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Sure.

We're we're not yeah. The <unk> point the back is that what are sort of it now the time for that it all kind of the.

The time period that most of it occurred is now at a time period, where rolls off and so we'll know better but yeah separate the card we've already seen.

Couple of hundred thousand roll off in a bunch of rolling off as we speak to you that is.

Yep, 85% them or card into separate that from the standpoint of all the other aspects, where they said earlier about small business, which is the next because it was which is the biggest percentage category.

Those are docs, and Dennis and they're they've all told us they're paying us in their payments are now coming up in July in early August in terms of home loans were seeing the numbers on deferral drop every week, because the new request or less than people continue to pay up and so it's going to come down to cards and we're in that period of time, but there are some substantial reserve.

We're set up based on the credit characteristics of those individual cardholders and what our expected outcome for them are and as we said earlier a lot of in a substantial number been paying us every month, some haven't been paying us at all some of them paying us part buying and that all play out. This this this quarter when they charge off with them will be down the as that play.

It's out over the.

The the roll rate type of thing.

But it's all in the reserves today no. If there is it yeah. There's a there's a decent chunk of reserves in the car business out that is specifically built by these deferred loan what I said earlier and you. If you didn't hear it was that for the second quarter for the people who had deferred the actual increase in charge offs would've been about I don't.

The $40 million on a basis 607 million whatever it is so it wasn't a substantial difference yet and so there was an people them at the only got enough that they would have rolled in and charged off during the quarter. So, let's let us see it play out fits into reserves will be covered by the reserves.

Okay. Thanks.

Our next questions from Brian Kleinhanzl with KBW. Please go ahead.

Yeah. Thanks, just two quick questions I mean first on the expenses just how are we should be thinking about the expense trajectory as we look out to the third quarter fourth quarter I get the extra 200 million from merchant services, but then how much of these covert type expenses are expected to roll off.

And the third quarter, but that's still typical seasonality as well in the back after the year.

Yeah. So all those factors I call laid out earlier, but what we were mining People's last year, when we unwound the joint venture and in the told you about it. This time last year, we said when we took it from a joint venture interest due up through the piano on the balance sheet interest it was going to increase our expenses that 200 million. It. This is a quarter where it has.

Ones and so we just want to make sure people are factoring that in absent that you know that we manage expenses tightly in this company and we will manage them down and we'll have some pluses and minuses animal work it down, but we didn't want people to forget that we told you that last year.

Oh, the rest of will be the same sort of manager practice. We had you have some PPP expenses you have come down a little bit you have you know as Weve. You know people moved around opened up a little bit you have a little more business activity expenses, what we'll see it play out but and then you have to seasonality is you mentioned the net albeit standard fare, but the key differences we want to make sure people didn't forget what we told you last year.

Okay and then it's up <unk> just simple is the a tax rate Guy that you gave in second half of that roll forward into 2021. Thanks.

I don't think we have a good answering for 2021 yet.

I always I don't have an answer I wouldn't get back to you on that.

If you needed about that for the rest of the year to be around 11%.

Yeah. Thanks.

And we'll take our final question today from Charles Peabody with for tablets. Please go ahead.

Yeah, I wanted to get some more color on your consumer and community bank and particularly the.

Profitability of the various product lines like cards mortgages autos branching and I asked that because on a relative basis, your consumer and community bank has done much better than the.

The other big three wells JP Morgan City, and I know a big part of it is probably cards were where the other businesses are losing money and the other companies are losing money and cards. So can you talk a little bit about the profitability of your different product lines and and the relative.

Value that they produce for you guys versus other major banks.

I'm not sure.

I frankly, I agree with your premise that you know the profitability our consumer bank is driven by the deposit business and so given that you're in the middle of up a twist right now with rates falling in the floors of zero rates and the consumer business you know if that.

Dick Clark Yeah.

It fell this quarter, but that would that be expected as you go through this twist. So it's been running you know the deposit segment had been run $2 billion a quarter.

Right, but numbers and that you know that's in a consumer lending segment would have been running you know even back in 19 about a billion dollars a quarter. So it's a business, which is and that's all lending not just the card lending. So it's a business, which is driven by the deposit business and when the rates fell as quickly and we move rates down into quarter.

It's it's going to take a little wad of catch back up and it but that's.

I'm not sure I agree with the premise and you know.

That is driven by the card business the card businesses relative a portion of that third of the general operating profit I think you're right part I think it the way to think about it as we see.

We started out a position of profitability before writing down that way.

Stronger than many of our competitors given the strength of our deposit franchise.

And given how careful we have Ben you know with respect to credit unsecured consumer credit.

You're now seeing you know.

It's getting hurt on the you know because that deposit franchise isn't.

So I wasn't talking as valuable already environment.

Not seen.

I don't have the same sort of.

Central losses.

And unsecured consumer because we just don't have as much as others Yep.

As it may there because it that lending portion lost money this quarter and the deposit business continue to make money this quarter. So.

I'm not sure I get to the starting point, but it's just to give you a sense. So that it wasn't a lot of money over all but if.

It was made by the Pos business.

I guess, the starting point was that the card businesses tend to be an outsized.

Product for the other big banks.

And there they.

Clearly are losing money and so is that the big differentiation that Europe is your card business, losing money this quarter as well and but less so than the other big businesses other big companies.

Ah, yes, the lending business lost money, we don't I don't have a separate karp you know.

But the lending business and consumer lost money the deposit business made money and brought it to profit enough said, you know freak or as a billion dollars losses on the lending side, because the provisions that versus threeq or as a billion dollars a profit after tax so but remember what drives the profitability consumer business is the.

Position, we have across all the products, we don't think of it lending business and as we think of a customer business that is number one position and deposits or 90% core checking account checking account growth of.

Other million accounts year over year, they average about those accounts growing year over year, even taking out the cobot impact they still are growing at double digits typically in a year.

That the operating costs coming down year over year in terms of <unk> as a percentage deposits. These are all good measures that give you a great anchored woodward it gets tougher when rates are very low. That's we played that you know I've been CEO for <unk>. That's my 11th year and then through 911, I think that the the fed fund rate has basically been zero a quarter and so that.

Yes, that's we're doing the card business is a nice business, we keep it to size that we think is consistent with our are up.

At a mentink a commitment to responsible growth and therefore, you know that's it's never going to drive the P. no one way or the other way.

And the risk adjusted margins, 8% in that business today during actual charge offs remember what were what's causing the losses you put up reserves for the rest of life for the portfolio in one quarter given an economic scenario has deteriorated. So it's a good it's a wonderful business for us it's our biggest business in terms of profit and you know it but we don't run.

But as a card businesses at home was loan business, we got out of that many a decade ago, saying it is a consumer business and we drive a unified basis.

Thank you.

It appears we have no further questions I'll return to Florida, Brian for closing remarks.

Oh. Thank you end up thank you for a spending time as this morning, it's another quarter, where we've driven responsible growth we continue to.

Maybe just completely tightly given the environment, we're in and we continue to drive the core activities Ford and this quarter, we especially pleased with the work our team did in global markets in investment banking area that are gaining share and.

But in the earnings power to have it habits are twice, our dividend build our capital bit or build our liquidity in habit and into the worst economic order since the great depression. So thank you were talking anixter.

This will conclude todays.

Program. Thank for your participation you may now disconnect.

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