Good morning. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wells Fargo First Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I would now like to turn the call over to John Campbell, Director of Investor Relations. Sir, you may begin the conference.

Thank you, Katherine. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf and our CFO, John Shrewsberry will discuss first quarter results and answer your questions. This call is being recorded. Before we get started, I would like to remind you that our first quarter earnings release and quarterly supplements are available on our Web site at wellsfargo.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release and quarterly supplement. Information about any non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can also be found in our SEC filings in the earnings release and in the quarterly supplement available on our Web site. I will now turn the call over to Charlie Scharf.

Good morning, I'm going to open the call with comments on the current environment, the actions we're taking, our business performance and ongoing work to transform the company. Then John will provide more details on the first quarter results before we take your questions. Let me start with some remarks about the current environment. I first want to start by saying that our thoughts are with those directly impacted by COVID-19. This includes those who have contracted the virus, healthcare workers who are on the frontlines helping those directly impacted and all of those who provide essential services to ensure the country continues to function. As difficult as this is, the response by government, companies and individuals has been extraordinary. We understand that Wells Fargo plays an important role in providing stability to the financial system and the economy more broadly. And while there is still much to do, I'm incredibly proud of the efforts across the entire company, particularly those on the front lines. Let me start by discussing what Wells Fargo has done. First, I'll start with our customers. We've been aggressive in our actions to ensure we can best serve customers while also prioritizing employee and customer safety. First, on access, we've temporarily closed approximately 1,400 branches, which is about one fourth of our network nationwide, choosing locations to close based on the historical branch traffic and the physical design of each branch that would allow appropriate social distancing. Consumer and small business contact centers remain open in all other US locations to serve our customers. The wait times are higher. And we've deployed social distancing and safety measures in all sites to ensure we keep our employees safe. We've been rapidly expanding digital access and deploying new tools, including air limits for mobile deposits and wires,…

Thanks, Charlie and good morning everyone. Charlie covered the information provided in the initial pages of the supplement related to the actions we're taking to support our customers, employees and communities during the pandemic. So I'm going to start on Page 6. As we highlight on this page, we had a number of significant items in the first quarter that impacted our results. We had $4 billion of provision expense for credit losses, reflecting the expected impact these unprecedented times could have on our customer's creditworthiness. We had $950 million of securities impairment, predominantly related to equity securities reflecting lower market valuations. While deferred compensation plan investment results did not meaningfully impact the bottom line, they increased net losses from equity securities by $621 million and reduced employee benefits expense by $598 million. We had $464 million of operating losses which were down $1.5 billion from the fourth quarter that included elevated litigation accruals. We had a $463 million gain on the sale of residential mortgage loans which had previously been designated as held for sale. Mortgage banking income declined $404 million from the fourth quarter driven by mark-to-market losses on loans held for sale and higher MSR asset valuation losses as a result of assumption updates primarily prepayment estimates. Finally, we redeemed our Series K Preferred Stock, which reduced EPS by $0.06 per share as a result of the elimination of the purchase accounting discount recorded on these shares at the time with the Wachovia acquisition. Even after factoring in the COVID-19 related impacts experienced during the first quarter, as we highlight on Page 7, our CET1 ratio remained 170 basis points above the regulatory minimum and our LCR ratio was 21% above the regulatory minimum. These surpluses are noteworthy given the regulatory minimums they're based upon are established…

[Operator Instructions]

Operator, are there any questions.

[Operator Instructions]

The queue is filling I understand.

Yeah.

Operator, how are we doing?

Your first question comes from the line of Ken Usdin with Jefferies.

Hi, Ken.

Hi, good morning, guys. Thanks a lot for the color in the deck today. Can I just ask you, John, can you elaborate a little bit more in terms of – it was good to see the Fed giving you some flexibility to participate in the programs on lending, but can you elaborate a little bit more on – are you truly able to provide all the help that your customers are asking for? And how are you balancing that demand function on behalf of clients with the magnitude that you have to dial back and the effects that that might have on the company from an income statement perspective? Thanks.

Sure. Thank you. So on the PPP front, which was the targeted action where the Fed gave us a little extra flexibility. There, I would describe this as unconstrained and in a position to help everybody who approaches us subject to the program, of course, having sufficient funding from a legislative perspective, but no constraints at Wells Fargo. With respect to the other tradeoffs, as I mentioned, the first places that we're going to be able to create more capacity to help customers are to reduce non-operational deposits, principally in the financial institutions area, where relatively easily substitutable and it's a low value use of cap balance sheet because there's a high runoff factor on those types of deposits and there are tens of billions of dollars of those types of deposits to continue to work down. And then secondly, our securities financing footprint or I would describe that as is that plus different sources of wholesale funding. We did this in 2018 when the cap was originally put in place, but we've dialed back, some of the repo financing and other securities financing that we provide and then our own utilization of external repo as a financing source to create more room and that whether some of those activities is first and foremost gets us down below the cap on the spot basis, but then will create some amount of room for us to make choices about how to help our customers and it starts with existing customers and making sure that we can meet their needs. And that's what we're focused on right now.

Hi, Ken, this is Charlie. I just – I know you didn't mean it this way. And I just want to make sure that it's clear for everyone else is that we have no restrictions on participating in these programs. What the Fed did is they allowed us to go above the existing balance sheet cap, so that we could participate in a more holistic way without having to adjust other items, which, as you know, is difficult to do in a shorter period of time. So it provided us the flexibility to do far more than we had chosen to do ourselves based upon our capacity.

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

Yeah, it's a fair question, but not quite yet. We've got the – I think we're all forecasting something like zero in the front end or with depending on where LIBOR moves over time, and then some number between call it 70 and 100 basis points at the long-end. How the – how deposit pricing reacts to that and it had – it came down in this quarter and we anticipate it coming down rapidly over the course of the remainder of the year will be a big driver. What of these recent balances that we just booked stick versus those that the dial back down I think will be a big driver, so not looking for NII growth. I'm sure it'll be down by some amount. But we're not freeing any more precise and hopefully by the time we get to either mid or at the end of the second quarter, we'll be in a position to be a little bit more declarative about that.

Yeah, I appreciate that. Thanks, guys.

Thank you.

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

Hi, Betsy

Hi, good morning. Hi, good morning. A couple of questions, one, just on the outlook for CECL and CECL charges, I mean, you obviously went through in detail what you did this most recent quarter, but just trying to understand what kind of unemployment level you're assuming in that just so if we see a trajectory differently from your assumptions, we know how to think about reserve builds from here.

Yeah, so it's a combination of things including unemployment, but to what level and then for how long and then the same with GDP, obviously, other things that are going to matter are what this stimulus means at the personal level and at the business level and whether that's an effective offset to the impact on consumer credit from unemployment. So our scenarios and there's a few of them that we're relying on and we have different weights on each basically are sort of high single digits, sustained down GDP and sustained unemployment really through 2021, while I take it back where we get flat to GDP in 2021, but really not much growth, so quite elongated in terms of the U shape. Hopefully that's helpful. And we'll update as we go along, we're a little less relying on sharp spikes and sharp recoveries and thinking about this a little bit more is a long, slow burn over the next couple of years for risk management purposes.

Got it and then if I could drill down just on the oil side, I mean, obviously, we went through an oil event several years ago, was like 2016. And you had some workouts around that, brought down the oil exposure or the gas exposure since then. Maybe you can give us a sense as to how you're thinking about this go round. I mean, the price is obviously a little bit lower, but I'm thinking that your book has changed a bit, maybe if you give us some color on how you're dealing with that portfolio and what your expectations are there?

Thanks and the book does look different. So on the one hand, it's smaller, on the other hand it's a little bit – it's more senior. We had a bigger wait on lowering the capital structure activity before going into the 2015, 2016 downturn. We're imagining because of the levels of the resource price that losses given default are substantially worse this time through. In terms of the migration of performing to non-performing, I'd say in our own credit loss analysis, we're assuming basically across the board, full notch downgrade type of – in our own estimation of default probability. I think we're approaching it in a pretty sober basis. We've got a good number on it now, both specifically and through our qualitative reserve. And we'll continue I think to up our disclosure around it like we did in 2015, 2016 as we work through that.

Okay, but that's embedded within your CECL estimate today already. So if it pans out as expected we wouldn't expect to see any more reserve build on that specific asset class.

Yeah. Well, so yes and no. We always end up reserving more than we end up charging off. So when I'm thinking about the through the cycle charge-off my sense is, we have a line of sight on how we expect it to perform. But for any number of reasons we do. And CECLs different than the prior methodology, but I'm not surprised when we lean in a little hard and it turns out that cumulative losses were less than allocated number. It just seems to work out that way.

All right, thanks.

Your next question comes from John McDonnell with Autonomous Research.

Hey, John, Charlie, John was wondering if you could give any more color on the kind of base case economic scenario that you've baked into the first quarter reserve build and given that like, what kind of macro scenario would have to materialize in the second quarter for you to have a similar sized provision or to be adding more than you added in the first quarter? And then maybe Charlie could just add some thoughts on the potential paths he sees for this credit cycle relative to what you've seen in your career trolley. What are some of the similarities and differences you think about how this might play out relative to great financial crisis or stress test scenarios? Thank you.

So I'll go first. And John, it’s still Autonomous Research, right? Not Anonymous Research.

Yeah. Thank you.

Sure. Yeah, make sure we get that right. So as I mentioned to Betsy, we're taking kind of a longer window approach rather than a quick V or even a quick view in thinking about growth through the rest of the year and into next year being mid to high single digits negative this year and flattening out but not growing really next year. And then unemployment in the long and sustained high single digit range. They may vary – there already have been perhaps spikes that go beyond that, but we're thinking about this as it plays out quarter after quarter. So it's just two dimension it compared to other scenarios thinking about both our performance in the financial crisis as well as our own CCAR severely adverse scenarios. At this point we see this as not generating that level of loss in our own CCAR severely adverse scenarios. And if we produce nine quarter credit losses of about two and three quarter percent in total, with peak quarterly loss rates expressed on an annualized basis of about 1.7%, 1.75% and an average of about 1.2%. That's got a steeper drop in GDP and a steeper climb and in unemployment and importantly, no stimulus baked into the severely adverse case, it's – it doesn't anticipate the types of interventions that we've already seen and we're waiting to see materialize. And with respect to the financial crisis as a benchmark, importantly, at least for Wells Fargo, it may be true for other banks as well. But loan portfolios were very different than the quality of loans, particularly on the single family side was worse. I think our auto portfolio was worse than too. And so there we did produce higher – somewhat higher loss rates, even higher loss rates than we do today in our own CCAR analysis because the content of the portfolio is different, but I guess I would describe what we're currently imagining now to be – I'll call it halfish of an annualized loss rate of the severely adverse version of our own stress test. And so if things play out substantially worse, then there's certainly the possibility that we end up building more or experiencing more charge-offs or both, but we feel good about the approach that we've taken in March developing our scenarios with our governance around it and coming into the quarter end. And Charlie, you may have comments on the comparability?

Yeah, listen, I think and as I said in my remarks, I think it's – we all know, we haven't seen anything like this before, there's no clear path to with a – with any narrow range of outcomes for what unemployment or GDP will be. I mean, when we think about different people's estimates, I mean, you can see GDP differences of10, 20 points across very smart people who do this for a living. Same thing with unemployment, 5, 10 points differences. And so making an analogy of what this environment is to other environments. I just have a very hard time doing. Having said that, I think we feel like the portfolios that we have are stronger than they were at other downturns as I think they certainly are in many banks out there. The real question will ultimately be how long this shutdown actually continues, which again none of us know. But in addition to that, how our actions, whether it's the forbearance plans that we have, or the fee waivers, the things that we're doing very actively to help our clients and the huge amount of government intervention, whether those things will actually be able to bridge individuals and small businesses and larger corporations to the other side of this. I personally wouldn't be surprised that as the earnings cycle continues, and as we start to see these numbers, even though people are talking about big numbers, they'll potentially continue to be surprised by the size of them. And that will create additional volatility in the environment that we live in. And it wouldn't surprise me to continue to have to add to reserves as those things impact, confidence and ultimately what economic growth looks like. But as I said, I think it's different. And again, what we know is we're strong and the industry is strong to be able to handle this.

Great and again as a quick follow up to that. Charlie, the idea of banks maintaining dividend payments is a big debate right now, not just for Wells Fargo, but for the industry overall. And you've cut the majority of distributions, you and the other banks, two thirds of it has been buybacks. And folks talk about the importance of dividends as a signaling. Can you talk about the pros and cons of keeping the dividends for yourself in the industry?

Yeah. Well, listen, I think certainly the dividends are certainly important for all those that own the stock and ultimately those that wind up benefiting from stock ownership or for individuals in one way or another, whether it's direct holdings, or whether it's pension plans and things like that. And so I think the income stream that people come to rely on especially at times like this is important, but there has to be an underlying ability for companies to be able to pay. And so to the extent that they have that ability to pay, I certainly think it's the right thing to do for the reasons that I just said. We have strong capital ratios. We do all the stress tests and whatnot that John referred to and determine our ability to return capital in these severely stressed environments. Also remind you that for us, we are slightly different than others because of the balance sheet cap. So our balance sheet cap does limit our ability to deploy capital internally. And so based on that – that's why we sit here and look at and say that we think the dividends, certainly that we're paying, makes sense. But as I alluded in my prior comments, we don't know what the future looks like based upon the assumptions that we've laid out in these very stressed environments. We do feel good about it, but ultimately the timing and the pace of the recovery is going to determine earnings capacity for everyone to be able to continue to support the level of dividends.

Thanks.

Your next question comes from line of Erika Najarian with Bank of America.

Good morning, Erica.

Hi. Good morning. I just wanted to ask a clarifying question on John's question on the dividend because it is a question that investors are asking a lot about Wells Fargo specifically. So before you reported earnings consensus is at 235 for this year versus dividends of 204. And I just wanted to make sure I'm taking away the right message and that the market shouldn't really look at the payout. And instead given that the bright line on capital distributions would be breaking that 9% CET1. We would continue to monitor where your capital levels are relative to the minimum and because of the balance sheet restriction, unlike some peers, you are less able to eat through your capital through RWA growth, is that the right way to think about the dividend going forward?

I think that's right. I'd also add Charlie's view, though that as the quarters unfold, and we figure out how long we're going to be in this economic state and what the path forward looks like, and we use that to interpret and an estimate what our go forward earnings trajectory looks like that that's the context for understanding what the steady state dividend should look like. So in terms of like this year's dividend looks like versus this year's consensus or estimated earnings during a time of stress is less germane. I think than A, the fact that we start with ample capital and B, what we think are run rate more steady state earnings are on the way out of this and reflect what the dividend is in light of that. Tell if that's helpful, but yes, the point that Charlie was making about the fact that we're not really in a position to go out and generate substantial incremental RWA through outside loan origination is an important one and a distinguishing one versus others who may be doing that right now and expanding their balance sheet intentionally.

Got it and my second question is on forbearance. And just a clarification question also and something that you said John, so if possible, could you give us some updates on how many of your clients – if you could give it to us like by mortgage, by auto or in the 90 day or 60 day forbearance period, how April 1, payment behavior was like? And also just clarify what you said John, you said that potentially the losses, the cumulative losses, this cycle would be 50% of the severely adverse, which I think for nine quarters was 26 billion.

What I said was that the current loss rates that are in the scenario that we're talking through are in the neighborhood of half of our current severely adverse and if you're probably looking at last year. And so I'm not making a call on the cumulative level of losses, I'm just making the point that that as a benchmark and answer in response to John's question for contextually, like what is bad really look like. In that instance, over nine quarters, we've generated a calculated two and three quarter percent aggregate credit loss. And for context, in terms of where we are now, these loss rates are lower than that by more than half, roughly half. But I'm not predicting that we're going to go through a cycle like our own severely adverse stress test cycle that lasts for nine quarters and goes that deep, et cetera, just providing a benchmark. With respect to two deferrals, I think we're – and now in deferrals, I'm including both loans on our own books as well as loans that we service for others because the customers don't distinguish when they call Wells Fargo. And I think at this point, we've had requests for deferring over a million payments, it's about $3 billion worth of P&I. I think about 20% of that relates to loans on our own books and 80% of it is loans serviced for others. It's disproportionately auto and mortgage, the dollars of course, the mortgage because the P&I is bigger there than it is on an auto loan. I don't have the specifics in front of me beyond that, but that's what it amounts to. And then it's probably just worth mentioning that at least with respect for the loans on our own books that we would be deferring interest into the future and recognizing interest revenue on an effective interest basis, which would reduce the amount of interest income in the current period by some amount. It's not – at this point doesn't seem to be a large amount. We'll give updates on that as this number flattens out at some point. And we recalculate all of the P&I and effective yield, but I don't think it's going to be a huge difference maker in terms of our interest income recognition for the year.

Got it, thank you.

Thanks, Erica.

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

Good morning guys, thanks for taking the question. John, I think you mentioned at one point during the call, there has perhaps been a little bit of an abating in the pace of line of credit draws. I wonder if you can just talk to what you've been seeing since the quarter and I guess it stands a reason that with the quarter ending and your customers may be doing some window dressing there would be less need for line of credit draws, but how is that actually trending? And how would you expect those balances to behave? Is that cash actually getting used? Or are you seeing it just indeed re-deposited back into the bank, what are the phenomenon of work there?

Yeah. So those daily – monitor those daily draws just to understand what's happening by industry, by customer, by customer type, et cetera. And they really have flattened out. And they have been negligible for the last several days more than a week. And so they peaked probably at the end of the third week in April and then – pardon me in March and then came right back down. So not growing at anything like that pace. So the related question of how long do they stick is a good one. And I guess it depends on the reason for the draw to begin with whether it was window dressing, whether it was a need to access credit markets, which – some of which had been closed, and some of which are more or less open for high grade market wide open, obviously. But for people who need to go into the syndicated loan market or the high yield market, it's a little bit more by appointment, depending on their story. There were people who drew because of just a hardcore liquidity preference, and they wanted to have quick access to the cash regardless of the messaging that they were sending to their external stakeholders. And they may continue to have that preference for liquidity until people know when the economy is going to open back up. And depending on the nature of the borrower, what it means for their sales forecast. And so I don't think we've seen any meaningful pay downs yet. And as I mentioned in response to the question about NII guidance, whether or not those balances remain outstanding will have an impact on this quarter one way or the other. And currently they're sticking, but they're not, but they're not really growing.

Okay, perfect. Thank you. Then if I can ask a second question, just in the – on Slide 15 where you go through the C&I loans by bucket. Can you talk a little bit about the financials except banks portfolio? I know you've discussed it in the past, but just given all the turmoil, there's been in some of the non-bank areas that maybe a little color and sort of what we should be thinking about that?

Yeah, so the buckets of activity there, there's the CLO related activity, so credit managers, there's subscription finance where we're providing leverage to alternative asset managers against the commitments of their limited partners to fund when called, there's leasing, there's auto, there's card, there's mortgage, there's commercial mortgage, et cetera. I'm sure we'll see a little bit more stress in the system. As it relates to the loan balances, they by and large tend to be the highest quality loan balances on a ratings basis or among the highest quality that we'd have because they're generally credit enhanced pools of cross collateralized receivables of one form or another. And that's a huge benefit to us compared to the average portfolio of home loans where you have the first dollar of loss if something goes bad in a loan. Having said that these types of customers will have stress often in their origination function, if they're an originator or in their ongoing capital accumulation if they're an asset manager, there can be stressed on the servicing side of this for those that are our residential mortgage oriented, their life's going to be a little bit harder, presumably as servicing, servicing advances default servicing, things like that pop up, and so we're managing them in that way. On the CLO front, which is a big distinguishing portfolio for Wells Fargo in addition, to what's here was a little bit of overlap, but also in our securities portfolio, we have 30-ish billion dollars’ worth of CLO exposure disproportionately top of the capital structure, AAA, AA that can withstand an extraordinary – almost a complete level of cumulative defaults with varying levels of loss given default. And we're still very comfortable with that and 80% of that portfolio is externally rated AAA, which I think is a plus. So there haven't been meaningful signs of stress here. We will talk about it. If it becomes so we actively manage it in our allowance calculations. And these are very actively managed borrower relationships, as I mentioned.

Okay, that's perfect. I appreciate all the color, so thank you for taking the question.

Yeah. You bet.

Our next question comes from the line of Saul Martinez with UBS.

Hi, Saul.

Hey, how are you guys? Thanks for taking my questions. I wanted to tackle a couple of things really quickly. First, the interplay of credit in CECL, so you trued up – you tooth up your reserves, obviously and your ACL ratio is roughly about 120 basis points. And this is probably oversimplifying it, but one way to think about that ratio under CECL is it's an estimate of what you think you're going to lose on the entirety of your log book over the life of the loan at any given point in time. And that number is lower than what it is for all – for any other large bank even as of January 1. So I kind of want to get your perspective on how much of that do you think is a reflection of just – you guys have a lower loss content loans, a better risk profile of it, as opposed to maybe some other more idiosyncratic things as I seem to recall that you've marked some loans in the past that were in recovery positions and stuff like that. So and I ask also just because I do get that question occasionally from investors asking if you're undeserved relative to your peers, which I don't think is the case, but I kind of wanted to get your perspective on this.

Yeah, I think it's a good question. I think loan mix has a lot to do with it. The question about marked loans historically would have been true, but with the adoption of CECL, most of those marks had to be reversed, which was the source of a portion of our day one adoption negative number. So we don't have that to rely on although we used to. I think the biggest difference is probably the waits that we have on jumbo mortgage versus the wait that we have on credit card in a heads up basis versus other peers. And that's true of both outstanding as well as undrawn. And the allowance if they're to serve both our credit card portfolio, which under most conditions we wish was a bigger capability for Wells Fargo in times like this is a little bit of a saving grace because we expected loss content both in what's outstanding as well as what might be expected to come through from undrawn is more manageable in the size of our balance sheet. It's still as you'd expect the higher loss content, higher loss rate exposure because it's consumer unsecured and unemployment will be a big driver of losses in this cycle or any cycle, But on the on the first lean mortgage front because that business has changed so much in between borrower capacity to repay reserves, LTVs, et cetera. Even in stress our loss estimations for that portfolio are really quite low. And so as you run down different categories of C&I or commercial real estate or the various consumer categories, credit card is the highest and first lean mortgage is lowest and there we have the biggest wait on mortgage and probably the lowest wait on card.

Okay and I presume in your queue and in Y 90s, you'll be given loan loss allowance by lending category, so we can compare you to your peers by segment, right?

Yeah.

And just one final one, do you have a sense or have you disclosed how much you've actually reserved? Or would you disclose or have a sense for how much you've actually reserved for oil and gas and entertainment and all that all of the higher risk sectors on Slide 28 to 30, just to get a sense of where you stand in terms of reserve level in those categories.

We haven't yet – because most of that is still – it's still a part of this qualitative top up of the reserve, which is how the big build for this quarter went down. This is all estimation and as a result, it's not specifically allocated by loan grade and buy portfolio. It will get there. Those are the industries that I mentioned or the categories that I mentioned are the ones where we've leaned in the hardest and on a qualitative basis assumed that certain levels of downgrade which lead to the higher reserve factor being attached to them, but it hasn't run through the process yet that way, because we haven't had those downgrades. So we will start to provide more information. I'm not sure if it will be in the queue, but certainly as the cycle unfolds and these things actually start to appear in the calculated, graded reserve for C&I categories in particular.

Got it, thanks a lot.

Yeah, thank you.

Our next question comes from line of John Pancari with Evercore ISI.

Hi, John.

Good morning. Back to the through cycle loss number, your two and three quarter number, I know you just indicated that cards would be the highest net assumption. Do you have what those through cycle numbers are that you have by bucket for example, commercial real estate and card and C&I that make up the 2.75?

Right, so the 2.75 is the CCAR severely adverse through the cycle, cumulative loss level. So it's not through the cycle loss level. And I know – I'm not sure whether I wasn't clear I don't want anybody to walk away thinking that that's what we anticipate experiencing through the average cycle. We have not laid all of that out. We – I guess I would look to the categories of loan loss disclosure with our last – the last stress test, those come from the Fed and it'll come from if you get to Wells Fargo's, but we haven't gone category by category and laid it out. I can tell you that on the commercial side, it's about 2.5% percent and on the retail side it's about 3%. But in terms of the individual components, we haven't run through that with folks.

Okay, got it. Got it and then regarding the loan loss reserve from here, I believe, Charlie, you indicated in one of your previous answers that you could see incremental loan loss reserve builds from here. Is that a fair assumption at this point, given the – given your expectation for the ongoing stress on borrowers et cetera, that we could have incremental builds or do you think the – we're at an adequate level given the recast of the bank's [ph] book and what you put on this current quarter in terms of where your reserve stands at this point.

Yeah, I guess. I guess – let me just – I'm not an economist. And so I don't pretend to know any more about the future than anyone else who's in my position. And I – what I said was I think it's clear that economists are having a difficult time trying to figure out what the trajectory of unemployment in GDP will be. What I was saying was it just it wouldn't surprise me that people will continue to be surprised by the downside in the numbers. We've not seen anything in our own portfolios to suggest that we will be adding in the future. But if confidence does deteriorate and the shelter in place orders stay on for longer, which is possible, then it wouldn't surprise me that loss estimates would have to go up from this point. Again, I just – it's not based on something that we've seen. We don't know the impact of all the programs that are out there, which we've never seen anything like this before. But there's probably – I think it's fair to say at least in my mind, there's more downside than there is upside at this point, just given the uncertainty of the environment today.

Got it, that's helpful. If I can ask just one more, on the drawdown point, I know you had implied that you're seeing a little bit of stability there on the draws. Have drawdown from the commercial side, trended as you had expected? Or would you have thought that they could have exceeded the current level where they've showed some near term leveling off?

So they came out of the gate fast and furious before borrowers actually experienced meaningful stress. So I would say that was a little faster than we probably would have imagined. In terms of how things have leveled off, the prior question about whether there was window dressing going on through the quarter and where our borrowers wanted to have cash on their balance sheet, certainly possible that that was a part of it. The high grade – well, CP market being inaccessible for many users and the high grade market being expensive or closed for a little bit certainly contributed to it. Two, both of those things are functioning better now and these balances are still maintained. So it's not crystal clear whether that was a contributor to it, but it seemed a little fast. The fact that it – I think that folks are like Charlie mentioned with respect to our own results are trying to understand how long they're to the – if they're meaningfully affected from a sales perspective. How long shelter in place is going to change the nature of their business, and they're going to make their liquidity determinations along the way. It feels like many people, many business leaders made that determination relatively quickly in the early drives, but it's, as I said, it's flattened out.

Building at it is the time. This is not as we say over and over again this isn't something that we've seen before. And so did – would we have thought that the number of industries and businesses would be shut down as quickly at the same time? No. Does that increase draw levels and the speed at which they draw? Absolutely. So but the fact that we're seeing some stability in those numbers and reductions in terms of where they are says an awful lot about the actions, certainly that the Fed has taken to stabilize the markets and give people the confidence that the markets will function well when they need to access them.

Got it. Alright, thanks guys.

Your next question comes from line of Matt O'Connor with Deutsche Bank.

Hi, Matt.

Good morning. It seems like expenses in the first quarter came in a bit lower than expected even if we adjust for the deferred comp noise, any outlook that you could provide on cost for the year?

Not meaningful, we instituted a few programs for our employees in the first quarter that didn't cost much in the first quarter that will probably contribute a little extra throughout the course of the year. On the other hand, there's a range of revenue related costs that will probably be lower with commissions, incentive comp types of things if the – depending on business conditions of course and our ongoing level of performance. T&E is pretty much down to zero because people are not travelling or sheltering in place. We will have different technology costs that probably get a little bit more expensive as we've enabled 180,000 people to work from home, that all has to get factored in. And then of course, we've got certain types of expense that are levered to where the stock price is et cetera. And that in this environment will probably be cheaper than it was a year ago, but not anything targeted or meaningful in this moment during the public health crisis beyond that.

And the only thing that I would add is as we think about what the future is we were very clear on the last call about our views on our efficiency and the work we had to do. And given the environment that we're in this is not the kind of environment where we're able to realize any meaningful savings. So we need to see line of sight past this crisis in order to continue to get back to the work that we have to do to drive that number down which we still completely believe is there, doable and the right thing. It's just going to take a little more time at this point.

Okay, understood. And then you've made some comments in terms of the regulatory issues and obviously, the flexibility to help small business customers, but any just kind of broader update on addressing regulatory issues? And there were some headlines that you are missing some deadlines in the media, which doesn't seem surprising, since a lot of things are shut down. But is there anything you want to add from kind of a regulatory perspective that you are able to comment on?

I'm not going to talk about anything specific. It's not the right thing to do. I'll just reiterate. We have a lot of work to do. I've been saying that very, very consistently. Our ability to get beyond some of these regulatory actions is based upon our doing the work properly. There is a bunch of it. We're continuing to devote all the necessary resources towards it, even during this crisis. And that's really what I could say at this point.

Okay, understood. Thank you.

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

Hi, good morning. So John just wanted to ask a question about how you're managing the securities book. I recognize you guys pulled again NII dive ins, but I'm just trying to understand given this significant decline that the long end of the curve, I was hoping you could help us frame where you're reinvesting today versus to roughly 2.8% yield on the securities book, and maybe just bigger picture what's your appetite to reinvest in other asset classes, outside of agency MBS and treasuries to maybe mitigate some of those reinvestment pressures?

Yeah, it's a good question. So where we're investing today and I think we're – we've got $6 billion to $9 billion a month of expected prepayment and maturity that needs to get redeployed. We have been and will likely continue to redeploy it into HQ LA. There are certainly interesting opportunities in credit sensitive securities, et cetera. They were really interesting in March, but they're still interesting today. But for low liquidity value, more risk weighted types of investment we're more likely to use our dry powder for our customers. So for loan growth, rather than on the securities front, even though historically we would have done both. And a portion of that is related to the existence of the asset cap. So it's still likely to be treasuries, G&A's and agency mortgages as we redeploy that$6 billion to $9 billion per month for the rest of the year.

And just for my follow up, I just wanted to try and gauge the near term outlook for fee income. I know there's a lot of moving pieces this quarter, it looked like if we adjust for all the specials, it was about a $1.3 billion drag suggesting maybe a core fee run rate somewhere around 7.7 billion. I'm just wondering as we look ahead, just given some of the pressures you cited on service charges, spend volume contracting, lower fees in wealth given the lag quarter pricing, I guess you'll have an offset from mortgage. I just wanted to try and frame how we should be thinking about the right jumping off point for core key income in 2Q and maybe just speak to your outlook for the remainder of the year.

So that's complicated for all the reasons we've been describing. I would say that that you're right about the stepping off point for wealth and investment managements. That will be lower. I expect mortgage to be stronger. We have a $60 billion pipeline and a stronger gain on sale on a per pound basis. So the second quarter should be good in that respect. The markets businesses are actually doing really well right now, although investment banking is quieter, high grade is open, but there isn't quite as much going on in non-investment grade or equity issuance. Card fees should be lower because transactional volumes are lower. Deposit service charges in my sense will be lower because of actions that we're taking on a targeted basis to reverse fees where it's appropriate. And it never works to add it all up and give a starting –give a core number, but those are probably the bigger influences on fee income going into Q2.

That's great, very helpful color and thanks for taking my questions.

Yeah. You're welcome. Thank you

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

Hello, Charles,

Hi. It's my guess that tail risk events are not over for this economic cycle. So I was wondering if you could address two different tail risks as they relate to managing your interest rate sensitivity and the impact on your P&L. The first is if we go into a multi-quarter period of negative rates, what are the actions you can take to manage that? And how do you see that impacting your P&L? And then the second is if bond vigilantes ever do come back, and we got a steepening of the yield curve, 125 basis points spread between twos and 10s. What impact does that have on your P&L as it relates to NII, mortgage banking and equity securities or debt securities?

Sure, I'd like the second one better than the first one.

Yeah, I know you would, but also did you take any material actions in the month of March to hedge your interest rate risk going into second quarter? So those are the three separate questions. Sorry.

Yeah, so we'll go in reverse order. In the month of March I would say getting longer duration and not much longer, but continuing to replace and add to duration in this investment portfolio is the most visible activity to defend against going lower in rates in any size. On the second question about what happens if we get to steepen, obviously, there's a hit to capital from OCI when that happens because our bond portfolio loses value, but with the amount that we have regularly to reinvest with deposits at levels that they are et cetera. We are sensitive to the, call it that seven to 10 year point and without putting a specific number on it, it's probably the – it's among the biggest drivers in terms of the way we're positioned for increasing net interest income and the reverse is true as well. And then with respect to negative rates there's a handful of things. I mean, it's obviously, looking at looking at Europe or looking at Japan, there's plenty of examples of why that's not a terrific environment to be in for banking. But on the LIBOR based lending side, I'd make the point that I think substantially all of our C&I loans that are LIBOR based have floors in them. So that we're not worried about eating through margin, still an attractive place to be, but we've protected ourselves in that way. I think there are a range of deposit related activities that we have where we would begin to institute charging for holding cash. Given our – the existence of the asset cap, we can't overpay for deposits, because we were in the business of sending low liquidity value deposits back to bank customers and alike, so we would probably be pretty quick to be managing what we pay for deposits to – so that we didn't have an incremental influx that we that we didn't have an appetite for. And then as I mentioned, adding or maintaining a fixed rate posture duration – the long duration posture on the investment portfolio is a way to abate earning a negative rate as rates go below zero. I don't think you're suggesting there's a higher probability of that. I think Fed's been pretty clear, and have been some instances where bills went negative just because of technical factors, but I don't think it's at least currently part of the playbook for the Fed and then the other jurisdictions around the world where it has occurred out the curve, it started with a policy decision to do it at the front end. So I like the steeper curve better than the negative rates among your questions.

Thank you.

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

Hey, good morning. Just a quick question first maybe the mortgage banking and can you kind of walked through the decision to exit on the non-conforming correspondent. I mean, I heard that expecting loss rates below residential mortgage. So the issue with the asset cap or just credit risk more broadly.

It's really shelf space and putting our own retail customers at the front line as one of the levers that we're using to manage living under the asset cap, not Fed risk in particular.

Okay. And then a separate question and there was a lot of kind of one off items in the quarter that were due just to where markets were at the end of the quarter or more spreads were, another was the reserve for debt securities, equity impairments and then often has an effectiveness and it was expected to reverse given where markets are, at this point in time or where rates are for the hedging activity.

On hedging effectiveness, I wouldn't expect that to reverse or to persist. It's sort of a confluence of events that gave rise to it for the quarter. So that probably goes back to a debt expectation of call it a net zero expectation and it can drift up or down depending on what happens in the LIBOR OIS basis or for some other reasons. In terms of equity impairments, those [indiscernible] and there are some measurement alternative activities that actually do get written back up when the situation warrants it, but I wouldn't expect that to happen in the early stages of a recession, if that's where we are in the next few quarters. Obviously, there are lots of ways to earn that back over the life of those investments, but it'll take a while for that to reveal itself. And what was the last one? There were a couple different examples.

The reserve for debt securities.

Yeah. I don't anticipate that it will – those are – that relates to both AFS and held for – held to maturity security. So presumably there are some AFS securities that might get sold or mature that release some of that, but I don't think it just comes right back. That's the nature of OTTI.

Okay, thanks.

Your next question comes from the line of Vivek Juneja with JPMorgan.

Hi, thanks for taking my questions Charlie and John, couple of things. Firstly, how did total criticized loans do in the quarter? I know you mentioned oil and gas. Have we seen any – firstly any numbers and have we seen any impact of any of those other industries where there's concern? And as you look at your commercial loan book you broke down the drawdown's into CIB, commercial banking, commercial capital and CRE, any color on the outstandings in those and also the breakdown of how criticized did in those four categories?

So criticized loan balances increased about $4 billion in the quarter almost all of it in March. I'm trying to do the math here. A big piece of it are – for those that are in the industries that we mentioned earlier, airlines for example. You'll see it in energy for sure. There have been – there's some commercial real estate that has already come through. It's just – it's so early because this all occurred in size in the – in mid to late March, but we'll probably see more of that realizing itself in Q2, which is part of why our allowance build is really so much from a qualitative perspective. I mean, it's based in math, but it's not driven by loan gradings, et cetera, which drive the quantitative approach. So I think you'll see it coming from the usual places. We'll have more specifics in the 10-Q when we file it and then of course, we'll see the behavior in actual– we’ll receive financials will administer loans on a loan-by-loan basis through the second quarter and that will update the quantitative model and the disclosures in Q2.

And how does your commercial loan book break down between CIB, commercial banking, commercial capital? Really, those are your three biggest categories and I guess there's a little bit of CRE Included in C&I, any color on that?

There will be when we publish those segments. What we have in the deck today that shows the total C&I outstandings and commitments is a superset of those businesses. So you can see the total. Where we draw the lines between what it is in which segment. We haven't, haven't added it up and disclosed it that way, but you will begin to see it that way in Q2.

Another question you mentioned on the page on deposits that you grew deposits in consumer through high yield savings. Given any color on why you're growing high yield savings [either] you're really not trying -- I didn't think you were trying to grow deposits, any color what's behind that?

Yeah, well, high yield isn't the same today as it was a year ago. Some of where we grow is the preference of the customer choosing where they're going to put their money in this label of high yield savings means something different. As I said a little bit earlier, we're forecasting our deposit costs to come down substantially throughout the remainder of 2020, reflecting what you're suggesting, which is in a flight-to-quality timeframe with a liquidity preference by our customers as the deposits are rolling through the door and we are not overpaying for them. You will see in Q2 I think substantially all of the incentives from last year as we were building deposits at a slightly more expensive timeframe to finally roll off and then so through Q2, three and four as we currently forecasted, we're going to be heading back to deposit costs of the --call it 2014, 2015 era.

Okay, thank you.

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

Thank you. Good morning, gentlemen. John, can you share with us on Slide 15, you gave us the total outstandings and the total commitments, I think it is about 58% outstanding to commitments. What was that number at the end of the fourth quarter of 2019? And within those categories you gave us, who had the biggest drawdowns?

That's a very specific question you're asking me to answer you. Well, so I don't have that information right in front of me. I can tell you that as a category and this was on Slide 12 in the same deck, our utilization rate jumped up almost 9% to 49%. So for the whole universe of wholesale commitments, we had been in the high 30s and now we're in the high 40s of utilization. I'm going to have our IR folks follow up with you because we do – we have been tracking utilization, or I should say draw requests by industry and that might be useful, but I don't have it right in front of me.

No, that that's good, thank you. And as someone else complimented you guys the break out on the portfolios for oil and gas, retail, transportation, entertainment was very helpful. If you could provide a suggestion for the next time for the financial except banks, I think that would be helpful. One last question for you, it's a technical question. If your assumptions in CECL are correct on the economy that you guys use to build up the CECL reserve this quarter. If they are correct, in the second quarter, do we see the provision being primarily in the covered net charge offs and loan growth and no more CECL reserve build up? Is that correct? Is that the way we should look at it?

In theory, if you had perfect foresight, but you also have to kind of know how to view a growth in the same timeframe, because at the minimum, you'd be capturing allowance for the change in the loan portfolio from one quarter to the next. But I would discourage anyone from imagining that at this point in time that any bank has got perfect clairvoyance about what the future holds, and whether it gets better it gets worse. I'm sure it'll be a little bit different.

No doubt. I appreciate that. Thank you for the candor.

Terrific, terrific, well, thank you, everybody, that was our last call. And this is the first step on our journey as we go into this cycle. We've been saying for some time that we're late in the cycle. We're going to stop saying that because now we're early in the cycle and we'll be working with each of you to help understand or answer your questions where we can and we look forward to talking to you next quarter. Thank you very much.

Thanks, everyone.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.