富國銀行 (WFC) 2020 Q1 法說會逐字稿

Good morning. My name is Catherine, 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. (Operator Instructions) Please note that today's conference is being recorded. Thank you.

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

Thank you, Catherine. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie 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 supplement are available on our website at wellsfargo.com.

I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including the Form 8-K filed today containing our earnings 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 website.

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 interact with the virus, health care workers who are on the front lines 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 1/4 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 U.S. 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, new digital mortgage deferment tools and expanded e-signature support. Customers are adopting these new tools as demonstrated by a 52% increase in dollar volume of mobile deposits in March 2020 versus March 2019.

We're providing significant credit to our clients. In the month of March alone, our commercial customers utilized over $80 billion of their loan commitments. And we're providing accommodations for clients in need. Through April 10, we helped more than 1.3 million consumers and small business customers by deferring payments and waiving fees. We deferred over 1 million payments representing almost $2.8 billion of principal and interest payments and provided over 900,000 fee waivers exceeding $30 million. We've suspended residential property foreclosure sales, evictions and involuntary auto repossessions. And we continue to work with HUD, the GSES, our trade groups, others in the industry as well as government officials and not-for-profits to identify other ways to assist customers facing financial challenges in the current environment.

We've extended our participation in the PPP program and hope to provide significant relief for our small business customers. We're quickly ramping up our processing capacity to respond to the significant demand we've seen. Through April 10, we've received more than 370,000 indications of interest from our customers. We are working with industry groups and the U.S. Treasury in preparation to distribute millions of economic impact payments to Americans as quickly as possible. For those that receive checks, we implemented changes to our ATMs and mobile app to make it more convenient to use those depository options instead of going into a branch.

Now turning to how we're operating the company and our employees. We have enabled approximately 180,000 employees to work remotely. For jobs that cannot be done from home, in addition to modifying branch formats, we've taken significant actions to ensure safety, including enhancing social distancing measures, staggering staff and shifts and implementing an enhanced cleaning program. We continue to pay all employees. We made a onetime cash award to approximately 165,000 employees who make less than $100,000. Additionally, as a way of recognizing the unique contributions of our employees that work on the front line, we're making additional payments to those employees. We've made changes to our benefit plan to support those who are being tested or those who have the virus. To assist our employees who need child care, we granted eligible employees up to 5 paid business days off so they can find child care. We're also providing financial support to eligible employees for those seeking child care through their own personal networks. And we made a $10 million grant to the We Care Employee Relief Fund, which is available to employees affected by coronavirus, especially those with limited resources, to help them get back on their feet with basic necessities. And we're supporting our communities by directing $175 million in charitable donations from the Wells Fargo Foundation to help address food, shelter, small business and housing stability as well as providing help to public health organizations fighting to contain the spread of COVID-19.

Turning to what we've seen over the last month in the markets. As you all know, the health crisis has had a swift and severe impact on the financial markets. But the banks, including Wells Fargo, are financially strong and have done a great job as many other industries have in providing continued service while many of our employees have been unable to access their offices. We also have navigated huge disruptions we saw in liquidity in most asset classes for several weeks. HQLA bid-ask spreads, daily volatility and credit spreads increased 100% to 500% versus normalized levels prior to crisis. Activity remained reasonably order in HQLA, other loss remote credit assets and high-quality corporate primary issuance. But most other markets saw forced selling, high intraday volatility and bid-asks widening meaningfully.

Fed programs designed to support smooth market functioning and effective transmission of monetary policy immediately improved risk pricing, increased dealer balance sheet capacity, decreased market volatility and lowered transaction costs. Large-scale asset purchases and treasuries and agency MBS improved secondary trading flows in HQLA while credit-sensitive assets lag the recovery. All of this, as well as the effective shutdown of the economy, directly impacted our results.

Turning to the quarter. You can see that results were materially impacted by loan loss reserves, impairment of securities and redemption of preferred securities. Our results included a reserve build of $3.1 billion for loans and debt securities, $950 million of securities impairment predominantly related to equity securities and a negative $0.06 impact related to the redemption of our Series K preferred stock.

Within our community bank, as would be expected, branch traffic significantly slowed as March progressed. We had approximately half the teller volume at the end of March compared with the same period a year ago. ATM transactions were also down significantly, down approximately 17% in March compared to a year ago.

On the lending side, we originated $48 billion of residential mortgage loans, 52% for refinancing. Auto originations declined 5% from the fourth quarter with strong originations early in the quarter more than offset by a slowdown in March. Credit card purchase volume is down 13% from the fourth quarter and down 1% from year ago as strong volume early in the quarter was more than offset by declines in March.

Within Wealth and Investment Management, period end deposit balances increased 13% during the quarter driven by higher retail brokerage sweeps reflecting higher client and cash allocations. Retail brokerage transaction revenue increased 12% from the prior quarter. And despite market declines, Wells Fargo Asset management AUM still grew 2% during the quarter driven by strong inflows into money market funds.

I'll turn to our wholesale businesses now. In trading, markets businesses were nice -- were up nicely year-over-year in the first 2 months of the quarter, but performance was mixed in March. We had strong performance in macro trading as well as in equities due to volatility and increased flows. However, our performance in spread products suffered due to the market dislocation. Commercial loans grew $52 billion or 10% from the fourth quarter. And overall global debt capital markets activity was the strongest on record driven by high-grade offerings from U.S. issuers whose volumes were up 63% compared to a year ago. Wells Fargo's high-grade debt capital markets lead table rankings improved from fourth to third with 9.2% fee-based market share during the quarter.

While focused on our efforts around COVID, we continue to make significant changes inside the company. We continue to add talent to the senior leadership team. Ellen Patterson joined us several weeks ago as our General Counsel, and we expect several more additions to the team in the coming quarter. Even with the significant amount of time being devoted to our COVID response, we're not reducing our efforts on our regulatory commitments, and we continue to move forward on improving the processes, structure and cultural change necessary to get the work done.

As a reminder, during the quarter, we announced a new organizational structure with 5 lines of business reporting directly to me. I've also spoken of our business reviews we've had put in place. Those agendas have changed and are now oriented towards issues related to operating in the current stressed environment. As we settle into this environment and have some line of sight to recovery, we will reengage with the work I discussed last quarter.

Let me turn to the asset cap now. John will provide more details on how we're managing in this environment given the constraints, but here are some highlights.

We are focused on doing all we can for our clients while satisfying their requirements. And to do this, we make decisions each day on balance sheet allocation. As a reminder, the asset cap is measured on a 2-quarter daily average basis and must be below $1.952 trillion at the end of the quarter. On March 31, that calculation was an estimated $1.943 trillion. In mid-March, as the crisis began to evolve, we first saw slow increases in deposits and draws -- drawdowns in committed lending facilities, and both of those accelerated as the crisis deepened. At the end of the quarter, we had $1.981 trillion in assets. John will discuss this in more detail, but we're taking a number of actions to ensure we stay below the cap.

We started the quarter with a strong capital position, including a CET1 ratio of 11.1%. With the strong growth in assets during the quarter, materially wider spreads as well as lower earnings, our CET1 ratio declined to 10.7%, still above the regulatory minimum of 9% and our current internal target of 10%. As you know, we suspended our share buyback as we focus on helping our customers get to these challenging times. I'm sure you still -- you'll want to discuss our capital plans going forward. But as you know, we submitted our 2020 capital plan earlier this month, and the results will be published by the Federal Reserve Board in June.

As I think about what the future holds, here are a few thoughts. We've entered into a world we haven't seen before. Much of the economy is essentially closed. Consumer spend is down over 25% year-over-year this past week with food and drug increasing and other spend down significantly. New auto sales in the month of March were down 32% from February. Manufacturing has turned downward with ISM March reading of 49.1% as businesses cut back on orders. Commodity prices are down 24%, speaking to the weakness in global demand. Unemployment has grown beyond what we've traditionally modeled. And while there is hope that this is time-bound by shelter-in-place orders, we don't know what the time frame is or how quickly the economy will recover when these orders are lifted. What we do know is the contraction is real, and we must do all we can to be safe and to ensure we do our part to help recover as quickly as possible.

It's equally important to note, the response is also beyond what we've historically seen. Banks have provided significant amounts of credit and liquidity. Banks have deferred payments on loans, waived fees, made numerous other accommodations for customers in need. The response from the Federal Reserve has been fast, comprehensive in scope and significant in size. And the response of Congress has been equally impressive, and their actions are just beginning to provide the support necessary for many but will unfold quickly. The question remains what this means for our future. What's important is controlling the spread of the virus so the economy can reopen. We're hopeful that our actions, those of others and especially government support should provide needed relief and help many customers bridge this difficult period, but the length of the shutdown will ultimately determine the severity. What we do know is our strong levels of capital and liquidity position enable us to support our customers and the broader U.S. economy. We will be closely evaluating our assumptions regarding our allowance for credit losses as we move forward, and the actual level of losses we incur will be driven by how long this period lasts and the effectiveness of the support in government and private industry.

Sitting here today, there are many unknowns, and the year will look quite different than we expected the last time we spoke. But as I said, we're focused on delivering for our customers and communities to get through these unprecedented times, and we remain committed to the financial and performance improvements we've discussed as we get beyond this crisis.

Thanks again to all my partners at Wells Fargo that have been working tirelessly, and I'll pass it on to John.

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 customers' 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 460 -- we had a $463 million gain on the sale of residential mortgage loans, which had previously been designated as held for sale. Mortgage banking income declined $404 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 of 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 is 21% above the regulatory minimum. These surpluses are noteworthy given the regulatory minimums they're based upon are established to ensure financial institutions maintain sufficient resources to withstand severely adverse economic and market conditions.

Turning to Page 8. I'll be covering the income statement drivers throughout the call, but I wanted to highlight that our effective income tax rate was 19.5% in the first quarter and included net discrete income tax expense of $141 million.

I'll be highlighting most of the balance sheet drivers on Page 9 throughout the call, but I will note here that the economic environment our customers are facing due to COVID-19 caused our balance sheet to expand as loan demand and deposit inflows increased significantly late in the first quarter.

On Page 10, we highlight how we're helping our customers while managing under the asset cap that's been in place since early 2018. Driven by strong loan demand -- loan growth in March, our total assets grew $53.8 billion from year-end to $1.981 trillion. As Charlie highlighted, even with this growth, we continue to operate in compliance with the asset cap of $1.952 trillion as compliance is measured at each quarter end based on a 2-quarter daily average. As of March 31, the 2-quarter daily average for our assets was $1.943 trillion.

During these challenging times, we expect loan-to-deposit growth could continue but cannot provide guidance on the level of growth, and we're actively working to create balance sheet capacity to help our customers. It's worth noting that the high rate of growth and line utilization by our commercial clients is backed off since credit markets have reopened.

We appreciate the targeted action the Federal Reserve took last week, which will provide additional flexibility for us to make small business loans as part of the Paycheck Protection Program and the forthcoming Main Street business lending program. We have and will continue to take actions to manage the size of our balance sheet. For example, we've exited correspondent nonconforming mortgage originations, which gives us the ability to better meet the mortgage financing needs of our existing customers. And similar to the actions we took in early 2018, we're reducing low liquidity value deposits, particularly deposits from other financial institutions, and we've also reduced our securities finance footprint.

Let's look at the drivers of the balance sheet growth we had in the first quarter, starting with average loans on Page 11. Average loans increased $8.5 billion from the fourth quarter driven by commercial loans. Given the significant growth that occurred late in the quarter related to a change in borrowing behavior caused by the COVID-19 pandemic, I'm going to spend more time describing period-end trends starting on Page 12.

Period-end loans increased $61.6 billion or 6% from a year ago and $47.6 billion or 5% from the fourth quarter. Commercial loans grew $52 billion or 10% from the fourth quarter as balance sheet declines early in the first quarter were more than offset by strong growth late in the quarter. The growth in commercial loans in the first quarter included more than $8 billion of borrower draw activity in the month of March on commercial banking and corporate investment banking loans. Revolving loan utilization in wholesale banking was 48.6% in March, up 860 basis points from December. And as I mentioned, during the first 2 weeks of April, we've seen these draws slow. Consumer loans were down $4.4 billion or 1% from the fourth quarter as declines in credit card loans, consumer real estate loans and other revolving loans were partially offset by growth in auto loans. I'll highlight the drivers of the linked quarter trends in more detail starting on Page 13.

The first mortgage loan portfolio decreased $927 million from the prior quarter as refinancing-led paydowns more than offset $14.3 billion of held-for-investment mortgage loan originations. Junior lien mortgage loans were down $982 million from the fourth quarter as continued paydowns more than offset new originations and $1.8 billion of draws on existing lines, which was up meaningfully late in the first quarter. Credit card loans declined $2.4 billion from the fourth quarter, driven by seasonality and fewer new account openings. Our auto portfolio continued to grow while we maintained our credit discipline with balances up $695 million from the fourth quarter. However, as Charlie highlighted, originations declined 5% from the fourth quarter with strong originations in the first quarter -- early in the first quarter, more than offset by a slowdown in March due to the pandemic.

Turning to commercial loans on Page 14. C&I loans were up $50.9 billion from the fourth quarter with broad-based growth across business lines, largely driven by draws of revolving lines as clients reacted to the economic slowdown associated with the pandemic. Commercial real estate loans were up $1.8 billion from the fourth quarter with growth in both CRE mortgage and construction loans. Given the focus on commercial loan draws and exposure to industries that have been particularly hard hit as a result of the pandemic, we're providing more details on certain of our industry exposure starting on Page 15.

We typically disclose the industry breakdown of our C&I and lease financing portfolio in our quarterly SEC filings but are also providing the industry breakdown of our total commitments on this slide. I'd note that not all unfunded loan commitments are unilaterally exercisable by borrowers. For example, certain revolvers contain features that require the customer to post additional collateral in order to access the full amount of the commitment. While many areas of the economy are being impacted by the pandemic, the next few slides provide details on the industries with escalated monitoring.

Starting with oil and gas on Page 16. As of March 31, we had $14.3 billion of loans outstanding to the oil and gas industry. The size of our portfolio was down 20% from $17.8 billion in the first quarter of 2016, which was also when oil prices were low. As of the end of the first quarter, 47% of our portfolio were loans to the exploration and production sector, 41% to midstream and 12% to services. I'll provide more detail on the performance of this portfolio later on the call.

We had $27.8 billion of retail loans outstanding at the end of the first quarter, which included $5.8 billion to restaurants. This includes $3.9 billion to limited service restaurants, commonly referred to as fast food restaurants typically with a drive-through, which have largely remained open across the country, while other restaurant formats have been more impacted with service limited to delivery or pickup.

Turning to the entertainment and recreation industry on Slide 17. We had a total of $16.2 billion of loans outstanding at the end of the first quarter with less than 1% to cruise lines. We had $11.9 billion of loans outstanding to the transportation industry as of March 31, which included $2.4 billion to air transportation.

We're also closely monitoring our commercial real estate portfolio, which we highlight on Slide 18. At the end of the first quarter, we had $14.1 billion of loans outstanding to retail, excluding shopping centers with our commercial real estate mortgage -- within the commercial real estate mortgage portfolio and $10.6 billion in loans outstanding for the hotel/motel industry. Within our $20.8 billion construction portfolio, we had $7.1 billion of loans outstanding in apartments.

Turning to deposits on Page 19. Average deposits increased 6% from a year ago and 1% from the fourth quarter. Typically, we experienced linked quarter seasonal declines in average deposits in our wholesale banking and WIM businesses, but all of our deposit-gathering businesses grew in the first quarter. This growth included the late quarter impacts of flight to quality deposits across all business lines following the emergence of COVID-19 as well as the inflow of deposits associated with corporate and commercial loan draws. Our average deposit cost declined 10 basis points from the fourth quarter with declines across all of our major -- all of our lines of business. We had larger declines in wholesale banking and WIM, while our retail banking deposit cost declined at a slower pace as they were lower to begin with and continue to be impacted from promotional pricing in early 2019, most of which will expire in the second quarter.

On Page 20, we provide details on period-end deposits, which better reflect the strong growth we had at the end of the first quarter with total deposits of $53.9 billion or 4% from year-end. Wholesale banking deposits were up $13.5 billion from the fourth quarter driven by commercial banking and commercial real estate revolving line draws, partially offset by lower financial institutions deposits, reflecting actions taken to manage the asset cap. Consumer and small business banking deposits increased $41.1 billion or 5% from the fourth quarter, including higher retail banking deposits largely driven by growth in high-yield savings and interest bearing checking. Wealth and Investment Management deposit growth was driven by higher cash balances from brokerage clients.

Net interest income increased $112 million from the fourth quarter reflecting $356 million higher hedge ineffectiveness accounting results attributable to the level of market rates and differences in basis and notional on swaps hedging our long-term debt. $84 million of lower MBS premium amortization resulting from lower realized prepays partially offset by balance sheet repricing, including the impact of the lower interest rate environment as our assets repriced down faster than our liabilities and from one fewer day in the quarter. Low rate environment could continue to put pressure on our net interest income, but we're managing our interest rate exposure to minimize the impact as much as possible. Given the current market volatility and uncertainty, we're withdrawing our prior 2020 net interest income guidance. While we're currently not providing guidance on our expectations for net interest income for this year, we will provide more insights regarding developments throughout the year.

Turning to Page 22. Noninterest income declined $2.3 billion from the fourth quarter driven by a $1.9 billion decline in net gains from equity securities and $404 million of lower mortgage banking income. Let me explain these declines in more detail starting with mortgage banking. Lower mortgage banking income reflected unrealized losses of approximately $143 million on residential loans and $62 million on commercial loans held for sale due to illiquid market conditions and a widening of credit spreads. This impact is recorded in net gain on mortgage loan originations, and the $143 million loss reduced the production margin we report on residential held-for-sale originations. Absent this impact, our production margin would have increased as origination demand exceeded capacity during the first quarter.

Mortgage banking results also reflected $192 million of higher losses on the valuation of our MSR asset as a result of assumption updates, primarily prepayment estimates. I would note that we ended the first quarter with a $62 billion mortgage loan application pipeline, which was up $29 billion or 88% from the fourth quarter.

We provide details on the net losses from equity securities on Page 23. We had $1.4 billion of net losses from equity securities in the quarter, which included $621 million of largely P&L neutral deferred comp plan investment losses. Net losses from equity securities also included $935 million of impairments, reflecting lower market valuation. The impairments on venture capital, private equity and certain wholesale businesses represented 17% of the carrying values of these businesses' portfolio investments subject to the impairment assessment.

Turning to expenses on Page 24. Our expenses declined $2.6 billion from fourth quarter. Operating losses declined $1.5 billion from the fourth quarter, which included elevated litigation accruals. Personnel expense, which is typically seasonally elevated in the first quarter, declined $494 million from the fourth quarter driven by lower employee benefits expense. The decline in employee benefits expense was driven by $861 million of lower deferred comp expense, which was partially offset by $544 million of seasonally higher payroll taxes and 401(k) matching expenses. We also had lower expenses in a variety of other areas, including commission and incentive comp, outside professional services, technology and equipment, and as you would expect, travel and entertainment.

The enhanced benefits and payments we provided to employees in March as part of our response to COVID-19 did not meaningfully impact our expenses in the first quarter, but we currently expect that they will have a greater impact beginning in the second quarter and through the remainder of this year. While these costs will add to our expense base, the actions we took were the right thing to do to support our employees.

Before discussing our business segments starting on Page 25, I want to note that as a result of the new, flatter organizational structure that was announced in February, we will be updating our operating segments when we complete the transition and are managed in accordance with new -- the new 5 business segment structure. Community banking earnings declined $274 million from the fourth quarter reflecting higher provision expense as well as net losses from equity securities.

On Page 26, we provide our community banking metrics. I'll start by noting that, as always, our digital, mobile and primary consumer checking customers are reported on a 1-month lag, so the numbers reported here for first quarter do not capture the change in customer behavior we experienced in March due to COVID-19. For example, our customers have shifted to depositing checks through our mobile app, and the dollar volume of mobile checks deposited increased over 40% in March compared with February.

Turning to Page 27. Teller and ATM transactions are reported through March, which is when we reduced our branch hours and temporarily closed approximately 1/4 of our branches as a result of COVID-19, which resulted in an approximate 50% decline in teller volume during the final weeks of the first quarter compared with a year ago. Our customers also meaningfully reduced their card spending late in the first quarter due to the impact of the pandemic. During the first 2 months of the year, credit card volumes were up from a year ago, while March 2020 volumes declined approximately 15% from March 2019, resulting in first quarter credit card purchase volumes being down 1% from a year ago. We also had meaningful shifts in customer spending in March with grocery and pharmacy spending increasing, while all other categories were down from a year ago. Debit card spending trends were similarly impacted, but the change in spend was less significant with year-over-year growth in January and February and a 5% decline in year-over-year volumes in March. Similar to credit card, debit card spending shifted significantly to grocery in March, but the growth in this category started to slow in the last week of the month.

Turning to Page 28. Wholesale banking earnings declined $2.2 billion from the fourth quarter, reflecting a $2.2 billion increase in provision expense. I've already highlighted the strong loan and deposit growth from our commercial customers in the first quarter, and we also raised $47 billion of debt capital for our clients.

Wealth and Investment Management earnings increased $209 million from the fourth quarter. During the first quarter, we have experienced strong demand from clients for liquid products. Period-end deposit balances increased 13% from the fourth quarter, reflecting higher cash allocation than brokerage client assets. And assets under management in our Wells Fargo asset management business grew significantly driven by over $34 billion of inflows into our money market funds. Despite the market volatility, closed referred investment assets into WIM from the consumer bank partnership increased on a linked-quarter and year-over-year basis, and flows into our retail brokerage advisory business remained positive in the first quarter. As a reminder, retail brokerage advisory assets are priced at the beginning of the quarter. So first quarter results reflected market valuations as of January 1, and second quarter results will reflect market valuations as of April 1.

Turning to Page 30. Our net charge-off rate was up 6 basis points from the fourth quarter to 38 basis points, predominantly driven by higher C&I losses primarily related to higher losses in our oil and gas portfolio reflecting significant declines in oil prices. We had net recoveries in all of our commercial and consumer real estate portfolios and lower losses in our auto portfolio. The increase in credit card losses from the fourth quarter included seasonality. Nonaccrual loans increased $810 million from the fourth quarter to 61 basis points of total loans, which was up 5 basis points from the fourth quarter and down 12 basis points from a year ago. Commercial nonaccruals increased $621 million predominantly driven by the economic impact of the pandemic. Consumer nonaccrual increased $189 million predominantly driven by higher nonaccruals in the real estate 1 to 4 family first mortgage loan portfolio as the implementation of CECL required PCI loans to be classified as nonaccruing based on performance.

On Page 31, we provide detail on the performance of our oil and gas portfolio. Oil and gas loans outstanding increased 5% linked quarter and 7% from a year ago, reflecting increased utilization rates driven by the impact of COVID-19 and the decline in oil prices. Total commitments declined, reflecting a weaker credit environment. The significant decline in oil prices in the first quarter resulted in early signs of credit deterioration, particularly in the E&P sector. Total oil and gas net charge-offs increased $112 million in the first quarter to $186 million. Nonaccruals declined $66 million from the fourth quarter due to the higher net charge-offs as well as paydowns, partially offset by new downgrades to nonaccrual status in the first quarter. Approximately 84% of nonaccrual loans were current on payments during the quarter. Criticized loans increased 23% from the fourth quarter, predominantly reflecting increases in the E&P sector.

On Page 32, we highlight our adoption of CECL. At the end of the first quarter, the allowance for loans and debt securities was $12.2 billion. $12 billion of this allowance was for loans and unfunded commitments, and our allowance coverage ratio was 1.19% of loans. We added $3.1 billion to our allowance for credit losses since the adoption of CECL on January 1. This increase was driven by a number of factors, including: economic sensitivity due to the COVID-19 pandemic; the estimated impact to industries most adversely affected by the pandemic; our exposure to the oil and gas industry; draws on loan commitments during the quarter, which were the primary driver of commercial loan growth; and a $141 million reserve build for debt securities reflecting economic and market conditions.

Turning to capital on Page 33. Even after a multiyear program to return excess capital to shareholders, our CET1 ratio was 10.7% at the end of the first quarter, which continued to be above the regulatory minimum of 9% and our current internal target of 10%. Our period-end common shares outstanding were down 38 million shares from the fourth quarter. On March 15, we, along with the other members of the financial services forum, suspended share repurchases through the end of the second quarter.

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

And Charlie and I will now take your questions.

Operator, do you want to open it up for questions?

(Operator Instructions) Your first question comes from the line of Ken Usdin with Jefferies.

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?

Sure. Yes. Thank you. So on the PPP front, which was the targeted action where the Fed gave us some -- 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 trade-offs, as I mentioned, the first places that we're going to be able to create more capacity to help customers are to reduce nonoperational deposits, principally in the financial institutions area, where we're 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, there's -- 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 -- the sum of those activities is, first and foremost, gets us down below the cap on a spot basis, but then we'll 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.

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.

Yes, exactly, 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?

Yes. It's a fair question, but not quite yet. We've got the -- I think we're all forecasting something like 0 in the front end or depending on where LIBOR moves over time and then some number between, call it, 70 and 100 basis points at the long end. How deposit pricing reacts to that, and 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 have been dialed 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 being 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.

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

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

Yes. 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 is 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, there's a few of them that we're relying on, and we have different weights on each. Basically, our sort of high single digits sustained down GDP and sustained unemployment really through 2021. Well, I take it back. 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 as 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. It was like 2016. And you had some workouts around that, brought down the oil exposure, 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 you could 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 weight 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 nonperforming, 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.

Yes. 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 CECL is 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 the allocated number. It just seems to work out that way.

Your next question comes from the line of John McDonald with Anonymous Research (sic) [Autonomous Research].

John, Charlie. John, I 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 path you see for this credit cycle relative to what you've seen in your career, Charlie. 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?

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

Yes.

Yes. 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 U 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. There already have been perhaps spikes that go beyond that, but we're thinking about this as it plays out quarter after quarter.

So just to 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. I think we produced 9 quarter credit losses of about 2.75% 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 in unemployment. And importantly, no stimulus baked into the severely adverse case. 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 then. The quality of loans, particularly on the single-family side, was worse. I think our auto portfolio was worse then, too. And so there, we did produce 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, half-ish 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?

Yes. Listen, I think as I said in my remarks, I think we all know we haven't seen anything like this before. There's no clear path 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 of 10, 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. 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 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, 2/3 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 and the industry?

Yes. Well, listen, I think certainly, the dividends are certainly important for all of those that own the stock. And ultimately, those that wind up benefiting from stock ownership are 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 it 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.

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

I just wanted to ask a clarifying question on John's question on the dividend because that is a question that investors are asking a lot about Wells Fargo specifically. So before you reported earnings, consensus was at $2.35 for this year versus dividends of $2.04. 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. And also, I'd add to 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 estimate what our go-forward earnings trajectory looks like, that's the context for understanding what the steady state dividend should look like. So in terms of what 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 our run rate, more steady state earnings are on the way out of this and reflect what the dividend is in light of that. Hope 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 outsized 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 on 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, are in the 90-day or 60-day forbearance period? How April 1 payment behavior was like? And also, just clarifying 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 9 quarters was $26 billion?

No. 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. I think 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 as a benchmark in response to John's question for contextually, like what does bad really look like? In that instance, over 9 quarters, we calculated 2.75% 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 9 quarters and goes that deep, et cetera, just providing a benchmark.

With respect to deferrals, I think we're -- now in deferrals, 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 1 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, are 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 probably is worth mentioning, at least with respect to 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.

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

John, I think you mentioned at one point during the call that there's 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 end. I guess it stands to 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 redeposited back into the bank? What are the phenomena at work there?

Yes. We 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 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, some of which had been closed and some of which are more or less open, the 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 nature of the borrower, what it means for their sales forecast. And so I don't think we've seen any meaningful paydowns 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 really growing.

Okay. Perfect. And then if I can ask a second question just 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 nonbank areas, just maybe a little color on sort of what we should be thinking about there?

Yes. 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 have because they're generally credit enhanced pools of cross-collateralized receivables in one form or another. And that's a huge benefit to us compared to the average portfolio of whole 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 stress on the servicing side of this. For those that are residential mortgage oriented, their life is 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, there's a little bit of overlap. But also in our securities portfolio, we have $30-ish-billion worth of CLO exposure, disproportionately top of the capital structure, AAA, AA that can withstand an extraordinary, almost a complete level of cumulative default with varying levels of loss given default. And we're still very comfortable with that. 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.

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

Wanted to tackle a couple of things really quickly. First, the interplay of credit and CECL. So you trued up, you took 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 loan book over the life of the loan at any given point in time. And that number is lower than what it is for any other large bank even as of January 1. So I kind of want to get your perspective on how much of that, you think, is a reflection of just you guys having lower loss content loans, a better risk profile of it, as opposed to maybe some other more idiosyncratic things. I seem to recall that you've marked some loans in the past that were in recovery positions and stuff like that. And I ask also just because I do get that question occasionally from investors, asking if you're under-reserved relative to your peers, which I don't think is the case, but I kind of wanted to get your perspective on this.

Yes. I think it's a good question. And 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 1 adoption negative number. So we don't have that to rely on, although we used to. I think the biggest difference is probably the weights that we have on jumbo mortgage versus the weight that we have on credit card on a heads-up basis versus other peers. And that's true of both outstanding as well as undrawn. And the allowance is there to serve both our credit card portfolio, which under most conditions we wish was a bigger capability for Wells Fargo at times like this is a little bit of a saving grace because the 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 first lien mortgage front, because that business has changed so much, and 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 lien mortgage is the lowest. And there, we have the biggest weight on mortgage and probably the lowest weight on card.

Okay. And I presume in your Q, in your loans 90 days, you'll be giving loan loss allowance by lending category so we can compare you to your peers by segment, right?

Yes.

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 of the high risk sectors on, I think, Slide 28 to 30, just to get a sense of where you stand in terms of reserve levels in those categories.

We haven't yet because most of that is 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 by 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 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 Q, but certainly, as the cycle unfolds and these things actually start to appear in the calculated graded reserve for C&I categories, in particular.

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

Back to the through-cycle loss number, your 2.75% number. I know you just indicated that cards would be the highest in that assumption. Do you have what those through-cycle numbers are that you have by bucket for, 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 our through the cycle loss level. 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. I guess I would look to the categories of loan loss disclosure with the last stress test. Those come from the Fed. You get to see 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% 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 your expectation for the ongoing stress on borrowers, et cetera, that we could have incremental builds or do you think we're on an adequate level given the recast of the back book and what you put on this current quarter in terms of where your reserve stands at this point?

Yes. 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 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 and GDP will be. What I was saying was, 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, 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 drawdowns on 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?

Yes. So they came out of the gate fast and furious before the 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 end where our borrowers wanted to have cash on their balance sheet, certainly possible that, that was a part of it. The high grade, well, the CP market being inaccessible for many users and the high-grade market being expensive or closed for a little bit certainly contributed to it, too. 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 there. 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 draws. But it's, as I said, it's flattened out.

The only thing I'd add is that this is not, as we say over and over again, this isn't something that we've seen before. And so 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 it? Absolutely. But the fact that we're seeing some stability in those numbers and reductions in terms of who 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.

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

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 costs 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, depending on business conditions, of course, and our ongoing level of performance. T&E is pretty much down to 0 because people are not traveling or sheltering in place. We will have different technology costs but 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 will, 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 the regulatory issues? And there were some headlines that you were missing some deadlines in the media, which doesn't seem surprising since a lot of things are shut down. But just anything you want to add from kind of a regulatory perspective that you're 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 can say at this point.

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

So John, just wanted to ask a question about how you're managing the securities book. I recognize you guys called the NII guidance. But I'm just trying to understand given the significant declines at the long end of the curve, I was hoping you could help us frame where you're reinvesting today versus the 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?

Yes. It's a good question. So where we're investing today, and I think 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 HQLA. 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, Ginnies and agency mortgages as we redeploy that $6 billion to $9 billion per month for the rest of the year.

Got it. 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 of 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 fee income in 2Q, maybe just speak to your outlook for the remainder of the year.

So that's complicated for all the reasons you've been describing. I would say that you're right about the stepping off point for Wealth and Investment Management. 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 noninvestment-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 core number, but those are probably the bigger influences on fee income going into Q2.

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

It's my guess that tail risk events are not over for this economic cycle. So I was wondering if you could address 2 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, 100, 125 basis point spread between 2s and 10s, what impact does that have on your P&L as it relates to NII, mortgage banking and equity securities or debt securities. And then finally...

Sure. I like the second one better than the first one.

Yes. 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 the second quarter? So those are the 3 separate questions, sorry.

Yes. Sure. So we'll go in reverse order. In the month of March, I would say getting longer duration, 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 a steepener, 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 7- to 10-year point. And without putting a specific number on it, 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, obviously, 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 margins. 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 the existence of the asset cap, we can't overpay for deposits because we're in the business of sending low liquidity value deposits back to bank customers and the like. So we would probably be pretty quick to be managing what we pay for deposits so that we didn't have an incremental influx that we didn't have an appetite for. And then as I mentioned, adding or maintaining some fixed rate posture, long duration posture on the investment portfolio as a way to abate earning a negative rate as rates go below 0. I don't think you're suggesting there's a high probability of that. I think the Fed's been pretty clear. There've 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 in 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 negative rates among your questions.

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

Just a quick question on first maybe the mortgage banking and can you kind of walk through the decision to exit on the nonconforming correspondent? I mean, I heard the trend in loss rates below in residential mortgage. Was this an 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 of the line as one of the levers that we're using to manage living under the asset cap, not credit risk in particular.

Okay. And then a separate question then. There was a lot of kind of one-off items in the quarter that were due just where markets were at the end of the quarter or where spreads were. I know there was the reserve for debt securities, equity impairments and then also on hedge ineffectiveness. Are any of those expected to reverse given where markets are at this point in time or where rates are for the hedging activity?

On the hedge ineffectiveness, I wouldn't expect that to reverse or to persist. It was sort of a confluence of events that gave rise to it for the quarter. So that probably goes back to a net expectation of, call it, a net 0 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 move up. 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 will take a while for that to reveal itself. And what was the last one? There were a couple of different examples.

The reserve for debt securities.

Yes. I don't anticipate that it will. That relates to both AFS and held-to-maturity securities. 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.

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

A couple of things. Firstly, how did total criticized loans do in the quarter? I know you mentioned oil and gas. Have we seen, firstly, any numbers and have you 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 drawdowns 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 4 categories?

So criticized loan balances increased about $4 billion in the quarter, almost all of it in March. 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's some commercial real estate that has already come through. It's so early because this all occurred in size in mid to late March that 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. When we receive financials, we'll 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 breakdown between CIB, commercial banking, commercial capital? Really, those are your 3 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 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 is in which segment, we 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. Any color on why you're growing high-yield savings? You're really not trying. I didn't think you were trying to grow deposits. Any color on what what's behind that?

Yes. 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. The label of high-yield savings means something different. As I said a little bit earlier, we're forecasting our deposit cost to come down substantially throughout the remainder of 2020, reflecting what you're suggesting, which is in a flight to quality time frame with a liquidity preference by our customers, 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 time frame to finally roll off. And then Q2, so through Q2, 3 and 4 as we currently forecasted, we're going to be heading back to deposit costs of the 2000 -- call it, '14, '15 era.

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

John, can you share with us -- on Slide 15, you gave us the total outstandings and the total commitments. I think there's about 58% outstandings 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?

Wow. That's a very specific question you're asking me.

Save the worst for last.

Yes. Yes. Yes. 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's good. And if someone else complemented you guys, the breakout on the portfolios for oil and gas, retail, transportation and entertainment was very helpful. If you could provide then the 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're correct, in the second quarter, do we see the provision being primarily then to cover net charge-offs and loan growth and no more CECL reserve buildup? Is that correct? Is that the way we should look at it?

In theory, if you had perfect foresight, but you'll also have to kind of know RWA growth in the same time frame because at a 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 at this point in time that any bank has got perfect clairvoyance about what the future holds. And whether it gets better or gets worse, I'm sure it will be a little bit different.

No, no. No doubt. I appreciate that.

Terrific. Terrific. Well, thank you, everybody. That was our last call. And this is the first step on the 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 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.