PNC Financial Services Group Inc (PNC) Q1 2020 earnings call dated Apr. 15, 2020
Corporate Participants:
Bryan K. Gill — Executive Vice President and Director, Investor Relations
William S. Demchak — Chairman, President and Chief Executive Officer
Robert Q. Reilly — Chief Financial Officer
Analysts:
Erika Najarian — Bank of America Merrill Lynch — Analyst
John Pancari — Evercore ISI — Analyst
R. Scott Siefers — Piper Sandler — Analyst
Bill Carcache — Nomura Securities Intl (America) — Analyst
Presentation:
Operator
Good morning. My name is Gina, and I will be your conference operator for today. At this time, I would like to welcome everyone to The PNC Financial Services Group Earnings Conference Call. [Operator Instructions] I will now turn the call over to Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.
Bryan K. Gill — Executive Vice President and Director, Investor Relations
Thank you, and good morning, everyone. Welcome to today’s conference call for The PNC Financial Services Group. Participating on this call are PNC’s Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO.
Today’s presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures are included in today’s earnings release materials, as well as our SEC filings and other investor materials. These materials are all available on our corporate website pnc.com under Investor Relations. These statements speak only as of April 15, 2020, and PNC undertakes no obligation to update them.
Now, I’d like to turn the call over to Bill.
William S. Demchak — Chairman, President and Chief Executive Officer
Thanks Brian, and good morning, everybody. As you’ve seen this morning, our results for the quarter were solid on a pre-provision basis, but the extraordinary changes in the economic backdrop occurring in March and the implications of the broad-based response to the COVID-19 breakout had a material impact on our provision for credit losses.
Before we go into the financials, however, I want to acknowledge the current environment. Obviously, this pandemic is having a profound impact on the global economy and on people’s lives. And the challenges we face as a country are unprecedented. PNC through this period is navigating these challenges from a position of strength. We have nearly 52,000 employees who are working incredibly hard to serve our customers. We immediately mobilized to mitigate the risks to our front-line employees and implemented enhanced pay provisions for those in roles that cannot be performed remotely.
Our technology, in which we’ve invested heavily over time, allowed us to quickly transition to a remote work model for more than 30,000 of our employees, including those from our call center who are managing a very high call volume from the safety of their homes. Our technology also allowed us to quickly prepare for and respond to the federal government’s economic stimulus package, which we are supporting through loans and other relief to consumer and business customers.
As an aside, since launching our online Paycheck Protection Program portal on April 3, we’ve received over 75,000 applications, and we have thousands of people working tirelessly to processes these loan requests in accordance with the SBA’s requirements, including documentation, and have registered at this point, actually as of this morning, something over $6 billion worth of these loans. Also, the convenience and security of our mobile and online banking tools are allowing us to continue to provide critical banking services with minimal disruption.
Despite the current economic challenges, we are confident in our ability to continue to withstand strong environmental headwinds. We have solid liquidity and capital positions. We grew loans by $25 billion and deposits by $17 billion compared to the end of the fourth quarter. While this was largely driven by draws on commercial lines of credit, as Rob is going to take you through, we have provided new loans to support key industries in our country since the COVID outbreak, including over $2 billion in new loans to hospitals and other healthcare entities and $1 billion in new loans to municipalities.
As an aside, over the last few weeks and into April, we’ve seen the rate of loan draws normalize. In addition, we’ve seen a meaningful increase in deposits with the growth in dollars now equal to the loan growth since the outbreak of COVID-19. We’re processing thousands of forbearance and loan modification requests for consumers. To date, consumer modifications, we’ve had 41,000 processed, sorry, as of April 12. Importantly, of the 41,000, 20,000 of these are bank-owned with the remainder being for loans that we service for others.
This may be the greatest challenge that many in our country have ever experienced. Many of our clients have experienced financial hardships. And despite their uncertainties, our commitment to them is as certain as it has ever been.
Now, our results for the first quarter are shown on Slide 4. And while pre-provision earnings increased 7%, the provision for credit losses of $914 million increased $693 million, reflecting the new CECL standard. While we developed our economic scenarios to account for COVID-19, I want to say that the economy has worsened since we closed the books on these numbers.
Now, Rob will provide insight on how our scenarios have been impacted by [Technical Issues] developments and how we would fare if the situation was to become more severe. In that instance, we would still be well capitalized, highly liquid and be able to maintain our dividend, while complying capital standards.
Rob is going to take you through the income statement, but one thing I wanted to point out inside of our non-interest income is our security gains, which were higher than usual this quarter. And we realized these gains by taking advantage of some of the disruption in the fixed income markets that occurred before the Fed stepped in, and we still managed to increase our book yield on securities quarter-over-quarter. So you think about it normally, you sell securities and your — replace them and your book yield goes down. In this instance, we actually increased our book yield in securities.
Before I turn it over to Rob, I want to recognize and thank our employees who are going above and beyond every day to help our customers address the many challenges that they are facing. Additionally, our regional presidents, together with the PNC Foundation, are playing a critical role in upholding our commitment to the communities we serve by allocating critical funds to coronavirus relief efforts across our markets.
And with that, I’ll turn it over to Rob for a closer look at our first quarter results, and then we’ll be happy to take your questions.
Robert Q. Reilly — Chief Financial Officer
Great. Thanks Bill, and good morning, everyone. Our balance sheet is on Slide 5 and is presented on a spot basis. While we typically cover our average balance sheet, we’re going to focus on our spot balances this quarter due to the substantial increased activity late in the quarter related to the economic impact of COVID-19.
On the asset side, loan balances of $265 billion at March 31 were up $25 billion or 10% compared to December 31, 2019. This growth reflected an increase in commercial loan balances of approximately $24 billion, primarily driven by higher utilization of loan commitments. Investment securities of $91 billion increased $3.7 billion or 4% linked quarter. Also, our cash balances at the Federal Reserve as of March 31, 2020 were $20 billion, down $3.6 billion from year-end, in part due to the benefits from the regulatory tailoring rules on our liquidity, effective January 1, 2020.
On the liability side, deposit balances of $305 billion at March 31 were up $17 billion or 6% compared to December 31, 2019. A high proportion of the commercial loan draws were placed back with us in the form of deposits, and as a result, non-interest-bearing deposits grew $8.8 billion or 12% linked quarter.
Total borrowed funds increased $13 billion due to higher FHLB borrowings and increased debt issuance activity during the quarter. As of March 31, 2020, our Basel III common equity Tier 1 ratio was estimated to be 9.4%, which reflected the impact of the tailoring rules, including our decision to opt out of AOCI, as well as our election to phase in CECL’s impact on our estimated regulatory capital. While our capital ratios remain strong, on March 16, 2020, we announced a temporary suspension of our common stock repurchase program in conjunction with the Federal Reserve’s effort to support the US economy during this time. It did not impact PNC’s dividend policy.
Our tangible book value was $84.93 per common share as of March 31, an increase of 9% compared to a year ago. Our loan to deposit ratio was 87% at March 31. And importantly, our liquidity coverage ratio exceeded the regulatory minimum requirement.
As you can see on Slide 6, commercial loan unfunded commitments declined by approximately $16 billion as customers drew down lines to bolster their liquidity or replace alternative funding channels. As a result, our utilization rate increased from 55% to 61%. The draw-downs we’ve experienced are diversified across industries, and more than two-thirds of the increased utilization is from investment grade borrowers. While draw-downs were well above normal in mid-March, we saw activity begin to slow at the end of the quarter, and that’s remained the case so far during the second quarter. That said, we do expect loan balances to be elevated for some time.
Importantly, PNC is well positioned with strong capital and liquidity, and we’re committed to putting our resources to work to support our customers and the broader financial system at this critical time. As you can see on the slide, as of March 31, we had approximately $140 billion of readily available liquidity from diverse sources. These sources, along with substantially more availability from the Fed discount window, should it be necessary, provide ample funding to meet the potential needs of our customers.
Turning to Slide 7, we’re working to provide relief and flexibility to our customers through a variety of solutions during this time. On the commercial side, we’re offering emergency relief for small and medium-sized business loans, including those being provided through the federally enacted CARES Act.
We’ve received thousands of applications through the Paycheck Protection Program and have begun to fund those loans successfully, as Bill just mentioned. Additionally, we’re granting loan modifications to commercial clients, primarily in the form of principal and/or interest deferrals. We’re analyzing and making decisions on these modifications based on each individual borrower’s situation.
With our consumer customers, we’re also granting loan modifications through extensions, deferrals and forbearance. As of April 13, we have completed over 41,000 consumer loan modifications, primarily related to COVID-19. And in addition, we’re offering relief in the form of extended grace periods and halting all foreclosures, while waiving certain fees and charges.
As you can see on Slide 8, first quarter total revenue was $4.5 billion, down $92 million linked quarter or 2%. Net interest income of $2.5 billion was up $23 million or 1% compared to the fourth quarter, as lower funding costs, as well as higher loan and security balances were partially offset by lower loan yields and one less day in the quarter.
Our net interest margin increased to 2.84%, up 6 basis points linked quarter, in large part due to lower rates paid on deposits. Non-interest income declined $115 million or 5% linked quarter, reflecting stable fee revenue that was offset by lower other non-interest income. Non-interest expense declined $219 million or 8% compared to the fourth quarter, with all categories essentially flat to down.
Our efficiency ratio was 56% in the first quarter, improving from 60% in the previous quarter. Provision for credit losses in the first quarter was $914 million, reflecting the adoption of the CECL methodology, including the economic effects of COVID-19 and loan growth. And our effective tax rate in the first quarter was 13.7%.
In light of the current economic circumstances related to COVID-19, naturally, we’re evaluating and monitoring our entire loan portfolio. However, we believe the industry sectors likely to be most impacted are on Slide 9. Our outstanding loan balances as of March 31 to these industries are $19.3 billion and represent 7% of our total loan portfolio. Corporate loan balances in these industries totaled $10.6 billion. Within this group, we’re most focused on our exposures to retail, restaurants and certain parts of leisure travel. In retail, total loans outstanding are $2.5 billion, 60% of which are asset based. Restaurant loan outstandings are $1.2 billion. And cruise lines and commercial airlines together total less than $600 million.
In our commercial real estate portfolio, we have $8.7 billion in outstanding in areas most likely to be impacted by COVID-19. This includes CRE properties of $5.1 billion, 60% of which are stabilized and 40% under construction, all with a portfolio LTV of 55%. The remaining $3.5 billion of exposure is to REITs, approximately two-thirds of which are investment grade.
Turning to Slide 10, this is an update on our oil and gas portfolio, given the continued pressures on the energy industry. At the end of the first quarter, we had total outstandings of $4.6 billion in oil and gas loans, or just less than 2% of our total outstanding loans. We last updated you on this portfolio in the fourth quarter of 2016, while we were relatively pleased with the performance of this portfolio through the last oil and gas downturn of 2016, especially with respect to reserve-based lending structures. Accordingly, the growth in our portfolio since 2016 has been primarily in the upstream segments, which carry these structures, as well as the midstream segments which tend to perform relatively well under stress. Nearly all of our losses from the 2016 downturn occurred in our services book, which has declined as a percentage of total loans from the fourth quarter of 2016. And notably, approximately $900 million or 74% of the $1.2 billion of this sector is asset-based. We will continue to monitor market conditions and actively manage our energy portfolio.
Our credit quality metrics are presented on Slide 11. Net charge-offs for loans and leases were stable with the fourth quarter, increasing slightly by $3 million. Annualized net charge-offs to total loans was also stable with the fourth quarter at 35 basis points. Nonperforming loans increased $9 million or 1% compared to December 31, 2019. And total delinquencies declined $21 million linked quarter or 1%. The ratios for both nonperforming loans to total loans and delinquencies to total loans decreased in the quarter. As you can see, our provision for first quarter 2020 increased substantially to $914 million, reflecting the adoption of the CECL methodology, including the economic effects of COVID-19 and loan growth.
Since the adoption of CECL on January 1, 2020, we’ve increased our reserves by approximately $1.3 billion. As a result, at March 31, our allowance for credit losses, including unfunded balances, to total loans was 1.66% and our allowance to nonperforming loans was 240%.
Slide 12 shows the drivers of the increase to our allowance for credit losses, and ultimately, our provision under CECL. Our attribution shows the increase in reserves for the CECL day one transition adjustment of $642 million, as well as portfolio changes in economic factors. Portfolio changes represent the impact of shifts in loan balances, age and mix, as well as credit quality and net charge-off activity. These factors accounted for $196 million of the change in our reserves for the first quarter of 2020.
Economic factors represent our evaluation and determination of an economic forecast applied to our loan portfolios. To accomplish this, we used a three-year reasonable and supportable forecast period and a weighted average of four different economic scenarios at quarter-end. Importantly, each of these scenarios were designed to address at the time the emerging COVID-19 pricings. This approach provided a blended scenario as of March 31, which when compared to the scenarios used for our transition calculation, resulted in an increase in reserves of $496 million for the quarter — for the first quarter.
For this blended approach, we used a number of economic variables, with the largest driver being GDP. In this scenario, annualized GDP contracts 11.2% in the second quarter of 2020 and finishes the year down 2.3% with recovery to the pre-recession peak levels occurring by the fourth quarter of 2021.
Since the end of the first quarter, when we finalized our CECL estimate, the macroeconomic backdrop has worsened, suggesting a deeper decline in GDP and other economic factors than what our March 31 scenario contemplated. Should these macroeconomic factors persist, we’ll adjust our blended scenario accordingly, which would likely result in a material build to our reserves during the second quarter.
Additionally, for our own stress informational purposes, we considered our most extreme adverse scenario in isolation to determine a hypothetical year-end 2020 capital and liquidity impact. This scenario is even more severe than the 2020 CCAR severely adverse scenario. It assumes a 30% annualized contraction in GDP in the second quarter of 2020, followed by another 20% annualized contraction in the third quarter, leading to a peak to trough decline of 14%. This compares with the CCAR severely adverse scenario peak to trough decline of 8.5%.
To be clear, this scenario is not our expectation, nor does this exercise attempt to capture all the potential unknown variables that would likely arrive, but simply provides an approximation of outcome under these circumstances. This results in an approximately 8.5% CET1 ratio at year-end 2020 and we believe would allow us to continue to support our current dividend.
In summary, looking at the remainder of the year, we expect a challenging environment as a result of the COVID-19 pandemic. We expect a significant contraction in GDP, and we expect the Fed funds rate to remain in its current range of 0 basis point to 25 basis points throughout 2020.
Clearly, the biggest variables impacting the economy will be the length of the crisis and the efficacy of the massive US government support and stimulus programs. While we’re hopeful the duration will be short and the government programs prove highly effective, at this time, we naturally have no way of knowing these outcomes. Accordingly, our visibility is low. However, based on what we think now, we can provide a second quarter guidance and some directional thoughts for the full year.
For the second quarter of 2020, compared to the first quarter of 2020, we expect growth in average loans to be in the high-single digit range as a result of the increased spot level at quarter-end, as well as additional anticipated funding needs of our commercial and consumer customers. We expect NII to be stable. We expect total non-interest income to be down approximately 15% to 20%, mostly reflecting the elevated MSRs and security gains that we generated amid the volatility during the first quarter.
We also expect some general softening in fee categories as well, particularly service charges on deposits, while we continue to weigh fees for our customers during this crisis. We expect total non-interest expense to be flat to down. And in regard to net charge-offs, we expect second quarter levels to be between $250 million and $350 million, up quarter-over-quarter as we begin to experience the economic effects of the crisis.
For the full year and for the reasons previously stated, our visibility is substantially limited. So, with that in mind, we now expect both full year revenue and non-interest expense to each be down between 5% and 10%.
And with that, Bill and I are ready to take your questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Erika Najarian with Bank of America. Please go ahead.
Erika Najarian — Bank of America Merrill Lynch — Analyst
Hi, good morning.
William S. Demchak — Chairman, President and Chief Executive Officer
Hi, good morning, Erika.
Erika Najarian — Bank of America Merrill Lynch — Analyst
Very much appreciate the comments on the extremely adverse scenario as we think about the dividend. I’m wondering, as you think about your Company-run test in a severely adverse scenario, I think last year, over nine quarters, you estimated losses of 4.2%. And I’m wondering — you [Technical Issues] about the difference in unemployment rate. What’s different from a — negative, obviously, from that scenario of this economic outlook that we’re steering down at versus the severely adverse and what’s better? And how [Speech Overlap] cumulative losses compared to that 4.2%?
William S. Demchak — Chairman, President and Chief Executive Officer
Well, just on cumulative losses, the scenario we ran — and jump in here where you want, Rob — basically had us coming up with losses of $10 billion in 2020, whereas the severely adverse in CCAR had roughly $10 billion over the nine quarters [Speech Overlap]. So it’s much worse. Maybe that’s a simple soundbite to it.
Robert Q. Reilly — Chief Financial Officer
Yeah, Erika, that’s exactly right. So it’s more severe in the sense that we front-end those losses into the next nine months, whereas CCAR and DFAST contemplated that over nine quarters.
William S. Demchak — Chairman, President and Chief Executive Officer
And the peak to trough, what do we do on GDP?
Robert Q. Reilly — Chief Financial Officer
About 14%.
William S. Demchak — Chairman, President and Chief Executive Officer
Versus 8%…
Robert Q. Reilly — Chief Financial Officer
8.5% [Speech Overlap].Yeah, that’s right. So, much sharper and faster.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah.
Erika Najarian — Bank of America Merrill Lynch — Analyst
Just to clarify the question, I’m wondering what you think your cume losses could actually be? So, there’s that extremely adverse scenario with that $10 billion shock in 2020, and then we have the other data point of severely adverse. So wondering what the — what — based on what you know now, cumulative losses could look like?
William S. Demchak — Chairman, President and Chief Executive Officer
That’s an unanswerable question. So what we’d try to do is barbell it for you. We would tell you, and I had this in my script, that since we closed the books, we saw claims be higher than we had assumed. We changed from thinking that a V-shaped recovery was going to happen fast into more of a U-shaped recovery. So that’s why we kind of put comments out there that we’re going to have a reserve build likely into the second quarter. If we had perfect foresight here, the reserve true-up we would have taken in the first quarter would have effectively marked our book to current economy and future provision would simply be based on growth, so it would go way down. In practice, given we’re seeing the economy worsen from our assumptions, again, sort of dragging up further unemployment a little bit higher, we’ll see reserve build into the second quarter. That doesn’t mean it’s going to be necessarily higher than the first quarter. It doesn’t mean that it’s going to be lower than the first quarter.
Robert Q. Reilly — Chief Financial Officer
Yeah, no comment on the magnitude but the fluidity of where we are.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah. So, trying to give you some precise science with all of these unknowns out there, I just — I don’t think is a useful exercise. What I did think was useful is simply make it as ugly as we can make it and show that we are still highly liquid and — at that point, 150 basis points over the regulatory minimum. So, we can operate in this environment.
Robert Q. Reilly — Chief Financial Officer
And that’s the primary point.
Erika Najarian — Bank of America Merrill Lynch — Analyst
Understood. And the follow-up question is probably equally unanswerable, but as I — this is our first recession obviously in a CCL construct, and many management teams have noted that CECL is pro-cyclical by nature. And I’m wondering if, again, we could have some sort of guardrails in terms of where reserve to loans could build to. And I guess the big investor question is that, given the amount of PPNR strength and capital levels banks have, there seems to be an opportunity to anticipate the future provisions ahead of when charge-offs are recognized. So is there something in CECL that would allow you to recognize those ahead of charge-offs? And perhaps when the charge-offs actually hit, the draw on your provision cost won’t be as painful.
William S. Demchak — Chairman, President and Chief Executive Officer
All right. Let me — yeah, so that’s a CECL 101 question. Let me — but basically, CECL itself in its perfect form, if our economic predictions were correct, today, our reserve would cover the entire portfolio as it runs down, including charge-offs. And any change in provision would be — would come from the rundown of the portfolio, upgrades and downgrades of the portfolio, and then additions to the portfolio. So CECL by its very nature is ahead of the charge-offs. It has those embedded in that.
So again, if our assumptions were correct in the first quarter, and we think that they weren’t conservative enough, but if they were and we just quit lending, we’re covered. That’s what CECL is designed to do. And in theory, if that were correct, our provision would decline through here from the print in the first quarter through the rest of the year. In practice, we’re saying, we think the economy is worse, and therefore, the provision will be elevated beyond what we would provide for simple loan growth. And beyond that, we can’t get any more exact.
Robert Q. Reilly — Chief Financial Officer
That’s right.
Erika Najarian — Bank of America Merrill Lynch — Analyst
That’s helpful. I appreciate it. Thank you.
Operator
Your next question comes from the line of John Pancari with Evercore. Please go ahead.
John Pancari — Evercore ISI — Analyst
Good morning.
Robert Q. Reilly — Chief Financial Officer
Hey, good morning, John.
William S. Demchak — Chairman, President and Chief Executive Officer
Hey, John.
John Pancari — Evercore ISI — Analyst
Yeah. So, back to your point around that you can’t roll out an incremental material addition to the reserve in 2Q. I know you just said, it’s tough to size it up. I guess, I’m trying to figure out how we could think about the magnitude. Like, how much would the potential addition in the second quarter, how much would that have deferred under your base scenario that you embedded in the first quarter provision versus that more severe scenario? Can you give us a little bit of color that way?
William S. Demchak — Chairman, President and Chief Executive Officer
Well, versus the severely adverse we talked about, by $9.5 billion, but that’s not the one we expect. Versus what’s happened in the economy, put it into context from what I’ve seen other people do just against charge-offs, go back to kind of basics. I think we provided for 4.2 times or something like that are charge-offs…
Robert Q. Reilly — Chief Financial Officer
That’s the ratio.
William S. Demchak — Chairman, President and Chief Executive Officer
…in the quarter. That’s pretty similar to what everybody has done. JP was a little bit higher than that, I think. But people are kind of right around that number. Should it have been 5 times? Yeah, maybe. But in context against what we know if we were light, it’s not orders of magnitude light. It’s — we’re supposed to have — we should have been a couple of hundred million more. And I’m — again, I’m making up a number here. And by the way, a week from now, I can give you a different number.
Robert Q. Reilly — Chief Financial Officer
[Speech Overlap] That’s the primary point.
William S. Demchak — Chairman, President and Chief Executive Officer
And that’s the challenge.
Robert Q. Reilly — Chief Financial Officer
The fluidity of the situation, John, as you know, is moving so fast on any given day, the scenarios can change. We felt good about our estimate at March 31. It’s deteriorated from then. For the second quarter, it can move around a lot over the next couple of months. And when we go to do our CECL estimates for the second quarter, we’ll factor all that in.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah. And notwithstanding — I actually — notwithstanding all the magic that goes into the CECL models, I did gain some amount of comfort from the fact that at least for the big banks that have reported to date that the numbers are kind of similar as a function of multiples of charge-offs.
Robert Q. Reilly — Chief Financial Officer
And reserves are increasing substantially.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah.
John Pancari — Evercore ISI — Analyst
Got it, okay. All right. And then, in terms of the — in terms of your loan modifications, I appreciate the color you gave us on the consumer modifications. But are you starting to see restructurings — or modifications on the commercial side? And if you are, what amount or balances have you restructured on the commercial end?
Robert Q. Reilly — Chief Financial Officer
Yeah. Just — that’s been slower. And as I mentioned in my comments, John, we handle that on an individual basis with customers. So it’s — there has been some of it, but nowhere near the volume on the consumer side.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah. I think, what’s happening — think about it occurring with smaller commercial small business clients, a lot of it real estate related. Not surprised where we’re kind of differing interest for 90 days or something. Much of it, when we do it, as an aside, isn’t actually changing the rating of the credit. So they were good credits. They got a cash flow crunch. We’re waving interest or payment or something, and it doesn’t necessarily trigger an outright downgrade. So it’s kind of case-by-case. It’s building. And ultimately, it’s going to result in losses, and that’s what we’re…
Robert Q. Reilly — Chief Financial Officer
And it’s something that we’ve got our eye on for the second quarter. So — but it’s nowhere near the volume of the consumer.
John Pancari — Evercore ISI — Analyst
Okay, thank you. Appreciate it.
Robert Q. Reilly — Chief Financial Officer
Sure.
Operator
Your next question comes from the line of Scott Siefers with Piper Sandler. Please go ahead.
- Scott Siefers— Piper Sandler — Analyst
Thank you. I was hoping to ask another question on the modification. So specifically, in the $5.1 billion of consumer mods you guys have done, how does that break down between — I’m guessing it’s mostly mortgages, but among the various consumer categories, what — where are you seeing — and what — I guess, what’s your sense for where that ultimately could go?
Robert Q. Reilly — Chief Financial Officer
Yeah. Right now, it is 80/20 investor versus bank owned, and the vast majority of that being mortgage. The other significant category is auto, but mortgage is the largest.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah. And the other — I’m just looking to some numbers here. The other thing on auto is, for example, we have about $300 million in auto where we’ve had mods. But if memory serves, we on any given day have half of that in the normal course. So, some of these totals were close to $5 billion. A big chunk of that is kind of in the ordinary course of what you see in consumer. And to be honest with you, we struggled a little bit to break out how much of this is really COVID-related versus how much of this is basic churn in the consumer book.
Robert Q. Reilly — Chief Financial Officer
But the majority is mortgage and the majority is investor owned.
- Scott Siefers— Piper Sandler — Analyst
Okay. All right, perfect. Thank you. And then, one — I guess, a little more ticky-tack just in the — in your other fees, I mean a lot of private equity marks. Presumably, those aren’t the kind of things that will persist. Do you guys have a sense for where that other line ends up going — as we look forward?
Robert Q. Reilly — Chief Financial Officer
Well, that’s why, for the second quarter at least, I combined other with fee income, and we have the total being down 15% to 20%. So that’s about as precise as I can get. Hopefully, we won’t see the private equity valuation marks that we saw in the first quarter, but who knows.
- Scott Siefers— Piper Sandler — Analyst
Yeah, exactly. Okay. Sounds perfect. Thank you, guys, very much.
Robert Q. Reilly — Chief Financial Officer
Sure.
Operator
[Operator Instructions] Your next question comes from the line of Bill Carcache with Nomura. Please go ahead.
Bill Carcache — Nomura Securities Intl (America) — Analyst
Hi, good morning. Bill and Rob, I had a clarification question on your CECL methodology comments. It sounds like you’re basing the allowance on economic forecasts available through 3/31. And to the extent there was deterioration in the outlook as we got into early April with expectations for unemployment, GDP growth further deteriorating, you would not be factoring in that incremental deterioration into your 3/31 allowance, even though that deterioration arguably existed at the balance sheet date because you didn’t find out about it until April. Is that right?
William S. Demchak — Chairman, President and Chief Executive Officer
No, because the thing that changed the most was the shock that the market had on unemployment claims, the two weeks in a row where they kind of went 6 million a week, and that was post to close. So that’s the biggest change we saw. The other thing that’s impacting how we think of this, the GDP decline is probably right. The unemployment decline, we need to think through how to model correctly because of the amount of government dollars that are going into unemployed pockets. So the normal impact you’d see from the spike in unemployment that would drive GDP further down doesn’t feel right. And it’s more than you want to know, but that’s what we have to sort of model in…
- Scott Siefers— Piper Sandler — Analyst
And that’s a challenge for us in the second quarter.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah, as we get into the second quarter.
Bill Carcache — Nomura Securities Intl (America) — Analyst
Yeah, I guess, I was just trying to see if there’s any implication that as long as the delta and expectations were to continue to deteriorate post balance sheet date, as we go forward from here, whether we can expect there to be incremental reserve building continuing even though CECL in theory should already be capturing lifetime losses, setting aside, of course, any growth that you have to reserve on.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah. The basic notion is that that reserve gets marked to your best expectations of economic outcome when you close the books.
Robert Q. Reilly — Chief Financial Officer
Which is what we did.
William S. Demchak — Chairman, President and Chief Executive Officer
Which is what we did and what we will do. And what we’re saying — all we’re saying today is, all else equal, what I know now, a couple of weeks post is, the economy is a little bit worse than what we assume when we closed the books. And we’ll capture that in the second quarter.
Robert Q. Reilly — Chief Financial Officer
Yeah, we’re mindful of that.
William S. Demchak — Chairman, President and Chief Executive Officer
And if we get it right in the second quarter, then there wouldn’t be any more build in the third quarter. And it’s as simple as that. We’re not trying to — don’t confuse that with orders of magnitude, to my point. Things could just get horrific, and we’ve shown you the horrific number.
Robert Q. Reilly — Chief Financial Officer
Yeah. And the only thing that I would add to that is — and you know it, Bill, it’s just the fluidity of all this. It moves fast daily, and we’ll continue to monitor it and build it into our scenarios.
Bill Carcache — Nomura Securities Intl (America) — Analyst
Got it. Thanks Rob. That’s helpful. And Bill, if I may, just one last follow-up on the — I guess the fee income growth opportunity in the period leading up to the great recession you guys did out for a slowing loan growth and stepping on the gas to grow fee income — the fee income side of the business. As we look back to this recession several years from now, what do you think will stand out about the way that PNC handled itself both in the period leading up to and during the recession?
William S. Demchak — Chairman, President and Chief Executive Officer
I think without question, our loan book is going to stand out. We’ve said this forever. We haven’t changed our credit box. We’re going to have losses, but they’re going to be losses that you would otherwise expect for the way we talk about our credit. And I think, in an environment like this, I always say, the cost of goods sold actually becomes known to peak.
So, I think that stands out. I think our willingness to extend capital intelligently to clients is going to stand out, as it did in the crisis. We have an opportunity to grow good clients and support existing clients with our liquidity and capital, and we are going to do that. We do have, as you know, some very stable fee streams, in particular, in our treasury management business, which is doing fantastically well and is very stable and will support us through this. We have — for the quarter and probably for the next quarter or so, our capital markets activity has been very strong. So I think we’re in a really good position. And we sit as a management team here, working tirelessly to support our clients and with mixed emotions in the sense that these are — this is the environment we run our company for. Our company is built around being able to support people and grow when everybody else falters.
Bill Carcache — Nomura Securities Intl (America) — Analyst
That’s super helpful. Thanks Bill. Thanks. Thanks Bill. That’s super helpful.
William S. Demchak — Chairman, President and Chief Executive Officer
Yeah. Thanks Bill.
Operator
There are no further questions.
William S. Demchak — Chairman, President and Chief Executive Officer
Okay. All right. Well, thank you, everybody. Stay safe.
Operator
[Operator Closing Remarks]