Earnings Call Transcript
WELLS FARGO & COMPANY/MN (WFC)
Earnings Call Transcript - WFC Q1 2022
Operator, Operator
Welcome and thank you for joining the Wells Fargo First Quarter 2022 Earnings Conference Call. All lines have been muted to avoid background noise. Following the speakers' remarks, there will be a question-and-answer session. Today's call is being recorded. I will now hand the call over to John Campbell, Director of Investor Relations. Please begin the conference.
John Campbell, Director of Investor Relations
Thanks, Brad. Good morning, everyone. Thank you for joining our call today where our CEO, Charlie Scharf; and our CFO, Mike Santomassimo, 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 materials, including the release, financial supplement, and presentation deck 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 materials. 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 and the earnings materials available on our website. I will now turn the call over to Charlie.
Charlie Scharf, CEO
Thanks, John, and good morning, everyone. I’ll make some brief comments about our first quarter results, the operating environment, and update you on our priorities. I’ll then turn the call over to Mike to review the first quarter results in more detail before we take your questions. Let me start off with some first quarter highlights. We earned $3.7 billion or $0.88 per common share in the first quarter. Our results included a $0.21 per share impact from a decrease in the allowance for credit losses. We have broad-based loan growth with our consumer and commercial portfolios growing from the fourth quarter, while net interest income was down modestly from the fourth quarter, driven by fewer days in the quarter. It grew 5% from a year ago. Higher interest rates, along with our expectations for continued loan growth, should drive higher net interest income growth than we anticipated at the beginning of the year. Mike will provide more details regarding our current view later on in the call. However, the increase in rates negatively impacted our mortgage banking business. The mortgage origination market experienced one of its largest quarterly declines that I can remember, and it will take time for the industry to reduce excess capacity. Credit performance remained incredibly strong, and our net charge-off ratio declined to 14 basis points. While we have minimal direct exposure to Russia or Ukraine, we’re monitoring certain industries that have the potential to be impacted by the conflict and economic sanctions, but thus far don’t have concerns. In addition, we returned a significant amount of capital to our shareholders in the first quarter, including repurchasing $6 billion of common stock and increasing our common stock dividend to $0.25 per share. The significant changes we’ve made across the Company have put us in a position to increase the dividend, and our work continues. The health of our consumers and businesses thus far has remained strong, though we’re entering a period of uncertainty. March was the eighth straight month in which inflation outpaced income, with lower-income consumers being most impacted by rising energy and food prices. That said, higher deposit balances and rising wages have thus far allowed consumers to weather these headwinds. We continued to see median deposit balances above pre-pandemic levels, up approximately 25% compared to 2020, but down from the highs observed in 2021. Consumer credit card spending remained strong, up 33% from a year ago. All spending categories were up, with the highest growth in travel, entertainment, fuel, and dining. After strong growth in the first quarter of 2021, driven by stimulus payments, debit card spending increased 6% in the first quarter of 2022. Discretionary spending remained strong, with entertainment up 39% and travel up 29% from a year ago. The increase in energy prices was reflected in a 27% increase in fuel spending. Loan demand from our commercial customers increased with growth in both commitments and loans outstanding as customers’ borrowing needs are increasing to fund working capital expansion. Credit quality remained strong with net recoveries in our commercial portfolio. Now, let me update you on the progress we’ve made on our strategic priorities. Building an appropriate risk and control infrastructure remains our top priority, and I continue to believe that we’re making significant progress. Early in the first quarter, we named Derek Flowers, our new Chief Risk Officer, following Mandy Norton’s retirement announcement. Derek has extensive experience managing risk, including the work he’s done over the last several years in managing the build-out of Wells Fargo’s risk and control framework. Derek has been with Wells Fargo for over 20 years, and his familiarity with the Company and his risk background make him the ideal candidate to succeed Mandy, who I’d like to thank for the tremendous progress she made in transforming the risk organization. We also continue to make progress in resolving legacy regulatory issues, with news in January that the OCC had terminated a consent order regarding add-on products that the Company sold to retail banking customers before 2015. We have much more work to do to satisfy our regulatory requirements, and we will likely have setbacks, but I’m confident in our ability to continue to close the remaining gaps over the next several years. We remain focused on improving our financial performance while investing to drive growth across our businesses. Providing our customers with simple, easy-to-use, and fast digital experiences is one of our most important strategic priorities. In the first quarter, we began rolling out our new mobile banking experience for our customers in our consumer businesses, and feedback has been very positive. Digital adoption, which is critical to both delivering seamless digital experiences that our customers expect and reducing the cost to serve, has continued to increase, with mobile active customers up 4% from a year ago. We added approximately 500,000 new mobile active customers in the first quarter alone. We continue to invest to improve our digital capabilities, with additional enhancements planned for this year. We’re also focused on reducing friction in moving money. We’ve continued to invest in Zelle and made changes to expand customer usage, including increasing sending limits. These changes have helped to drive 21% growth in active send customers and a 33% increase in send volume from a year ago. We continued to enhance our credit card offerings with our partnership with Bilt Rewards and MasterCard. This first-of-its-kind co-brand card allows members to pay rent and earn points with no transaction fees on rent payments at any apartment in the U.S. In the first quarter, we selected nCino to streamline our origination, underwriting and portfolio management for our small business customers. This collaboration is expected to provide our customers with a more streamlined lending experience and builds on our existing relationship that we announced last year to accelerate our digital transformation within our Commercial Banking and corporate investment banking businesses. Let me just make some summary comments before I turn it over to Mike. As we sit here today, our internal indicators continue to point towards the strength of our customers’ financial position, but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation, and this will certainly reduce economic growth. In addition, the war in Ukraine adds additional risk to the downside. Wells Fargo is positioned well to provide support for our clients in a slowing economy. While we will likely see an increase in credit losses from historical lows, we should be net beneficiaries as we will also benefit from rising rates. We have a strong capital position, and our lower expense base creates greater margins from which to invest. We remain diligent in extending credit and are focusing on managing the other risk types within the Company as well. We remain on target to achieve a sustainable 10% ROTCE, subject to the same assumptions we’ve discussed in the past on a run rate basis at some point this year. We continue to focus on a broad set of stakeholders in our decisions and actions. As we have all seen, the reports and images coming out of Ukraine are deeply concerning. In order to support those most impacted, we announced $1 million in donations across three nonprofits in support of humanitarian aid for Ukraine and Ukrainian refugees, as well as services that support the U.S. military. Earlier this week, we also announced plans to introduce HOPE Inside centers in select branches to increase access to financial education and guidance. Working with Operation HOPE is one important way that we can remove barriers to financial inclusion as part of our banking inclusion initiative, which is focused on helping more people who are unbanked gain access to affordable mainstream banking products. Since the pandemic began, close to 100,000 of our employees never left the workplace. And last month, we started to welcome the rest back to the office. It’s been great to be back together again, and I want to thank all of our employees as they work together to better serve our customers, our communities, and each other. I will now turn the call over to Mike.
Mike Santomassimo, CFO
Thank you, Charlie, and good morning, everyone. Net income for the quarter was $3.7 billion or $0.88 per common share, and our results included a $1.1 billion decrease in the allowance for credit losses, predominantly due to reduced uncertainty around the economic impact of COVID on our loan portfolios. Our effective income tax rate in the first quarter was approximately 16%, which included net discrete income tax benefits due to stock-based compensation. We expect our effective income tax rate for the full year to be approximately 18%, excluding any additional discrete items. Our CET1 ratio declined to 10.5%, still well above our regulatory minimum of 9.1%. We highlight capital on slide 3. The decrease in our CET1 ratio from the fourth quarter reflected a $5.1 billion reduction in cumulative other comprehensive income, driven by higher interest rates and wider agency MBS spreads, which reduced the ratio by approximately 40 basis points. Higher risk-weighted assets driven by growth in loan balances and commitments; we adopted the standardized approach for counterparty credit risk, which had a minimal impact on total risk-weighted assets, and we continued with our strong capital returns. We repurchased $6 billion of common stock in the first quarter, bringing our total repurchases since the third quarter of 2021 to $18.3 billion, which is in line with our 2021 capital plan. While we have flexibility under the stress capital buffer framework to exceed the share repurchases contemplated in our capital plan, we will be disciplined in our approach, given the current rate volatility, and currently expect to have significantly lower levels of share buybacks in the second quarter. Finally, we’ve submitted our 2022 capital plan. And as I’ve called out before, it’s possible that our stress capital buffer could increase when the Federal Reserve publishes our official stress capital buffer in the third quarter, while our GSIB surcharge of 1.5% will remain the same for 2023. Turning to credit quality on slide 5. Our net loan charge-off ratio declined to 14 basis points in the first quarter. Commercial credit performance was strong again with $29 million of net recoveries in the first quarter driven by recoveries in energy, asset-based lending, and middle market. Consumer credit performance was also strong. Credit losses were down $59 million from the fourth quarter, which included $152 million of net charge-offs related to a change in practice to fully charge off certain delinquent legacy residential mortgage loans. The first quarter included higher auto losses and seasonally higher credit card losses. Nonperforming assets decreased $323 million or 4% from the fourth quarter. Commercial nonaccruals were down $423 million, declining again this quarter and are now below pre-pandemic levels. Consumer nonaccruals increased $82 million, driven by an increase in residential mortgage non-accruals, primarily resulting from certain customers exiting COVID-related accommodation programs. Overall, early performance of loans that have exited forbearance has exceeded our expectations. Our allowance for credit losses at the end of the first quarter reflected continued strong credit performance, less uncertainty around the economic impact of COVID, economic recovery thus far, and an outlook that reflects the increasing risks from high inflation and the Russian-Ukraine conflict. On slide 6, we highlight loans and deposits. Average loans grew 3% from a year ago in the fourth quarter. Period-end loans grew for the third consecutive quarter and were up 6% from a year ago, with growth in both our commercial and consumer portfolios. I’ll highlight the specific growth drivers when discussing business segment results. Average deposits increased $70.6 billion or 5% from a year ago, with growth in our consumer businesses and Commercial Banking, partially offset by continued declines in Corporate and Investment Banking and corporate treasury reflecting targeted actions to manage under the asset cap. Turning to net interest income on slide 7. First quarter net interest income increased $413 million or 5% from a year ago and declined $41 million from the fourth quarter. The decline from the fourth quarter was driven by $178 million of lower income from EPBO and Paycheck Protection Program loans, as well as two fewer days in the quarter, which offset the impact of higher earning asset yields and higher securities and loan balances. Last quarter, we highlighted that net interest income for the full year 2022 could potentially increase by approximately 8%, driven by loan growth and other balance sheet mix changes, as well as the benefit from rising rates, which was based on the forward curve at that time. Obviously, a lot has changed over the past three months. Loan growth has been solid, and average loan balances were up 3% versus the fourth quarter and 2% at period end. If we continue to see increased demand, it’s possible that average loan balances will be up in the mid-single digits from the fourth quarter 2021 to fourth quarter 2022, up from our prior outlook earlier this year of low to mid-single digits. The rate increase currently included in the forward rate curve would also drive stronger net interest income growth than we anticipated earlier in the year. However, it’s important to note that the benefit from rising rates is not linear, and we would expect deposit betas to accelerate after the initial rate hikes, and customer migration from lower-yielding to higher-yielding deposit products would also likely increase. Higher rates will also have a negative impact on mortgage volumes and potentially on market-related fees in Corporate and Investment Banking, private equity and venture capital businesses, and in wealth management. Given our current expectations for higher loan growth and recent forward rate curves, net interest income for the full year 2022 could be up mid-teens on a percentage basis from 2021. That said, net interest income growth will ultimately be driven by a variety of factors, including the magnitude and timing of Fed rate increases, deposit betas, and loan growth. Now, turning to expenses on slide 8. Noninterest expense declined 1% from a year ago. We continue to make progress on our efficiency initiatives, and expenses also declined due to divestitures last year. The first quarter included approximately $600 million of seasonally higher personnel expenses, including payroll taxes, restricted stock expense for retirement-eligible employees, and 401(k) matching contributions. We also had $673 million of operating losses, which were primarily driven by higher customer remediation expenses, predominantly for a variety of historical matters. Our full year 2022 expenses are still expected to be approximately $51.5 billion. However, as we experienced this quarter, operating losses can be episodic and hard to predict, and we will continue to update you on our expense expectations throughout the year. Turning to our operating segments, starting with Consumer Banking and lending on slide 9. Consumer and Small Business Banking revenue increased 11% from a year ago, primarily due to higher deposit balances, higher deposit-related fees, primarily reflecting lower fee waivers, and an increase in debit card transactions. We continue to reduce the underlying cost to run the business and serve customers. Customers have continued to migrate to digital channels, and correspondingly teller transactions are down 45% from pre-pandemic levels. Over the same period, we’ve decreased our number of branches by 12% and branch staffing by approximately 30%, and we have more opportunities to improve our efficiency while we continue to make enhancements to better serve customers. Earlier this year, we announced changes that we are making to help our customers avoid overdraft fees. We began to implement some of these new policies, and we’ll be rolling out the rest of the changes this year. We eliminated fees for nonsufficient funds and overdraft protection transactions in early March. So, these changes didn’t have a meaningful impact on the first quarter results. We still expect the annual decline in these fees to be approximately $700 million. However, as we highlighted last quarter, this is an annualized estimate and the reduction may be partially offset by higher levels of activity, and we will observe how customers respond to the new features that will be introduced in the latter part of the year. Home lending revenue declined 33% from a year ago and 19% from the fourth quarter, driven by lower mortgage originations and press margins, given the higher rate environment and competitive pricing in response to excess capacity in the industry. Mortgage rates increased 156 basis points in the first quarter and are above rate levels observed for most of the last decade. Reflecting this environment, we expect second quarter originations and margins to remain under pressure, and mortgage banking revenue to continue to decline. We’ve started to reduce expenses in response to the decline in volume and expect expenses will continue to decline throughout the year as excess capacity is removed and aligned to lower business activity. Credit card revenue was up 6% from a year ago, driven by higher loan balances and point-of-sale volumes. Auto revenue increased 10%, and personal lending was up 2% from a year ago, primarily due to higher loan balances. Turning to some key business drivers on slide 10. Our mortgage originations declined 21% from the fourth quarter. We believe the mortgage market experienced its largest quarterly decline since 2003, primarily due to lower refinance activity in response to higher mortgage rates. Home lending loan balances grew modestly from the fourth quarter, driven by the third consecutive quarter of growth in our nonconforming portfolio, which more than offset declines in loans purchased from securitization pools or EPBOs. Turning to auto. Origination volume increased 4% from a year ago but was down 22% from the fourth quarter due to credit tightening in higher risk segments and increased price competition as interest rates rose, and we targeted solid returns for new originations. Turning to debit card. Transactions declined 7% from the fourth quarter due to seasonality and were up 3% from a year ago with double-digit growth in travel and entertainment. Credit card point-of-sale purchase volume continued to be strong. It was up 33% from a year ago, but down 5% from the fourth quarter due to seasonality. While payment rates remain elevated, balances grew 14% from a year ago due to strong purchase volume and the launch of new products. New credit card accounts increased over 80% from a year ago, and we continue to be pleased by the quality of the accounts we’re attracting. Turning to Commercial Banking results on Slide 11. Middle Market Banking revenue increased 8% from a year ago, driven by higher deposit and loan balances as well as the impact of higher interest rates. Asset-based lending and leasing revenue increased 17% from a year ago, driven by higher loan balances, stronger net gains from equity securities, and higher revenue from renewable energy investments. Noninterest expense declined 6% from a year ago, primarily driven by lower personnel and occupancy expenses due to efficiency initiatives and lower lease expenses. After declining during the first half of last year, average loan balances have grown for 3 consecutive quarters and were up 6% from a year ago. Revolver utilization rates have increased but are still well below historical levels. Loan demand has been driven by larger clients who are increasing borrowing due to the impact of inflation on material and transportation costs as well as to support inventory growth. We’re also seeing new demand from some clients who are catching up from underinvestment in projects and capital expenditures over the past couple of years. Turning to Corporate and Investment Banking on Slide 12. Banking revenue increased 4% from a year ago, primarily driven by higher loan balances and improved treasury management results. Average loan balances were up 18% from a year ago with increased demand across most industries driven primarily by capital expenditures and growing working capital needs. Commercial real estate revenue grew 9% from a year ago, driven by the higher loan balances and higher revenue in our low-income housing business. Average loan balances were up 17% from a year ago, and originations in the first quarter outpaced volumes from a year ago, and loan pipelines continue to be strong. Markets revenue was down 18% from a year ago, primarily due to lower trading activity in residential mortgage-backed securities and high-yield products. Average deposits in corporate investment banking were down $25.3 billion or 13% from a year ago, driven by continued actions to manage into the asset cap. On slide 13, Wealth and Investment Management revenue grew 6% from a year ago, driven by higher asset-based fees on higher market valuations and higher net interest income from the impact of higher interest rates as well as higher deposit and loan balances. As a reminder, the majority of WIM 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 the lower market valuations as of April 1. The 5% increase in expenses from a year ago was primarily driven by higher revenue-related compensation, which was more than offset by higher revenue. Average deposits were up 7% from a year ago, and average loans increased 5% from a year ago, driven by continued momentum in securities-based lending. Slide 14 highlights our corporate results, both revenue and expenses declined from a year ago, driven by the sale of our student loan portfolio and divestitures of our Corporate Trust Services business and Wells Fargo Asset Management. These businesses contributed $791 million of revenue in the first quarter of 2021, including the gain on sale of our student loan portfolio, and they accounted for approximately $400 million of the decline in expenses compared with a year ago, including the goodwill write-down on the sale of our student loan portfolio. We will now take your questions.
Operator, Operator
Our first question comes from Scott Siefers of Piper Sandler.
Scott Siefers, Analyst
Mike, thank you for clarifying the expense guidance for the full year. I'm wondering about the fluctuations related to seasonality, account expenses, and some operational losses. Could you provide more details on the anticipated trajectory? Specifically, how much should we expect expenses to decrease in the second quarter? Will we see a steady decline through the year, or do you foresee any variations?
Mike Santomassimo, CFO
Yes. Thank you, Scott. As I mentioned earlier, we incurred approximately $600 million in seasonal expenses related to 401(k), stock compensation, and other associated costs in the first quarter. These should diminish over time. Additionally, I noted the operating losses, which can vary throughout the year. However, if you look at the bigger picture, just like last year, the benefits of our efficiency initiatives don't all materialize immediately. Therefore, you can expect to see more positive impacts as the year progresses. While not every quarter will show a linear decrease in expenses, we anticipate an overall downward trend. To reiterate our earlier statement, we still believe the $51.5 billion target for the full year is attainable despite higher operating losses this quarter. Lastly, I’d like to highlight our guidance on Net Interest Income. As we mentioned in January, we expected an increase of around 8%. We are now projecting that could rise to the mid-teens for the year, reflecting the loan growth we've experienced and the significant increase in interest rates.
Scott Siefers, Analyst
Perfect. Thank you. And then just maybe to follow up. I think you guys talked in the past about an expectation for expenses to decline next year as well. Just given how lasting some of these inflationary pressures seem to be, do you see any risk to that outlook of another down year in costs next year?
Charlie Scharf, CEO
It’s Charlie. I want to mention a couple of things. We're still considering how we want to plan for the year as we sit here today. Regarding inflationary pressures, it's still early and things are evolving, but based on our own experience, the wage pressures we're seeing now are not as significant as they were in the fourth quarter of last year. They still exist, but they appear to be slowing down. The Fed will, as I've mentioned, do everything possible to reduce that. So, as we look ahead to next year, I believe we'll be in a much different situation concerning inflation. We're still very focused on efficiency, or running the business better, and that's what these expense reductions will lead to.
Operator, Operator
The next question comes from Steven Chubak of Wolfe Research.
Steven Chubak, Analyst
So, wanted to just start off with a question on NII and excess liquidity deployment. Specifically, I was hoping you could speak to your appetite to deploy some of the excess liquidity that you guys still retain. And where reinvestment yields are currently just given spread widening in MBS in particular? And what securities you might look to purchase, given some of the sensitivities on the duration side?
Mike Santomassimo, CFO
Thank you, Steve. It's Mike. To start, when we look at deploying liquidity, our priority will be loans. As we anticipate loan growth, that's where we will focus our efforts first, and it remains our preferred approach. Depending on the loan growth we observe, we will then evaluate the potential to expand our securities portfolio over the year. I want to clarify that our guidance for net interest income does not take into account substantial growth in the portfolio. We'll need to monitor loan growth before making any decisions. Additionally, we are seeing yields for both treasuries and mortgage-backed securities, which are our main asset classes, and we are now investing at higher rates than we've experienced in quite some time. This will be beneficial as we move forward.
Steven Chubak, Analyst
Got it. And just one follow-up relating to deposit beta specifically, certainly a big area of focus given the more aggressive pace of Fed tightening as well as QT, I was hoping you can just speak to your relative stickiness of your deposit base versus last cycle, given the liability optimization, you guys have been executing under the asset cap for a number of years now. And is there a credible case in your view that deposit betas could in fact be lower this cycle, just given some of that favorable deposit remixing?
Mike Santomassimo, CFO
Yes. No, I think you highlighted the right point. As you look at what we’ve had to do over the last couple of years to manage on the asset cap, we’ve really pushed away some of our most interest rate-sensitive deposits during that time. And so, we’ve seen the least rate-sensitive deposits on the retail side and the consumer side grow as a percentage of the overall deposit base. And so, that’s definitely going to help lower the average betas that we’ll see relative to what we saw in the last cycle. I think, our expectations as you sort of think about the different slices of the deposit base haven’t really changed much over the last couple of months. I think, as we look at the first 100 basis points, we don’t think deposit rates are going to move that much, which is pretty similar to what we saw last go around. And then I think on the consumer side, you’ll have slower betas and you’ll have higher betas on the wholesale side. But likely, given our position, we’ll lag a little bit on pricing given the asset cap and what we’ve got to do to continue to manage that.
Charlie Scharf, CEO
And this is Charlie. The only thing I would add is that a lot of it also depends on the alternatives available to consumers. When you consider the environment we're moving into and the volatility we will encounter, I believe it's a very different situation compared to being in a stable market where rates increase gradually. So, I think it is different in that regard as well.
Steven Chubak, Analyst
All right. That's great. If I could just squeeze in one more quick question, I would be remiss if I didn’t ask about the fee income commentary you have highlighted, particularly the headwinds in both mortgage and wealth management. How should we be thinking about the appropriate starting point for second-quarter fee income, considering the volatility in some of those line items this quarter?
Mike Santomassimo, CFO
I’ll share a few insights. When considering advisory assets, it’s worth noting that the valuations in both fixed income and equity markets have decreased around 5% to 6% as of March 31. This could serve as a good basis for modeling advisory assets, especially since many are established based on that valuation. Regarding the mortgage sector, we anticipate a decline due to a significant slowdown in the refinance market. While we expect to maintain reasonable volumes in the purchase market, spreads and gain on sale margins will be affected because there remains a lot of excess capacity in the system. It’s important to keep this in mind within the context we outlined regarding the growth in net interest income as the year progresses. Thus, even if there’s some pressure on those specific items, the increase in net interest income should position us favorably for the remainder of the year.
Charlie Scharf, CEO
Yes, this is Charlie. I want to emphasize that we feel very positive about our position going into this environment. While mortgage banking income will decline due to rising rates, the increase in rates will benefit us more than the decrease in mortgage banking income will hurt us. We are focused on reducing expenses, and credit remains exceptionally strong, which we expect to continue into the next quarter and possibly beyond, despite any future increases. While we are uncertain about the overall economic environment, our perspective remains that we are well-positioned for whatever comes next.
Mike Santomassimo, CFO
Just a reminder, I said in my script, Steve, too, on the impact of the reduction in nonsufficient fund balance fees and some of the overdraft changes we made, you’ll start to see the impact of that in the second quarter as well.
Operator, Operator
The next question comes from John Pancari of Evercore ISI.
John Pancari, Analyst
On the expense side, I appreciate you helping us out with the $51.5 billion in terms of the reiteration of the guide. On the operating loss side, how do you feel about that $1.3 billion expectation, given the pressure on the number in the quarter? And then separately, I guess, also on the cost savings, I wanted to see how you’re feeling about the $3.3 billion in gross saves and $1.6 billion net, any changes to that expectation? Thanks.
Charlie Scharf, CEO
I’ll address the first part, and Mike can handle the second. The issues we encountered in the first quarter are specifically related to remediations. What we observed in that quarter will not influence what we expect to see in the upcoming quarters. These factors are distinct and do not carry over into future results.
Mike Santomassimo, CFO
Yes. As we assess our efficiency, I believe this was implied in the guidance we provided. We are performing well on our efficiency program. As I've mentioned several times in recent quarters, this is not a static program; it is something we are integrating into the core of our operations, and it continues to progress. We are confident in our ability to execute on this.
John Pancari, Analyst
Okay. And then, on the capital side, I know the CET1 decline of 90 basis points this quarter. You also mentioned the SCB surcharge could increase. You did flag the lower levels of buyback expected for the second quarter. Maybe can you talk about your thoughts on capital return beyond the second quarter, just given how things are shaping up and your earnings outlook? I just wonder if you have updated thoughts there. Thanks.
Charlie Scharf, CEO
I’ll begin, Mike, and then you can add in. We are aware of the impact on OCI during the quarter, and you can see the current CET1 levels. Our dividend stands at approximately $1 billion per quarter, providing us with ample room to accommodate any further changes to OCI or our ambition to grow RWA, in light of ongoing loan demand. Our position in the second quarter will largely depend on interest rate movements. Additionally, while we are navigating CCAR, we should still have the flexibility to determine how to utilize the excess capital the Company generates.
Mike Santomassimo, CFO
Yes. As our earnings capacity increases and our net interest income grows throughout the year, we are implementing our efficiency program. While we are still operating under the asset cap, I believe we will be cautious in our approach, but we have ample flexibility as we move forward.
Operator, Operator
The next question comes from Ken Usdin of Jefferies. Your line is open, sir.
Ken Usdin, Analyst
Just a couple of follow-ups on the cost side. So, Mike, the business sales from last year and kind of the stranded costs and the transition agreements, can you walk us through again how much of that was in the first quarter? And then, how does that kind of decline? And is that also built into your full year expectation for the cost numbers?
Mike Santomassimo, CFO
Yes. In the first quarter, approximately $400 million in expenses were eliminated as the business transitioned. Out of that, about $300 million was related to the ongoing business run rate, while roughly $100 million was a charge we incurred last year for the student loan business. The remaining costs are associated with the transitional services agreements currently in effect, which will likely continue throughout most of this year and potentially into early next year. It's important to note that there is revenue corresponding to those costs. Additionally, we have stranded costs to address. The figures we provided at the end of the fourth quarter last year remain unchanged. As the transitional services agreements conclude, we will strive to provide updates if there are significant changes. We will also keep working on reducing the stranded costs, although this will take some time, as we mentioned last quarter.
Ken Usdin, Analyst
Right. Okay. And then, just two little things on net interest income. You did mention that you had the EPBO sales this quarter and I think related lower net interest income, plus you did show the decline in premium amortization. And I’m wondering if you can just help us understand how much the EPBO sales took out of NII? And are you still expecting those to go out through the year? And then, how do you expect premium am to trend from here?
Mike Santomassimo, CFO
Yes. The combination of PPP loans and EPBO decreased by about $178 million compared to the previous quarter, which affected revenue related to net interest income. We will reiterate this in the upcoming quarter. Regarding premium amortization for mortgage-backed securities, you can refer to the slide for more details when you have a moment. It declined by a little over $100 million, around $110 million for the quarter, and we expect this to continue decreasing as prepayments slow down throughout the year. It has significantly reduced compared to last year.
Operator, Operator
The next question comes from John McDonald of Autonomous Research.
John McDonald, Analyst
Just on the fee income front, you made a couple of comments already about the core fee line. What about some of the more volatile lines on the capital markets side? I think the venture capital came in a little bit better than expected in a tough market this quarter. What should we be thinking about in terms of investment banking, trading and maybe the Norwest Venture line?
Mike Santomassimo, CFO
Yes. As you know, predicting investment banking fees and market fees is quite challenging. It's clear that on the investment banking side, some capital markets, especially in equity, have slowed down this year due to volatility we've experienced. Our pipeline hasn’t changed much; it's still strong as we enter the quarter. The realization of that pipeline is market-dependent and hinges on the timing of certain deal closures. We will see how it plays out. Market revenue is influenced by the volatility and demand we observe. As others navigate this, we expect to benefit, but it's difficult to predict our exact position. Regarding Norwest Venture, looking at the past few years shows some stability in that line. This quarter, we did have some successful business sales or public offerings among a few investments, which is encouraging despite the market volatility. We will see how it unfolds. It's hard to envision reaching the peak revenues we had last year, but I do anticipate continued strong performance across those businesses.
John McDonald, Analyst
Do you have any insights on your expectations for the timing of the Net Interest Income improvement throughout the year? Additionally, could you share what you anticipate regarding premium Asset Management and the potential benefits from a 25 or 50 basis point hike? Any framework you could provide would be appreciated.
Mike Santomassimo, CFO
Yes. No. So, a lot of it’s going to be dependent on how fast the Fed moves. And as you know, when the Fed moves, the impact of that is immediate; you start realizing that the day after. And so, obviously, those expectations there have changed quite a bit. So, that will be the case. I think in the Q, we give you the shock numbers on 100 basis-point moves. And those are pretty close to what you should expect for the first few rate rises in terms of the impact. And again, it’s pretty immediate for most of it.
John McDonald, Analyst
And the premium AM, Mike, you assume that that comes down throughout the year?
Mike Santomassimo, CFO
Yes, it has to. Absolutely, it will continue to decrease as we see rates rise and prepayments slow. I think you’ll start to see that reduction. Whether it will be significant depends on how things progress, but it’s reasonable to expect that for the next quarter, it will be similar to what we observed in the current quarter on a linked quarter basis.
Operator, Operator
The next question comes from Ebrahim Poonawala of Bank of America.
Ebrahim Poonawala, Analyst
I guess, first question, Charlie, you’ve, in the past, talked about the 15% ROTCE as needing the asset capital lift and some level of higher rates. We’re getting a lot more in terms of higher rates than we expected six months ago. Just doing rough math in terms of how you’ve talked about expense outlook, mid-teens NII growth. Do you think it’s conceivable that we hit 15% ROTCE at some point over the next four to six quarters, even without the asset cap being lifted?
Charlie Scharf, CEO
I don't want to specify a timeframe right now because we have consistently stated that we will reach 10%, and then we can discuss 15% and focus more on timing. However, I believe it's reasonable to assume that the rate increases we're experiencing are greater than what we initially thought was needed to reach 15%. The challenge of the asset cap is still present, and that's the reality we face. It's quite possible that the rate increases will end up being more beneficial than we anticipated in offsetting that. Nonetheless, I think we should wait until we reach 10%. Clearly, the rate increases we are experiencing and our asset sensitivity are significant positives for us, exceeding our expectations.
Ebrahim Poonawala, Analyst
I appreciate that response. And just one quick question on credit, Mike. When we think about another quarter of sizable reserve release, we’ve seen one of your peers yesterday build reserves, talking about just putting a higher weight on a stress case scenario. Give us a sense in terms of your outlook for the economy and how that leads to loan loss reserves, where they are today versus I think your day one CECL was about 95 basis points. Just any thought process around how you’re thinking through that would be helpful.
Charlie Scharf, CEO
Yes, this is Charlie. I’ll respond to that first. Understanding our CECL assumptions is important. Although it’s challenging to predict, it provides insight into our thought process and how our loan portfolio and other factors influence our reserving calculations. However, comparing across companies is difficult due to differing scenarios and probabilities we assign to various factors. Additionally, the level of conservatism in models varies among companies. What we've observed in our reserving levels is that we tend to be on the more conservative side compared to others. This may stem from a more cautious perspective regarding our assumptions or how we approach the potential impacts of COVID and the current slowing economy. Overall, from my perspective today, if you were to examine how we assess the assumptions, we have already factored in a reasonable probability of downside risks. This hasn’t changed, but we feel more confident about some of our assumptions related to COVID, and we have incorporated new considerations regarding inflation. In summary, this contributes to the reduction in our reserves. We still believe we are at the more conservative end of CECL calculations.
Ebrahim Poonawala, Analyst
That’s helpful. And should we then still assume that the reserves probably track lower over the next few quarters, at least absent a big change in the macro?
Charlie Scharf, CEO
Yes. I believe it all hinges on the macroeconomic situation at this time. CECL requires an assessment of the full extent of losses within the portfolio in relation to the macroeconomic outlook and specific performance metrics. If the outlook improves, reserves will decrease. If it worsens, reserves will increase. If it remains unchanged, it will stay stable.
Operator, Operator
The next question comes from Betsy Graseck of Morgan Stanley.
Betsy Graseck, Analyst
I have a semi-technical question regarding the NII outlook. I understand that we should expect some improvement in the near term from the rate environment. However, I noticed that the loan yields decreased slightly this quarter. I realize that part of this could be due to the day count, but we also saw declines in residential mortgages, both first and second lien, as well as in auto loans and C&I. I would like to understand what contributed to those quarter-on-quarter changes and how quickly we might see a reversal as we progress through the year.
Mike Santomassimo, CFO
Yes. Hey Betsy, it’s Mike. I’ll address that. On the residential mortgage side, what you're observing is the effect of the EPBO loans, which have led to a decrease for us. This introduces some variation in terms of yield. Regarding the commercial and industrial (C&I) book, approximately two-thirds of it is floating rate, give or take, and this tends to respond quickly to rate changes. In any quarter, there can be some fluctuations in that yield, but as rates increase, you will begin to see that response.
Betsy Graseck, Analyst
Okay. It’s not like it’s hedged out, and that’s why we saw what we saw Q-Q
Mike Santomassimo, CFO
No.
Betsy Graseck, Analyst
Okay. And then the other message I’m getting from you this morning is that this rate improvement you’re expecting to drop to the bottom line, is that fair?
Mike Santomassimo, CFO
Well, I think we reiterated our expense guidance for the year, and NII is going to be a lot better.
Charlie Scharf, CEO
Betsy, what’s in your question? I’m not sure I understand.
Betsy Graseck, Analyst
Well, you’re getting an uptick in rates. And given the fact that your guidance on expenses is holding steady, it seems like you’re going to drop all that rate hike to the bottom line.
Charlie Scharf, CEO
Yes, we expect to increase our net interest income. Mike explained that while noninterest income may decrease, it won’t be nearly as significant as the gains we anticipate from net interest income. Charge-offs are expected to remain low for the foreseeable future, although we do anticipate them rising eventually. Additionally, we will continue to reduce expenses to reach our target of $51.5 million.
Betsy Graseck, Analyst
Yes. I mean it feels like it’s at least a mid-singles uptick on consensus EPS. That’s what it feels like to me, at least. But I mean I know if you drop all the NII to the bottom line, I get something closer to high-singles uptick on consensus EPS, but…
Charlie Scharf, CEO
I want to emphasize what to expect regarding noninterest income. Charge-offs are currently at historically low levels, and the delinquency rates reflect that. Unless there are unforeseen issues in the commercial or wholesale sectors, we believe the economy is stable. We feel confident in our position within this environment, but it’s important for everyone to remain aware of changes across all financial metrics.
Betsy Graseck, Analyst
And then, on the customer remediation charge that you took this quarter, I guess that’s the other kind of question that I’ve been getting is it’s one-timey, but it feels like it’s happened a lot. So, how much more is left?
Charlie Scharf, CEO
It’s really difficult to provide a clear answer, and I understand the frustration. Each quarter, we go through this process and emphasize the importance of ensuring everything is in order. We need to align our remediation efforts with what makes sense for the customer and ensure that we’ve accounted for all portfolios. Some of these remediations required us to revisit scenarios from 10 to 15 years ago, which adds to the complexity. While we can't guarantee that there won't be any more, they are very specific to each case. Eventually, we will move past this, but it’s important to follow through on our obligations. In the grand scheme of things, considering the benefits from aspects like net interest income, these are not overwhelming. We also understand how this situation fits into the guidance we provided regarding full-year expenses.
Operator, Operator
The next question comes from Matt O’Connor of Deutsche Bank.
Matt O’Connor, Analyst
I want to follow up on the regulatory questions. As always, I have to ask some challenging questions. You've acknowledged you're making significant progress, and the regulators have confirmed this as well. The fundamentals are clearly moving in a positive direction. However, in your prepared remarks, you mentioned the need to continue closing gaps over the next several years. Is this just cautious language, or are there still ongoing efforts on a daily basis to address some of the legacy issues? I had thought you had already implemented the necessary fixes, and that it was more about oversight and execution. Could you elaborate on that?
Charlie Scharf, CEO
Yes. I don’t remember using the words you mentioned. We have been clear that there is still a lot of work ahead, and we feel positive about the frameworks we've established. However, implementing these frameworks takes considerable time. We are making progress, and as we enhance our internal controls, we will likely uncover issues that need to be addressed and remedied, as this is a long-term effort. Regulators recognize the time required to tackle these issues and the legacy challenges that persist. It's reasonable to anticipate that we may encounter additional matters. While we are making significant strides from where we started, there is still a substantial amount of work to be done.
Matt O’Connor, Analyst
Okay. And then, just a follow-up on a different topic. And I apologize if I missed it. But you did talk about slowing buybacks in the second quarter, partly rates, partly loans. And obviously, you bought back a lot this quarter. Did you give the magnitude that you expect to buy back or remind us your targeted capital at least until the next CCAR comes out?
Mike Santomassimo, CFO
Yes. Matt, I’ll take that. As we’ve said a few times in the past, we plan to run the CET1 ratio at somewhere between 100 and 150 basis points over our reg minimum, which right now is 9.1%. And I think as we look forward, given the way the framework works is we’ll have plenty of flexibility to do what we think is prudent on buybacks as we go throughout the rest of the year.
Operator, Operator
The next question comes from Erika Najarian of UBS.
Erika Najarian, Analyst
My questions have been asked and answered. Thank you.
Charlie Scharf, CEO
Thank you.
Operator, Operator
The next question will come from Charles Peabody of Portales Partners.
Charles Peabody, Analyst
Most of my questions have been asked. But let me ask one question about how you manage your mortgage banking operation because you’re one of the few large banks that still has a relatively balanced origination and servicing side. Historically, servicing was kind of viewed as a balance to origination. When originations didn’t do well, servicing would do well. But that hasn’t been the case recently in your recent history. And so, can you talk about how you’re managing it and why there isn’t a balance to those two pieces?
Charlie Scharf, CEO
Yes, I’ll start, this is Charlie, Mike, and then you can pipe in. I think we think about our mortgage business in the context of the whole company, not as a separate, independent entity that has to stand by itself. And so, when we think about the interest rate risk position of the entire company, that’s where we think about what potentially happens on the production side versus what happens in the MSR. The management of the MSR is difficult. It’s got some very different types of risks embedded in it. And all you did was look at those 2 as offsets, you could be kidding yourselves as to what the value of the servicing is. And so as I said, net-net-net, when we look at the position of the company, I would look at the reduction of mortgage banking income not being offset by the MSR, but being offset by the rest of the benefit that will get as a company NII.
Charles Peabody, Analyst
And just as a follow-up, when you gave guidance about a material step down in mortgage banking in the second quarter, were you talking strictly on the origination side or as a whole entity?
Mike Santomassimo, CFO
As a whole, think of the mortgage banking income line as what we’re referring to.
Charlie Scharf, CEO
And remember, the MSR is fairly well hedged. Essentially, it encompasses the entirety, but what is primarily driving it is origination.
Operator, Operator
Our final question for today will come from Gerard Cassidy of RBC Capital Markets.
Gerard Cassidy, Analyst
Charlie, you both referenced in your comments about the excess capacity in mortgage banking, and you’re anticipating or waiting for some of that excess capacity to come out as originations, of course, for the industry have come down to higher rates. What are some of the metrics you guys are monitoring and keeping an eye on to show you that that capacity is coming out of the system?
Mike Santomassimo, CFO
Well, I think, as you think about the industry as a whole, it’s hard, Gerard, to look at any specific metrics per se. But I think where you’re going to see that first is likely gain on sale margins as people start to normalize as excess capacity comes out, right? So, I think that’s probably one of the areas I would look at.
Charlie Scharf, CEO
Yes. Everyone in the industry is aware of the significant decline in volume and is evaluating their expenses. This leads to reevaluating costs, which alters the competitive landscape regarding pricing. We are prioritizing aligning our expenses with the revenue and volume we are experiencing, which is a common practice among others in the industry.
Gerard Cassidy, Analyst
Very good. Mike, could you clarify what you consider to be a normal gain on sale margin? Where does your company stand on that today?
Mike Santomassimo, CFO
We don't disclose the margin as we look ahead, but it varies throughout the mortgage business cycle. When considering primary and secondary spreads, that can indicate where gain on sale margins might head. Currently, we seem to be back to what are likely historical levels around 100 basis points. This suggests a return to a more normal level. As excess capacity decreases, we may see gain on sale margins increase again. It's difficult to predict exactly what normal will look like as we progress through the cycle.
Gerard Cassidy, Analyst
Okay. As a follow-up question, Mike, you mentioned that the stress capital buffer after this year's CCAR could be somewhat higher for you. Could you provide some insights on what is leading you to that conclusion?
Mike Santomassimo, CFO
It's really about the severity of the factors involved, Gerard. It's somewhat uncertain what the exact outcome will be. We strive to understand how these elements may affect us and how the Federal Reserve might respond. Ultimately, it depends on how impactful the scenario turns out to be.
Gerard Cassidy, Analyst
Great, always appreciate the color. Thank you.
Mike Santomassimo, CFO
I appreciate it. And I think that’s the last question. So, we know it’s a really busy day for everyone. So, we thank you for spending the time, and we’ll talk soon.