U.S. Bancorp

Welcome to U.S. Bancorp's first quarter 2020 earnings conference call. Following a review of the results by Andy Ciceri, chairman, president, and chief executive officer, and Terry Dolan, U.S. Bancorp's vice chairman and chief financial officer, there will be a formal question and answer session. If you would like to ask a question, please press star 1 on your touch-tone phone and press the pound key to withdraw. This call will be recorded and available for replay beginning today at approximately 12 o'clock p.m. Eastern Time through Wednesday, April 22nd at 12 o'clock midnight Eastern Time. I will now turn the conference call over to Jen Thompson, director of investor relations for U.S. Bancorp.

Thank you, Janika, and good morning, everyone. With me today, as usual, are Andy Ciceri, our chairman, president, and CEO, and Terry Dolan, our chief financial officer. Also joining us on the call today are our chief risk officer, Jody Richard, and our chief credit officer, Mark Runkle. During their prepared remarks, Andy and Terry will be referencing a slide presentation. A copy of the slide presentation, as well as our earnings release and supplemental analyst schedules, are available on our website at usbank.com. I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on page two of today's presentation in our press release and in our Form 10-K and subsequent reports on file with the SEC. I'll now turn the call over to Andy.

Thanks, Jen, and good morning, everyone, and thank you for joining our call. After Terry and I finish our prepared remarks, Terry, Jody, Mark, and I will take any questions you have. I'll begin on slide three. In the first quarter, we reported earnings per share of 72 cents. Our performance this quarter was adversely impacted by the COVID-19 in the U.S. and global economies. The -at-home orders across the country, while necessary and temporary, are significantly restricting economic activity. Consumers and businesses are dealing with a fallout which is affecting sentiment and business activity and resulting in financial distress for many. These dynamics are affecting the banking industry in a number of ways, and our first quarter results were reflective of these developing economic conditions. We saw strong long growth and related deposit growth, particularly in the last few weeks of the quarter, as we supported our customers' liquidity needs. During this timeframe, the company funded approximately $22 billion of loans for our customers while continuing to strengthen our cash position. Our fee businesses were affected to varying degrees. Our payments businesses were negatively impacted by a sharp decline in both consumer and commercial spend activity, in line with the drop in global economic activity in March. Demonstrating the importance of having a well-diversified business mix, mortgage revenue growth was strong this quarter, as the decline in interest rates allowed many more consumers to refinance their mortgage at more attractive terms. We also saw strong growth in our commercial products revenue, reflecting robust capital markets activity. Non-performing assets started to trend higher in the first quarter, reflecting the increased economic stress. We increased our allowance for loan losses in response to current economic conditions, and as you can see in the lower right quadrant of this slide, we remain well-capitalized. Book value per share grew 5% compared with a year ago. Slide 4 provides key performance metrics. We delivered a 12.6 return on tangible common equity in the first quarter, impacted by lower earnings due to the current economic environment. Slide 5 shows our continually improving digital uptake trends. The significant investments we've made in our digital capabilities over the last several years are helping our customers continue to do banking as social distancing has become more widespread. Because of our Agile development activities, we've made a number of updates in recent weeks to digital tools and processes to help customers who choose to bank at home. We've added the ability to accept treasury checks via mobile check deposit, which will help customers more quickly and seamlessly get access to funds being distributed through the government stimulus efforts. Our teams work quickly to design and deploy a new digital forbearance tool. Within a week of this feature being launched, more than 50% of all customers requesting forbearance were doing so in a digital way. Digital is a core part of our strategy and we'll continue to look for innovative ways to help our customers bank from home and to meet financial goals through the social distancing period and beyond. Now I'll turn the call over to Terry who will provide more color on the quarter. Terry?

Thanks Andy. If you turn to slide 6, I'll start with a balancing review followed by a discussion of first quarter earnings trends. Average loans grew .9% on a linked quarter basis and increased .0% year over year. Linked quarter growth was primarily driven by growth in commercial loans and mortgage loans. Business customers drew down lines to support business activity and toward the end of the quarter to support future liquidity requirements. Strong residential mortgage loan growth reflected the low interest rate environment. On a period end basis, loans increased $22 billion or .5% linked quarter and .6% year over year. Turning to slide 7, average deposits increased .8% on a linked quarter basis and grew .2% year over year. Average savings deposits increased .1% year over year driven by growth in wealth management investment services, corporate and commercial banking, and consumer and business banking. On a period end basis, deposits increased $32.9 billion or .1% linked quarter and .1% year over year. Turning to slide 8, while the net charge off ratio was relatively stable on both a linked quarter and year over year basis, non-performing assets increased .1% sequentially, reflecting recent economic stress. We have taken a proactive approach to evaluating risk ratings across the entire commercial loan portfolio and considered the risk rating changes in the evaluation of our allowance for credit losses. Our credit loss provision was $993 million in the first quarter, reflective of $393 million of net charge offs and a reserve bill of $600 million. The increase in the reserve was related to changes in risk ratings and deterioration in economic conditions driven by the impact of COVID-19 on the U.S. and global economies, and our expectation that credit losses and non-performing assets will increase from current levels. The increase in the allowance for credit losses has been considered our best estimate of the impact of significantly slower economic growth and higher unemployment, partially offset by the benefits of government stimulus programs as of March 31. Slide 9 highlights our key underwriting metrics and exposures to certain at-risk segments given the current environment. We have a strong relationship-based credit culture at U.S. banks supported by cash flow-based lending that considers sensitivity to stress, proactive management, and portfolio diversification, which allows us to support growth through the economic cycle and produce consistent results. However, while actual credit quality results will depend on the duration of the COVID-19 situation, the impact of -in-place orders on consumer and business activity, as well as the extent of the benefit of government stimulus programs, it is likely that changes in risk ratings and net charge-offs will continue to assess the adequacy of the allowance for credit losses as credit conditions change. Slide 10 provides an earnings summary. In the first quarter of 2020, we reported 72 cents per share. Turning to slide 11, net interest income on a fully taxable equivalent basis declined by .2% year over year in line with our expectations as the impact of declining rates and a flatter yield curve was partially offset by deposit and funding mix, loan growth, and one additional day. The net interest margin declined by one basis point versus the fourth quarter. The lower margin reflected lower interest rates and a flatter yield curve, as well as approximately five basis points of drag due to intentionally higher cash balances being maintained for liquidity to accommodate customer demand. These factors were mostly offset by beneficial shifts in loan and deposit necks. We expect to see more pressure on our net interest margin in the second quarter, primarily due to timing and extent of changes in interest rates late in the first quarter, the significant build up in liquidity to support the significant loan growth or loan demand being experienced, changes in loan necks, and the impact of floors on deposit pricing. Slide 12 highlights trends in non-interest income, which came in higher than we expected, primarily due to better than expected mortgage banking results and strong fixed income capital markets activities. Compared with the first quarter a year ago, higher mortgage production and stronger gain on sale margins were partially offset by changes in the valuation of mortgage servicing rights net of hedging activity. Slide 13 provides information about our payments services businesses lines, including exposures to impacted industries. In the first quarter, payments services revenue declined .9% on a year over year basis, reflecting lower corporate payment products revenue and lower merchant acquiring revenue, driven by significantly lower sales volume in March as shelter in place orders impacted many of our customers. Within the merchant acquiring business, sales volumes declined between 50 and 60% on a year over year basis in the second half of March, compared with an increase in the mid to high single digits in the first two months of the quarter. Within our corporate payments business, commercial sales volumes declined between 30 and 40% in late March due to the worldwide impact of the economic slowdown on business spend activity. Government sales volumes declined between 15 to 20% in late March. The government business accounts for about 20% of the total corporate payments revenue. Commercial products revenue benefited from higher corporate bond fees and trading revenue, partly offset by credit valuation losses related to the customer derivative portfolio. The valuation losses reflect hedging effectiveness, given the significant volatility in the markets during the first quarter and changes to credit risk ratings for customers. It is likely that mortgage production will continue to be relatively strong in the near term, but may begin to slow later in the year in line with the trend in refinancing activity. Payments revenue is likely to be adversely affected through the remainder of the year, reflecting significant declines in consumer and business spend activity. Trust and investment revenue will likely decline from first quarter levels due to recent trends in the equity markets. Turning to slide 13, non-interest expense increased .4% year over year, reflecting business investment, including digital capabilities, as well as higher revenue related expenses of approximately $49 million related to mortgage production and capital markets activities. Additionally, we encourage incremental COVID-19 related costs of approximately $100 million, principally related to increasing liabilities for potential future delivery claims related to the airline industry and other merchants, but also including expenses related to premium pay for frontline workers and expenses tied to providing a safe working environment for our employees. Slide 14 highlights our capital position. At March 31, our common equity tier one capital ratio reflecting the full implementation of the current expected credit loss accounting methodology was 8.6%. Our common equity tier one capital ratio calculating in accordance with transitional regulatory capital requirements related to the current expected credit loss methodology implementation at March 31 was 9.0%. I'll hand it back to Andy for closing remarks.

Thanks, Terry. The banking industry is operating in a challenging environment, and we are not immune from the economic stress brought on by COVID-19 pandemic. However, I'm confident that we'll manage through this difficult period, just as we've managed through difficult periods in the past. Our balance sheet is strong, our businesses are diverse, and our culture is proving to be a differentiating factor over time, and perhaps especially during adverse situations. The interest rate environment is not ideal, but we view it as manageable, and we will continue to benefit from our strong core deposit base, our reputation as a flight to quality bank, and our best in class debt rating on a global basis. An economic downturn will mean higher credit costs for the entire industry, but we have a strong track record, and it's at times like this when portfolio diversity and discipline and consistent underwriting really pay off. It's unclear at this point how the situation will develop or how long it will be until the economy opens up and then we'll start to rebound. However, our strong capital position and ample liquidity give us the ability to weather even a severe downturn. We recently suspended our share buyback program to give us more flexibility. We are continually evaluating potential scenarios, and we believe that even if an economic downturn persisted through most of the year, we would be able to maintain our dividend at its current level. I believe we'll emerge from this stronger on the other side, but in the meantime, we are intently focused on doing what we can for our customers, communities, and employees as they deal with their unique situations. We stand ready with the necessary liquidity to support the significant loan demand we expect to see in the coming weeks as the government continues to roll up facilities to support businesses such as the Small Business Administration Paycheck Protection Program and the Main Street Lending Program. We've made adjustments to certain consumer and small business lending products and services to make them more affordable and accessible to existing customers who may be experiencing financial stress. We also raised mobile check deposit limits for many customers using our mobile app. Recognizing the precarious situation many of our communities are in, we announced a number of initiatives including a $30 million new and redirected investments, $26 million of which are to local nonprofits across the country to continue to support individuals and families with financial education, affordable housing, and work assistance. We've taken a number of steps to support and protect our employees. Within a short period of time, we have transitioned 76 percent of our employees to be able to work from the safety of their home. We announced a premium pay program to provide office critical frontline employees a 20 percent hourly wage increase during the shelter in place conditions. We also expanded our flexible leave policies and we're keeping our employees safe with personal protection equipment at our customer facing sites. I want to end this call by saying thank you to all our employees, those working from home and those on the front lines. I'm proud of the way you've come together and the work you are doing to partner with and support all of our constituents in this very difficult time. We'll now open up the call for Q&A.

At this time if you would like to ask a question simply press stars and the number one on your phone is the telephone keypad. Again that is star one to ask a question. Your first question comes from the line of Erica Najarian of Bank of America. Good morning. Morning Erica. Thanks for your comments on the credit and we're wondering you know as we think about the company run DFAS results so four and a half percent cumulative losses over nine quarters. Could you talk about how you think this recession would look like relative to that stress? You know what's different for the better for the positive and you know what's worse for the for the negative? Clearly the unemployment rate is was capped at 10 percent in the DFAS result and also with the reserve at 2.07 you've told us before that diesel is very pro-cyclical and from here I'm wondering how much more reserve build we could potentially see.

Yeah Erica thank you very much so let me try to address maybe the DFAS questions first and you know when we when we end up thinking about you know the allowance maybe at the current state relative to the losses that we're experiencing we think that the coverage ratio associated with that is relatively strong you know that is over kind of a nine quarter period of time we have a lot of capacity with respect to our pre-provision net revenue capability in terms of being able to produce that so you know we have the opportunity to be able to absorb a pretty substantial amount of losses if need to especially when you kind of think about where our capital level is where it would need to progress before it become problematic so you know we when we think about you know the coverage ratio you know 2.7 percent you know when we think about the reserve from here on out I think that things will continue to progress and evolve and change you know how this recession I think is different on clearly the rapid development of the situation in terms of the health care crisis the impacts obviously to people from an employment perspective and having to either work from home or being unemployed peaks pretty quickly as we think about you know and certainly as we were thinking about the reserving process you know we took into consideration tried to take into consideration the rapid increase that would take place and then the impact that it would have on unemployment over a more sustained period of time before it starts to come down you know it's hard to judge particularly right now because there's just a lot of moving parts I think the other thing that comes into play which is kind of difficult to get your arms around is the whole stimulus package I think the government put a lot of programs into place both to stabilize the markets quickly as well as to be able to bridge customers and businesses between now and when they're able to get back to employment and that's one of the things that will continue to play out over time but you know we do expect that the credit quality statistics related to non-performing and delinquencies and things like that will continue to progress upwards and we'll have to watch and manage it.

Okay got it. The second question is I know this is another impossible question but given what happened to payments related revenues down seven percent year over year but clearly a of two different you know points in the quarter what how should we expect us to progress and it is you know should we expect down double digits through at least the second quarter and what are increased liabilities driven by future delivery exposure that you noted were related to merchant and airline processing?

Yeah so one of the things we tried to do on slide 13 is to give you a good sense in terms of both the percentage of revenue that our payments businesses represent as a percentage of the total revenue of the company as well as industries the mix of the industries that are more severely impacted so let me kind of break it down but I do believe at a high level when we think about and how we're kind of stress testing the next several quarters we do believe that second third and possibly through the end of the fourth quarter that consumer spend and business spend is going to be at relatively low levels so as we're modeling and we're thinking that for example merchants is going to continue to be down at 50 to 60 percent on a -over-year basis that CPS is going to continue to be down in that 30 25 to 30 percent sort of range and that RPS is probably going to continue to migrate downward you know it's kind of in that 30 to 40 percent range today but I do think that it starts to migrate closer to that 50 percent as well and that's as we are stress testing and thinking about the future quarters that's how we're thinking about it and it's a function of the you know the mix of the businesses so if you think about the merchant acquiring business you know we have a about 28 percent of the revenue from that business is directly tied to travel and hospitality and another 27 percent is directly tied to retail and both of those businesses are pretty significantly impacted I mean airlines as example being you know 85 to 95 percent down depending upon the week so you know it's as we think about second third and even into the fourth quarter you know we're stressing it down quite a bit.

I have a question on the go. Oh yeah future delivery

I'm sorry yeah future delivery so future delivery if you think about the airline industry you know we process transactions for airline industry as well as some other merchants where you know customers are paying up front for their tickets for a future travel or flight and the merchant kind of stands in between the merchant acquirer stands in between the customer that is buying that ticket and the airline that that will provide that future service to that customer so to the extent that that airline is unable to provide it then the customer has the right to go back against the merchant acquirer. Now what ends up happening over time is and what has been happening is that exposure gets just starts to dissipate and it dissipates when the airline either refunds the customer or the customer decides not to fly the flight or the airline provides future credit to that particular customer and so that future delivery risk to us continues to dissipate over time but we wanted to make sure and we're required from an accounting standpoint to recognize the potential risk associated with that future delivery exposure and we'll continue to manage it.

And Erica I'm just going to add a little bit I'm just going to add a little bit to Terry's comments on the merchant card and corporate payments spend so if you think about the first quarter three months we really saw the stress in the last half of the last month so we sort of had a one-sixth impact on the quarter on those payments businesses and what Terry is telling you is that what we saw in those last two months of March in merchant and corporate and retail was a spend particularly in merchant down in that 50 plus percent range now no one knows exactly when that's going to that's the impact we wanted to provide you the detail but when it comes back it's uncertain for sure but that's that's the impact and the exposure we would have.

And just to clarify that spend not revenues.

Well it's spend and revenue is pretty closely tied to the same sort of trends and again as Andy said it really is a function of when does the when does when new businesses relaunch when the people get back to work and what is the duration of the situation that is really hard to get your arms around but we're stress testing it based on what I talked about.

Got it thank you.

Thanks Erica.

Jenny question from us on the line of Bill Cartes of Nomura.

Thank you good morning first Terry I wanted to ask you a question following up on your response to Erica's question about expecting certain credit metrics like delinquencies to head higher from if we think about Cecil in theory it's supposed to capture lifetime losses and so shouldn't that upward trajectory and delinquencies and losses already be contemplated in your allowance at 331 and so just I guess wondering if you could help us understand what it will take to drive incremental reserve building versus from here you know versus what's already baked into that allowance.

Yeah so great question Bill and you know so if you if we had perfect insight into exactly what was going to happen and we knew exactly how bad GDP and unemployment and everything else was going to get the Cecil process would take that into consideration but as you know nobody has perfect insights in fact you know the the expectations around unemployment and GDP and when people get back to work and all sorts of things are constantly changing so you know at any particular point in time we have to make our best estimate of what that forecast looks like knowing that it's likely to continue to progress based upon how conditioners change so you know if you end up you know when we go through that process we end up looking at you know things like Moody's analytics and Morgan Stanley, Goldman Sachs or just a whole variety of different and even over the course the last seven days or so you know those projections with respect to how the economy is going to change and what the potential impacts might be has been pretty significant so we're going to have to take all those things into consideration as part of that process and then of course you know the models are never perfect you know there's a lot of things that we have to take into consideration from a judgmental standpoint think about the impact of the stimulus package it's really hard at this particular point in time to know exactly you know what the benefits are that are going to come into play etc so there's just a lot of different factors that that we have to try to consider so you know we believe that it's going to continually evolve really over the next several quarters and that's going to impact the reserve build over time

that's super helpful Terry but I guess as we think about where you guys were in terms of like the economic forecast that you were using through let's say the end of March and the first quarter and then to the extent that new information became available in early April before earnings that suggested that the rate of deterioration in unemployment real GDP would be greater than what was thought at March 31st is that information that you know it was still I guess it existed at the balance sheet date but you didn't find out about it until after would that be something that you contemplate in your 331 allowance or is the 331 allowance literally just based on information through 331 or is there room for judgment here just trying to get a little bit of you know I guess sense of how how that works

yeah well you know obviously we do try to take into consideration what we know and apply judgment with respect to what we think the trends are going to be but eventually you have to kind of snap the chalk line and say this is what we're going to base our assessment on and you know we really have to do that right around the end of the quarter so you know as things change you know we'll have to take that into consideration you know the other thing you know in terms of the whole reserving process you know just maybe to kind of put some context around it so there's obviously a lot of judgment that kind of comes into play and you have to kind of come up with what your economic forecast is but you know as we think about it and the reserve at the end of the first quarter you know when we end up looking at the coverage ratios that we have in terms of charge-offs and in terms of the overall the overall loan book etc you know we feel like those coverage ratios are at least reasonable at this particular point in time also kind of keep in mind that at on day one we had to make certain judgments and assessments with respect to the amount of the fee-sale of judgment at that point in time and to kind of give you some insight when we when we made that assessment of the economic forecast a little over 50 percent of that we assumed would either be a slower growth environment a moderate recession or a severe recession so you know there were lots of different views with respect to where the economy was going to go so you know we have taken some of that into consideration as part of kind of our day one and then it's also very important to take into consideration where you're starting from and you know if you think about our portfolios when in terms of determining the allowance our portfolios on the consumer side are principally prime or super prime sort of customers with very high FICO scores and good coverage in terms of loan to value ratios on the secured side of the equation then our commercial book of business tends to be high investment grade where we stress cash flows it's based on cash flow lending and the ability to be able to withstand so you know we start from good credit underwriting a good risk profile strong coverage ratios and all those things are taken into consideration in terms of the R.S. and the allowance.

That's very helpful if I could squeeze one more in for Andy. Andy you mentioned in the press release you commented on how you USB is going to emerge stronger in the other side of the pandemic and proving a reliable partner to your customers in the I guess period when we think about the great recession you know there was you guys really use that as an opportunity to win relationships with new partners in part because you were in a spotter position versus many other banks as we think about where you guys stand today do you see opportunities for USB to differentiate itself in this environment or is it more difficult because the banks I guess generally speaking are coming into this downturn in a stronger position relative to the great recession.

I think generally speaking all banks are in a good position right now which is why we're all able to help our customers while protecting employees which is exactly what we're focused on. One of the other things I said is we have been stressing across all the dynamics margin fees all the things we've talked about as well as credit losses and importantly based on what I know today even if the economic downturn persisted through the most of the year we still believe we can maintain the dividend which is also an important factor for shareholders.

Thank you for taking my questions.

And again ladies and gentlemen if you would like to ask a question or make a comment press star than the number one on your telephone keypad. Your next question comes from the line of Mike Mayo of West Fargo.

Hi this is Chris on behalf of Mike. This is just related to the questions you had previously. How have you I mean what is your view of the economy since the end of the third quarter and how has that changed? Just again I know you kind of addressed that to a degree but a little more specifics on what you think the economy has done in the last few weeks given what you saw at the end of March.

Yeah again I think since the end of March I think there are a number of forecasts that have come out with respect to GDP declining dramatically particularly in the second quarter. I think there are other forecasts that try to take into consideration not only what we call a V-shaped sort of recovery but more of a maybe a U-shaped sort of recovery so the duration has changed a fair amount. And then where unemployment either peaks or at least you know what level it's sustained at over a period of time. I think whether you look at Moody's analytics you look at you know reports that have come out from Goldman Sachs or JP Morgan since the end of the quarter most of those have started to at least incorporate downside risk related to you know the environment.

Okay and then on reserving just a couple of questions on the reserves for unused commitments and then also can you relate your reserve level today in the coverage ratio today versus what you might have seen during the global financial crisis because it's much lower today and even with all the adjustments you've made and builds you've made since the GFC so just how has your portfolio changed to give you so much more confidence today in the coverage ratio versus what you have might have had say eight or nine or ten years ago?

Yeah so I mean I think that and I'll have maybe Mark pipe in here a little bit but you know if you think about how our portfolios have changed since 2008 or 2009 certainly if you end up looking at you know on the consumer side of the equation I think across the industry and including ourselves the underwriting standards are you know tighter than they were back then certainly on the mortgage side you think about the mortgage product you know it is it is underwritten to take into consideration a customer's ability to manage cash flows even in different rates scenarios and environments etc. You know on the on the commercial side of the equation I think the exporters related to leverage lending and some of those sorts of things is different but Mark what could you kind of address that?

Yeah I would just say in addition to what Terry's mentioned like I said on the retail side or the consumer side the portfolios continues to be very strong I think we're better positioned at this point of the economic cycle than we were going into the last downturn the quality of the portfolio in terms of the average borrower profile from a credit perspective is stronger the loan the values are lower especially on the real estate portfolios that would be true as well with our auto portfolio both lending lease is stronger today as well as our credit card portfolio so we feel good with the quality of the portfolio as Terry said is very much prime on the commercial side continues to be pretty much investment greater equivalent as you know we capitalized during the last downturn to really what I would say is increase or move towards a large corporate strategy and with that we've got higher quality borrowers today than we had going into the last downturn which is which has provided some of the funding of that 22 billion dollars and some of the draws that we talked about earlier and then the commercial real estate you know we've been in that business a long time that's really a and I would say we've really gone up market and focused in on stronger sponsors today compared to where we were at at the last I think from a from a credit quality perspective the portfolio is very strong as we enter into this changing economic environment

and then Chris maybe one of the last things on the commercial real estate side of the equation you know for the last two years we have really been tightening the underwriting and bringing down exposure with respect to construction money and I think that's a pretty significant difference and you know we have been doing that you know in contemplation that ultimately we had some form of a downturn and we've been relatively conservative associated with that you know if you end up looking at the peak you know one of the questions you had is what really kind of in the last cycle kind of what sort of peaks did we see you know ultimately I think the reserve at that time ended up building to about 2.9 percent of loans and the the charge off rates ended up kind of increasing to about 2.4 percent kind of overall you know so there's that that's why I say I think when you end up looking at charge drops and some of these other statistics they're going to continue to migrate but we have good strong if you end up looking at the even the allowance today and while I said I think that in the future quarters it's going to continue to build if you look at the allowance today in terms of coverage ratios relative to net charge-offs non-performing assets etc our coverage ratios are very strong

thank you just just a quick follow-up on that then so the slight decline in the allowance for commitments oh

yeah you know I think that part of that is you know what commitments have now funded but what we try to do is take into consideration from a reserving perspective what unfunded commitments exist out there and probabilities that they will become funded and then the loss rates that you have to apply to it but mark can you yeah

and I would just say the you know the unfunded commitments we also look at the credit quality of those borrowers and so what remains is some of the stronger quality borrowers on the balance sheet as well

thank you

the next question comes from the line of the beat junja of jp morgan

hey we're back

sorry multiple calls a quick question um just a question that I have for you is what and you may have already mentioned this but multiple calls so pardon me what reserves are you putting aside against credit card loans in your reserve bill so

what your question is what are we reserving or taking into consideration with respect to cards themselves yeah okay

mark why don't you enter the reserve rate with 8.83 percent at the end of q1 okay

thanks that's uh I presuming you've already given some detail which I have missed thanks so I'll follow up with IR about whether you've given any metrics on unemployment where you're expecting that to pan out next year where do you expect to settle out did you already give that

yeah we didn't we didn't talk about that you know in the modeling process as of the end of march we talked about the fact that you know this will continue to evolve and change as estimates change but in the modeling process we tried to take in we considered a number of different forecasts ultimately in the high single digits between eight and ten percent and that had been sustained at a certain level for a period of time and ultimately dissipating as we get into 2021

and I noticed you took a little bit of reserve for the merchant processing library is that is that your best estimate as to what you have to take or do you think that if the stent needs for a while there's more likely than the hundred million it took

yeah at this particular time we feel like that's a pretty good estimate of what we think the exposure is and again it's a liability for what the exposure might be related to that future delivery you

know in

this particular area you know that exposure tends to dissipate again for a whole variety different reasons including airlines making refunds them using their government stimulus programs in order to be able to do that customers choosing not to fly the flights or being given future credit by the airline so that will dissipate it quite a bit and then the other thing guys have to kind of keep in mind is that for these airlines to relaunch they need a merchant acquirer and so you know from a prioritization perspective they want to make sure that their merchant acquirer is on board and ready to go and so you know they tend to prioritize the resolution of those future delivery exposures to make sure that that merchant acquirer is held so all right

thank you

your next question comes from the line of john pichari of evercore isi

hey john hi uh hi this is ralph patio and john um i just want to revisit the whole discussion around reserve level and cumulative loss um so per your 2019 d5 results um you know so you had 16.3 billion dollars of losses uh per the feds projections over nine quarters and i believe it model uh your reserve right now stands around 6.6 billion dollars i just want to get a sense for what portion of that cumulative losses are you assuming uh right now when you're sizing up the current reserve level uh and or you know potential incremental reserve build in the coming quarters

yeah so i think you're trying to get at uh you know when we think about dfast and how our reserve would kind of compare to dfast results and again that 15 billion dollars is pretty close to that estimate both by the fed as well as ourselves and you know that is really you know what sort of losses you would experience over a nine quarter period with pretty severe unemployment taking place and being sustained over a substantial amount of that time our allowance today represents just by a 40 percent of that and we certainly have the uh you know the capacity both from a capital perspective as well as from a earnings perspective to be able to manage any losses that might be above that chat reserve level um you know we don't necessarily as we think about it necessarily come up with a percentage of losses relative to dfast but i think the coverage is pretty strong at this point in time and again it will progress as the quarters go on

got it um all right and then you said it's a 5.7 billion dollars of loans that you've modified is that mainly consumer loans or have you begun restructuring commercial loans as well

that would be both portfolios we've we've we've helped a number of customers what i would say is those are programs or modifications that john kind of in the past on a forward-looking view on the consumer portfolio over the last few weeks we have granted forbearance and extensions of about 181,000 customers which is about 4.9 percent of on and off balance sheet exposure in addition we've helped 3,400 business customers or about 2 billion dollars of total of exposure as well so those would not be included in those restructured numbers that you're looking at

got it all right and then just one last question so i'm looking at your lcr disclosures as of year end you know where it seems like you assumed around 18.6 billion dollars of line drawdowns that compares to the 22 billion dollars that you cited today so just two part questions so you know what sort of stress scenario is based into that lcr disclosure over a 20-day and how does that compare with the environment today and then secondly was there some impact to the line drawdowns you saw in march due to window dressing by companies or do you expect another day of drawdowns in coming weeks

sorry the the drawdowns were high in the third and fourth week of march and started to level out in early april so i think we saw the already occurring you broke up a little bit on your first question what was the question around december 31st

yeah so basically i was just looking at your lcr disclosures where it seems like you were assuming you know 18 to 19 billion dollars of drawdowns over a 30-day stress period and i'm just wondering like what sort of stress scenario were you assuming in your lcr disclosures and how does that compare with the scenario that you're seeing today

yeah so there's actually two different tests there's lcr and there's kind of a liquidity stress test and with respect to liquidity stress test the coverage ratios which aren't disclosed are much higher than the lcr itself so you know under a stress scenario you know we have the we have the liquidity and the ability to be able to manage that very effectively you know in terms of liquidity today right now we have about about 40 billion dollars of cash that we're maintaining that's kind of over targeting and we have substantial kind of off balance sheet liquidity whether that is through a variety of different lines and and and sources and then within the investment portfolio there's probably realistically about another 20 billion dollars that we could draw down if we had to you know so from a liquidity perspective even under pretty significant stress we feel pretty comfortable

okay thank you

thank you

the next question from the center line of john mcdonnell of autonomous

hello this is david smith filling in for john the figures you mentioned that you're modeling for payments merchant down 50 to 60 percent for the next few quarters big drops in cps and rps also were those stress cases are those your base case for now that you're modeling well

i think it's probably base case for purposes of the second quarter so the near term and then you know when i talk about stress test it's really trying to understand if the covet situation continues on in the third and fourth quarter what that would look like so i think near term that's kind of what we would expect until businesses start to recover and consumers kind of get back to to full employment so to speak

thank you

operator are we do we have any other callers online

there are no further questioners in queue

okay great thank you for listening to our call today if you have any other questions please contact investor relations thank you

this concludes today's conference call you may now disconnect