Q1 2020 Earnings Call

So there will be a formal question and answer session.

You would like to ask a question. Please press star one on your Touchtone phone and press the pound keeps a withdraw this call will be recorded and available for replay beginning to date at approximately 12 o'clock PM Eastern time through Wednesday April 22nd at 12 o'clock Midnight Eastern time I would not.

The conference call over to Jim Thompson Director of Investor Relations for U.S. Bancorp.

Jen Thompson: Thank you, Janika, and good morning, everyone. With me today, as usual, are Andy Cecere, our Chairman, President, and CEO, and Terry Dolan, our Chief Financial Officer. Also joining us on the call today are our Chief Risk Officer, Jodi 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.

Thank you Jamaica and good morning, everyone with me today as usual or Andy subsidiary, our Chairman, President and CEO and Terry Dolan, Our Chief Financial Officer.

Operator: Also joining us on the call today are our Chief Risk Officer, Jodi 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.

Also joining us on the call today, our chief risk Officer, Jody, Richard and our Chief Credit Officer more critical.

During their prepared remarks, Andean Terry will be referencing a slide presentation.

A copy of the slide presentation as well as our earnings release and supplemental analysts schedules are available on our website at U.S. Bank Dot com.

I would like to remind you that any forward looking statements made during today's call are subject to risks and uncertainties.

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.

Factors that could materially change our current forward looking assumptions are described on page two of todays presentation in our press release and in our form 10-K, and subsequent reports on file with the FCC I'll now turn the call over to Andy.

Andy Cecere: Thanks, Jen, and good morning, everyone, and thank you for joining our call. After Terry and I finish our prepared remarks, Terry, Jodi, 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 $0.72. Our performance this quarter was adversely impacted by the COVID-19 in the US and global economies. The stay-at-home orders across the country, while necessary and temporary, are significantly restricting economic activity. Consumers and businesses are dealing with the 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.

Thanks, John and good morning, everyone and thank you for joining our call. After Curian I finish our prepared remarks, Terry Jody Mark and I will take any questions you though.

Operator: After Terry and I finish our prepared remarks, Terry, Jodi, 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 $0.72. Our performance this quarter was adversely impacted by the COVID-19 in the US and global economies. The stay-at-home orders across the country, while necessary and temporary, are significantly restricting economic activity. Consumers and businesses are dealing with the 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 loan growth and related deposit growth, particularly in the last few weeks of the quarter, as we supported our customers' liquidity needs.

I'll begin on slide three in the first quarter, we reported earnings per share a 72 cents. Our performance this quarter was adversely impacted.

By the corporate 19, and you actually global economies, the state orders across the country well necessary in temporary.

Our significantly restricting economic activity.

No.

Consumers and businesses are dealing with the fall, which is affecting sentiment and business activity and resulting in financial distress for many.

These dynamics are affecting the banking industry, a number of wage and our first quarter results were reflective of these developing economic conditions.

We saw strong loan growth and related deposit growth, particularly in the last few weeks of the quarter, as we supported our customers' liquidity needs. During this time frame, 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.

We saw strong loan growth and related deposit growth, particularly in the last few weeks of the quarter as we supported our customers liquidity needs.

Operator: During this time frame, 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.

During this timeframe the company funded approximately $22 billion at launch 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 ACA Almac activity in March.

Demonstrating the importance of having a well diversified business mix mortgage revenue growth was strong this quarter. That's a decline in interest rate swap many more consumers to refinance or mortgage at more attractive church.

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 the 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 four provides key performance metrics. We delivered a 12.6 return on tangible common equity in Q1, impacted by lower earnings due to the current economic environment. Slide five 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.

Nonperforming assets started to turn higher in the first quarter, reflecting the increased economic stress.

Operator: We increased our allowance for loan losses in response to the 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 four provides key performance metrics. We delivered a 12.6 return on tangible common equity in Q1, impacted by lower earnings due to the current economic environment. Slide five 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 increased our allowance for loan losses in response to the current economic conditions and as you can see in a lower right quadrant of the slide we remain well capitalized.

Book value per share grew 5% compared with a year ago.

Slide four prefer 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 five shows are continually improving digital I'll take tranche.

The significant investments we've made in our digital capabilities are last several years are helping our customers continue to do banking actual through social distant team 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 worked 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.

Because of very 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.

Operator: 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 worked 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 will 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 six, I'll start with a balance sheet review followed by a discussion of first quarter earnings trends.

We've added the ability to accept treasury trucks 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 worked quickly to design and deploy a new digital forbearance tool within a week of this feature being much more than 50% of all customers request, we crushing forbearance, we're doing so in a digital way.

Digital is a core part of our strategy and will 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?

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 me in financial goals through the social discovery period and beyond.

Now I'll turn the Colbert color to Jerry will provide more color on the quarter Jerry Thanks, Andy.

Terry Dolan: Thanks, Andy. If you turn to slide six, I'll start with a balance sheet review followed by a discussion of first quarter earnings trends. Average loans grew 0.9% on a linked quarter basis and increased 4.0% 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 7.5% linked quarter, and 10.6% year over year. Turning to slide seven, average deposits increased 1.8% on a linked quarter basis and grew 8.2% year over year.

Let me turn to slide six I'll start with a balance sheet review, followed by a discussion or first quarter earnings trends.

Operator: Average loans grew 0.9% on a linked quarter basis and increased 4.0% 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 7.5% linked quarter, and 10.6% year over year. Turning to slide seven, average deposits increased 1.8% on a linked quarter basis and grew 8.2% year over year. Average savings deposits increased 14.1% year over year, driven by growth in wealth management and investment services, corporate and commercial banking, and consumer and business banking. On a period-end basis, deposits increased $32.9 billion, or 9.1% linked quarter, and 14.1% year over year.

Average loans grew 0.9% on a linked quarter basis and increased 4.0% year over year.

Linked quarter growth it was primarily driven by growth in commercial loans.

And mortgage loans business customers drew down lines to support business activity and towards the end of the quarter to support future liquidity requirements.

Strong residential mortgage loan growth reflected the low interest rate environment.

On a period and basis loans increased $22 billion or 7.5% linked quarter and 10.6% year over year.

Turning to slide seven average deposits increased 1.8% on a linked quarter basis grew 8.2% year over year.

Average savings deposits increased 14.1% year over year, driven by growth in wealth management and investment services, corporate and commercial banking, and consumer and business banking. On a period-end basis, deposits increased $32.9 billion, or 9.1% linked quarter, and 14.1% year over year. Turning to slide eight, while the net charge-off ratio was relatively stable on both a linked quarter and year-over-year basis, non-performing assets increased 14.1% 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-off and a reserve build of $600 million.

Average savings deposits increased 14.1% 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 were 9.1% linked quarter and 14.1% year over year [laughter].

Operator: Turning to slide eight, while the net charge-off ratio was relatively stable on both a linked quarter and year-over-year basis, non-performing assets increased 14.1% 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-off and a reserve build 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 US and global economies and our expectation that credit losses and non-performing assets will increase from current levels.

Turning to slide eight while the net charge off ratio was relatively stable on both the linked quarter and year over year basis, nonperforming assets increased 14.1% sequentially, reflecting recent economic stress.

We have taken a proactive approach to evaluating risk ratings across the entire commercial loan portfolio be considered the risk rating changes and 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 build 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 US 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 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 31 March. Slide nine 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 US Bank, 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.

The increase in the reserve was related to changes in risk ratings on deterioration in economic conditions, driven by the impact of cobot 19 on the U.S. and global economies and our expectation that credit losses, and nonperforming assets will increase from current levels.

Operator: The increase in the allowance for credit losses has 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 31 March. Slide nine 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 US Bank, 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.

The increase in the allowance for credit losses, as a consider our best estimate or the impact of significantly slower economic growth and higher unemployment, partially offset by the benefits of government stimulus programs as of March 31st.

Slide nine highlights our key underwriting metrics exposures to certain at risk segments, given the current environment.

We have a strong relationship based credit culture at U.S. bank 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.

Operator: However, while actual credit quality results will depend on the duration of the COVID-19 situation, the impact of shelter-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 Q1 2020, we reported $0.72 per share. Turning to Slide 11, net interest income on a fully taxable equivalent basis declined by 1.2% 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 Q4.

However, while actual credit quality results will depend on the duration of the COVID-19 situation, the impact of shelter-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 Q1 2020, we reported $0.72 per share. Turning to Slide 11, net interest income on a fully taxable equivalent basis declined by 1.2% 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 Q4.

However, well actual credit quality results will depend on the duration of the cobot 19th situation the impact of shelter in shape. So shelter in place orders on consumer and business activity as well as the extent of the benefit of government stimulus programs. It is likely a changes in risk ratings and net charge offs.

Continue.

To assess the adequacy of the allowance for credit losses of credit conditions change.

Slide 10 provides an earnings summary.

In the first quarter 2020, we reported 72 cents per share.

Turning to slide 11, net interest income on a fully.

Taxable equivalent basis declined by 1.2% to year over year inline with our expectations as the impact of declining rates and a flatter yield curve was partially offset by deposit funding mix loan growth and one additional day.

The net interest margin declined by one basis point versus fourth quarter.

Operator: 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 mix. We expect to see more pressure on our net interest margin in the second quarter, primarily due to the timing and extent of changes in interest rates laid in the first quarter, the significant buildup in liquidity to support the significant loan growth or loan demand being experienced, changes in loan mix, 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.

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 mix. We expect to see more pressure on our net interest margin in the second quarter, primarily due to the timing and extent of changes in interest rates laid in the first quarter, the significant buildup in liquidity to support the significant loan growth or loan demand being experienced, changes in loan mix, 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.

The lower margin reflected lower net in a lower interest rates and a flatter yield curve as well as approximately five basis points, a drag due to intentionally higher cash balances being maintained where liquidity to accommodate customer demand. These factors were mostly offset by beneficial chefs and loan and deposit mix.

We expect to see more pressure on our net interest margin in the second quarter, primarily due to the time in an extensive changes in interest rates late in the first quarter, the significant build up and liquidity to support the significant loan growth or loan demand being experience changes in loan mix 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.

Operator: 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 payment services business lines, including exposures to impacted industries. In the first quarter, payments services revenue declined 6.9% 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.

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 payment services business lines, including exposures to impacted industries. In the first quarter, payments services revenue declined 6.9% 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.

Compared with the first quarter, a year ago higher mortgage production and stronger gain on sale margins, 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, you couldn't exposures to impacted industries.

In the first quarter payment services revenue declined 6.9% 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 decline 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 lots in the quarter.

Operator: 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% and 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 of 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.

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% and 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 of 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.

Within our corporate payments business commercial sales volumes declined between 30 and 40% in late March due to the worldwide impact to the economic slowdown on business spend activity.

Government sales volumes decline between 15% to 20% in late March the government business accounts for about 20% of the total corporate payments revenue.

Commercial products revenue benefit from higher corporate bond fees and trading revenue, partially offset by a credit valuation losses related to customer during the customer derivative portfolio.

Valuation losses reflect hedging effectiveness given the significant volatility in the markets during the first quarter and changes to credit risk rating from 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 inline with the trend in the refinancing activity.

Operator: 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 Q1 levels due to recent trends in the equity markets. Turning to slide 13, non-interest expense increased 7.4% 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 incurred 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.

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 Q1 levels due to recent trends in the equity markets. Turning to slide 13, non-interest expense increased 7.4% 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 incurred 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.

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 and the equity markets.

Turning to slide 13, noninterest expense increased 7.4% 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 incurred.

Good incremental covert 19 related costs of approximately $100 million principally related to increasing liabilities for potential future delivery claims related to the airline industry. Another merchants, but also including expenses related to premium pay for frontline workers and expenses tied to providing a safe working in.

Chairman for our employees.

Slide 14 highlights our capital position at March 30, Onest, 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 calculated in accordance with transitional regularly.

Operator: At 31 March, our Common Equity Tier 1 capital ratio, reflecting the full implementation of the Current Expected Credit Loss accounting methodology, was 8.6%. Our Common Equity Tier 1 capital ratio, calculated in accordance with transitional regulatory capital requirements related to the Current Expected Credit Loss methodology implementation at 31 March, 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 the 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 has proven to be a differentiating factor over time, and perhaps especially during adverse situations.

At 31 March, our Common Equity Tier 1 capital ratio, reflecting the full implementation of the Current Expected Credit Loss accounting methodology, was 8.6%. Our Common Equity Tier 1 capital ratio, calculated in accordance with transitional regulatory capital requirements related to the Current Expected Credit Loss methodology implementation at 31 March, was 9.0%. I'll hand it back to Andy for closing remarks.

Sorry capital requirements related to the current expected credit loss methodology implementation at March 31st was 9.0%.

I'll hand, it back to Andy for closing remarks.

Andy Cecere: Thanks, Terry. The banking industry is operating in a challenging environment, and we are not immune from the economic stress brought on by the 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 has proven to be a differentiating factor over time, and perhaps especially during adverse situations.

Thanks, Terry the banking industry is operating in a challenging environment and we're not immune from the economic stress brought on by coated 19 pandemic. However, I'm confident that we'll manage through this difficult period.

Just as we manage through difficult periods in the past.

Our balance sheet is strong our businesses, our diverse and our culture has proven to be a differentiating factor overtime.

And perhaps especially during addressed situations.

Operator: 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 disciplined 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 when 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.

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 disciplined 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 when 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.

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.

And economic downturn will be higher credit cost for the entire industry. So we'd have a strong track record and it's at times like this when portfolio diversity and discipline to 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 whether even a severe downturn.

We recently suspended our share buyback program to give us more flexibility.

Operator: 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 will 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 out facilities to support businesses such as the Small Business Administration Paycheck Protection Program and the Main Street Lending Program. We 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 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 will 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 out facilities to support businesses such as the Small Business Administration Paycheck Protection Program and the Main Street Lending Program.

We are continually evaluate evaluating potential scenarios and we believe that even kits and economic downturn persisted through most of the year, we would be able to maintain our dividend on its current level.

I believe will emerge from this stronger on the other side, but in the meantime, we're intently focused on doing what we can for our customers communities and employees as they deal with this you 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 rail facilities to support businesses such as the small business administration Paycheck protection program and the main street lighting program.

We 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% of our employees to be able to work from the safety of their home.

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.

Operator: 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% 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% 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.

We also raised mobile check deposit limits for many customers using our mobile app.

Recognizing the precarious situation many of our communities are and we announced a number of initiatives, including a $30 million, new and redirected investments $26 million of what's your two local nonprofits across the country to continue to support individuals and families with financial education Affordable housing and work assistance we take.

In a number of steps to support and protect our in place within a short short period of time, we have transition 76% 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% 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.

We announced a premium pay program to provide office critical frontline employees, a 20% hourly wage increase during this shelter in place conditions.

We also expanded our flexible lead policies and we're keeping our employee safe with personal protection equipment at our customer facing sites.

Operator: 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 star then the number one on your 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 credit. We're wondering, as we think about the company-run DFAST results, so 4.5% cumulative losses over nine quarters, could you talk about how you think this recession would look like relative to that stress?

I wanted to end this call by saying, Thank you to our employees those working from Paul and those on the front lines.

Probably the way to come together and the work you're doing to partner with and support all of our constituents in this very difficult time.

Well now open up the call for QNX.

Operator: At this time, if you would like to ask a question, simply press star then the number one on your 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.

At this time, if you like to ask a question simply press Star then the number one on your telephone keypad again that its star one to ask a question.

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

Erika Najarian: Good morning.

Good morning America.

Andy Cecere: Morning, Erica.

Erika Najarian: Thanks for your comments on credit. We're wondering, as we think about the company-run DFAST results, so 4.5% cumulative losses over nine quarters, could you talk about how you think this recession would look like relative to that stress? What's different for the better, for the positive, and what's worse for the negative? Clearly, the unemployment rate was capped at 10% in the DFAST result. Also, with the reserve at 2.07, you've told us before that CECL is very pro-cyclical. From here, I'm wondering how much more reserve build we could potentially see.

Yes, Thanks for your comments on credit and what we're wondering you know as we think about the company Ryan the fast results, so far and a half percent cumulative losses I'm over nine quarters like you've talked about how you think via recession would look like.

Relative to that stress.

Operator: What's different for the better, for the positive, and what's worse for the negative? Clearly, the unemployment rate was capped at 10% in the DFAST result. Also, with the reserve at 2.07, you've told us before that CECL is very pro-cyclical. 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 DFAST questions first. When we end up thinking about the allowance, maybe at current state relative to the losses that we're experiencing, we think that the coverage ratio associated with that is relatively strong. 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.

What difference.

For the better for the positive and what's worse or is it for the negative clearly the unemployment rate is.

With cap at 10% in the de fast result, and also with the reserve a 2.07.

Told us before that diesel is very pro cyclical and from here I'm wondering how much more reserve build we could potentially see.

Terry Dolan: Yeah, Erica, thank you very much. So let me try to address maybe the DFAST questions first. When we end up thinking about the allowance, maybe at current state relative to the losses that we're experiencing, we think that the coverage ratio associated with that is relatively strong. 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 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 and where it would need to progress before it becomes problematic.

Yes, Erica Ah. Thank you very much so let me try to address maybe the D. Fas questions first.

And we will end up thinking about you know the allowance maybe.

At the current state relative to the losses over experience that we think that full coverage ratio associated with that is.

Relatively strong you know that is over.

Have 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 becomes.

Operator: So 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 and where it would need to progress before it becomes problematic. So when we think about the coverage ratio, 2.7%, when we think about the reserve from here on out, I think that things will continue to progress, and evolve, and change. How this recession, I think, is different. Clearly, the rapid development of the situation in terms of the healthcare crisis, the impacts, obviously, to people from an employment perspective and having to either work from home or be unemployed peaks pretty quickly.

Problematic so.

So when we think about the coverage ratio, 2.7%, when we think about the reserve from here on out, I think that things will continue to progress, and evolve, and change. How this recession, I think, is different. Clearly, the rapid development of the situation in terms of the healthcare crisis, the impacts, obviously, to people from an employment perspective and having to either work from home or be unemployed peaks pretty quickly. As we think about it, and certainly as we were thinking about the reserving process, we took into consideration or 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.

We are we think about you know the coverage ratio is 2.7%.

When we think about the reserve from here on out I think that things will continue to progress.

And and evolved and changed how this recession I think is different time clearly the the rapid development of the situation in terms of the healthcare crisis impacts obviously, two people from unemployment perspective, and having to either work from home are being unemployed.

Peaks pretty quickly as we think about it.

Operator: As we think about it, and certainly as we were thinking about the reserving process, we took into consideration or 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. 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.

And then certainly as we were thinking about the reserving process.

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.

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 we do expect that the credit quality statistics related to non-performing, delinquencies, and things like that will continue to progress upward, and we'll have to watch and manage it.

It is 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 than.

That's one of the things that will continue to play out overtime, but we do expect that the the you know the credit quality statistics related to nonperforming and delinquencies and things like that we'll continue to progress upward and we'll have to watch it management.

Operator: But we do expect that the credit quality statistics related to non-performing, delinquencies, and things like that will continue to progress upward, 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 7% year over year, but clearly a tale of two different points in the quarter, how should we expect this to progress? And should we expect down double digits for at least the second quarter? And what are increased liabilities driven by future delivery exposure that were related to merchant and airline processing? Yeah.

Erika Najarian: Okay, got it. The second question is, I know this is another impossible question, but given what happened to payments-related revenues, down 7% year over year, but clearly a tale of two different points in the quarter, how should we expect this to progress? And should we expect down double digits for at least the second quarter? And what are increased liabilities driven by future delivery exposure that were related to merchant and airline processing?

Okay got it. The second question is I know this isn't her impossible question, but given what happened.

Payments related revenues.

Down 7% year over year, but clearly a tale of two different you know points in the quarter of what's how should we expect this progress.

It is.

Should we expect down double digits currently the second quarter and what what our increased liabilities driven by future delivery exposure.

We are related to merchant in airline processing.

Terry Dolan: 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 Q2, Q3, and possibly through the end of Q4, that consumer spend and business spend is going to be at relatively low levels.

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.

Operator: 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 Q2, Q3, and possibly through the end of Q4, that consumer spend and business spend is going to be at relatively low levels.

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, let me kind of break it down but I do believe at a high level would we think about and how we're kind of stress testing.

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 gonna be at relatively low level. So as we're modeling and we're thinking that for example merchant is going to continue to be down that 50% to 60%.

Operator: So as we're modeling and we're thinking that, for example, merchant is going to continue to be down at 50% to 60% on a year-over-year basis, that CPS is going to continue to be down in that 25% to 30% sort of range, and that RPS is probably going to continue to migrate downward. It's kind of in that 30% to 40% range today, but I do think that it starts to migrate closer to that 50% as well. And 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 mix of the businesses. So if you think about the merchant acquiring business, we have about 28% of the revenue from that business is directly tied to travel and hospitality, and another 27% is directly tied to retail.

So as we're modeling and we're thinking that, for example, merchant is going to continue to be down at 50% to 60% on a year-over-year basis, that CPS is going to continue to be down in that 25% to 30% sort of range, and that RPS is probably going to continue to migrate downward. It's kind of in that 30% to 40% range today, but I do think that it starts to migrate closer to that 50% as well. And 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 mix of the businesses.

On a year over year basis that Cps is going to continue to be down.

In that.

30, 30, 25% to 30% sort of range.

And that Rps is probably going to continue to migrate down word it's kind of that 30% to 40% range today, but I do think that it starts to migrate closer to that 50% 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 as a function of the you know them.

Mix of the businesses. So if you think about the merchant acquiring business.

So if you think about the merchant acquiring business, we have about 28% of the revenue from that business is directly tied to travel and hospitality, and another 27% is directly tied to retail. Both of those businesses are pretty significantly impacted. I mean, airlines, as an example, being 85% to 95% down depending upon the week. So as we think about Q2, Q3, and even into Q4, we're stressing it down quite a bit.

We have a about 28% of the revenue from that business is directly tied to travel and hospitality and another 27% is directly tied to retail and both of those businesses are pretty significantly impacted I mean airlines as an example, being.

Operator: Both of those businesses are pretty significantly impacted. I mean, airlines, as an example, being 85% to 95% down depending upon the week. So as we think about Q2, Q3, and even into Q4, we're stressing it down quite a bit. I just have a follow-up question on the future delivery. Oh, yeah, future delivery. I'm sorry. Yeah, future delivery. So future delivery, if you think about the airline industry, we process transactions for the airline industry as well as some other merchants where customers are paying upfront for their ticket 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 will provide that future service to that customer.

85% to 95% down depending upon the depended upon the week so it's.

As we think about a second third and even into the fourth quarter worth stressing that down quite a bit.

Erika Najarian: I just have a follow-up question on the future delivery.

Question on.

Oh, Yes, you care delivery I'm, sorry, yeah future delivery, so future delivery.

Terry Dolan: Oh, yeah, future delivery. I'm sorry. Yeah, future delivery. So future delivery, if you think about the airline industry, we process transactions for the airline industry as well as some other merchants where customers are paying upfront for their ticket 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 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.

If you think about the airline industry, we process transactions for the airline industry as well as some other merchants where customers are paying upfront for their ticket for a future travel or flake and the merchant kind of stands in between the merger.

An 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.

Operator: 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 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 to Terry's comments on the merchant card and corporate payments spend.

Now, what ends up happening over time is, and what has been happening, is that exposure 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.

This starts to dissipate in the dissipates when the airline either refunds the customer or the customer decides not to fly the flight.

For the airline provides future credit to that particular customer and so.

That that future delivery risks to us continues to dissipate over time, but we wanted to make sure and where required from an accounting standpoint to recognize the potential risk associated with that future delivery exposure and we'll continue to manage it.

Andy Cecere: And Erica, 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 1/6 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, corporate, and retail was a spend, particularly in merchant, down in that 50+% range. Now, no one knows exactly when that's going to come back.

And Eric I'm, just trying to add none of it.

That is going to add a little bit to Jerry's comments on on the merchant card and corporate payments spend. So if you think about the first quarter.

Operator: 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 1/6 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, corporate, and retail was a spend, particularly in merchant, down in that 50+% range. Now, no one knows exactly when that's going to come back. And what Terry, as he indicated, is we're stress testing it, understanding that that's the impact. We wanted to provide detail. But when it comes back is uncertain for sure, but that's the impact and the exposure we would have. Yep. And just to clarify, that's spend, not revenues. Well, it's spend and revenues pretty closely tied to the same sort of trends.

Three months, we really saw the stress in the last half of the last month, so we sort of how to once fixed impact on the quarter on those payments businesses and what Terry is telling you is that what what we saw in those last two months of March.

In merchant in 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 come back and let Terry yet as he indicated is where stress testing it understanding the vast the impact we wanted friday's in detail, but when it comes back is uncertain.

And what Terry, as he indicated, is we're stress testing it, understanding that that's the impact. We wanted to provide detail. But when it comes back is uncertain for sure, but that's the impact and the exposure we would have.

For sure, but Thats best the impact on the exposure we would have yes.

Terry Dolan: Yep.

Erika Najarian: And just to clarify, that's spend, not revenues.

And just to clarify that spend not revenue.

Terry Dolan: Well, it's spend and revenues pretty closely tied to the same sort of trends. And again, as Andy said, it really is a function of when do businesses relaunch, when do 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 upon what I talked about.

Well it spend then revenues pretty closely tied to the same sort of trends and again as Andy said it really is a function of when does the rate when does.

Operator: And again, as Andy said, it really is a function of when do businesses relaunch, when do 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 upon what I talked about. Got it. Thank you. Thanks, Erica. Yeah, next question comes from the line of Bill Carcache 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 here. If we think about CECL in theory, it's supposed to capture lifetime losses. And so shouldn't that upward trajectory in delinquencies and losses already be contemplated in your allowance at 331?

When do business has re launch with the people get back to work and what does the duration of the situation that is really hard to to get your arms around but where stress test and that based on what I talked about.

Erika Najarian: Got it. Thank you.

Got it thank you.

Terry Dolan: Thanks, Erica.

Thanks, Eric.

Operator: Yeah, next question comes from the line of Bill Carcache of Nomura.

Your next question comes from the line of build cars cache of Nomura.

Bill Carcache: 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 here. If we think about CECL in theory, it's supposed to capture lifetime losses. And so shouldn't that upward trajectory in 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 from here versus what's already baked into that allowance.

Thank you good morning, first Terry I wanted to ask you a question following up on your response to Eric Good question about expecting certain credit metrics like delinquencies to head higher from here.

If we think about Cecil in theory, it's supposed to capture lifetime losses, and so shouldn't that upward trajectory in delinquencies and losses already be contemplated in beer allowance at 331.

Operator: And so just, I guess, wondering if you could help us understand what it will take to drive incremental reserve building from here versus what's already baked into that allowance. Yeah. So great question, Bill. And so 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 CECL process would take that into consideration. But as you know, nobody has perfect insights. In fact, the expectations around unemployment, GDP, and when people get back to work and all sorts of things are constantly changing. So 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 conditions change.

So just I guess I'm wondering if you could help us understand what it will take to drive incremental reserve building versus.

I'm here versus what's already baked into that allowance.

Terry Dolan: Yeah. So great question, Bill. And so 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 CECL process would take that into consideration. But as you know, nobody has perfect insights. In fact, the expectations around unemployment, GDP, and when people get back to work and all sorts of things are constantly changing. So 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 conditions change. So if you end up when we go through that process, we end up looking at things like Moody's Analytics, Morgan Stanley, Goldman Sachs, just a whole variety of different.

Yeah, So great question Bill and 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, the the expectations around unemployment and GDP and when people get back to work and all sorts of things are constantly changing so.

At any particular point in time, we have to make our best estimate of what that forecast looks like knowing that is likely to continue to progress based upon how conditions change so.

Operator: So if you end up when we go through that process, we end up looking at things like Moody's Analytics, Morgan Stanley, Goldman Sachs, just a whole variety of different. And even over the course of the last seven days or so, 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, the models are never perfect. 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 what the benefits are that are going to come into play, etc.

You know if you end up.

You know when we go through that process, we end up looking at things like Moody's analytics and Morgan Stanley Goldman Sachs. So 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 what the potential impacts might be has been pretty soon.

And even over the course of the last seven days or so, 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, the models are never perfect. There's a lot of things that we have to take into consideration from a judgmental standpoint.

So we're going to have to take all those things into consideration as part of that process and then of course.

The models are never perfect.

No theres 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 what the benefits are that are going to come into play et cetera. So there's just a lot of different.

Think about the impact of the stimulus package. It's really hard at this particular point in time to know exactly what the benefits are that are going to come into play, etc. So there's just a lot of different factors that we have to try to consider. So we believe that it's going to continue to evolve really over the next several quarters, and that's going to impact the reserve build over time.

Operator: So there's just a lot of different factors that we have to try to consider. So we believe that it's going to continue to 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 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 and real GDP would be greater than what was thought at March 31st. Is that information that it was still, I guess, it existed at the balance sheet date, but you didn't find out about it until after?

Factors that are that we have to try to consider so we believe that it's going to continually evolve really over the next several quarters and that's going to impact the reserve build overtime.

Bill Carcache: That's super helpful, Terry. But I guess as we think about where you guys were in terms of 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 and real GDP would be greater than what was thought at March 31st. Is that information that it was still, I guess, it existed at the balance sheet date, but you didn't find out about it until after?

Thats Super helpful. Terry, but I guess is we think about where you guys were in terms of like the economic forecasts that you were using through let's say at 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 Scott at March 31st is that information that it was still I guess it existed at the balance sheet deep, but you didn't find out about it until after would that be something that you contemplate in year 331 allowances at 331, a launch literally just based on information.

Operator: 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 there? Just trying to get a little bit of, I guess, sense of how that works? Yeah. Well, 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 we really have to do that right around the end of the quarter. So as things change, we'll have to take that into consideration. The other thing in terms of the whole reserving process, just maybe to kind of put some context around it.

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 there? Just trying to get a little bit of, I guess, sense of how that works?

Through 331 or is there room for judgments or just trying to get a little bit of.

Just a sense of how how that works yeah, well you know obviously, we do try to take into consideration, what we know and.

Terry Dolan: Yeah. Well, 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 we really have to do that right around the end of the quarter. So as things change, we'll have to take that into consideration. The other thing in terms of the whole reserving process, 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.

And.

And applied judgment with respect to what we think the trends are going to be but eventually you have to kind of snap the chalk light and say this is what we're going to base our assessment.

We really have to do that right around the ended the quarter. So as things change, we'll have to take that into consideration.

No the other thing.

In terms as a whole reserving process.

Maybe the kind of puts some context around it. So there's obviously a lot of judgment that kind of comes into play you have to kind of come up with what's your economic forecasters, but.

Operator: 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 as we think about it and the reserve at the end of Q1, when we end up looking at the coverage ratios that we have in terms of charge-offs and in terms of the overall loan book, etc., we feel like those coverage ratios are at least reasonable at this particular point in time. Also kind of keep in mind that on day one, we had to make certain judgments and assessments with respect to the amount of the CECL judgment at that particular point in time.

But as we think about it and the reserve at the end of Q1, when we end up looking at the coverage ratios that we have in terms of charge-offs and in terms of the overall loan book, etc., we feel like those coverage ratios are at least reasonable at this particular point in time. Also kind of keep in mind that on day one, we had to make certain judgments and assessments with respect to the amount of the CECL judgment at that particular point in time. And to kind of give you some insight, when we made that assessment of the economic forecast, a little over 50% of it we assumed would either be a slower growth environment, a moderate recession, or a severe recession.

We think about it.

And the reserve at the other the first quarter.

We ended up looking at the coverage ratios that we have in terms of charge offs in terms of the overall.

The overall.

Loan book et cetera, we feel like those coverage ratios or at least reasonable at this particular point in time.

So it kind of keep in mind that add on day, one we had to make certain judgments and assessments with respect to the amount of the Cecil judgment with after for a point in time.

Operator: And to kind of give you some insight, when we made that assessment of the economic forecast, a little over 50% of it we assumed would either be a slower growth environment, a moderate recession, or a severe recession. So there were lots of different views with respect to where the economy was going to go. So 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 if you think about our portfolios 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.

As a kind of give you some insight when we when we made that assessment of the economic forecast.

A little over 50% of that we are so we would either be a slower growth environment, a moderate recession or a severe recession. So.

So there were lots of different views with respect to where the economy was going to go. So 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 if you think about our portfolios 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.

There were lots of different views with respect to where the economy was going to go. So 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 sub.

And if you think about our portfolios.

We went 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 at a good coverage in terms of loan to value ratios on the secured side equation that Eric our commercial book of business tends to be a high invest.

Operator: And our commercial book of business tends to be high investment grade, where we stress cash flows. It's based upon cash flow and the ability to be able to withstand. So we start from good credit underwriting, a good risk profile, strong coverage ratios, and all those things are taken into consideration in terms of our estimate of 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 USB is going to emerge stronger on 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 guys really used that as an opportunity to win relationships with new partners, in part because you were in a stronger position versus many other banks.

And our commercial book of business tends to be high investment grade, where we stress cash flows. It's based upon cash flow and the ability to be able to withstand. So we start from good credit underwriting, a good risk profile, strong coverage ratios, and all those things are taken into consideration in terms of our estimate of the allowance.

It's been grade, where we stress cash flows is based on cash for overland is the ability to be able to withstand so we start from good credit underwriting a good risk profile.

Strong.

Coverage ratios and all those things are taken into consideration in terms of our estimate of the allowance.

Bill Carcache: That's very helpful. If I could squeeze one more in for Andy. Andy, you mentioned in the press release you commented on how USB is going to emerge stronger on 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 guys really used that as an opportunity to win relationships with new partners, in part because you were in a stronger 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?

That's very helpful. If I could squeeze one more in for Andy.

It's Andy you mentioned in the press release.

You commented on how.

You Usbs going emerged stronger in the other side of the pandemic and proving a reliable partner to your customers in the in the I guess period.

When we think about the the great recession.

There was you guys really use that as an opportunity to win relationships with new partners in part because you were in a stronger position versus many other banks as we think about where you guys stand today do you see opportunities for us be to differentiate itself in this environment.

Operator: 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. Importantly, based on what I know today, even if the economic downturn persisted through most of the year, we still believe we can maintain the dividend, which is also an important factor for shareholders. Got it.

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.

Andy Cecere: 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. Importantly, based on what I know today, even if the economic downturn persisted through most of the year, we still believe we can maintain the dividend, which is also an important factor for shareholders.

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 in place 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 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 important factor for shareholders.

Bill Carcache: Got it. Thank you for taking my questions.

Got it thank you for taking my questions.

Operator: 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, then the number one on your telephone keypad. Your next question comes from the line of Mike Mayo of Wells Fargo. Hi, this is Chris Barr on behalf of Mike. This is just related to the questions you had previously. 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've kind of addressed that to a degree, but we just want a little bit more specifics on what you think the economy has done over the last few weeks, given what you saw at the end of March. Yeah.

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

That.

And again, ladies and gentlemen, if you would like to ask a question. Our Mckay common press Star then and number one on your telephone keypad. Your next question comes from the line of Mike Mayo of Wells Fargo.

Chris Spahr: Hi, this is Chris Barr on behalf of Mike. This is just related to the questions you had previously. 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've kind of addressed that to a degree, but we just want a little bit more specifics on what you think the economy has done over the last few weeks, given what you saw at the end of March.

Hi. This is hi, this is Chris bar on behalf of Mike.

Just this is just related to the questions you had previously.

How happy 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 interested to degree, but we just about little more specifics on what you think the economy has done over the last few weeks given what you saw at the end of March.

Terry Dolan: 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 I would 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 what level it's sustained at over a period of time. I think whether you look at Moody's Analytics or you look at reports that have come out from Goldman Sachs or J.P. Morgan since the end of the quarter, most of those have started to at least incorporate downside risk related to the environment.

Yeah.

Again, I think since the end of March I think there are a number of forecasted to come out with respect to.

Operator: 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 I would 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 what level it's sustained at over a period of time. I think whether you look at Moody's Analytics or you look at reports that have come out from Goldman Sachs or J.P. Morgan since the end of the quarter, most of those have started to at least incorporate downside risk related to the environment. Okay.

GDP declining dramatically.

Particularly in the second quarter I think there are other forecast that.

Try to take into consideration not only what I would call a V shaped sort of recovery, but more of a maybe a U shape sort of recovery. So the duration this changed a fair amount.

And then where unemployment either peaks or at least a you know what level of sustained up.

Over a period of time I think whether you look at the you look at Moody's analytics you'd look at.

Reports that have come out from Goldman Sachs or JP Morgans since the end of the quarter most of those have started to.

To to at least.

Incorporate downside risk related to the the environment.

Chris Spahr: 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 and 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 might have had, say, eight or nine or 10 years ago?

Okay, and then on reserving just a couple of questions on the reserves for unused commitments and then also can you were late your reserve level today in the coverage ratio today versus what you might have seen during the financial global financial crisis, because it's much lower today and even with all the adjacencies.

Operator: 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 and 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 might have had, say, eight or nine or 10 years ago? Yeah.

Made and builds you've made since the GFC. So just how has your portfolio would change to give you so much more confidence today and the coverage ratio versus what you have might have had say eight or nine or 10 years ago.

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

Yeah. So I mean, I think that and I'll have maybe mark pipe in here, a little bit, but if you think about how our portfolios have changed since since 2008 or nine certainly if you end up looking at you know on the consumer side of the equation I think across the industry, including ourselves.

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

The underwriting standards.

Our tighter than they were back then certainly on the mortgage side I think about the mortgage product.

It is.

It is.

Underwritten to take into consideration a customer's ability to manage cash flows even in different rates scenarios and rate environments et cetera.

On the on the commercial side of the equation I think the exposures related to leverage lending and some of those sorts of things is different but mark what it could you kind of address that yes, I would just say in addition to what periods mentioned like I said on the retail side or the consumer side. The portfolio continues to be very strong I'd.

Mark Runkel: Yeah. I would just say, in addition to what Terry's mentioned, like I said, on the retail side or the consumer side, the portfolio 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-to-values are lower, especially on the real estate portfolios. That would be true as well with our auto portfolio. Both loan and 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-grader equivalent.

Operator: I would just say, in addition to what Terry's mentioned, like I said, on the retail side or the consumer side, the portfolio 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-to-values are lower, especially on the real estate portfolios. That would be true as well with our auto portfolio. Both loan and 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-grader equivalent. As you know, we capitalized during the last downturn to really what I would say is move towards a large corporate strategy.

I think we're better positioned at this point of the economic cycle, then we were going into the last downturn the quality of the portfolio.

The average borrower profile from credit perspective is stronger loan to values are lower especially on the real estate portfolios that would be true as well with our auto portfolio, both loan and lease and stronger today.

As well as our credit card portfolio. So we feel good with the quality of the portfolios. Perry 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.

As you know, we capitalized during the last downturn to really what I would say is 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 has provided some of the funding of that $22 billion and some of the draws that we talked about earlier. And then the commercial real estate, we've been in that business a long time, and that's really relationship-based. 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 downturn. So I think from a credit quality perspective, the portfolio is very strong as we enter into this changing economic environment.

What I would say in Korea 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 that $22 billion and some of the draw that we talked about earlier than the commercial real estate, we've been in that business along time, and that's really relationship base and I would say weve really gone up markets focused in on stronger.

Operator: And with that, we've got higher quality borrowers today than we had going into the last downturn, which has provided some of the funding of that $22 billion and some of the draws that we talked about earlier. And then the commercial real estate, we've been in that business a long time, and that's really relationship-based. 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 downturn. So I think from a credit quality perspective, the portfolio is very strong as we enter into this changing economic environment. Yeah. And then, Chris, maybe one of the last things on the commercial real estate side of the equation. For the last two years, we have really been tightening the underwriting and bringing down our exposure with respect to construction lending.

Sponsors today compared to where we were out of the Alaska I think from up from a credit quality perspective.

Portfolio is very strong as we enter into this changing economic environment.

Terry Dolan: Yeah. And then, Chris, maybe one of the last things on the commercial real estate side of the equation. For the last two years, we have really been tightening the underwriting and bringing down our exposure with respect to construction lending. I think that's a pretty significant difference. We have been doing that in contemplation that ultimately we had some form of a downturn, and we've been relatively conservative associated with that. If you end up looking at the peak, one of the questions you had is really kind of in the last cycle, kind of what sort of peaks did we see? Ultimately, I think the reserve at that time ended up building to about 2.9% of loans, and the charge-off rates ended up kind of increasing to about 2.4% kind of overall.

And Chris maybe one of the last things on the commercial real estate side of the equation.

No for the last two years, we have really been.

Tightening the underwriting and bringing down our exposure with respect to construction lending I think thats, a pretty significant difference and you know we have been doing that.

Operator: I think that's a pretty significant difference. We have been doing that in contemplation that ultimately we had some form of a downturn, and we've been relatively conservative associated with that. If you end up looking at the peak, one of the questions you had is really kind of in the last cycle, kind of what sort of peaks did we see? Ultimately, I think the reserve at that time ended up building to about 2.9% of loans, and the charge-off rates ended up kind of increasing to about 2.4% kind of overall. So that's why I say I think when you end up looking at charge-offs and some of these other statistics, they're going to continue to migrate.

In contemplation that ultimately we had some form of the downturn and we've done relatively.

Conservative associated with that you know if you end up looking at the peak one of the questions. You had is what really kind of.

In the last cycle kind of what sort of peaks did we see.

Ultimately I think the reserve.

At that time ended up.

Building to about 2.9% of loans.

And the the charge off rates ended up kind of increasing.

Two.

About 2.4% kind of overall you know so.

So that's why I say I think when you end up looking at charge-offs and some of these other statistics, they're going to continue to migrate. But we have good, strong if you end up looking at 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.

There is that that's why I say I think when you end up looking at charge offs in some of these other statistics, they're going to continue to migrate.

Operator: But we have good, strong if you end up looking at 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. But just a quick follow-up on that then. So the slight decline in the allowance for commitments? Oh. Yeah. I think that part of that is what commitments have now funded. But what we try to do is to take into consideration, from a reserving perspective, what unfunded commitments exist out there, and the probabilities that they will become funded, and then the loss rates that you have to apply to it. But Mark, can you? Yeah.

But we have good strong if you end up looking at the even the allowance today and well I said I think that in the future quarters, it's going to continue to build you look at the allowance today in terms of coverage ratios.

Relative to net charge offs nonperforming assets et cetera, our coverage ratios are very strong.

Chris Spahr: Thank you. But just a quick follow-up on that then. So the slight decline in the allowance for commitments?

Thank you, but just just a quick follow up on that then so the slight decline and the allowance for commitments.

Terry Dolan: Oh. Yeah. I think that part of that is what commitments have now funded. But what we try to do is to take into consideration, from a reserving perspective, what unfunded commitments exist out there, and the probabilities that they will become funded, and then the loss rates that you have to apply to it. But Mark, can you?

Oh.

Yeah, you know I think that part of that is a you know what commitments have now funded but where we tried to do is to 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 at the marketing again I would just say the you know the unfunded commitments. We also looked at the credit quality of those borrowers in somewhat remains as some of the stronger.

Mark Runkel: Yeah. I would just say that 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.

Operator: I would just say that 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. Your next question comes from the line of Vivek Juneja of J.P. Morgan. Hey, Vivek. Sorry. Multiple calls. A quick question. 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 build? So your question is, what are we reserving or taking into consideration with respect to credit cards themselves? Yes. Okay. Mark, why don't you answer that? Yeah. Reserve rate was 8.83% at the end of Q1. Okay. Thanks. I'm presuming you've already given some detail, which I have missed. Thanks.

Quality borrowers on the balance sheet as well.

Chris Spahr: Thank you.

Thank you.

Operator: Your next question comes from the line of Vivek Juneja of J.P. Morgan.

Your next question comes from the line of the Beach Challenge of JP Morgan.

Terry Dolan: Hey, Vivek.

And with that.

Vivek Juneja: Sorry. Multiple calls. A quick question. 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 build?

Sorry.

Multiple calls a quick question.

Just.

[music].

A question that I have seals.

And you May have already mentioned this the multiple calls so pardon me, what presumably you're putting aside against.

Uh huh.

Yes.

If you ever as a belt.

Terry Dolan: So your question is, what are we reserving or taking into consideration with respect to credit cards themselves?

So your question is what are we reserving are taken into consideration with respect to credit cards and cells.

Vivek Juneja: Yes.

Terry Dolan: Okay. Mark, why don't you answer that?

Okay.

Mark why don't you actually our reserve rate was 8.83% at the end of Q1.

Mark Runkel: Yeah. Reserve rate was 8.83% at the end of Q1.

Vivek Juneja: Okay. Thanks. I'm 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 it to settle out? Did you already give that?

Okay.

[noise]. Thanks.

That's a.

I presume you have already given some detailed which I have missed thanks.

Operator: 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 it to settle out? Did you already give that? Yeah, we didn't talk about that. In the modeling process, as of the end of March, we talked about the fact that this will continue to evolve and change as estimates change. But in the modeling process, we tried to take; we considered a number of different forecasts, ultimately in the high single digits between 8% and 10%, and that it being sustained at a certain level for a period of time and then ultimately dissipating as we get into 2021. And I noticed you took a little bit of reserve for the merchant processing liability.

So I'll follow up with IR about whether you've given any metrics on unemployment is where you expect to conduct a panel next year, where do you expect to settle out how did you over to give that.

Terry Dolan: Yeah, we didn't talk about that. In the modeling process, as of the end of March, we talked about the fact that this will continue to evolve and change as estimates change. But in the modeling process, we tried to take; we considered a number of different forecasts, ultimately in the high single digits between 8% and 10%, and that it being sustained at a certain level for a period of time and then ultimately dissipating as we get into 2021.

We didn't talk about that in the modeling process as at the end of March we talked about the fact that this will continue to evolve and change has 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 10%.

And that it'd be is sustained at a certain level for a period of time and then ultimately dissipating.

As we get into 2021.

Vivek Juneja: And I noticed you took a little bit of reserve for the merchant processing liability. Is that your best guesstimate as to what you could take, or do you think that if this continues for a while, there's more likely than the $100 million you took?

Overall.

[noise] I notice it took a little bit of reserve for the merchant processing.

Liability Jim is that.

Operator: Is that your best guesstimate as to what you could take, or do you think that if this continues for a while, there's more likely than the $100 million you took? Yeah. At this particular point in 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. In this particular area, that exposure tends to dissipate again for a whole variety of 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.

Is that your best estimate as to what do you have to check on do you think that if this is for awhile.

There is more likely than the 100 million they've talks.

Terry Dolan: Yeah. At this particular point in 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. In this particular area, that exposure tends to dissipate again for a whole variety of 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 you guys have to kind of keep in mind is that for these airlines to relaunch, they need a merchant acquirer.

At this particular point in time, we feel like that's a pretty good estimate of what we think the exposure is and again, it's it's a liability for what the exposure might be related to that future delivery.

In this particular area that exposure tends to dissipate again for a whole variety different reasons, including airlines, making refunds of them using their government stimulus.

Programs in order to be able to do that.

Customers choosing not to fly the flight.

Or being given future credit by the airline so that will dissipate at quite a bit.

Operator: And then the other thing you guys have to kind of keep in mind is that for these airlines to relaunch, they need a merchant acquirer. And so from a prioritization perspective, they want to make sure that their merchant acquirer is on board and ready to go. And so they tend to prioritize the resolution of those future delivery exposures to make sure that the merchant acquirer is held. All right. Thank you, Terry. Your next question comes from the line of John Pancari of Evercore ISI. Hey, John. Hi. Hi. This is Rahul Patil, NPO for John. I just want to revisit the whole discussion around reserve level and cumulative loss. So per your 2019 DFAST results, you had $16.3 billion of losses per the Fed's projection over nine quarters. And I believe it was $12.5 billion losses for your own model.

And then the other thing you guys have to kind of keep in mind as a part of these airlines to relaunch they need a merchant acquirer.

And so from a prioritization perspective, they want to make sure that their merchant acquirer is on board and ready to go. And so they tend to prioritize the resolution of those future delivery exposures to make sure that the merchant acquirer is held.

And so you know from up prioritization perspective.

They want to make sure that they're merchant acquirers onboard and ready to go so they tend to prioritize the resolution of those future delivery exposures to make sure that that merchant acquirer is helpful.

Vivek Juneja: All right. Thank you, Terry.

Alright, Thank you attack.

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

[noise]. Your next question comes from.

In line of John Kerry Evercore ISI.

Terry Dolan: Hey, John.

Hey, John Bye.

Rahul Patil: Hi. Hi. This is Rahul Patil, NPO for John. I just want to revisit the whole discussion around reserve level and cumulative loss. So per your 2019 DFAST results, you had $16.3 billion of losses per the Fed's projection over nine quarters. And I believe it was $12.5 billion losses for your own model. Your reserve right now stands around $6.6 billion. I just want to get a sense for what portion of that cumulative losses are you assuming right now when you're sizing up the current reserve level and/or potential incremental reserve build in incoming quarters?

Hi, this is about popular.

I just want to revisit the whole discussion around reserve level and as soon as loss.

I'm still part of your 29 can be faster Doug.

So you had $16.3 billion off losses.

For the feds projections over nine quarters and I believe it was 12 and have begun losses are you own model.

Operator: Your reserve right now stands around $6.6 billion. I just want to get a sense for what portion of that cumulative losses are you assuming right now when you're sizing up the current reserve level and/or potential incremental reserve build in incoming quarters? Yeah. So I think you're trying to get at when we think about DFAST and how our reserve would kind of compare to DFAST results. And again, that $15 billion is pretty close to that estimate, both by the Fed as well as ourselves. And that is really 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 shy of 40% of that.

Your reserve right now stands at around $6.6 billion.

I want to get a sense for what portion of that cumulative losses are you assuming.

Right now when Youre sizing of the current views of level.

And our potential incremental we've been in coming quarters.

Terry Dolan: Yeah. So I think you're trying to get at when we think about DFAST and how our reserve would kind of compare to DFAST results. And again, that $15 billion is pretty close to that estimate, both by the Fed as well as ourselves. And that is really 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 shy of 40% of that.

Yes, so I think you're trying to get at a you know when we think about de fast and how our reserve would kind of compare to de fast results and again that $15 billion.

Is pretty close to that estimate both by the fed as well as ourselves.

And that is really what's 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 shy of 40% to that and we certainly have the ER.

Operator: And we certainly have the capacity, both from a capital perspective as well as from an earnings perspective, to be able to manage any losses that might be above that reserve level. 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 particular point in time. And again, it will progress as the quarters go on. Got it. All right. And then you cited $5.7 billion 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 helped a number of customers. What I would say is those are programs or modifications that we've done kind of in the past on a forward-looking view.

And we certainly have the capacity, both from a capital perspective as well as from an earnings perspective, to be able to manage any losses that might be above that reserve level. 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 particular point in time. And again, it will progress as the quarters go on.

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 jet reserve level.

We don't necessarily as we think about it necessarily come up with a percentage of losses relative to the fast, but I think the coverage is pretty strong at this point in time and again it will progress as the quarter's go on.

Rahul Patil: Got it. All right. And then you cited $5.7 billion of loans that you've modified. Is that mainly consumer loans, or have you begun restructuring commercial loans as well?

Got it.

All right and then you said, it's $5.7 billion of known modified is that mainly consumer loans or have you begun restructuring commercial loans as well.

Mark Runkel: That would be both portfolios. We've helped a number of customers. What I would say is those are programs or modifications that we've done 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% of on- and off-balance sheet exposure. In addition, we've helped 3,400 business customers, or about $2 billion of total exposure as well. So those would not be included in those restructured numbers that you're looking at.

That would be both portfolios.

We have helped out a number of customers what I would say is those are programs or modification, but weve 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 181000 customers, which is about 4.9% of on and off balance sheet exposure.

Operator: 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% of on- and off-balance sheet exposure. In addition, we've helped 3,400 business customers, or about $2 billion of total 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, where it seems like you assumed around $18.6 billion of line drawdowns. That compares to the $22 billion that you cited today. So just two-part question. So what sort of stress scenario is baked into that LCR disclosure over a 30-day period? And how does that compare with the environment today?

And we've held 3400 business customers are about $2 billion, a total of exposure as well so.

Those would not be included in those.

Restructured numbers that you're looking at.

Rahul Patil: Got it. All right. And then just one last question. So I'm looking at your LCR disclosures as of year-end, where it seems like you assumed around $18.6 billion of line drawdowns. That compares to the $22 billion that you cited today. So just two-part question. So what sort of stress scenario is baked into that LCR disclosure over a 30-day period? 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 wave of drawdowns in coming weeks?

Got it Alright, and then one last question so I'm looking at your SCR disclosures as of yearend.

You know there seems like you assumed around $18.6 billion off line drawdowns.

That compares to the $22 billion that you cited today. So just two part question. So what sort of stress scenario is baked into that NCR disclosure already today.

And how does that compared with the environment today, and then secondly, or was there some impacted the line drawdowns you saw in March.

Operator: 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 wave of drawdowns in coming weeks? Sorry. 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 peak already occurring. You broke up a little bit on your first question. What was the question around 31 December? Yeah. So basically, I was just looking at your LCR disclosures, where it seems like you were assuming $18 to $19 billion of drawdowns over a 30-day stress period. And I'm just wondering, 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.

Due to window dressing by companies or do you expect another be drawdown.

Terry Dolan: Sorry. 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 peak already occurring. You broke up a little bit on your first question. What was the question around 31 December?

So I did the drawdown.

We are high and the third and fourth week in March and started to level out in early April. So I think we saw the peak already occurring you broke up a little bit on your first question. What was the question around December 31st.

Rahul Patil: Yeah. So basically, I was just looking at your LCR disclosures, where it seems like you were assuming $18 to $19 billion of drawdowns over a 30-day stress period. And I'm just wondering, 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?

Yes, so basically just looking at various yard loser.

Seems like you were assuming you know $18 billion to $19 billion of drawdown.

Good day extracting opinion.

And I'm, just wondering like what sort of stress scenario, where are you assuming youre as yard disclosures and how does that compare that scenario that you're seeing today.

Terry Dolan: Yeah. So there's actually two different tests. There's LCR, and there's kind of a liquidity stress test. And with respect to the liquidity stress test, the coverage ratios, which aren't disclosed, are much higher than the LCR itself. So under a stress scenario, we have the liquidity and the ability to be able to manage that very effectively. In terms of liquidity today, right now, we have about $40 billion of cash that we're maintaining. That's kind of what we're targeting. And we have substantial kind of off-balance sheet liquidity, whether that is through a variety of different lines and sources. And then within the investment portfolio, there's probably realistically about another $20 billion that we could draw down if we had to. So from a liquidity perspective, even under pretty significant stress, we feel pretty comfortable.

Yeah. So there's actually two different testers LCR and there is kind of a liquidity stress test and with respect to liquidity stress test the coverage ratios, which aren't disclosed are much higher than.

Operator: There's LCR, and there's kind of a liquidity stress test. And with respect to the liquidity stress test, the coverage ratios, which aren't disclosed, are much higher than the LCR itself. So under a stress scenario, we have the liquidity and the ability to be able to manage that very effectively. In terms of liquidity today, right now, we have about $40 billion of cash that we're maintaining. That's kind of what we're targeting. And we have substantial kind of off-balance sheet liquidity, whether that is through a variety of different lines and sources. And then within the investment portfolio, there's probably realistically about another $20 billion that we could draw down if we had to. So from a liquidity perspective, even under pretty significant stress, we feel pretty comfortable. Okay. Thank you. Thank you. Your next question comes from the line of John McDonald of Autonomous. Hi there.

The LCR itself. So you know under stress scenario, we have the we have the liquidity and the ability to be able to manage that very effectively in terms of liquidity today right. Now we have about a $40 billion of cash that we're maintaining that's kind of what we're targeting and we have.

Substantial kind of off balance sheet liquidity.

Whether that is through a variety of different lines and sources and then within the investment portfolio, that's probably realistically about another $20 billion that we could draw down if we had two.

You know so from a liquidity perspective, even under pretty significant stress, we feel pretty comfortable.

Rahul Patil: Okay. Thank you.

Okay. Thank you.

Terry Dolan: Thank you.

Thank you.

Operator: Your next question comes from the line of John McDonald of Autonomous.

Your next question comes from the line ABS I'm Mcdonald of autonomous.

David Smith: Hi there. This is David Smith filling in for John. The figures you mentioned that you're modeling for payments, merchant down 50% to 60% for the next few quarters, big drops in CPS and RPS also. Were those stress cases, or are those your base case for now that you're modeling?

Hi, This is David Smith filling in for John The figures you mentioned that you're modeling for payments merchant down 50% to 60% for the next few quarters big drops and CBS and Rps also where those stress cases are those your base case for now that you're modeling.

Operator: This is David Smith filling in for John. The figures you mentioned that you're modeling for payments, merchant down 50% to 60% for the next few quarters, big drops in CPS and RPS also. Were those stress cases, or are those your base case for now that you're modeling? Well, I think it's probably base case for purposes of the Q2, so the near term. Then when I talk about stress testing, it's really trying to understand if the COVID situation continues on into the Q3 and Q4, 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 full employment, so to speak. Thank you. Operator, do we have any other callers on the line? There are no further questioners. Thank you. Okay. Great.

Terry Dolan: Well, I think it's probably base case for purposes of the Q2, so the near term. Then when I talk about stress testing, it's really trying to understand if the COVID situation continues on into the Q3 and Q4, 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 full employment, so to speak.

Well I.

I think it is 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 coal that situation continues on into the third and fourth quarter, what that would look like so I think near term that's kind of what we would.

Expect Intel businesses start to recover and consumers kind of get back to two full employment so to speak.

David Smith: Thank you.

Thank you.

Jen Thompson: Operator, do we have any other callers on the line?

<unk>.

Operator, we can you have any other callers on line.

Operator: There are no further questioners. Thank you.

There are no further questioners in Q.

Jen Thompson: Okay. Great. Thank you for listening to our call today. If you have any other questions, please contact investor relations. Thank you.

Okay great.

Operator: 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. Okay.

Thank you for listening to our call today, if you have any other questions. Please contact investor relations. Thank you.

Operator: This concludes today's conference call. You may now disconnect. Okay.

This concludes today's conference call you may now disconnect.

Okay.