Earnings Call Transcript
US BANCORP DE (USB)
Earnings Call Transcript - USB Q1 2020
Operator, Operator
Welcome to U.S. Bancorp's First Quarter 2020 Earnings Conference Call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer; and Terry Dolan, U.S. Bancorp's Vice Chairman and Chief Financial Officer, there will be a formal question-and-answer session. This call will be recorded and available for replay beginning today at approximately 12 o'clock p.m. Eastern through Wednesday, April 22nd at 12 o'clock midnight Eastern Time. I will now turn the conference call over to Jen Thompson, Director of Investor Relations for U.S. Bancorp.
Jen Thompson, Director of Investor Relations
Thank you, Jenika, 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 Runkel. 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'd 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.
Andy Cecere, CEO
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 3. In the first quarter, we reported earnings per share of $0.72. Our performance this quarter was adversely impacted by COVID-19 in the U.S. 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. 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 timeframe, the Company funded approximately $22 billion of loans for our customers while continuing to strengthen our cash position. Our fee businesses were affected to varying degrees. Our payments businesses were negatively impacted by a sharp decline in both consumer and commercial spend activity, in line with the drop in global economic activity in March. Demonstrating the importance of having a well-diversified business mix, mortgage revenue growth was strong this quarter as the declining 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. Nonperforming assets started to turn higher in the first quarter, reflecting the increased economic stress. We increased our allowance for loan losses in response to the current economic conditions. As you can see in the lower right quadrant of this slide, we remain well-capitalized. Book value per share grew 5% compared with a year ago. Slide 4 provides key performance metrics. We delivered a 12.6% return on tangible common equity in the first quarter, impacted by lower earnings due to the current economic environment. Slide 5 shows our continually improving digital uptake trends. The significant investments we've made in our digital capabilities over the last several years are helping our customers continue to do banking as social distancing has become more widespread. Because of our agile development activities, we've made a number of updates in recent weeks to digital tools and processes to help customers who choose to bank at home. We've added the ability to accept treasury checks via mobile check deposit, which will help customers more quickly and seamlessly get access to funds being distributed through the government stimulus efforts. Our teams work quickly to design and deploy a new digital forbearance tool. Within a week of this feature being launched, more than 50% of all customers requesting forbearance were doing so in a digital way. Digital is a core part of our strategy, and we’ll continue to look for innovative ways to help our customers bank from home and to meet financial goals through this social distancing period and beyond. Now, I'll turn the call over to Terry to provide more color on the quarter.
Terry Dolan, CFO
Thanks, Andy. If you turn to slide 6, I'll start with the 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 7. 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. Turning to slide 8. 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 and considered the risk rating changes in the evaluation of our allowance for credit losses. Our credit loss provision was $993 million in the first quarter, reflective of $393 million of net charge-offs and 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 U.S. and global economies, and our expectation that credit losses on non-performing assets will increase from current levels. The increase in the allowance for credit losses as considered our best estimate of the impact of significantly slower economic growth and higher unemployment, partially offset by the benefits of government stimulus programs as of March 31st. Slide 9 highlights our key underwriting metrics and exposures to certain at-risk segments, given the current environment. We have a strong relationship-based credit culture in 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. However, while actual credit quality results will depend on the duration of the COVID-19 situation and 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 the first quarter of 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 1 basis point versus the fourth quarter. The lower margin reflected lower interest rates and a flatter yield curve as well as approximately 5 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 late in the first quarter with significant build-up in liquidity to support the significant loan growth and 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. Compared with the first quarter a year ago, higher mortgage production and stronger gain-on-sale margins were partially offset by changes in the valuation of mortgage servicing rights net of hedging activity. Slide 13 provides information about our payments services business lines, including 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 declined between 50% and 60% on a year-over-year basis in the second half of March compared with an increase in the mid- to high single-digits in the first two months of the quarter. Within our corporate payments business, commercial sales volumes declined between 30% and 40% in late March, due to the worldwide impact of the economic slowdown on business spend activity. Government sales volumes declined between 15% to 20% in late March. The government business accounts for about 20% of the total corporate payments revenue. Commercial products revenue benefited from higher corporate bond fees and trading revenue, partly offset by credit valuation losses related to customer derivative portfolio. The valuation losses reflect hedging effectiveness, given the significant volatility in the markets during the first quarter and changes to credit risk ratings for customers. It is likely that mortgage production will continue to be relatively strong in the near-term but may begin to slow later in the year, in line with the trend in refinancing activity. Payments revenue is likely to be adversely affected through the remainder of the year, reflecting significant declines in consumer and business spend activity. Trust and investment revenue will likely decline from first-quarter levels due to recent trends in the equity markets. Turning to slide 13. Non-interest expense increased 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 paid for frontline workers and expenses tied to providing a safe working environment for our employees. Slide 14 highlights our capital position. At March 31st, 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 March 31st was 9.0%. I'll hand it back to Andy for closing remarks.
Andy Cecere, CEO
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 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. The interest rate environment is not ideal, but we view it as manageable. 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 need higher credit costs for the entire industry, but we have a strong track record. 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've recently suspended our share buyback program to give us more flexibility. We are continually evaluating potential scenarios, and we believe that even if an economic downturn persisted through most of the year, we would be able to maintain our dividend at its current level. I believe we 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 this significant loan demand we expect to see in the coming weeks as the government continues to roll up facilities to support businesses, such as the Small Business Administration, Paycheck Protection Program, and the Main Street Lending Program. We've made adjustments to certain consumer and small business lending products and services to make them more affordable and accessible to existing customers who may be experiencing financial stress. We also raised mobile check deposit limits for many customers using our mobile app. Recognizing the precarious situation many of our communities are in, we announced a number of initiatives including a $30 million new and redirected investments, $26 million of which are to local non-profit organizations 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 homes. We announced a premium pay program to provide office critical frontline employees a 20% hourly wage increase during these 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 our employees, those working from home and those on the frontlines. I'm proud of the way you’ve come together and the work you're doing to partner with and support all of our constituents in this very difficult time. We will now open up the call for Q&A.
Erika Najarian, Analyst
Thanks for your comments on the credit. And 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 results. And also with the reserve at 2.07, you told us before that CECL is very pro-cyclical. And from here, I'm wondering how much more reserve build we could potentially see?
Terry Dolan, CFO
So, let me try to address maybe the DFAST questions first. And, when we end up thinking about the allowance maybe at current state relative to 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 needed, especially when you kind of think about where our capital level is, where we’d 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 and 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 being unemployed peaks pretty quickly. As we think about it and 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. 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 governments 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. 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 nonperforming and delinquencies and things like that will continue to progress upward and we'll have to watch and manage it.
Erika Najarian, Analyst
The second question is about the payments related revenues, which decreased by 7% year-over-year. It seems that there were two different points in the quarter. How should we anticipate this trend to develop? Should we expect it to decline by double digits through at least the second quarter? Additionally, what are the increased liabilities caused by future delivery exposure concerning merchant and airline processing?
Terry Dolan, CFO
Yes. 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. Let me kind of break it down. But, I do believe at a high level when we think about and how we're kind of stress testing the next several quarters, we do believe that second, third, and possibly through the end of the fourth quarter that consumer spend and business spend is going to be at a relatively low level. 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 that's how we're stress testing and thinking about the future quarters, that's how we're thinking about it. It's a function of the mix of the businesses. If you think about the merchant acquiring business, about 28% of 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, and the airlines, as an example, being 85% to 95% down depending upon the week. So, as we think about the second, third, and even into the fourth quarter, we're stressing it down quite a bit.
Erika Najarian, Analyst
And just to clarify, that’s spend not revenue?
Terry Dolan, CFO
Well, it’s spend, and revenue is pretty closely tied to the same sort of trends. 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.
Operator, Operator
Your next question comes from the line of Bill Carcache of Nomura.
Bill Carcache, Analyst
Thank you. Good morning. First, Terry, I wanted to ask you a question following up on your response to Erika'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. Shouldn't that upward trajectory in delinquencies and losses already be contemplated in your allowance at 3/31? And so just, I guess, wondering if you could help us understand what it will take to drive incremental reserve building versus what's already baked into that allowance.
Terry Dolan, CFO
Yes. So, great question, Bill. 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 and GDP and when people get back to work and all sorts of things are constantly changing. 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 on how conditions change. So, when we go through that process, we end up looking at things like Moody's Analytics, and Morgan Stanley, Goldman Sachs, a whole variety of different. 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, have been pretty significant. We'll have to take all those things into consideration as part of that process. The models are never perfect. There are 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 point in time to know exactly what the benefits are that are going to come into play, etc. There are 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.
Bill Carcache, Analyst
That's super helpful, Terry. But, I guess, as we think about where you guys were in terms of like, the economic forecast that you were using through, let's say, the end of March, and the first quarter. To what extent has new information became available in early April before earnings, suggesting that the rate of deterioration in unemployment and real GDP would be greater than what was thought at March 31. Is that information that it was still, I guess, existed at the balance sheet date, but you didn't find out about it until after? Would that be something that you contemplate in your 3/31 allowances, or is the 3/31 allowance literally just based on information through 3/31, or is there room for judgment there? Just trying to get a little bit of I guess sense of how that works?
Terry Dolan, CFO
Yes. 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. We really have to do that right around the end of the quarter. 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. There’s obviously a lot of judgment that comes into play and you have to come up with what's your economic forecast. But, as we think about it, and the reserve at the end of the first quarter, when we look at the coverage ratios that we have in terms of charge-offs and in terms of the overall loan book, we feel like those coverage ratios are at least reasonable at this particular point in time. Also, 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. To give you some insight, we made that assessment of the economic forecast; a little over 50% of it we have shown would either be a slower growth environment or moderate recessions, or a severe recession. So, there were lots of different views with respect to where the economy was going to go. We have taken some of that into consideration as part of our day one. It's also very important to take into consideration where you're starting from. If you think about our portfolio in terms of determining the allowance, our portfolios on a 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. Our commercial book of business tends to be high investment grade where we stress cash flows based on cash flow and the ability to withstand developments. We start from good credit underwriting, a good risk profile, strong coverage ratios, all those things are taken into consideration in terms of our estimate of the allowance.
Bill Carcache, Analyst
That's very helpful. If I could ask one more question for Andy. You mentioned in the press release that USB will emerge stronger after the pandemic and will prove to be a reliable partner for your customers. When we think about the previous recession, you really took advantage of the situation to build relationships with new partners, partly because you were in a better position than many other banks. As we consider your current standing, do you see opportunities for USB to stand out in this environment, or is it more challenging since banks, in general, are entering this downturn in a stronger position compared to the last recession?
Andy Cecere, CEO
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.
Operator, Operator
Your next question comes from the line of Mike Mayo of Wells Fargo.
Unidentified Analyst, Analyst
Hi. This is Chris speaking for Mike. This relates to your earlier questions. What is your perspective on the economy since the end of the third quarter, and how has that changed? I know you touched on this to some extent, but could you provide a bit more detail on your views of the economic situation in the last few weeks, especially considering what you observed at the end of March?
Terry Dolan, CFO
Yes. 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. There are other forecasts that try to take into consideration not only what I would call a V-shaped sort of recovery but maybe a U-shaped sort of recovery. So, the duration has changed a fair amount. 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 the reports that have come out from Goldman Sachs or JP Morgan since the end of the quarter, most of those have started to at least incorporate downside risk related to the environment.
Unidentified Analyst, Analyst
Okay. And then, on reserving, just a couple of questions on the reserves for unused commitments. Can you relate your reserve levels today and a coverage ratio today versus what you might have seen during the financial crisis? It's much lower today, and even with all the adjustments you've made and builds 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 9 or 10 years ago?
Terry Dolan, CFO
Yes, if you look at how our portfolios have evolved since 2008 or 2009, particularly in the consumer sector, you’ll notice that underwriting standards are much stricter than they were back then, especially for mortgages. Mortgage products are now designed to factor in a customer’s ability to manage cash flows across various rate scenarios and environments. On the commercial side, the risks related to leverage lending and similar aspects are different. Mark, could you provide some insights on that?
Mark Runkel, Chief Credit Officer
Yes. I would just say, in addition to what Terry has mentioned, 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 in 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. We feel good. The quality of the portfolio, as Terry said, is very much prime. On the commercial side, it continues to be pretty much investment grade or equivalent. As you know, we capitalized during the last downturn to really move towards a large corporate strategy. 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. The commercial real estate, we've been in that business a long time and that's really relationship-based. We've really gone upmarket and focused on stronger sponsors today compared to where we were at the last downturn. From a credit quality perspective, the portfolio is very strong as we enter into this changing economic environment.
Terry Dolan, CFO
And Chris, regarding commercial real estate, over the past two years, we have significantly tightened our underwriting and reduced our exposure in construction lending. This represents a notable shift as we have taken these steps in anticipation of a potential downturn. We have adopted a fairly conservative approach. If we look back at the peak of the last cycle, one of your questions related to the peaks we observed back then. Ultimately, our reserves built up to about 2.9% of loans, while charge-off rates increased to around 2.4% overall. This informs my view that charge-offs and similar statistics are likely to continue to change. Our allowance today, when looking at coverage ratios in relation to net charge-offs and nonperforming assets, is strong, and I expect it to continue to build in future quarters.
Unidentified Analyst, Analyst
Thank you. Just a quick follow-up on that then. So, the slight decline in the allowance for commitments?
Terry Dolan, CFO
Yes. I think part of that is what commitments have now funded. But what we try to do is take into consideration from a reserving perspective what unfunded commitments exist out there and probabilities that they will become funded and then the loss rates that you have to apply to it. But Mark, can you...?
Mark Runkel, Chief Credit Officer
Yes. I would just say that the unfunded commitments, we also look at the credit quality of those borrowers. So, what remains is some of the stronger quality borrowers on the balance sheet as well.
Operator, Operator
The next question comes from the line of Vivek Juneja of JP Morgan.
Vivek Juneja, Analyst
Sorry. I have a quick question. What reserves are you setting aside against credit card loans in your reserve build?
Terry Dolan, CFO
So, your question is, what are we reserving or taking into consideration with respect to credit cards themselves?
Vivek Juneja, Analyst
Yes.
Terry Dolan, CFO
Mark, why don’t you answer that?
Mark Runkel, Chief Credit Officer
Yes. Reserve rate was 8.83% at the end of Q1.
Vivek Juneja, Analyst
Thank you. I appreciate the details you've provided. I'll reach out to Investor Relations to inquire whether any metrics on unemployment have been shared, specifically regarding expectations for next year and where it is projected to stabilize. Did you provide that information already?
Terry Dolan, CFO
Yes. We didn't discuss that. In the modeling process at the end of March, we mentioned that this would continue to evolve and change as estimates change. However, in our modeling process, we considered several different forecasts, ultimately landing in the high single digits between 8% and 10%. This is expected to be sustained at a certain level for a period before eventually tapering off as we move into 2021.
Vivek Juneja, Analyst
And I noticed you took a little bit of reserve for the merchant processing library. Is that your best guesstimate as to what you have to take or do you think that if this continues for a while, there's more likely than the $100 million you took?
Terry Dolan, CFO
Yes. At this particular point in time, we feel like that's a pretty good estimate of what we think the exposure is. 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 airlines. That will dissipate it quite a bit. The other thing you guys have to keep in mind is that for these airlines to relaunch, they need a merchant acquirer. From a prioritization perspective, they want to make sure that their merchant acquirer is onboard and ready to go. So, they tend to prioritize the resolution of those future delivery exposures to ensure that that merchant acquirer is helpful.
Operator, Operator
Your next question comes from the line of Rahul Patil of Evercore ISI.
Rahul Patil, Analyst
Hi. This is Rahul Patil in on behalf of John. I just want to revisit the whole discussion around reserve level and cumulative loss. For your 2019 DFAST results, you had $16.3 billion of losses per the Fed's projections over nine quarters, and I believe it was $12.5 billion losses per 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 sizing up the current reserve level and/or potential incremental reserve builds in coming quarters?
Terry Dolan, CFO
Yes. I think you are asking about how our reserve compares to the DFAST results. That $15 billion estimate is close to what both the Fed and we have projected. This reflects the losses expected over a nine-quarter period during a time of significant and prolonged unemployment. Our current allowance is just under 40% of that amount. We have the capital and earnings capacity to handle any losses that exceed this reserve level. While we do not specifically calculate a percentage of losses in relation to DFAST, I believe our coverage is quite strong at this moment. It will continue to evolve as the quarters progress.
Rahul Patil, Analyst
Got it. All right. And then, you said it's $5.7 billion of loans that you've modified. Is that mainly consumer loans or have you begun restructuring commercial loans as well?
Mark Runkel, Chief Credit Officer
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 drawn in the past on a forward-looking view. On the consumer portfolio over the last few weeks, we have granted programs and extensions to 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. Those would not be included in those restructured numbers that you're looking at.
Rahul Patil, Analyst
And then, just one last question. I'm looking at your LCR disclosures as of year-end where it seems like you assumed around $18.6 billion of line draw-downs. That compares to the $22 billion that you cited today. So just two-part question. 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 of the line draw-downs you saw in March due to window dressing by companies or do you expect another wave of draw-downs in coming weeks?
Terry Dolan, CFO
Sorry. The draw-downs 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 December 31st?
Rahul Patil, Analyst
Yes. So basically, I was just looking at your LCR disclosures where it seems like you were assuming around $18 billion to $19 billion of draw-downs over a 30-day stress period. I'm just wondering how that stress scenario was assumed in your LCR disclosures and how does that compare with the scenario that you're seeing today?
Terry Dolan, CFO
Yes. There are actually two different tests; there's LCR and there's kind of a liquidity stress test. With respect to liquidity stress tests, the coverage ratios which aren't disclosed are much higher than the LCR itself. Under a stress scenario, we have the liquidity and the ability 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. We have substantial off-balance sheet liquidity, whether that is through a variety of different lines and sources. Within the investment portfolio, there is probably realistically about another $20 billion that we could draw down if we had to. From a liquidity perspective, even under a pretty significant stress, we feel pretty comfortable.
Rahul Patil, Analyst
Okay. Thank you.
Terry Dolan, CFO
Thank you.
Operator, Operator
The next question comes from the line of John McDonald of Autonomous.
Unidentified Analyst, Analyst
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 and big drops in CPS and RPS also. Were those stress cases, or are those your base case for now that you're modeling?
Terry Dolan, CFO
Well, I think it's probably base case for purposes of the second quarter, so with near term. When I talked about stress test, it was really trying to understand if the COVID situation continues on in the third and fourth quarter, what that would look like. So, I think near term, that's kind of what we would expect until businesses start to recover and consumers kind of get back to full employment, so to speak.
Jen Thompson, Director of Investor Relations
Operator, do we have any other callers on the line?
Operator, Operator
There are no further questioners in queue.
Jen Thompson, Director of Investor Relations
Okay, great. Thank you for listening to our call today. If you have any other questions, please contact Investor Relations. Thank you.
Operator, Operator
This concludes today's conference call. You may now disconnect.