Q1 2020 Earnings Call
Hello, and welcome to key Corp.'s first quarter 2020 earnings call. As a reminder, this call is being recorded at this time I'd like to pass it over to President and Chief Operating Officer, Chris Gorman. Please go ahead.
Thank you operator, good morning, and welcome to keep Corp.'s first quarter 2020 earnings Conference call. Joining me on the call today, our Beth Mooney, our Chief Executive Officer, Don Campbell, Our Chief Financial Officer, and Mark Midkiff, Our Chief Risk Officer Slide two is our statement a forward looking disclosure and non.
GAAP financial measures. It covers our presentation materials and comments as well as the question and answer segment of our call.
I'm now turning to slide three.
It is an extraordinary time with the spread of co midnight team, causing a heavy human told throughout the country. It has impacted all of our daily lives in ways, none of us could have anticipated. Despite the unprecedented challenges we're facing I've been encouraged by our collective strength and resiliency and I'm.
Confident that this resiliency will carry us through this crisis. So let me start by giving you a brief overview on things where things stand here are key first our business resiliency plans are in effect and we have maintained our operational effectiveness across our organization.
Every decision we have made the health and safety of our clients colleagues and communities in which we operate have remained our top priority.
Currently we are committed to playing a critical role and providing capital and assistance to our clients and supporting broader initiatives to strengthen our economy to date, we have approved over 11000 credit extensions and more than 38000 applications have been submitted through the newly introduced.
Payroll protection program.
Im now moving to slide four I want to address our financial outlook, which in the near term will be impacted by the economic fallout from the covered 19 pandemic importantly, we are operating from a position of strength, our business model and clear strategy position us well during this period of economic and financial stress.
But importantly will provide us with significant opportunities through the recovery phase I want to affirm our long term targets have not changed and on the other side of this crisis. We expect to continued to deliver positive operating leverage and strong financial returns in this environment credit quality also.
Plays a critical role although some would continue to view key through the lens of the financial crisis. The reality is that we are a different company today in terms of our strategy our risk profile and our leadership team, we have significantly reduced our exposure to high risk sectors and industries and.
Positioned key to perform well through all phases of the business cycle, including highly stressed environments like the one in which we are operating today are moderate risk profile also informs our credit decisions and the way, we underwrite loans Don will share more details with respect to our credit measures and our adult.
Option of Cecil the final section of the slides focuses on capital and liquidity, both clear strengths for our company.
Key along with other major banks have participated in several rounds of government mandated stress test since the financial crisis. These tests have shown that key would remain well capitalized through periods of severe economic and financial stress, while continuing to support our clients our liquidity position all.
Also remained strong with a combined 50 billion in liquid assets and unused borrowing capacity.
Let me close my remarks by reaffirming our confidence in the long term outlook for our company, although our industry clearly faces near term challenges. We believe the steps we've taken over the past decade to strengthen and reposition our company will set key apart.
We have a consistent and targeted business strategy focused on relationships, we have a strong capital position and disciplined approach in the manner in which we deploy our capital we have significant sources of liquidity, we have dramatically de risks our company over the last several years and also we have.
Management team that is dedicated to helping our clients in our communities vantage through these challenging times.
And finally since this is Beth Mooney his last earnings call as CEO I want to acknowledge the outstanding leadership. She has provided our company Beth will offer a few remarks after Don but I just want to say it has not lost on any of us that our strong foundation and clear sense of purpose is in no smart small part due to best leader.
Over the past nine years as I've said before I could not have asked for a better partner and we wish her well in the next stage of her journey with that let me turn the call over to Don to report on the quarter.
Thanks, Chris I'm now on slide six this morning, we reported first quarter net income from continuing operations of 12 cents per common share.
Current quarter's results have really been impacted by Kobin dissecting pandemic.
Gary being impacted include provision expense exceeded net charge off by $275 million.
Means everything in the first quarter seasonal we experienced the impact of a global pandemic.
Through February our credit quality and economic outlook resulted in a stable allowance for loan losses compared to January one level.
The vast majority of the increase reflects the changed economic outlook.
Market related valuation adjustments totaled $92 million. These adjustments include $73 million it reserves on our customer derivatives, reflecting the market implied default rates given the significant increase in credit spreads.
The remainder of $19 million, the due to trading losses or portfolio Mark once again related to the wedding credit spreads in the market.
One other area of impact was or investment banking indefinitely.
Actual results for the quarter or approximately $40 million below our expectations and the pipeline from just a month ago.
I'll cover many the remaining items on the slide in the rest my presentation.
Turning to slide seven.
Total average loans were $96 billion up 7% from the first quarter of last year driven by growth in both commercial and consumer loans commercial loans reflect about $7 billion and growth in the month of March alone, including increased line draws and short term liquidity facilities provided to customers.
It's important to note that approximately 70% of the scene I draw in March came from an investment grade customers.
Consumer loans benefited from the strong growth from Laurel road in our residential mortgage business.
Floral road originated $600 million of student consolidation loans, this quarter, and we generated $1.3 billion residential mortgage loans.
The investments we have made in these areas continue to drive results importantly, adding high quality loans to our portfolio.
Linked quarter average loan balances were up 3%.
For next quarter lying draws and other commercial loan growth are expected to slow from the March level. We will however showed strong growth, reflecting the impact of the CPP program.
As Chris mentioned, we have process over 38000 applications, representing $9 billion request in the fundings are occurring quickly.
This program is critical to our customers and we're pleased to support these efforts.
Importantly, we remain disciplined with our credit underwriting and we have walked away from business that does not meet our moderate risk profile. We are different company than we were a decade ago, we remain committed to performing well through the business cycle and we manage our credit quality with this longer term perspective.
Continuing on the slide eight.
Average deposits totaled $110 billion for the first quarter of 2000, $23 billion or 3% compared to a year ago period and down 2% from prior quarter.
Linked quarter decline reflects the expected reduction in several temporary deposit balances early in the quarter.
Growth from the prior year was driven by both consumer and commercial clients.
It is also important to note deposit flows since February funded the loan growth continuing to support our strong liquidity position.
Total interest bearing deposit costs came down 14 basis points for the prior quarter, reflecting the impact of lower interest rates and the associated flag in pricing.
We would also expect deposit costs continue to decline approximately 30 to 35 basis point in the second quarter.
Continue to have a strong stable core deposit base with consumer deposits accounting for 65% of or total deposit mix.
Turning to slide nine.
Taxable equivalent net interest income was $989 million for the first quarter 2020, compared to $985 million in the first quarter 2019, and 987 million in the prior quarter.
Our net interest margin was 3.1% for this quarter compared to 3.13% for the first quarter 2019, and 2.98% for the prior quarter.
Compared to the prior quarter net interest income increased $2 million driven by an improved balance sheet mix and strong loan growth.
Net interest margin for the quarter reflects the improved balance sheet mix.
Looking into the second quarter as a result of the expected originations of the PPP loans, we would expect net interest income to increase from the first quarter level net margins should decline the yield on these loans is lower than other products.
Moving to slide 10.
Keith Noninterest income was $477 million for the first quarter 2020, compared to 536 million for the year ago quarter and $651 million in the prior quarter.
The current quarter, clearly reflected the impact of a pandemic on our market sensitive businesses.
Other income a negative $88 million for the quarter reflected $92 million or market related valuation adjustments. This included $73 million the reserves for a customer derivatives due to significant increases in credit spreads.
The cumulative reserve recorded for this portfolio now exceeds the total losses recognized in this area through the great recession.
The reserves would come down if credit spreads narrowed from March 30, Onest levels.
The remaining portion of the market related valuation adjustments include $19 million of trading losses, or Mark also driven by the increased credit spreads.
Two other areas of note operating lease income for the quarter included an 8 million dollar valuation adjustment.
Consumer mortgage income reflected $1.3 billion originations higher with higher gain on sale levels offset by $9 million of MSR impairment.
Going into the second quarter, we would not expect further meaningful market related valuation adjustments.
Most other fee income categories would be down slightly reflecting lower activity levels.
Investment banking and placement fees are challenging to predict at this time.
I'm now turning to slide 11.
Fence levels trended down this quarter as the results reflect the benefit of efficiency improvements and lower variable compensation.
Adjusting for notable items in the prior quarters compared to the year ago period, non interest expense declined $6 million. Despite the addition of Laurel Road in April 2019.
Compared to the prior quarter adjusting for notable items noninterest expense declined $27 million.
Lower incentive compensation costs correlated to revenues contributed to this decline.
As a services and marketing both were down seasonally this quarter.
Turning to slide 12.
Seasonal was adopted January one of this year, resulting in an increase to our allowance for loan losses as of the ended the year of $204 million consistent with previous disclosures.
Through February our Cecil reserves remain very stable, reflecting the credit quality of the portfolio and the economic forecasts were consistent with the started the year.
By the end of the quarter, the economic outlook changed considerably reflecting the expected impact of a pandemic.
Well no windows, the depth or duration of the economic downturn, we updated our seasonal reserves to incorporate a severe downturn and economic activity with the recovery beginning in late in the year.
Change in the economic outlook result, and provision expense exceeding net charge offs by $275 million.
As we progress through the current quarter, we will better be able to refine our outlook, including the potential depth and duration of the downturn.
It should also provide additional insights into the benefit from the various programs implemented by our government to help our customers and the economy.
Now turning to slide 13.
Despite the build in our allowances our credit quality metrics remained strong as of March 30 Onest.
Net charge offs were $84 million or 35 basis points of average net total loans in the first quarter, which continues to be below our over the cycle range of 40 to 60 basis points.
Nonperforming loans were $632 million quarter, reflecting a $45 million increase from a reclassification, resulting from the adoption of Cecil.
Adjusted for this reclassification npls increased $10 million from the prior quarter.
Non performing loans represent 61 basis points of period end loans flat with the prior quarter in prior year.
Criticized loans increased modestly, reflecting the impact of market conditions and loan rating changes in our oil and gas portfolio.
During March the increase in commercial line draws and temporary liquidity facilities generally related to our highly rated customers.
At the end of the quarter percent of our commercial loan book outstanding to investment grade customers actually increased by 200 basis points.
One other area. We continue to monitor is the level of assistance request from our customers as of the end of last week. We had received approximately 11000 request from a retail customers.
About 0.7% of accounts. We also received approximately 804 request from our commercial customers.
While this is still early with less levels have been less than we originally expect.
Turning to slide 14, we received questions about the exposure to certain industry or customer groups given the current environment.
Included on this slide is a summary of those areas as you can see most of those areas represent a small portion of the overall portfolio and our diversified by type and geography.
We have implemented and enhanced monitoring process, providing more active reviews, often weekly of relationships that might be more vulnerable to the current environment.
Outstanding balances shown our as March 31 to reflect some of the draw activity that occurred late in the quarter.
Now on slide 15.
Capital ratios this quarter reflected the impact of the balance sheet growth and lower earnings most of our planned capital actions for the quarter were completed before the economic outlook turn.
As a result, our common equity tier one ratio was 8.95% as of March 30, Onest down 49 basis points from year end.
This level is slightly below our target range, but well above the stress capital buffer levels required by the fed.
Our capital target was established to provide sufficient capital to operate and stressed environments. Recognizing we will be operating at levels below the target as we experienced the impact of those environments.
This capital level provides a sufficient capacity to continue to support our customers and their borrowing needs and based on our current outlook maintain our dividends.
As a reminder, our capital priorities continue to be to support organic growth to continue to continue our strong common dividend to repurchase shares of excess with excess capital.
And then you got from the new guidelines for the stress capital buffer are also helpful and addressing our capital actions.
As announced earlier, we suspended our share buybacks through the second quarter.
On slide 16, we provided our best insights and high level comments for the second quarter.
Given the uncertain economic outlook for the full year, we removed our guidance for full year 2020.
There is still a wide range of scenarios on the depth and duration of the economic downturn.
Also impacting this will be the benefit of various programs to help bridge the retail commercial customers.
As we move through the second quarter, we expect to have more clarity on the economic impact of Cobot 19, and the support provided to our clients, allowing us to provide more visibility on our full year outlook.
Loan growth should remain strong reflecting the balances as of the end of the first quarter. The production levels expected from the PPP loan program and continued strength in our commercial and consumer loan originations.
Deposits will showed good growth driven by both consumer and commercial areas. This growth would support much of the loan growth noted above.
Net interest income is expected to be up from the first quarter level driven by growth in loans, we expect net interest margin to decline, reflecting the dilutive impact.
Program.
For noninterest income, we would not expect further meaningful market related valuation adjustment.
Most other fee income categories, we remain would be down slightly reflecting lower activity levels.
Investment banking and debt placement fees are challenging predict this time.
Non interest expenses are expected to be relatively stable for next quarter.
Charge offs through should we increased slightly to around the lower end of our target range of 40 to 60 basis points.
The environment continues we challenge, which excuse me the environment continues to change rapidly.
Can impact the out look and the comments we provided.
Finally shown at the bottom applied our long term targets.
Given the economic downturn, we would not expect to achieve these all these targets. This year. However, as we have emerged from the current crisis, we expect to be back on the path that would lead us to operate within these targeted ranges importantly, we have not wavered from our commitment to achieve our long term targets.
Before we turn the call back over the operator, best we'd like to add some closing comments.
Thank you Don and good morning.
So with a lot of mixed feelings that I approach at the end of my time at key and as I've said before being the CEO. This great company has been the privilege and the highlight of my career and I will always be proud to have been part of this team.
I have also enjoyed meeting many of you on the line today and recognize the important work you do for our industry.
I've been at key for 14 years and nine years at those as our CEO and I've worked with some incredibly talented and dedicated individually and collectively we have created a different company financially strong value space and dedicated to providing unparalleled service to our clients never more and more.
And then the times, we find ourselves 10.
In addition to serving on Keys Board of Directors I also had the privilege to serving on the board to some of the leading into industrial technology and healthcare providers in the country, which provides me with the vantage point across a large part of our economy.
And while I recognize the near term challenges I continue to see strong underlying business that will whether the current environment and lead us through to the recovery phase.
Let me wrap things up with a comment on our CEO transition.
Chris will assume the role as keycorp CEO on May Onest, and our transition has been very smooth and seamless.
I am confident and Chris and in our leadership team and indeed of all of our teammates who are fully engaged and committed to not only navigate the current environment, but ultimately take our company to the next level and deliver value for all of our stakeholders.
And with that let me turn the call back to the operator for the Q and a portion of the call. Thank you.
And ladies and gentlemen, if you wish to ask your question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.
If you're using this speakerphone, please pick up the handset so far press in the numbers. Once again, we have a question you may press one than zero at this time.
And no one moment for our first question.
And we will go to the line of Scott Siefers with Piper Sandler. Please go ahead.
Thank you for taking my questions. So first congratulations best wishes.
In the future.
Yes.
So I want to wanted to ask Don maybe its most appropriate for you just little more detailed please on the assumptions that went into the seasonal reserve maybe anticipated GDP contraction on employment etcetera, and then maybe just follow up.
But in your mind would it take to require a repeat of the level of reserve build from the one quarter from the one Q in future quarters.
Sure great questions gotten as far as our economic scenarios, we use a number of the recent Moody's scenarios the forecast.
To inform our seasonal reserve.
Each of these scenarios included a severe reduction in GDP and significant increase in the unemployment levels.
I would say that our outlook assumed GDP will be negative through the third quarter and still be in the high single digit range as far as a.
Negative GDP impact and then also unemployment will also be in the high single digit level through the end of the year only a modest recovery in the fourth quarter is assumed and.
We have tried to incorporate some impacts from some of the program.
Place from the government that but.
It's difficult to fully estimate.
Our at this point in time.
As far as the increase that we experienced this quarter, we really gone from a a outlook that would have shown GDP growth in the 1% to 2% range and unemployment levels in the 3% to 4% range to where you are seeing both of those.
Have a significant.
Or severe reduction as far as or economic outlook and so.
Don't know how to predict whether to see that type of a return again or not but I would say that will continue assess out throughout the quarter and as we wrap up the June results low will be positioned better assess that.
Okay perfect. Thank you and maybe just final question.
Maybe a little more visibility into what's actually happening with the line of credit draws that you're seeing I am assuming they didnt largely read the positive, but you guys I think cat litter unique seasonality in your deposit flows anyway. So first quarter I think tends to be kind of weaker for you guys. So it makes it I guess, a little less obvious from the outside what's going on maybe just any additional.
Color there please.
You're absolutely right. If you look at the average balances, especially on the deposit side do you see the downward trend from fourth quarter to first quarter that really was dropped driven by significant temporary deposits that were in place throughout the fourth quarter. We knew they would go out and early first quarter and they did.
As I mentioned on the call that we've seen deposit flows matched the loan growth from into February to now.
We've seen over $8 billion inflow over that same time period and about $8 billion of.
Loan growth.
We solve out.
$6 billion of line draws and about $1 billion of liquidity facilities that were used to replace commercial paper borrowings for for our customers and on the line draws we're seeing.
Good percentage of those reinvested redeposit back into our bank for deposit flows and so thats part of the reason why we're seeing the strong deposit growth in the month of margin early April.
Perfect Alright, thank you very much thanks.
And our next questions from lines, Steven Alexopoulos with JP Morgan. Please go ahead.
Hey, good morning, everybody.
Good.
Wanted to start on slide 14, where you guys are calling out the select commercial portfolios.
On a weekly monitoring your now too we can you give us a sense as to the magnitude of cash flow disruption that you're seeing in these segments that may maybe if you know how many are participating government programs will be helpful too.
Thats your as far as.
Those industries that ill ask mark to comment a little bit later as far as cash flows, but I would say generally for the areas that we are monitoring.
We have seen cash flows continue to be a little bit higher than what we might have expected for certain areas, including commercial real estate and other activities.
As far as the assistance with the to as I mentioned before the to just through the PPP program. We had 38000 customers request the those those loans and we're well on our way as far as.
Getting those through a approval of the SBA and on to funding and so we have over 90% of those applications already through that approval stage.
As far as.
Additional insights on cash flows marketing thing else you would add on those.
Higher risk areas.
I think you noted as Chris noted that we've had approximately 800.
Customers that have come to us ASCII or some level.
Overall and in the commercial categories, and so I would make that comment thats been inside of a couple billion dollars.
Okay, Steve utilizing this is Chris anything I would add obviously, most impacted would be things like consumer behavior restaurants sports Entertainment leisure.
Travel, obviously very significantly impacted and on the other side of the equation leveraged lending we always talk anytime we talk about portfolios, we always talk about any place there's leverage.
That portfolio wouldn't necessarily have seen the kind of impact from cash flows that some of the others had right.
Thank you and given the large reserve increase this quarter can you give us a sense of what the reserves are on these buckets, so you're falling out on the slide.
Pacific reserves, we havent shown the reserves on the categories, we will see if we're going to add that and future disclosures.
In our slide deck, we do show the whether the reserves by loan category and so I think thats helpful. Just to give some insight as to how that reserve compares to the current levels of charge offs and it's also a good benchmark to show compared to other peers, because we think that.
By loan category, they're fairly consistent with what we've seen so far for some of the larger banks that have announced already.
Okay.
And finally for Beth you spent the last several years change in many aspects of keycorp right top to bottom, including the credit risk profile of the company.
Are you there is pretty confident here that you're going to come through this credit cycle is a top performer on credits specifically.
Well, thanks, Steve and indeed, we did spend a lot of focus on time on the strength of our balance sheet in our risk profile.
As well as our liquidity and being good stewards of our capital and we did it to position ourselves for stronger financial performance and then importantly to prove that this company.
Indeed, whether a downturn both as a company that could absorb its credit portfolio marks and risks.
Indeed, indeed be a top performer and performed better than the median and to also make sure that we could extend capital and support our customers through this downturn whatever downturn. It wasn't apparently here we are and as you can tell in the face of this we indeed our.
In extending that support both through that PPP program as well as line draws and I'm highly confident.
With the team with the positioning of this balance sheet with our risk profile and what will be our future performance.
Great. Thanks for the coloring very good luck in retirement.
Thank you Steve.
Our next question from the line of Ken Zerbe with Morgan Stanley. Please go ahead.
Great. Thanks.
I guess, maybe starting off with loan growth curve, obviously, you've got to ended period basis, It's really really strong I'm sure you had conversations with some of your larger borrowers how do you envision those balances trending over the next couple of quarters. Some is this just a temporary drawdown is it something a little more permanent.
Thanks.
Ken It's Chris we as you can imagine through this time period have been talking to a whole bunch of our customers as it relates to these larger investment grade.
Companies that you're referring to first we're getting obviously a significant amount of the deposits, but as the markets continue to stabilize and they clearly have by a whole lot of metrics I look for a lot of that to be taken out probably in the bond market probably in the next couple of quarters.
Got it okay.
And then I guess.
Maybe just in terms of second question in terms of the drawdowns, how many of those borrowers I know you said, 80% is our investment grade, but how many of those borrowers have like clearly defined borrowing bases are collateral that third that their borrowing against versus we hear some of the very large drawdowns. They may not have like specific collateral agreements.
You would on sort of your middle market customers.
So by definition, the biggest drawdowns or large investment grade companies that have access to capital can people that are on a borrowing base would be constrained obviously by their ability to generate receivables and inventory to in fact generate additional availability.
Okay that makes sense and then just last question. How are you guys reserving for troubled loans, so to speak troubled loans, where where you are providing forbearance, but they just aren't being classified for whereas as troubled is that something you can build into your see some reserves today or is that something that we see development materializing over the next couple of.
Quarters.
Our Cecil reserves do anticipate that kind of migration given the economic outlook, we haven't and on the commercial side, even though we would be giving forbearance, we would still be evaluating those credits as far as having those appropriately risk rated in that risk rating will be reflected in the future of seasonal reserves that are established for for those credit and anticipated with this.
Adjustment as well on the consumers I'd be a little bit more challenging as far as many of those my view more based on.
Delinquency status and given some of the forbearance that are done Warner bridge capacity might be a little bit lagged as far as the impact on on those credit.
Got it okay perfect. Thank you. Thank you.
And our next questions from line of Erika Najarian with Bank of America Merrill Lynch. Please go ahead.
Hi, Good morning, good morning, good morning.
Just wanted to ask a question about.
How we should look at your last DSS results is a potential.
Guide in terms of the severity of losses this cycle.
So a two part question one is that over nine quarters in your last Steve fast you.
Limited in your company run testing and over 6% nine quarter of credit loss rate and Cnine and Im wondering what you see that's different in both positive and negative in terms of what could be playing out in the actual recession first is the scenario and that last test and also you closed laurel.
Road Asker.
The fast and Im wondering where do you see stress losses here and is it as simple as taking that reserves from slide 23, and putting it over the consumer direct balances and saying okay. According to this reserve keycorp is implying a 3% loss rate.
The balance sheet date on this portfolio.
So a full question Eric I'll try to my best to follow up on that that.
What I would.
Just to offer up that as far as our severely adverse scenario that we just submitted to the fed.
This this quarter as matter of fact.
It would have a and economic scenario that will be much more dire than than what occurred through in the 2008 through 2010 time period.
And in that scenario, we would have had about $4 billion of credit losses during that nine quarter time period.
Look at our total reserves that we have both the allowance for loan losses and reserve for unfunded loan commitment that totaled about 1 billion a half dollars and so this is about 40% of those combined losses are recognizing that the biggest difference there as is the duration of that stressed period that it would have assumed severely adverse.
This impact on GDP and unemployment, but they would have been sustain for very long time period. Our current assumptions. We have is as we start to see that recovery in the fourth quarter of this year and so it's a much shorter impact and that duration is much more important as far as losses, and especially on the consumer side.
As opposed to just a b shave type of recovery that some of the initial assumptions might have included so.
I would say thats the biggest gap as far as the of the difference between that severely adverse scenario and what we're showing as far as reserves as of March 31.
As far as Laurel road that Thats only a component of the overall direct consumer loan portfolio and.
I would say that.
The loss content that we're seeing from that the the performance of the portfolio continues to be very strong that we're very pleased with a.
Highly focused on doctors and dentists and that's the group right now that we want to be able to support and bridge them through this time period and.
The lower road customer base and programs. We will offer are very helpful to be able accomplish that so.
Not seen any outsized expected stress loss for for that portfolio.
Got it very helpful.
My second question is is it yes.
Given the magnitude of.
Interest rate reduction is late in the first quarter could you, perhaps help quantify the level of net interest margin compression that you expect for second quarter.
For second quarter, Theres going to be really three components that drive that interest rate margin compression keep in mind that we do expect net interest income to be up.
But the PPP program should have about a seven basis point, plus or minus negative impact on margin.
The loans have a contractual rate of 1%, but the by the time you would factor in the.
The loan fees associated with added something just a little north of 2%, which is still a low yielding loan for us in this environment.
Second would be the increase liquidity levels that we're currently maintaining north of $3 billion and cash each night and at the fed just to make sure that we have robust levels of liquidity given the potential changes and overall funding mix is and what have you.
And thats, probably up from a half a billion to $1 billion and so that increase liquidity will put pressure on NIM not net net on eni, but have pressure on them.
And then I would say that the.
Remaining pressure on net interest margin would would probably be in that.
Low to mid type of basis point range difference because the rate decline occurred late in the core and what we said that our deposit rates will be down 30 to 35 basis points.
That's still wouldn't translate to north of a 40% beta on that change and so thats something that will put some near term pressure on margin as we view the lagged impact of deposit pricing coming through.
Got it and if I could just sneak in one more.
It is clearly a significant amount of demand for bank balance sheet and Im wondering your common equity tier one ratio at 8.95, what is the level that you're comfortable drying this ratio down to as this demand for balance sheet continues and is is there anything you can do in terms of R.W. admitted.
Jason too.
Offset some of that demand from your customers.
And that as far as our outlook right now, we would say and Chris highlighted as well that that commercial loan growth should be muted this quarter compared to what we experienced in the first quarter and we're not seeing the active increase request for draws or other funding coming through from from those customers.
Second we are seeing strong loan growth, but a lot of that's coming from the PPP program, which has a zero risk weighted component to accented is full of guaranteed and and we fairly short term in nature, and so that shouldn't putting pressure on that and then the consumer loan growth that we're seeing.
About half of its coming from residential mortgage which is also a low risk weighted asset and then the other half from lower road and so we don't think we'll see as much pressure on the R.W.A. is what we did this last quarter that.
The growth we saw the period in cost us over 40 basis points of R.W.A. because of that rapid increase in some of those balances. So we don't see that is an impact for us going forward.
I would say that as far as what level or are we comfortable that we'll continue to monitor it that would I headset is that slightly below our longer term targeted range, but.
That was with the expectation that when things are a little more stress, we could see that drop a little bit below that level.
And so we do believe that we have sufficient capital to continue to play through and support our customers and support our current.
Evident outlook based on our current earnings projections as well so things that we're in good position there, but that's something we'll continue evaluate as things will evolve.
Really helpful. Don Thank you and congratulations and I hope more women following your footsteps.
As do I. Thank you Eric.
Next we'll go to line of a John Pancari with Evercore ISI. Please go ahead.
Good morning, good morning.
Back to the.
Through the reserve I appreciate the color you gave in terms of higher how you're thinking about through cycle, our loss content and that your reserve is.
Is it at approximately 40% of that new level that you calculated.
Just to recycle losses is.
Others banks, just earning season have also talked about that relative size about 40% ballpark would they've also been indicating that they expect potential incremental loan loss reserve additions of.
Hi in coming quarters can you just talk about the likelihood of taken those additional sizable increases in next couple of quarters, because when you look at it you would think did that you might need to be higher than 40% of that expected loss rate. This type of crisis. Thanks.
That's a great question and I wish someone could help provide some clarity on on the depth of the recession, the duration that recession, and what kind of impact all these programs are having that.
We couldn't be more pleased with what we're seeing from the treasury or from the fed and from others to help provide that bridge to support for our customers and we think that we'll have a a meaningful impact on on their ability to continue to operate going forward and bring that economy backup to the level it needs to be but we don't know what's going to happen between.
Now and June Thirtyth that.
As far as other comments that if you if you look at the economic forecasts have come out in early April they probably are a little bit more negative more about the recovery rate as opposed to these the depth of the actual recession and so.
More going to toward a U shaped.
Scenario as opposed to a V shape and so.
We'll have to continue to assess that I think it to prevent premature for us to speculate as to how much that reserve change could be at this point in time.
But if we do see more negative economic forecast as of the end of the.
Second quarter.
There could be additional pressure on reserves at that point in time, but it's just too early to tell John sorry about that.
Okay, Alright, Thanks, and then I know you cited the balance of the PPP loans in that you're seeing a healthy amount of appetite there.
It looks like Mike Upsizing of the program. So I got to assume that you're going to see greater demand over time today.
What are your plans for those loans on the balance sheet are you looking to sell them. It is going to be to the secondary market, it's going be do that said.
Either facility, how should we expected that.
Find its way on and off your balance sheet.
One what we're very excited about that program and we were out early on and I think Chris we had over 130000 outreach efforts to customers and had over 50000 customers at least expressed some interest in and understanding what the program isn't as we mentioned over 38000 applications and so thats a huge percentage of our.
Customer base and.
Very pleased weve been able to support those the way that we have and as we looked at that program. We think the life of those loan should be fairly short that.
If you think about.
Hey, 10 weeks from the time, they get those loans they would be in a position potentially to ask for forgiveness against that and so we think the life could be fairly short term in nature and so we will keep it on our balance sheet that.
As I mentioned before having very strong positive flows the.
The fed and Treasury have provided additional areas as far as supporter funding for those assets and.
If deposits aren't sufficient to meet those funding needs than we would have those available to us to to provide that.
Liquidity, but generally don't see any need to sell those assets as part of our operational plan, yes, if I could just add.
Our immensely proud of how our team rallied around the PPP program, which we think is so important to get this country back up and moving if you think about it Don mentioned 135000 client outreach as we had more than 10000 of our team mates out working on this.
Massive program very short timeframe and I'm, just really proud of how the whole team came together and really went out to support these clients. We also built.
Really great digital straight through processing that enabled us to basically process nine or 10 years' worth of SPJ loans over a couple of weeks. It's good point, Chris that normally in annual flow for this type of loan product with the FDA with 100 600 for us and we've done 38000 applications and little over a week.
Okay got it thanks, Don and Thats best of luck in retirement.
Thank you John.
Our next questions from Peter Winter with Wedbush Securities. Please go ahead.
Hi, Good morning, Good morning, Peter just wondering you guys.
To sit on a fair amount of excess liquidity.
Let me, whereas the LCR ratio today, because I thought.
Thought to continue to use the securities portfolio.
On loan growth.
Seems like.
There is a fair amount of room to remix, earning assets to help the margin somewhat making the second half of the.
Peter you've been reading our playbook here that we didn't buy any new securities here in the in the first quarter we.
We're using some of the cash flows there is to reinvest and loan growth and so we still think thats clearly available to us we have.
Well over $50 billion of liquidity that our LCR ratio that we would calculate now is north of 120%, so whats well of.
What we would target.
The fed for bank, our size would have within the 100% range and we're well north of that even in this environment and so.
We will consider to.
Evaluate how we want to manage the overall mix for the assets.
And that could be continued opportunity for us, especially given the reinvestment rate for for those investment securities as well south of what our current portfolio is.
What are the.
Investment.
Yes.
We tend to have a fairly short to rated.
Agency Cmos and.
Our current cash flow off of that is somewhere north of 240 as far as the.
Maturing securities the reinvestment yield today would be between one and a quarter and want to half percent. So.
Considerably from from from where it was just a quarter ago.
Okay, and then just a follow up question, Chris with your opening remarks about going into this.
Downturn in a much better position certainly from the capital liquidity standpoint.
Just can you talk about some of the biggest changes from a credit perspective.
Heading into this downturn versus the fight financial crisis, and then just.
Thats comments that you think you could.
To better than peers.
From a credit perspective.
Sure Peter So if you went back 10 years for example, I'll just give you a couple of things take a look at say our real estate business at that point, our real estate business. We would have had about a third of our real estate book would have been in construction loans today that number would be 8%.
Ish, we also that our real estate business at that point, which is where most of our losses were incurred was principally a book in hold kind of business and in the last decade, we have built an amazing ability to distribute paper such that we don't really necessarily take in.
The risk that we don't want to take because we have a lot of avenues, whether its Fannie Freddie FHLB. The life companies right now the CMBS market is not available, but it will be once again.
Interesting Peter even in these times, because we've done a good job and I'll stay on real estate because that is where most of our losses were we also reconfigured exactly who we wanted to do business with if you think about people in the multifamily business in every city, there's one or two groups that really are the premier.
Providers of multifamily and we reconfigured our complete client base and what we're seeing right. Now is in spite of the disruption out there that our backlog is actually growing in our commercial mortgage business because we have tech the people that some of the agencies want a bank so that would be just some examples.
Sales of what we've done the other thing that I'm really proud of we are as significantly bigger business today than we were a decade ago and we are I mentioned leverage earlier, we always focused wherever there's leverage is where there's risk and our leverage book is generally exactly where it was 10 years ago before we grew by.
40%. So those are just a couple examples it's the whole concept of being able to distribute paper being able to carefully pick your clients. This whole notion of targeted scale and then lastly in the case of real estate, it's just a completely different business.
I think I would add to that as wells as it under Chris invest they've both shifted the overall strategy of the company would be a relationship bank.
And having that complete relationship we have shown time and time again through the downturn those relationship customers will perform much better than where it's a lending only relationship or where you're not the primary bank and I would say that.
That's subtle difference we think should better position is this time than what we experienced in the last downturn.
Right.
And I just want to which you guys best of luck next chapter it's been great working with you always yes.
Thank you Peter appreciate that.
Our next questions from Terry Mcevoy with Stephens. Please go ahead.
Hi.
Sure.
Great.
The recent highs.
Terry.
Very well I apologize, you're breaking up on as Terry.
Sorry about that.
I want to add a follow up question on the PPP program could you just talk about the average loan size because it does impact the process be in Don in response to it earlier question you kind of added that that fee into the yield so I just want to make sure.
Where that's going to where that's going to run through the income statement in the second quarter, whether it's a.
Included in interest in like you may be suggested or if you will come to fee income.
Sure that as we mentioned before we've got about 38000 applications about $9 billion as far as the loan value. There so something north of the 200000 dollar per average loan size and so it's been a broad mix of customers. It's gone from our small bank business banking accounts to bid.
Banking to even some of our middle market customers.
Still fall under that 500 headcount levels. So that says it's been a huge.
Program for Us and very pleased with those those results as far as a fee that we will be realizing on those that we do expect to take those through the net interest margin and amortize it through the contractual life of those loans, which is two years and so as those would be for given our prepaid.
Amortized portion of that fee would be taken an income at that time as well.
Great. Thank you for that and then I guess I'll ask about the main street lending program are you getting ahead of that program and what could that mean for balance sheet growth going forward.
So Terry it's Chris.
I'm proud of the fact that we a key along with many others in the industry have been part and parcel working with the fed and others to structure. The main Street program, we have a whole team around it and we think it's going to be helpful to some of our clients that really need some incremental funding.
And but for the main street program. They know they wouldn't necessarily have access to additional capital. We think it's going to be very helpful. It hasn't gotten a lot of discussion, but if you look at main street and some of the other programs in the aggregate there about 600 billion. So it's not inconsequential. We're we're working hard on it as we speak.
Thanks, and best Best wishes ahead for you. Thank you. Thanks, Terry I appreciate that.
And next week on line of a bill our cash with Nomura. Please go ahead.
Thank you good morning, Don I wanted to follow up on John's question regarding your Cecil assumptions your comments.
Thank you very clear that theres lots of uncertainty, but without getting into magnitude just direction. We've heard other banks that have already reported this quarter talk about the incremental degradation in the outlook post 331, with unemployment rising and GDP decline, even more sharply than originally expected and.
So I'm going from expecting the V shaped recovery as recently as March to now anticipating more of a U shape recovery and so given those changes the suggestion there has been that they'll need to book incremental reserves in Q2. So.
I guess the direct question for you guys is are the increases in initial claims that have negatively surprised maybe over the last you Thursdays in April our those increases contemplated in your allowance or would you need to book additional reserves, if those elevated unemployment figures hold.
As far as the unemployment and GDP assumptions again, we really have to wait till we get closer to the ended the quarter to to make any assessments. There I would say as you highlighted that.
The near term.
Impacts have been negative adjustments to the outlooks.
Since April 1st but.
As far as I am aware I haven't seen any new Moody's scenarios and others that we head into use considered in connection with our initial assessment that.
I think we're just again I apologize, we're just way too early to try to predict what's going to happen as of June thirtyth as far as economic outlook, we're hitting a period here, which I think we'll be very informative as we start to see how states and counties within states target start to return to work and how quickly the economy starts recur.
Cover from that how do these programs have been implemented.
Ridge those customers through this environment and this is really at a historic level as far as that support and so.
I wish I could give you a more direct answer but.
I think we need to see some of this play out before we provide any more insights as to where it might go from here I understood. That's fair. Thanks, Don separate question on on the dividend.
Some high profile current and former regulators have suggested that it would be prudent for the banks to cut back on their dividends to the extent that the duration of the downturn is prolonged can you frame for us would it would take for for key to hold its dividends.
We will continue to assess that based on what we see a for the depth and duration of the downturn that.
And our severely adverse scenario that I mentioned before takes our common equity tier one ratio to roughly 8% and that's with the assumption that we continue our dividend at the current level and that current dividend is only $185 million a quarter or so as far as the $180 million a quarter as far as the capital.
Utilization.
And so it's not a high percentages as far as the overall earnings capacity of the organization. It's also something very important to our shareholders and especially our retail shareholders, who will take that all in consideration.
We believe that we're well positioned to continue to maintain that based on our current outlook in assessments.
And so we don't see that is coming at risk that.
We'll continue to re evaluate as we get through this quarter and beyond to see.
We would see the economy trending at that point.
Understood so to the extent that this it were to be a prolonged.
Downturn that do you think the is the decision over whether or not to spend the dividend. One that you think banks should had the freedom to make on their own or would you prefer that regulators more broadly urge banks to spend the dividend. So the entire industry is sort of in the steamboat rather than having one off.
This is across individual banks just curious what your your views are.
I think if you talk to most banks, we have all significantly increased our capital levels in our liquidity position sinful basis.
And part of the reason for doing that was to be able to continue to support our customers in times of need and we think the way, we're well positioned to do that but also where appropriate to continue to support our common dividend.
Most if not all banks have cut out their share buybacks and thats a significant portion of the capital returns have occurred over the last few years and so that portion has already been stopped.
And so as we look forward.
The regulators may come to a point that where they are recommending that large banks do suspend dividend. If they believe that the things are our two dire but that but I.
I think that most banks, we believe that we're well positioned to continue to support those based on what we're seeing in the economy today and based on our capital levels that we maintain.
Thank you so much.
Let me Echo that I've enjoyed the time, we spent together and certainly echo everyone's congratulations as well.
Thank you Bill.
Our next questions from Ken Houston with Jefferies. Please go ahead.
Hey, Thanks, good morning.
Don wondering if you could just give us a little bit more detail on some of the fee points that you made in the guidance. So first of all.
When you're talking about the nonmarket revenues in your prepared remarks, you talked about a couple of extra negative this quarter, so when you're thinking about slightly lower off of.
First quarter or should we be adjusting for those little things as well as as of as much as obviously for the the fair value marks.
The.
The fair value marks are more than a little things and auto credit spreads have already come in nicely since the the ended the quarter and if we would.
Snap the line as of yesterday as of March 30, Onest that 73 million dollar reserve for.
Customer derivatives would be down by $25 million already and so we think that will provide some additional support we would not expect the thing that we mentioned as far as the operating lease adjustments that was more of a onetime one off type of an adjustment as opposed to something we would see going forward.
If you look at some of the other revenue category as trust and investment services.
About half of that is related to asset values and about half of it as a brokerage and or.
On the commercial activity trading account activity within that and so those levels were a little elevated this quarter, which we would probably see come down a little bit.
I'd say that cards and payments related revenues are impacted by credit card purchase card and.
Merchant services revenues of about 50% of that tied to that category and we did see declines of 20% to 30% of those but on transaction volume levels at the end of the first quarter. So we would expect those kind of trends initially continue into the second quarter, but many of the other revenue categories could see some stability and or even increase that.
Residential mortgage.
Fee income was negatively impacted by $9 million of MSR impairment.
Our pipeline right now sitting at $2 billion, which is two times when it was going into the the first quarter and so we should see some some nice ramp up in those revenues and so thats why we think that.
We would see some of the other revenue categories that down slightly reflecting some of that activity level being offset by some of.
Benefit for residential mortgage and other fee categories.
Yes, Okay, great and so then your markets related really.
Presumes that really speaks to the investment bank an understanding it's too early maybe can you just talk about your product areas and just what's happening in those product areas. You've got this year. He business on one side and then your verticals obviously to your point earlier about the fair value marks the markets have improved we've seen some opening in certain places so I.
While early just can you just maybe talk about the dynamics at the customers are talking through that you're hearing about with regard to weather pipelines or move or not.
Sure Ken it's Chris So pre Cobot 19, we had we described is very good pipelines across the board.
What has impacted.
Our business. The most is the delay in M&A activities, obviously, the whole world is in price discovery right now and it's not a time when you can complete an M&A transaction that also has.
Knock on effect of our syndication business, because we finance many of the transaction transactions in which we advise.
So that is those deals I don't think are gone, but the question is when do they come back in that goes back to Dons point, how deep and how long, which everyone is trying to figure out right now now as you step back some of our verticals that we've invested heavily in I think will be well positioned as we go forward. If you think for example.
About healthcare.
Arcane brothers platform is probably the number one adviser for facilities based healthcare I think you're going to see massive consolidation as we come out of this the next area, where we've invested a lot of time and money has been technology and I know I can speak for key we have three times as our growth rate of digital Cussed.
Summers is three times the rate prior to covert 19, and so the whole notion of software as a service the whole notion of technology I think is going to be an area that goes really well another area, where we're focused is renewables and I don't think that it's going to have much of an impact I think if you look at the push.
For both wind and solar and we're a leader in North America I think those will remain strong. So that gives you a little bit of flavor, maybe from both a product perspective, and a vertical perspective.
Okay got it and then one just quick one on the expenses side. So.
Really good first quarter Riddle, resulting you're talking about stable is part of that again, the reflection of of the uncertainty on the.
Markets related revenues and the kind of big slower start to the year or are there other things that you're also doing underneath what you'd already done last year to continue to hold the line. There. Thanks, guys and best of luck Beth. Thank you Ken Thanks, Ken and.
We are continuing to focus on other expense initiatives and programs to help.
Move the expense levels down.
I would say that some of the outlook reflects.
Not only some.
Revenue outlook provided but also some of the additional efforts including.
What we would be seen from a branch distribution perspective, what we're seeing from a current operating expense levels for supporting our current team and also include some increased costs that were expecting because of the shutdown that we're paying additional incentives to many of our team members that are required to be.
In.
Application for their responsibility, whether its brand employees or others and we've also had to step up some costs associated with.
Onshoring, some activities, where we've seen some third party vendors that haven't been able to provide the support that we need and certain areas and its requiring us to add some additional resources there and so each of those are reflected in that relatively stable expense outlook.
Our next question from Brian Foran with Autonomous Research. Please go ahead.
Hey, good morning. Good morning, I was just thinking about some of your comments about the difference is now versus the crisis for key.
I guess one of the things during the crisis. It was tough was the PPNR your pre provision earnings.
Really kind of collapse that got down to $80 million in Threeq you own night.
And I guess this quarter, even with all the charges it was over 500.
Don I guess is it fair.
And your comments, even building an uncertainty for investment banking it seems like you're kind of pointing to a number maybe 600 million a little north of that.
And then bigger picture beyond the number.
Think about the importance of that people are being so much higher just in terms of your ability to chew through whatever the ultimate losses are.
Great question, that's been a core focus of ours is continuing to improve our maintain our positive operating leverage to deliver improvements in that core performance.
See a shift of our portfolio into more of a balanced approach and so that we have.
Higher percentage of retail oriented businesses today than what we did before and those are critical to us.
I would agree that the that increased level of keeping our is clearly important to us as far as supporting our dividend going forward and our overall capital position and so even in the stressed environments. We're still showing strong levels of pp in order to be it will support the increased.
Our credit costs that might occur and those types of environments and Thats why we believe we are able to maintain those capital actions based on that type of an outlook.
And then maybe one follow up as we think about the trajectory for capital going forward.
Can you remind us suit to all of these Cie is excluded from the CP one ratio.
And if that's right.
Flexibility would you see whether it's the hedges or securities gains on if you needed to access a little bit more CTO one.
It would be a reasonable ballpark for the flexibility that.
Securities gains in hedges would give you.
Yes.
The majority of those is.
Backed out for for capital purposes, and so we are sitting in a net positive.
That would give us a lot of flexibility to be able to manage that.
Common equity tier one ratio up by realizing some of those security gains if we wanted to our challenge for for that would be that.
We don't want to do it for.
An earnings or liquidity perspective, and oftentimes, you'll you'll see a degradation in the future earnings when when you would would swap other securities for lower yielding securities today, but.
Does provide us some flexibility there.
Great. Thank you so much thank you.
Our next question from Saul Martinez with CBS. Please go ahead.
Hey, Good morning first of all best of luck that then we'll miss working with you.
So most my questions have been asked but I'll follow up on a on a seasonal related question, maybe this for Don answer Mark.
It's a little bit more of a broader question, but it's in response to to Eric's question and I guess I like to get your perspective on.
This de fast stress test and where they are useful lives a gauge to look at Cecil reserve adequacy in downside case scenarios in where they're not because it is there risk of taking those results to literally and I asked that because the fee.
Beyond sort of the differences you highlighted Don in terms of the economic assumptions. These fast is sort of a fundamentally different exercise it's meant to measure loss absorbing capital in a severe scenario and hence the construction of DSS is conservative whether its.
Line draw assumptions are until recently asset growth, it's in mind quarter period.
And which is very different obviously from from your corporate book a lot of which is.
Much much shorter contract maturities your reserving over and Cecil These a best guess estimate.
A point in time estimate of what your reserves in your losses will be so it's sort of fundamentally different construct so I guess my question is more how should we use that is sort of a gauge in is there risk of cheating.
Taking those results in the 4 billion you mentioned to literally is is sort of a gauge of where reserves.
So to even at it even in a really severe scenario.
So I think you've answered the question better the Nike on that.
I agree with your your observation that the purpose for.
Car is one distressed the capital and so the assumption sets are included in that would include higher utilization continuing for an extended period of time as far as some of the commercial loan draws would include using some historic loss rate may not be reflective of the current environment or the current portfolio levels.
The fed testing would would include some adjustments for where the data isn't present for their models, which to elevate the loss content.
Compared to what you might see another nuances of that for.
Cecil you only provides a little the reserve for the loan through its maturity, whereas in see car again would assume those loans get rolled over and therefore could be subjected to future loss based on the economic scenario. So.
Yeah, It's a challenge and I would say that.
I'm surprised as tightly as is the some of the estimates the numbers have come out from the banks that have announced so far as far as the ranges for the change in the seasonal reserves I thought they would be all over the board that.
If you think about the variability in the different types of.
Economic outlooks that you could assume the impact in the via the models the.
What kind of reasonable in for portable period or people using and how does how do those revert back to the norms I would've expected, even though a wider variability than what we're seeing today.
As far as the earnings announcements of come through and so.
I think it's helpful as far as a benchmark the but I don't think that it's necessarily predictive as far as if we would see the economy.
Worse.
That's the reserves.
Right. Okay. No. That's helpful. I guess I would just.
Just wanted a little bit of verification that way.
[music].
It is broadly applicable I guess, it's just a quick follow up on.
Yeah.
Okay.
On the slide with that risk portfolios.
Yes.
Clarification, the leverage loan portfolio.
Much overlap is there in that portfolio with some of the other segments that are at risk that you highlighted there.
I would say, there's very little overlap there that.
I would say that generally are.
Leverage book, probably more is.
Commercial industrials.
Nature as opposed to the categories that are shown Chris would you have any other influx right. Our leverage book lines up of very very strongly with our verticals that we are deep in and so there would not be a lottery overlap.
Got it and just on those risks buckets like any yes. There is a big variants within those buckets like travel for example, hotels tours and then Theres odder airing water.
I guess like is there a more granular assessment, where as you know how much hotels for example, the risk your parts within those buckets is there a way to kind of gauge the active.
These are these are fairly broad categorizations.
For some of these.
For the consumer discretionary and travel buckets you highlighted.
There are some some broader categories. For example, hotels that I believe that number is between the $701 billion level. So a fairly small portion of the overall portfolio.
But we'll see if we can provide some additional clarity or granularity on or around those those buckets to many of our peers have been more granular as far as commenting on on where there are very specific areas of risk and these are more quarters themselves and we have that provided.
Yes, I know that would be helpful. Thanks, a lot guys Q.
And our final question will be from the line of Gerard Cassidy with RBC. Please go ahead.
Thank you good morning, Beth Chris and done.
Morning.
I'm done maybe you can share with us.
Obviously, we know about the high risk nature of certain parts of your portfolio in your peers you just touched on the about hotels and leisure time says credits if you take that LNG off the table for a moment one of the other areas of the portfolio are you all focused on making.
Sure the.
You keep it really close to handle on what's going on in case this downturn extends out longer than any of us expect.
So Gerard its Chris.
This is it new to the pandemic, we always focused first and foremost on anything where there's a lot of leverage and so for us. It's our leverage book, which we indicated here and it's also any of our real estate portfolios.
That's those are the two places where there are leverage we've been monitoring those very very closely for a very long time, but those are the two areas. When you think about.
Financial and economic stress.
I will start with leverage.
Very good and then.
Some of US on this call has been around for a while and we remember the U.S. government getting involved in lending or getting involved with the banks and then subsequently changing the rules on the banking.
Recall, how is this lick carry capital and what happened after that.
ASCO then of course, we had park in kind of they changed the movies on how to get out of TARP, what's safe guarding so you guys putting up.
In this new program the PPP program when the mainstream lending program, where you working with the government, helping you customers, which is great everybody's working twice as hard to get this done.
Year to have some that were going to see that there were some mistakes made by the industry, let's say strategy putting in place to prevent any kind of pushed back you get me you know tissue, but the industry may get a year and a half from them.
First of all Gerard its it's it's a great question and obviously when a program has put together in the matter of weeks. That's 350 billion, we think going to another 250 billion.
There, it's it's not perfectly clean and our posture was that we need to be there to support our clients and we need to be out there talking to them and helping them through this period. So that was kind of our guiding principle, having said that we also spent time on things like indemnification.
And reps and warranties from the from the customers Don do you want to add to that.
I think you're right Chris that we've been very careful before we even within the app in for approval from the SPJ that we've done our homework and we've done appropriate underwriting based on the standards that are put in place and so it's been a significant effort on on the teams part to ramp ups to be able to address that the but.
That's primarily our area of safeguard has is making sure that we are falling.
Our understand our best interpretation and the guidelines and rules that are out there. So.
We again appreciate everything that's been done from from the Treasury from the fed from others that are trying to help provide that bridge and we want to so port our customers through that the best way that we can and.
And so we just want to do it right, but hopefully not subject ourselves to additional risk with hindsight after.
The dust settles.
Okay, and then just finally, congratulations Beth and you agree loan you running strong leadership can keep feeding into winning in general and good luck in your future adventures. Thank you. Thanks. Thank you so very much to art and to all of you today.
And then I'll turn it back to the company for any closing comments.
Again, thank you for participating in our call today. If you have any follow up questions. You can direct them to our Investor relations team to 16689 for two to one this concludes our remarks. Thank you.
Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
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