Q2 2020 KeyCorp Earnings Call
[music].
Thank you Greg Good morning, and welcome to Keycorp's second quarter 2020 earnings Conference call joining me for the call our Don Campbell, Our Chief Financial Officer, and Mark Midkiff, Our Chief Risk Officer Slide two is our statement on forward looking disclosure and non-GAAP financial measures. It covers our presentation materials.
And comments as well as question and answer segment of our call.
Im now moving to slide three as you saw in our press release. This morning, we reported second quarter earnings of 16 cents per share. Our results included a provision for loan losses, which exceeded net charge offs by 386 million were 34 cents per share.
Our strong results for the quarter are attributable to the resiliency and dedication of our team and their commitment to serving our clients our strong balance sheet and our disciplined risk management practices importantly for the quarter, we generated positive operating leverage compared with a year ago period.
Additionally, we reported a record level of pre provision net revenue revenue was up 17% from the prior quarter also a record reflecting double digit growth in both loans and deposits as well as broad based growth of our fee based businesses driven by strength in our.
Capital markets businesses cards, and payments businesses and consumer mortgage our consumer mortgage business demonstrated continued momentum with a record second quarter performance originations of 2.2 billion were up 100% year over year and consumer mortgage fee income of 62.
$2 billion more than tripled from last year. Our performance further demonstrated the success of our recent investments in residential mortgage our pipeline is currently at record levels and as such we expect continued strong performance in the second half of Twentytwenty.
<unk> expenses for this quarter reflected higher production related incentives costs related to our payments business and coated 19 related expenses, including steps that we continue to take to ensure the health and safety of our teammates.
We also supported our clients by offering payment deferrals hardship support borrower assistance programs and forbearance options to help provide a bridge for individuals and businesses through these uncertain times.
Notably we were very active in the Paycheck protection program, we were the seventh overall lender in the program and processed over 8 billion in funding to support our clients funding that saved hundreds of thousands of jobs.
Now turning to credit quality, we have continued to benefit from our strong risk culture are moderate risk profile and forms all of our credit decisions.
Net charge off charge offs for the third quarter were 36 basis points in our deck. We have highlighted several commercial portfolios that continue to receive heightened monitoring in this environment. Don will cover these focus areas in his comments. These portfolios have generally been performing consistent with our expectations.
Given the environment in which we are operating.
We also increased our loan loss reserve this quarter as our provision expenses decreased significantly exceeded net charge offs, our allowance to loan losses as a percentage of period end loans now stands at 1.11, 0.61% or 1.73% Ics.
Including PPP loans finally, we have maintained our strong capital position, while continuing to return capital to our shareholders in the second quarter, our common equity tier one ratio increased to 9.1%, which is within our targeted range of nine to nine in half percent.
Earlier this month, our board of directors declared a dividend of 18 and a half cents per share for the third quarter and that is consistent with our second quarter level I.
I will close by restating the key had a strong quarter, we remain confident both in our ability to achieve our financial targets and importantly, the long term outlook for our company, we have positioned the company to perform through various business cycles, including highly stressed periods like the one we are.
Operating in today.
We will continue to support our clients in play a role to help revitalize our economy.
He remains well capitalized highly liquid and committed to maintaining our moderate risk profile. Most importantly, we remain committed to delivering value for all of our stakeholders now let me turn the call over to Don to go through the results of the quarter Don Thanks, Chris I'm now on slide five this.
Chris said, we reported second quarter net income from continuing operations of 16 cents per common share. Notable this quarter was our provision expense that exceeded net charge off by $386 million were 34 cents per share.
Our results also reflected strong growth in our balance sheet with double digit growth in both loans and deposits fees were also a standout this quarter with strong results in a number of areas, including investment banking cards and payments and consumer mortgage.
I'll cover many of the remaining items on this slide in the rest of my presentation.
Turning to slide six.
Total average loans were $108 billion up 19% from the second quarter of last year, driven by growth in both commercial and consumer loans commercial loans reflected an increase of over $8 billion and PPP balances or $6 billion on an average basis.
Consumer loans benefited from the continued growth from lower road and as Chris mentioned strong performance from residential mortgage business.
Floral road originated $700 million of student consolidation loans, this quarter, and we generated $2.2 billion residential mortgage loans.
The investments we have made in these areas continue to drive results and importantly at high quality loans to our portfolio.
Linked quarter average loan balances were up 12%.
Importantly, we have remained disciplined with our credit underwriting and walked away from business that does not meet our moderate risk profile, 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 seven.
Average deposits totaled $128 billion for the second quarter, 2020 up $18 billion or 17% compared to the year ago period and up 16% from the prior quarter.
The linked quarter increase reflects.
Broad based commercial growth as well as growth from consumers stimulus payments and lower consumer spending.
This growth was offset by a decline in time deposits primarily related to lower interest rates.
Growth from the prior year was driven by both consumer and commercial clients.
Total interest bearing deposit costs came down 39 basis points from the prior quarter, reflecting the impact of lower interest rates and the associated lag in pricing.
We would expect deposit costs continue to decline approximately 15 basis points in the third quarter.
We continue to have strong stable core deposit base with consumer deposits accounting for over 60% of our total deposit mix.
Turning to slide eight.
A couple equivalent net interest income was $1.0 billion to $5 billion for the second quarter of 2020 compared to $989 million in both the year ago and prior quarter.
Our net interest margin was 2.76% for the second quarter of 2020, compared with 3.06% in the same period, a year last year and 3.1% for the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet in the second quarter of 2020 due to the impact of government stimulus programs. The larger balance sheet benefited net interest income that reduced the net interest margin due to lower yields on the paycheck protection program loans.
And significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter noninterest income increased $36 million driven by higher earning asset balances, partially offset by a lower net interest margin.
The net interest margin was impacted by lower interest rates any change in the balance sheet, including elevated levels of liquidity and as I mentioned, our participation in the PPP program.
Really levels negatively impacted the margin by 12 basis points lower interest rates costs seven basis points of pressure and PPP and other combined for six basis points of reduced net interest margin.
Moving to slide nine our fee based businesses had a very strong quarter noninterest income was $692 million the second quarter of 2020 compared to $622 million per year ago period, and 477 million in the first quarter.
Compared to the year ago period, noninterest income increased $70 million. The primary driver was an increase of $47 million in consumer mortgage business with a record level of loan originations and related fees in the second quarter of 2020.
Cards and payments income also increased $18 million related to prepaid card activity from state government support programs and operating lease expense increased $16 million driven by gains from a leverage leases.
Service charges on deposit accounts declined $15 million the year ago period, reflecting lower activity levels in a larger number of fee waivers.
Compared to the first quarter 2020, noninterest income increased by $215 million the largest driver with of the quarterly increase was an improvement in other income primarily driven by $92 million of market related valuation adjustments in the first quarter of 2020.
Other significant drivers of the quarter over quarter increase included record consumer mortgage quarter and leveraged lease gains that are already discussed as well as a $40 million increase in investment banking and debt placement fees, driven by strong commercial mortgage and debt capital markets activity.
I'm now turning to slide 10, total noninterest expense for the quarter was $1.13 billion compared to $1.19 billion last year and 931 million in the prior quarter.
A year ago quarter included $52 million notable items, primarily personnel related costs associated with our efficiency efficiency initiatives.
Excluding these expenses were up $46 million from year ago period.
The increase is primarily related to two main drivers $25 million of the payments related expenses incurred in the current quarter as well as $13 million of cobot 19 related costs to the steps. The company has taken to ensure the health and safety of our teammates.
Compared to the prior quarter noninterest expense increased $82 million. The increase was largely due to higher incentive and stock based compensation from strong revenue production in our investment banking and consumer mortgage businesses.
Other drivers of the linked quarter increase include the $25 million of payments related to cost and other cobot 19 related expenses.
Moving now to slide 11, as I mentioned earlier, the largest impact to our results. This quarter is the build in our reserves our provision for credit losses exceeded net charge offs by $386 million or 34 cents per share.
Overall credit quality trends. This quarter remained very solid net charge offs were $96 million or 36 basis points of average total loans.
Nonperforming loans were $760 million this quarter or 72 basis points of period end loans compared to $632 million 61 basis points in the prior quarter.
Additionally, delinquencies remained relatively stable with less than a 1% increase in our 30 to 89 day past dues and the 90 day plus category declining quarter over quarter.
We've also continued to monitor the level of assistance requests we received from our customers over the past quarter the percent of loan forbearance has not changed materially.
As of June Thirtyth loans subject to forbearance terms were around 2% based on the number of accounts for both commercial and consumer loans in about 4.5% when using outstanding balances.
Turning to slide 12, we also updated disclosure that we included in our first quarter 10-Q that highlight certain industries or customer groups that are receiving greater focus in the environment. These portfolios represent a small percentage of our total loan balances importantly, as Chris mentioned as a group they continue to perform consistent with our expectations.
Each relationship in these focus areas continues to be subject to active reviews and enhanced monitoring.
The outstanding balances shown our as of June Thirtyth and reflect some of the draw activity that occurred late in the quarter.
Now on to slide 13 continued to maintain a strong level of capital this quarter, our common equity tier one ratio increased from 8.9% to 9.1%, which places us back in the targeted range of 9% to 9.5%.
We believe that operating within our targeted range will provide us sufficient capacity to continue support our customers and their borrowing needs and overtime return capital to our shareholders.
As Chris mentioned earlier this month, our board of directors approved a third quarter common dividend of 18.5 cents per share, which was consistent with our second quarter dividend level.
On slide 14, we've provided our best insights for the third quarter, recognizing that we're still moving through some unchartered territory.
We expect average loans to be relatively stable, reflecting a reduction in commercial line draws and more modest growth in our consumer portfolio.
Average deposits are expected to remain relatively stable in the third quarter.
Our outlook for net interest income would be for a low single digit increase reflecting a relatively stable balance sheet and modest improvement in net interest margin.
Noninterest income in the third quarter will likely include a step down from the record consumer mortgage fees. We saw in this quarter and lower gains from operating leases overall I would expect a high single digit linked quarter decline in noninterest income.
Non interest expenses are expected to be down low single digits, but are highly dependent on production related incentive compensation ongoing costs to support our payments business and cobot related expenses.
Net charge offs are expected to be in the 50 to 60 basis point range.
This environment continues to change rapidly, which we can impact the up outlook and comments we provided.
Finally shown at the bottom of the slide our long term targets given the economic downturn, we would not expect to achieve our targets. This year. However, as we emerged from their current crisis, we expect to be back on the path that would lead us to operate within these target ranges importantly, we have not wavered from our commitment to achieve our long term targets.
With that I'll turn the call back over to the operator for instructions for the Q and a portion of our call operator.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad. You mean withdraw your question anytime by repeating the one zero command if you're using the speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one zero at this time and one moment. Please for your first question.
Your first question comes from the line of Ken as then from Jefferies. Please go ahead.
Oh, Thanks, guys good morning, everyone.
Hey, guys.
Which one is kind of ask about the outlook for reserving Don falling on your point see took a bigger reserve this quarter some of the underlying our understandably moving on questions coming up on all bank caused.
How do we know it at 1.73 X PPP on the Hcl.
That's the comfort level, where you guys want to live given the underlying trends and how do you think we outlook. We look for here in terms of reserve builds thanks.
Yes, we believe that our allowance as of June Thirtyth with based on what we consider to be very reasonable kind of economic outlooks and as a general rule, we would start with the Moody's consensus estimate for the outlook and I would say that unlike the first quarter. If you look at the outlook that we used to establish our June thirtyth reserves.
We havent seen much of a change in that through the early parts of July you contrast that with what we saw in the first quarter where.
The estimates that we used as of March 30, Onest did decline and so we had an expectation that there would be reserve builds that.
We believe the reserves are reasonable I think it's also reflective of the nature and composition of our portfolio and.
I would say that were 75% commercial and 25% consumer and the consumer loans generally would have a higher reserve level to total loans and also coverage ratio. If you would take a look at the reserves to what was severely adverse scenarios might and.
Got it and just second one on NII to get you gave the six basis point impact of PPP any in the NIM calculation can you just help us understand what the dollars impact was what Ken what your yield on the PPP part of the portfolio is and how your how you're counting for the fees and such.
Yes, sure that the average yield on the loans themselves or 1% is set by the program. We do take the estimated fees and amortize it over the average the two year life that assumed in the portfolio and so the.
Blended yield that we would have for that loan is.
North of the two in a quarter and then we would just assign a cost of funds to that loan product in order to determine what the impact is to our overall NIM and.
This quarter about half of that six basis points was related to PPP and we had some other miscellaneous items, including some of the in effectiveness as of the swap portfolio and things like that that also had a drag on on the NIM this quarter.
Okay. Thanks, Don Thank you.
Your next question comes from the line of John Pancari from Evercore ISI. Please go ahead.
Good morning, good morning.
On back to Ken's question around the reserves you mentioned the macro assumptions.
Yes, you could just give us look more color on on that was it surely Moody's that you went which and I guess one of them. When I'm also interested is how does it differ from the severely adverse.
D. faster Youre Your reserve right now it's about.
Half of the October 2018 mid cycle. The most recent one that you disclosed of your company run so I'm just trying to.
Triangulate to difference there between where you came out on D. Stat on a stress scenario versus where your reserve is sitting at now thanks.
Sure and a couple of things one the DFS assumptions and the stress loss. The models are different than what you would have for Cecil and for Cecil It's a life of loan which.
I would have a different set of assumptions than what you would be using for some of the.
Stress scenarios the stress scenarios also assume that you could have losses on on loans that are originated during that stress period and so there are some differences there that that would be unique if you look at the economic assumptions that we use the we start again with that consensus estimates, we do make adjustments we have some qualitative.
Adjustments, we make the allowance based on different factors, including.
The currency of of some of our loan grades and things like that and so it does result in some adjustments up.
But our base economic assumptions would have had for example, an unemployment rate in the fourth quarter of 2020 of 9% and would continue in the upper single digits. Throughout 2021. It would also assume that we don't give back to a GDP level that we experienced in the fourth quarter of 19 until.
So late in the second half of 2021, and so these assumptions are fairly conservative I would say that the other thing that does come into play for our models and and also for our outlook is a significant impact of the stimulus programs have provided the cares act and other stimulus of both the helped provide a bridge for some of the.
The commercial customers with PPP program, and others and also for consumers as just with the additional unemployment support that the consumers have received are at a level that would not have been cup contemplated with the stress scenarios in the defects results.
Okay. Thanks, that's helpful and then.
Separately just want to.
We get a little bit additional detail around the on the credit side of your.
I am keys were up to date at quarter end each store criticized assets looks like they liked up as well I'm assuming that pressure is going to be in a colgate sensitive areas, but just wanted to get a little more clarity on where you're seeing that stress start to hit no you're absolutely right more than 100% of the increase in both those categories came in the area.
As related to covert whether its oil and gas or some of the consumer based.
Commercial businesses are driving that increase for both in deals and for criticized and classified.
The only this is Chris John the only thing I'd add on the oil and gas portfolio and I think this is an important distinction obviously oil and gas went into this cycle down even prior to co that two thirds of our exposure is really reserve base, which is really asset base type lending, which is a self correcting.
Mechanism, what you'll see as the downstream exposure that we have as services, which is more than the industry as a whole by strategy is a very small piece of our portfolio, which I just think of important point.
Yes, okay. Thanks, Chris.
Your next question comes from the line of Erika Najarian from Bank of America. Please go ahead.
Good morning, good morning.
I'm going to just piggyback on on Kennen. John's question, you know it when I'm looking at slide 20 of your presentation. Your allowance on you're seeing that portfolio is like 24.
I always think about as you know what your expectations for the cumulative loss rate is for this cycle and your peers are close to 2% and I guess I'm wondering in terms of that contrast that can parish portfolio, which portfolio. What gives you confidence that you will significantly outperforming our peers.
Here's the cycle and what kind of federal reserve our government stimulus assumptions are you, making in terms of you know direct how Q and corporations that don't have access to debt capital markets.
Sure Erika as far as the reserve levels I think that then Chris highlighted this earlier, which is of the two we've had a significant change.
Change in our underlying credit profile for the company since the last downturn and so I think thats important to note. If you take a look at where we're positioned as of the end of the current quarter roughly 50% of ours commercial portfolio is investment grade.
And thats up from 42% just a year ago and so we're seeing continued migration that would suggest that there is a strength as far as the core underwriting underlining credit relationships, we have as the is a group.
The other thing that would be a little bit different for us compared to some of the peers is the level of PPP loans that are included in that seen I category.
The last piece as far as government support we're not assuming any additional government support beyond what was already passed and put through as part of the cares Act and so that's not a significant contribution to future loss assumptions other than what's already been realized or or benefited as far as helping to provide some of that that bridge through this interim period.
So.
Again, I think it's just more reflective of how we see that portfolio and the underlying credit quality that we see today.
Got it and the second question is for Chris So, Chris it's clear to the Investor base that you have plenty of capital.
And this cycle and obviously, if you remain profitable you won't even through that.
However, the fed asterisk curve ball by implementing a separate income test it separate from New York at the capital levels and I guess the question here as you know if this in kind of test on dividend.
Yes.
Extended beyond the third quarter.
How are you balancing earning more than 18 half cent essentially.
Pre preferred on a GAAP basis versus.
Perhaps getting your reserves to a level where investors can compare it appears to say that you're done for the cycle.
Well so just the just a couple of quick question a couple thoughts on that one obviously.
At the end of the second quarter, our reserves or where we think they should be for.
The duration of the through the credit cycle on a on a case by case basis. So we think that were properly reserved the other thing Eric to keep in mind is we have strong PPNR growth I mean, the to the two important things to be able to pay a dividend is to manage our credit really well.
And have PPNR.
Supportive and we kind of checked both of those boxes.
We were able to out earned our dividend in spite of taking the 386 million dollar.
Reserve that we took in this quarter so.
We feel good about where we are it's obviously a dynamic environment, but.
We like the way we're positioned.
Got it thank you.
Your next question comes from the line of Saul Martinez from Yes. Please go ahead.
Hey, good morning, guys warning.
Hi, guys.
Yes.
Glued.
Gains from PCT on forgiveness and.
Just more broadly.
How do we think can you help us bringing the potential size of that.
Those gains look what kind of forgiveness rates are you thinking about timing I know all of this is very very fluid and subject to a fairly high margin of error, but you $8 billion for you guys pretty sizeable and will will impact.
Assuming if they're fairly high for giving a straight with chicken Caesar plausible, but if you can just help us understand.
The impact you're assuming please re queue, if any and how to think about the the magnitude of these potential gains over the next coming quarters.
Sure I would say that we've already started to see receive just a handful of request as for as far as forgiveness from some of our customers. So our expectation for the third quarter does not have a significant contribution coming from that forgiveness and therefore, the rapid acceleration of the recognition of fee income we would think.
Most of that would occur in the fourth quarter.
We don't have any a crystal ball that would would say what what the exact number would be but we're expecting somewhere around 80%.
Of those loans would would probably be eligible for forgiveness and the remaining 20% would just pay down overtime, but that's just a place holder for now with again the majority of that coming in the fourth quarter.
Does your guidance does it explicitly contemplate anything in the third quarter or is it.
What was it very very very very modest that most of what's causing the growth for us and net interest income is the fact that.
We're still assuming that deposit rates will come down by an additional 15 basis points and that offsets the impact from the further LIBOR reductions net of our hedging that we've put in place.
Okay, I guess a related question on Eni that I don't fully grasp is the the average loan balances being flat.
Your period end loans are about 106 billion. Your average was closer to 108.
You know, which would imply for the average to be flat period end.
Thanks to step up from the quarter curious if some of the end of period.
Levels and so I guess can you just help me square way that math here is my thinking about right are you expecting in period loans to kind of jump up from 106 billion. If so what what would drive.
We did have some daily fluctuations on the ended the quarter balances the but I would say that for our outlook. We're assuming that we will have growth in the consumer categories for both the.
Lower road and for residential mortgage and that PPP loan balances on average will be up linked quarter and so the offset would be just further prepayments of repayments of some of the line draws and what have you on the commercial side.
So you do expect ERP balances to grow.
The gross in the third quarter growth from the the end of the second quarter. That's correct. Okay. Okay, Alright, alright.
All right thanks very much.
Your next question comes from the line of Terry Mcevoy from Stephens. Please go ahead.
Hi, good morning.
I just wonder if you could talk about the near term outlook for cards and payments income will that well the prepaid card activity remained high over over the next couple of quarters.
It will remain high for the next couple of quarters. Many of those are for US support programs of the various states have put in place and we would expect that.
Continuing to continue throughout this year and probably into the first part of next year as well.
And maybe as a follow up could you just help us understand some of the levers that key has to hitting in achieving some of those long term targets on page 14 here I guess, specifically that 16% to 19% ROTC quite a bit of step up from here, obviously and I'm wondering if that's more just macro or if there.
Thanks specific to key to helping you hit the helping you get to those levels.
Well good portion of that for right. Now is is macro in into the credit cost are much much higher than what we would see you on a core run rate basis in the future and so that's that's one of the components. The other is with the absolute low level of rates that not only has a negative impact on net interest income and total revenues. It also.
Increases arc equity as the OCI numbers go positive and so that was another significant step up again this quarter and at some point in time, we'll see that lead down as well, which will provide a little bit more support for that return on tangible common equity as well I don't want you think that the we're targeting that later this year or even.
In early next year, because I think just the environment.
To be challenging for us to get back up into that range, but we would clearly expect to see improvements from where we've reported in the first couple of quarters. This year.
Thanks for the insight on thank you.
Your next question comes from the line of Steve Alexopoulos from Jpmorgan. Please go ahead.
Hi, This is Jack Leon proceed.
I've a question on the funnel I'm going to files that Florida half percent of total loans are about I guess for.
Thank you Mr. can you shed some great backlog.
Sure happy if our volumes and trending.
Okay.
One as far as the deferral of balances there are fairly flat with where they were at the end of the second quarter and so we haven't seen much but a change in the absolute level as far as the new request. The those are down about 97% from from what we were experienced in at the end of the the first quarter and so it's.
And.
Fairly consistent as far as that that overall migration.
We're not seeing much in the way of.
Second round of request yet that those are still very low and so we'll learn more from from that going forward I.
I would say that.
As far as the mix.
On the consumer side that it's in the usual categories as far as where that might be a little bit more elevated in that 4.5% than others. So like a residential mortgage would would be a little bit higher.
Mark do you have any insights as far as industry groups within the commercial side as far as deferrals and any take away from that.
You know the the of the highest area would be in our commercial real estate book on the.
On the commercial side.
All right that's helpful.
I've a follow up on energy a buck what's the level as being allocated again, the energy portfolio and.
Can you also share what percentage of the criticized loans.
Why don't you should be able to the energy Buck.
Yes, as far as the reserve levels I don't know we've disclosed what that reserve is I would say that we've established that reserve based on.
The renewed.
Redetermination assessments that were put in place feel comfortable but where we are I think Chris had mentioned earlier that the majority of that portfolio is more reserve base and very little as an oilfield services, where you tend to see a little bit higher reserves overall as far as the increase of the non accrual would.
They generally about half of the increases in oil and gas or thereabouts from from from what we saw last quarter just the scope the size of it it's about a $2.4 billion portfolio, that's about 2% of our outstandings.
Right and I was referring to non accruals right macro sites.
It would be a similar type of overall trend for both as far as the relative percentage of the increase.
Hi, Thanks for taking my question. Thank you.
And just as a reminder, if you'd like to ask a question. Please press. One then zero next we'll go to online Scott Siefers from Piper Sandler. Please go ahead.
Morning, guys. Thanks for taking the Guardian.
So let me spend just a minute talking about the investment banking pipeline and how things are trending there just trying to get a sense or the sustainability of this this level of revenues and maybe even sort of balance between that the debt placement side and the rest of the business.
Sure.
Scott.
The the our pipelines in our investment banking area I would I would label as strong.
And we didnt benefit as much as the largest banks from record issuance of investment grade.
That.
That was obviously piece of our business, but that's not a huge piece.
On the on the positive side, our commercial mortgage business has performed really well really really well and interest rate environment I wouldn't anticipate that it will continue to perform well.
On the other side of the equation, we have our backlog in M&A is higher right now.
It was a year ago, having said that obviously for the balance of this year as people are in price discovery.
I don't see that I don't see that backlog working its way down but in total.
I would characterize the pipelines as strong as you well know its market dependent.
Yep.
Okay perfect. Thank you and then just to go back to sort of the the loan growth question I'm definitely hear what you're saying on growth on that consumer side, which is helpful. Because I think as I look at you guys. You're most of the larger regionals that have reported haven't had the same strengthen into period are really even apps.
Any sense for.
As much stability in loan portfolio as that that's definitely good I'm just curious what you're sort of your typical commercial customer eyes, telling you you know appetite to.
Take on new debts.
Overall, 10, or how they're feeling et cetera.
Sure.
So as you can imagine we're out talking to our clients all the time, what's interesting it sounds kinda counterintuitive, but it's actually the easiest I've seen in my career to get hold of all the decision makers.
Because no one is traveling and everyone's available I would say this on the commercial side, we're anticipating that we had to like everyone. We have big Spike up.
Ours actually came down earlier.
Then a lot of people, we see that as being kind of flat.
I don't see a lot of borrowing on the commercial side Scott for the balance of the year. We are fortunate in that Weve always done we've always had been 75% commercial 25%.
Consumer the nice thing now is we have a couple of good engines for consumer growth, namely Laurel Road, and our mortgage business that will be where most of our loan growth comes in the back half of the year.
Yep.
Got it alright, thank you guys very much.
Q.
Your next question comes from the line of Gerard Cassidy from RBC. Please go ahead.
Good morning, gross communing, Doug good morning.
Don can you share with us obviously, you've built up the reserves. This quarter is you guys have indicated that if you're Moody's forecasts comes close end year adjustments you need to that comes close to being accurate.
I would assume we should not expect loan loss reserve builds anywhere close to what we saw or here in the second quarter. That's fair assumption again, I know, it's really depends upon what the economy does nobody knows for certain what's going to happen, but could this potentially if that forecast comes true today.
Generally be to peak reserve building quarter.
I would say that if.
To your point nobody knows where we're at September Thirtyth of.
End up but I would say that if it continues to be with the same type of economic assumptions that we're seeing today in July at the end of September.
I think that you're right that we could see this is being the peak quarter as far as the overall reserve build but.
Going forward or we'd have to provide for new loan originations.
I would say at our current levels of loan originations, that's probably a an 80 to 100 million dollar kind of provision expense in in a normal quarter and then you would have to just to provide for any other outsized adjustments are migration as far as the underlying portfolio that wasnt contemplated the bit but.
I think the test will be just as what will the economic outlook be at the end of September and have we seen much change in that from from what we're seeing today.
I see thank you and then second on the quick obviously everybody's years included criticized loans have grown in views. This economy. We're in today in the really growth has been dramatic for everyone.
Do you sense again sticking to the as the economy.
Here's to somewhat close to this Moody's type forecast the rate of growth in criticized do you see that decelerating.
Under that type of scenario.
Well as we would take a look at our models that we use for the June Thirtyth allowance. It would assume that you would see continued migration to criticize through the next few quarters in increases there and then also increases the nonperforming loans just as the impact the economy would be felt more and more throughout our commercial book, especially.
The one thing that we really haven't seen anything yet and wouldn't expect for the third quarter is any significant increases in the consumer charge off levels in the probably wouldn't start to see that until in the fourth quarter or going into early 2021, as well, but but.
With the reserve levels that we have established the underlying assumptions would be as you would expect to see increases in npls and criticized classified for the next few quarters.
Great. Thank you.
Thank you.
Your next question comes from the line of Brian Clark from Keefe Bruyette <unk> Woods. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question good morning.
Don Cook a question for you analyze and a one year slides on the investment portfolio, you talked about investing some of the excess cash and liquidity at the end of the core it looks like it happened at the very nice quarter.
So because you're ending period balance that are up almost two and a half billion versus the average.
I am I reading that right that that there is.
They invested that excess liquidity add up to 49 yield.
That seems like Theres going to be maybe a couple of basis point benefits and then just from that all else equal.
I would say that no we didn't invest that at a 249 yield at the additional investments really came through and.
T bills that we put into the portfolio at the very ended the quarter of about 3 billion plus than and.
The yield on that with sub 20 basis points and so prospectively, we'll probably see more of those types of a temporary investments in short term, earning assets, but but.
It did step up in the current quarter and so.
We only purchased about $900 million or so of investment securities through the quarter I would say that the yield on that was in the one to one in a quarter range and that would be our expectation prospectively as far as a reinvestment yield on on the those purchases given the current rate environment.
Okay. So there's a modest pick up front and from that overall investment out of its just cash are fed funds.
You're right. It was a very small pickup compared to put in and cash the fed. So that was one of the things. We did just because of the liquidity levels continued to grow throughout the quarter.
Got it thanks very helpful. Thank you.
Your next question comes from the line of Brian for ran for from Autonomous. Please go ahead.
Hi, I you answered and that's my questions maybe just to.
Opinion.
I didn't appreciate it prepaid sites in the key benefits program I think you mentioned as part of the fee outlook you'd expect it to remain elevated.
We called out 25 million I'm not sure if it was an absolute expense or decrease in expense, but it's the.
How does that extends for the payments for people that also remain elevated or is that high this quarter coming down.
No you're right I would say that our outlook would be that the increase related to the various programs was about $25 million and fee income and also about $25 million an expense and for the third quarter. We would expect those levels to continue at that pace it might start to show a little bit of reduction.
Them from that point forward, but that will provide guidance and outlook for the fourth quarter.
End of our marker September results.
And it's like a third party processing expense or why is it.
It really is that it really is a pass through and essentially the revenues we make from that would be.
The earnings on the deposits that are attached to those programs, but the.
And initially that's why we Didnt included in our guidance because we thought initially it would probably be netted against the revenue as opposed to grossed up as we have the show it this quarter and prospectively.
Okay, and then just make sure im understanding like the dimension for days you going forward.
If you've got a 50 to 60 bit NCS next quarter, it 80 to 100 million.
Gross reserved for growth.
Maybe you're thinking like a starting point is to 40, and then you encourage us to.
And on whatever we all think on top of that based on economic outlook and everything and then in Fourq. You are maybe one Q 21, we should think about maybe similar levels of reserve building for growth, but a little bit charge offs step up.
You know just the natural delay from for parents programs stuff that.
But fair footing and starting point based on everything you're putting out there will actually the of the charge offs that we would have are embedded in the reserves that we've already established and so that $80 million to $100 million would would essentially be the than the new provision expense and the increase to the overall.
There are from from that component.
So as long as our charge off performance is consistent with our current assumptions included in our reserve balance we wouldn't have to establish provision expense to cover those charge offs prospectively. So what our provision will cover is one new loan growth, which the impact there would be $80 million to $100 million.
Two would be any changes in the economic outlook and as we've said before we're not seeing a significant change in that economic outlook today versus what we saw as of June thirtyth. When we established a reserves in three will be any different migration in our portfolio compared to what our models would assume and so each of those are factors.
That would be to use in establishing the allowance for for next quarter, but as long as the economic assumptions don't change and as long as the migrations consistent with our expectations. The only thing you're left with there is this provision for loan growth and so it would be an $80 million to $100 million range as opposed to 40 that you've talked about.
I'm glad I ask that was only up by a factor of three X. There [laughter]. Thanks, Thanks for that.
Your next question comes from the line of Mike Mail from Wells Fargo. Please go ahead.
Hi, I'm not one more question on the reserve.
My question is is there. These are high enough now of course, nobody knows that answer.
Certainly reserve provision board than the losses, but two questions one since quarter at.
The cases have increase which could mean, some setting down of location now.
You're not as exposed to some to the most exposed code agreed and that just your thoughts since quarter end, because Don just that.
Would be the same today, but.
There are some mix currents there and then a more broader question Chris.
Yeah, the largest corporations are able to tap the capital markets and you're an expert on that love to hear your your thoughts about that and the smallest purpose had the PPD program, but those companies in the middle companies that historically has been keycorp sweet spot, where they might not have access to capital market NASCAR.
Fair enough that TPP programs really those companies that are dependent on the main street lending program, which seems like it's off to kind of a slow start. So how do you think that your sweet spot your exposure to those smaller middle market companies you know as this kind of shut down or slower growth continues. Thanks.
Sure Mike So thanks for the question I'll I'll take that one last and then first and then we'll talk.
A little bit about kind of reserves and what our mixes of our business because I think it's important.
As you look at the large companies obviously, they have access to capital.
They demonstrated that they had access to capital when the markets opened up in March they went to the markets and a significant way and many of those brought us.
I have now been at Nab and pay down I think our.
I think our utilization rate actually dropped about 5%. So then on the other end of the spectrum as you correctly point out the really small companies, it's almost impossible to distinguish between the company and the individual and that's because year after year. They basically take out the equity and that can be a good thing or a bad thing given the store the finance.
Actual strength of the individual in the metal, which we have a lot of clients. The good news as the clients are performing well a lot of those clients were in fact eligible for PPP.
The main Street program I will tell you will be unlike.
The payroll protection program that was a real systematic approach for us here at key main street will be more idiosyncratic.
One off kind of helping our clients, but in total that mid size group of companies is performing is performing very well so.
I think.
I think they seem to be in good shape at the moment now obviously.
Everyone's been impacted by Cobot 19, I mean, there isn't a single customer a single individual or single business, but what we're seeing and as I said, we're out there talking to them a lot.
As it relates to the reserve your premise your question definitely right nobody knows one of the things, though that I think sometimes is missed and you know this because you've been following us for a long time is our mix is a lot different than others were 75% commercial 25% concern.
Sumer and if you look for example at our de fast results that we just received.
Would show a loss content under de fast and say, 6.5% on C. and I and 18.7% for example on credit card as you know, we're very small player in credit cards. So that's just the only point I would make us is the importance of mix Don on Mike You're right. I mean, we don't know what the impact would.
As far as any further shutdowns and on on the economic outlook and and we hadn't factored that in as part of our June Thirtyth Reserve and we'll have to see how that plays up between now and September Thirtyth and.
I would say again that our assumptions.
Still show stress in the environment with a 9% unemployment level in the fourth quarter and continuing to levels of high single digit kind of unemployment through 2021, and and that really seeing a full recovery of the economy back to the fourth quarter of 19 level until late 2021, and so could it get worse from here it could we don't know but.
What we've established our reserves are based on what we feel is a reasonable outlook the as of June thirtyth.
And then just one follow up you mentioned that the market the good still behind the biggest player.
And what is that just mix.
Ryan.
Or is it mix.
Fixed income versus other areas.
How would you explain that its its investment grade fixed income that is a relatively smaller part of our business given that we play in the middle market.
And as a result.
We did perform.
To that to the level that some of the most large at some of the largest banks performed.
Either in the issuance of.
Investment grade or frankly on the trading is obviously, a big big plot for some of the large institutions.
I think that's nice execution in your mind that's right.
Okay alright, thank you.
Thank you.
Your next question comes from the line of Matt O'connor from Deutsche Bank. Please go ahead.
Good morning, good morning.
Just any update you can provide on long haul road, obviously the production very good I think you're keeping most of it on balance sheet right now just given what what markets are going but I noted that the customer base is.
Hi, ordering that this and doctors and obviously, there's been some dislocation there really are the yeah.
I think most of them are up and running now because they're not they're not portfolio overall from a volume perspective and credit quality would be helpful. Thank you.
Sure you need be very pleased with both the volume and the credit quality that we're seeing from from from lower road and.
To your point a high percentage of is healthcare Dr. Dennis related and so some of those.
Practices, though were negatively impacted at first but many of them are our backup an opening and.
We continue to see the payment trajectory and just the overall performance.
Be consistent if not better than what we would have initially expected so very pleased with that credit quality in the performance overall.
And do you plan to portfolio. So all the production I think at one point you are.
Contemplating securitizing some of that but obviously those markets have gone.
Yeah, not all of them are open right now.
Markets are tighter, but more importantly, our liquidity levels and capital levels are such that allows us to retain that on balance sheet that.
We did about $250 million, a securitization last year I could see us doing something similar to that maybe later this year and just to keep.
The name out there and keep the familiarity with investors and the product so I would say that.
Generally we would expect to do some but probably all at a very modest level.
Okay. Thank you. Thank you.
And that this time there are no further questions.
Again, we thank you for participating in our call today. If you have any follow up questions you can direct them to our Investor relations team at 216689 for two to one.
This concludes our remarks, thank you.
Ladies and gentleman that does conclude your conference for today. Thank you for your participation and for using 18 T. teleconference. You may now disconnect.
We're sorry your conference is ending now please hang up.