KeyCorp (KEY) Q1 2020 Earnings Call Transcript

KeyCorp (KEY 1.43%)
Q1 2020 Earnings Call
Apr 16, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to KeyCorp's first-quarter 2020 earnings call. As a reminder, this call is being recorded. At this time, I would like to pass it over to President and Chief Operating Officer Chris Gorman. Please go ahead.

Chris Gorman -- President and Chief Executive Officer

Thank you, operator. Good morning, and welcome to KeyCorp's first-quarter 2020 earnings conference call. Joining me on the call today are Beth Mooney, our chief executive officer; Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer. Slide 2 is our statement of 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 3. It is an extraordinary time with the spread of COVID-19 causing a heavy human toll throughout the country and has impacted all of our daily lives in ways none of us could have anticipated. Despite the unprecedented challenges we are 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 where things stand here at Key. First, our business resiliency plans are in effect, and we have maintained our operational effectiveness across our organization. In every decision we have made, the health and safety of our clients, colleagues and communities in which we operate have remained our top priority. Secondly, we are committed to playing a critical role in providing capital and assistance to our clients and supporting broader initiatives to strengthen our economy.

To date, we have approved over 11,000 credit extensions, and more than 38,000 applications have been submitted through the newly introduced Payroll Protection Program. I'm now moving to Slide 4. I want to address our financial outlook, which in the near term will be impacted by the economic fallout from the COVID-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 continue 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, 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 have 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. Our moderate risk profile also informs our credit decisions and the way we underwrite loans. Don will share more detail with respect to our credit measures and our adoption of CECL.

The final section of this slide 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 tests 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 also remains 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 have 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 derisked our company over the last several years. And also, we have a management team that is dedicated to helping our clients and our communities manage through these challenging times. And finally, since this is Beth Mooney's 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 is not lost on any of us that our strong foundation and clear sense of purpose is in no small part due to Beth's leadership over the past nine years. As I have 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.

Don Kimble -- Chief Financial Officer

Thanks, Chris. I'm now on Slide 6. This morning, we reported first-quarter net income from continuing operations of $0.12 per common share. Current quarter's results have clearly been impacted by COVID-19 pandemic.

There has been impact that include provision expense exceeded net charge-offs by $275 million. Timing is everything. In the first quarter of CECL, 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 1 level.

The vast majority of the increase reflects the changed economic outlook. Market-related valuation adjustments totaled $92 million. These adjustments include $73 million of reserves on our customer derivatives, reflecting the market-implied default rates given the significant increase in credit spreads. The remainder of $19 million is due to trading losses or portfolio marks, once again, related to the widening credit spreads in the market.

One other area of impact was our investment banking debt placement fees. The actual results for the quarter are approximately $40 million below our expectations in the pipeline from just a month ago. I'll cover many of the remaining items on this slide in the rest of my presentation. Turning to Slide 7.

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 in 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 C&I draws in March came from investment-grade customers. Consumer loans benefited from the strong growth from Laurel Road and our residential mortgage business.

Laurel Road originated $600 million of student consolidation loans this quarter, and we generated $1.3 billion of residential mortgage loans. The investments we have made in these areas continue to drive results, and importantly, adding high-quality loans to our portfolio. Linked-quarter average loan balances were up 3%. For next quarter, line draws and other commercial loan growth are expected to slow from the March level.

We will, however, show strong growth reflecting the impact of the CPP program. As Chris mentioned, we have processed over 38,000 applications representing $9 billion of requests, and the fundings are occurring quickly. This program is critical to our customers, and we are pleased to support these efforts. Importantly, we have remained disciplined with our credit underwriting, and we have walked away from business that does not meet our moderate risk profile.

We are a 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 to Slide 8. Average deposits totaled $110 billion for the first quarter of 2020, up $3 billion or 3%, compared to a year-ago period and down 2% from prior quarter.

The 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's also important to note that deposit flows since February have funded the loan growth, continuing to support our strong liquidity position. Total interest-bearing deposit costs came down 14 basis points from the prior quarter, reflecting the impact of lower interest rates and the associated lag in pricing.

We would also expect deposit costs to continue to decline approximately 30 to 35 basis points in the second quarter. We continue to have a strong, stable core deposit base with consumer deposits accounting for 65% of our total deposit mix. Turning to Slide 9. Taxable equivalent net interest income was $989 million for the first quarter of 2020, compared to $985 million in the first quarter of 2019 and $987 million in the prior quarter.

Our net interest margin was 3.01% for this quarter, compared to 3.13% for the first quarter of 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. Our 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 interest margin should decline as the yield on these loans is lower than other loan products. Moving to Slide 10. Key's noninterest income was $477 million for the first quarter of 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 the pandemic on our market-sensitive businesses.

Other income, a negative $88 million for the quarter, reflected $92 million of market-related valuation adjustments. This included $73 million of reserves for our 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 will come down if credit spreads narrow from March 31 levels.

The remaining portion of the market-related valuation adjustments include $19 million of trading losses or marks, also driven by the increased credit spreads. Two other areas of note. Operating lease income for the quarter included an $8 million valuation adjustment, and consumer mortgage income reflected $1.3 billion of originations with higher gain on sales 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 debt placement fees are challenging to predict at this time. I'm now turning to Slide 11. Expense levels trended down this quarter as the results reflected the benefit of efficiency improvements and lower variable compensation.

Adjusting for notable items in the prior quarters, compared to the year-ago period, noninterest 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. Business services and marketing both were down seasonally this quarter.

Turning to Slide 12. CECL was adopted January 1 of this year, resulting in an increase to our allowance for loan losses as of the end of the year of $204 million, consistent with previous disclosures. Through February, our CECL reserves remain very stable, reflecting the credit quality of the portfolio, and the economic forecasts were consistent with the start of the year. By the end of the quarter, the economic outlook changed considerably, reflecting the expected impact of the pandemic.

While no one knows the depth or duration of the economic downturn, we updated our CECL reserves to incorporate a severe downturn in economic activity with a recovery beginning late in the year. This change in the economic outlook resulted in 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 31. Net charge-offs were $84 million or 35 basis points of average of 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 in the quarter, reflecting a $45 million increase from our reclassification resulting from the adoption of CECL.

Adjusted for this reclassification, NPLs increased $10 million from the prior quarter. Nonperforming loans represent 61 basis points of period-end loans, flat with the prior quarter and prior year. Precise loans increased modestly, reflecting the impact of market conditions and loan rating changes in our oil and gas portfolio. During March, the increase in the commercial line draws and temporary liquidity facilities generally related to our highly rated customers.

At the end of the quarter, the 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 requests from our customers. As of the end of last week, we had received approximately 11,000 requests from our retail customers, about 0.7% of accounts. We also received approximately 800 similar requests from our commercial customers.

While this is still early, request levels have been less than we originally expected. Turning to Slide 14. We received questions about the exposure of 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 are diversified by type and geography. We have implemented an enhanced monitoring process, providing more active reviews, often weekly, of relationships that might be more vulnerable to the current environment. The outstanding balances shown are at March 31 and reflect some of the draw activity that occurred late in the quarter. Now on to 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 turned. As a result, our common equity Tier 1 ratio was 8.95% as of March 31, down 49 basis points from year-end. This level is slightly below our target range, but well above the stressed capital buffer levels required by the fed.

Our capital target was established to provide sufficient capital to operate in stressed environments, recognizing we would be operating at levels below the target as we experience 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 dividend. As a reminder, our capital priorities continue to be to support organic growth, to continue our strong common dividend, to repurchase shares in excess with excess capital. The new guidelines from the stress capital buffer are also helpful in 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 have 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 and commercial customers. As we move through the second quarter, we expect to have more clarity on the economic impact of COVID-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 show 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 of the PPP program. For noninterest income, we would not expect further meaningful market-related valuation adjustments.

Both other fee income categories would be down slightly, reflecting lower activity levels. Investment banking and debt placement fees are challenging to predict at this time. Noninterest expenses are expected to be relatively stable for next quarter. Net charge-offs should increase slightly to around the lower end of our target range of 40 to 60 basis points.

The environment continues to be challenged -- excuse me, the environment continues to change rapidly, which can impact the outlook and the comments we've provided. Finally, shown at the bottom of the slide are our long-term targets. Given the economic downturn, we would not expect to achieve all these targets this year. However, as we have emerge 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 to the operator, Beth would like to add some closing comments. Beth?

Beth Mooney -- Chief Executive Officer

Thank you, Don. And good morning. It's with a lot of mixed feelings that I approach the end of my time at Key, and as I've said before, being the CEO of 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've 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 of those as our CEO. And I've worked with some incredibly talented and dedicated individuals. And collectively, we have created a different company, financially strong, values-based and dedicated to providing unparalleled service to our clients, never more important than the times we find ourselves in.

In addition to serving on Key's Board of Directors, I also had the privilege of serving on the boards of some of the leading industrial, technology and healthcare providers in the country, which provides me with a 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 weather 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's CEO on May 1, and our transition has been very smooth and seamless.

I am confident in 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&A portion of the call. Thank you.

Questions & Answers:

Operator

[Operator instructions] And we will go to the line of Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Thank you for taking the questions. So first, Beth, congratulations. Best wishes in the future. So a question I wanted to ask.

Don, maybe it's most appropriate for you. Just a little more detail, please, on the assumptions that went into the CECL reserve, maybe anticipated GDP contraction, unemployment, etc. And then maybe just as a follow-up, what, in your mind, would it take to require a repeat of the level of reserve build from the from the 1Q in future quarters?

Don Kimble -- Chief Financial Officer

Sure. Great question, Scott. And as far as our economic scenarios, we use a number of the recent Moody's scenarios forecast to inform our CECL reserve that each of these scenarios included a severe reduction in GDP and a significant increase in the unemployment levels. I would say that our outlook assumed GDP would be negative through the third quarter and still be in the high single-digit range as far as negative GDP impact.

And then also unemployment would 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 programs that have been put in place from the government, but it's difficult to fully estimate what those are at this point in time. As far as the increase that we experienced this quarter, we've really gone from an 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're seeing both of those have a significant or severe reduction as far as our economic outlook.

And so don't know how to predict whether to see that type of return again or not, but I would say that we'll have to continue to assess that throughout the quarter. And as we wrap up the June results, we'll be in a position to better assess that.

Scott Siefers -- Piper Sandler -- Analyst

OK, perfect. And maybe just a final question. Maybe a little more visibility into what's actually happening with the line of credit draws that you're seeing. I'm assuming they've been largely redeposited.

But you guys, I think, have a little unique seasonality in your deposit flows anyway. So the 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. So maybe just any additional color there, please?

Don Kimble -- Chief Financial Officer

Yeah, Scott, you're absolutely right. If you look at the average balances, especially on the deposit side, you see a downward trend from fourth quarter to first quarter. That really was driven by significant temporary deposits that were in place throughout the fourth quarter. We knew they would go out in early first quarter, and they did.

As I mentioned on the call that we've seen deposit flows match the loan growth from end of February to now. We've seen over $8 billion of inflow over that same time period and about $8 billion of loan growth. We saw about $6 billion of line draws and about $1 billion of liquidity facilities that were used to replace commercial paper borrowings for our customers. And on the line draws, we're seeing a good percentage of those reinvested or redeposited back into our bank for deposit flows.

And so that's part of the reason why we're seeing the strong deposit growth in the month of March and early April.

Scott Siefers -- Piper Sandler -- Analyst

Perfect. All right. Thank you very much.

Don Kimble -- Chief Financial Officer

Thanks, Scott.

Operator

And our next question is from the line of Steven Alexopoulos with JP Morgan. Please go ahead.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, everybody.

Beth Mooney -- Chief Executive Officer

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Steven Alexopoulos -- J.P. Morgan -- Analyst

I wanted to start on Slide 14 where you guys are calling out the select commercial portfolios. Based on the weekly monitoring you're now doing, can you give us a sense as to the magnitude of cash flow disruption that you're seeing in these segments? And maybe if you know how many are participating in government programs would be helpful, too.

Don Kimble -- Chief Financial Officer

Sure. As far as those industries, but I'll 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 that 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, as I mentioned before, that just through the PPP program, we had 38,000 customers request those loans, and we're well on our way as far as getting those through 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, Mark, anything else you would add on those higher-risk areas?

Mark Midkiff -- Chief Risk Officer

I think you noted, or Chris noted, that we've had approximately 800 customers that have come to us asking for some level of deferral in the commercial categories. And so I'd make that comment, that's been inside of a couple of billion dollars.

Chris Gorman -- President and Chief Executive Officer

Steven, this is Chris. The only thing 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, leverage lending.

We always talk -- any time 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

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 that you're calling out in the slide, the specific reserves?

Don Kimble -- Chief Financial Officer

We haven't shown the reserves on those categories. We'll see if we can add that in future disclosures. In our slide deck, we do show the reserves by loan category. And so, I think, that's helpful just to get 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And finally, for Beth. You spent the last several years changing many aspects of KeyCorp, right, top to bottom, including the credit risk profile of the company. Are you guys pretty confident here that you're going to come through this credit cycle as a top performer on credit, specifically?

Beth Mooney -- Chief Executive Officer

Well, thanks, Steven. And indeed, we did spend a lot of focus and time on the strength of our balance sheet and 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 would indeed weather a downturn, both as a company that could absorb its credit portfolio marks and risks and indeed be a top performer and perform better than the median, and to also make sure that we could extend capital and support our customers through this downturn, whatever downturn it was. And apparently, here we are, and as you can tell, in the face of this, we, indeed, are extending that support both through the 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.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Great. Thanks for the color and very good luck on your retirement, Beth.

Beth Mooney -- Chief Executive Officer

Thank you, Steven.

Operator

Our next questions are from the line of Ken Zerbe with Morgan Stanley. Please go ahead.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. I guess, maybe starting off with loan growth. Obviously, down, in end-of-period basis, it's really, really strong. I'm sure you've had conversations with some of your larger borrowers.

How do you envision those balances trending over the next couple of quarters? I mean, is this just a temporary drawdown? Is it something a little more permanent? Thanks.

Chris Gorman -- President and Chief Executive Officer

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.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it, OK. And then, I guess, maybe just in terms of -- same questions in terms of the drawdowns. How many of those borrowers -- I know you said 80% are investment grade. But how many of those borrowers have like clearly defined borrowing bases or collateral that they're borrowing against versus we hear some of the very large drawdowns, they may not have like specific collateral agreements like you would on sort of your middle market customers?

Don Kimble -- Chief Financial Officer

So by definition, the biggest drawdowns are large investment-grade companies that have access to capital. Ken, 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.

Ken Zerbe -- Morgan Stanley -- Analyst

OK, that makes sense. And then just last question. How are you guys reserving for troubled loans, or so to speak trouble loans, where you are providing forbearance but they just aren't being classified as troubled? I mean, is that something you can build into your CECL reserves today? Or is that something that we see development materializing over the next couple of quarters?

Don Kimble -- Chief Financial Officer

Well, our CECL reserves do anticipate that kind of migration, given the economic outlook we have. 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. And that risk rating will be reflected in the future CECL reserves that are established for those credits and anticipated with this adjustment as well. On the consumer side, it could be a little bit more challenging as far as many of those might be even more based on delinquency status and, given some of the forbearance, that are done more in a bridge capacity, it might be a little bit lagged as far as the impact on those credits.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it. OK, perfect. Thank you.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

And our next question is from the line of Erika Najarian with Bank of America Merrill Lynch. Please go ahead.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi, good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Beth Mooney -- Chief Executive Officer

Good morning.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Just wanted to ask a question about how we should look at your last DFAST results as 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 DFAST, you submitted in your company-run test something like an over 6% nine-quarter credit loss rate in C&I. And I'm wondering what you see that's different in both positive and negative in terms of what could be playing out in this actual recession versus the scenario in that last test.

And also, you closed Laurel Road after your last DFAST, and I'm wondering where do you see stress losses here. And is it as simple as taking that reserve from Slide 23 and putting it over to consumer direct balances and saying, OK, according to this reserve, KeyCorp is implying a 3% loss rate as of balance sheet date on this portfolio?

Don Kimble -- Chief Financial Officer

It's a full question, Erika. I'll try my best to follow up on that. But one, I would just offer up that as far as our severely adverse scenario that we just submitted to the fed just this quarter, as a matter of fact, it would have an economic scenario that would be much more dire than what occurred from the 2008 through 2010 time period. And in that scenario, we would've had about $4 billion of credit losses during that nine-quarter time period.

If you take a look at our total reserves that we have, both the allowance for loan losses and the reserve for unfunded loan commitment, that totaled about $1.5 billion. And so this is about 40% of those combined losses that are recognized in that. The biggest difference there is the duration of that stressed period that it would have assumed severely adverse impact on GDP and unemployment, but they would have been sustained for a very long time period. Our current assumptions that we have is that 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 V-shaped type of recovery that some of the initial assumptions might have included. So I would say that's the biggest gap as far as 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's 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 performance of that portfolio continues to be very strong, and we're very pleased with it.

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 Laurel Road customer base and programs we offer are very helpful to be able to accomplish that. So not seeing any outsized expected stress loss for that portfolio.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. That's very helpful. And my second question is, given the magnitude of interest rate reduction late in the first quarter, could you perhaps help quantify the level of net interest margin compression that you expect for second quarter?

Don Kimble -- Chief Financial Officer

For second quarter, there's 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 7-basis-point, plus or minus, negative impact on margin that the loans have a contractual rate of 1%, but by the time you would factor in the loan fees associated with that, it's something just a little north of 2%, which is still a low-yielding loan for us in this environment. Second would be the increased liquidity levels that we're currently maintaining north of $3 billion in cash each night at the fed, just to make sure that we have robust levels of liquidity given potential changes in overall funding mixes and what have you. And that's probably up from $0.5 billion to $1 billion.

And so that increased liquidity will put pressure on NIM, not on NII but have pressure on NIM. And then I would say that the remaining pressure on net interest margin would probably be in that low to mid- type of basis point range difference because the rate decline occurred late in the quarter. And while we said that our deposit rates will be down 30 to 35 basis points, that still would not translate to north of a 40% beta on that change. And so that's something that will put some near-term pressure on margin as we see the lagged impact of deposit pricing coming through.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. And if I could just please sneak in one more. There's clearly a significant amount of demand for bank balance sheet. And I'm wondering with your common equity Tier 1 ratio at 8.95%, what is the level that you're comfortable drawing this ratio down to as this demand for balance sheet continues? And is there anything you can do in terms of RWA mitigation to offset some of the demand from your customers?

Don Kimble -- Chief Financial Officer

Yeah. As far as our outlook right now, we would say, and Chris highlighted this as well, that the commercial loan growth should be muted this quarter compared to what we experienced in the first quarter. And we're not seeing the active increased request for draws or other funding coming through from those customers. Second, we are seeing strong loan growth, but a lot of that is coming from the PPP program, which has a zero risk-weighted component to the extent it is fully guaranteed and will be fairly short term in nature.

And so that shouldn't put any pressure on that. And then the consumer loan growth that we're seeing, about half of it is coming from residential mortgage, which is also a low risk-weighted asset and then the other half from Laurel Road. And so we don't think we'll see as much pressure on the RWA as what we did this last quarter. The growth we saw at the period end cost us over 40 basis points of RWA because of that rapid increase in some of those balances.

So we don't see that as an impact for us going forward. I would say that as far as what level are we comfortable at, we'll continue to monitor it, but what I had said is that slightly below our longer-term targeted range. But that was with the expectation that when things are a little more stressed, 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 dividend outlook based on our current earnings projections as well.

So we think that we're in good position there, but that's something we'll continue to evaluate as things would evolve.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Really helpful, Don. Thank you. And Beth, congratulations. And I hope more women follow in your footsteps.

Beth Mooney -- Chief Executive Officer

As do I. Thank you, Erika.

Operator

Next, we'll go to the line of John Pancari with Evercore ISI. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Morning.

Don Kimble -- Chief Financial Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

Back to the reserve, I appreciate the color you gave in terms of how you're thinking about the through-cycle loss content that your reserve is at approximately 40% of that new level that you calculated of the through-cycle losses. I know other banks this earnings season have also talked about that relative size, about 40% ballpark. But they've also been indicating that they expect potential incremental loan loss reserve additions of size in coming quarters. Can you just talk about the likelihood of taking additional sizable increases in the next couple of quarters? Because when you look at it, you would think that you might need to be higher than 40% of that expected loss rate in this type of crisis.

Thanks.

Don Kimble -- Chief Financial Officer

Great question. And I wish someone could help provide some clarity on the depth of the recession, the duration of that recession and what kind of impact all these programs are having. But we couldn't be more pleased with what we're seeing from the treasury and from the fed and from others to help provide that bridge support for our customers. And we think that will have a meaningful impact on their ability to continue to operate going forward and bring that economy back up to the level it needs to be.

But we don't know what's going to happen between now and June 30. But as far as other comments that if you look at the economic forecasts that have come out in early April, they probably are a little bit more negative, more about the recovery rate as opposed to the depth of the actual recession. And so more going toward a U-shaped scenario as opposed to a V-shape. And so we'll have to continue to assess that.

I think it will be too pretty mature 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.

John Pancari -- Evercore ISI -- Analyst

That's OK, Don. All right. Thanks. And then I know you've cited the balance of the PPP loans and that you're seeing a healthy amount of appetite there and it looks like we might get an upsizing of the program.

So I got to assume that you're going to see greater demand over time for that. What are your plans for those loans on the balance sheet? Are you looking to sell them? And is it going to be the secondary market? Is it going to be to the Fed through their facility? How should we expect that that find its way on and off your balance sheet?

Don Kimble -- Chief Financial Officer

Well, one, we're very excited about that program. And we were out early in. And I think that, Chris, we had over 130,000 outreach efforts to customers and had over 50,000 customers, at least express some interest in understanding what the program is. And as we've mentioned, over 38,000 applications.

And so that's a huge percentage of our customer base and very pleased we've been able to support those the way that we have. And as we looked at that program, we think that the life of those loans should be fairly short. That if you think about, say, 10 weeks from the time that they get those loans, they would be in a position potentially to ask for forgiveness against that debt. And so we think that the life could be really short-term in nature.

And so we will keep it on our balance sheet that, as I mentioned before, we've been having very strong deposit flows. The Fed and treasury have provided additional areas as far as support or funding for those assets. And if deposits aren't sufficient to meet those funding needs, then we would have those available to us to provide that liquidity. But generally, I don't see any need to sell those assets as part of our operational plan.

Chris Gorman -- President and Chief Executive Officer

Yeah. If I could just add, we are 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 the 135,000 client outreaches. We had more than 10,000 of our teammates out working on this, massive program, very short time frame.

And I'm just really proud of how the whole team came together and really went out to support these clients. We also built some really great digital straight-through processing that enabled us to basically process nine or 10 years worth of SBA loans over a couple of weeks.

Don Kimble -- Chief Financial Officer

That's a good point, Chris, that normally an annual flow for this type of loan product with the SBA would be under 600 for us, and we've done 38,000 applications in a little over a week.

John Pancari -- Evercore ISI -- Analyst

OK, got it. Thanks, Don. And Beth, best of luck in retirement.

Beth Mooney -- Chief Executive Officer

Thank you, John.

Operator

Our next question is from Peter Winter with Wedbush Securities. Please go ahead.

Peter Winter -- Wedbush Securities -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning, Peter.

Peter Winter -- Wedbush Securities -- Analyst

I'm just wondering, you guys do sit on a fair amount of excess liquidity. And I was wondering where is the LCR ratio today? Because I thought -- it is the thought to continue to use the securities portfolio to fund loan growth? Because it seems like there is a fair amount of room to remix earning assets to help the margin somewhat maybe in the second half of the year.

Don Kimble -- Chief Financial Officer

Peter, you've been reading our playbook here that we didn't buy any new securities here in the first quarter. We're using some of the cash flows there to reinvest in loan growth. And so we still think that's 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 it's well above what we would target the Fed for a bank of our size would have us in the 100% range, and we're well north of that even in this environment. So we will consider to evaluate how we want to manage the overall mix of the assets. And that could be a continued opportunity for us, especially given the reinvestment rate for those investment securities is well south of what our current portfolio is.

Peter Winter -- Wedbush Securities -- Analyst

What are those reinvestment rates?

Don Kimble -- Chief Financial Officer

Yeah. We tend to have a fairly short-durated agency CMOs. And our current cash flow off of that is somewhere in north of $240 million as far as the maturing securities, the reinvestment yield today would be between 1.25% and 1.5%. So down considerably from where it was just a quarter ago.

Peter Winter -- Wedbush Securities -- Analyst

OK. And then just a follow-up question. Chris, with your opening remarks about going into this downturn in a much better position, certainly from a capital liquidity standpoint. But could you just talk about some of the biggest changes from our credit perspective heading into this downturn versus the financial crisis? And then just Beth's comments that you think you could do better than peers from a credit perspective?

Chris Gorman -- President and Chief Executive Officer

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 one-third of our real estate book would have been in construction loans.

Today, that number would be 8%-ish. Also, that our real estate business at that point, which is where most of our losses were incurred, was principally a book and 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 any risk that we don't want to take because we have a lot of avenues, whether it's Fannie, Freddie, FHA, the life companies. Right now, the CMBS market is not available, but it will be once again.

It's 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 want 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 picked the people that some of the agencies want to bank.

So that would be just some examples of what we've done. The other thing that I'm really proud of, we are a significantly bigger business today than we were a decade ago. And we are, I mentioned leverage earlier, we always focus 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 of 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.

Don Kimble -- Chief Financial Officer

One thing I would add to that as well is that under Chris and Beth, they both shifted the overall strategy of the company via 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 subtle difference, we think, should better position us this time than what we experienced in the last downturn.

Peter Winter -- Wedbush Securities -- Analyst

Right. And I just want to wish Beth best of luck in the next chapter. It's been great working with you all these years.

Beth Mooney -- Chief Executive Officer

Thank you, Peter. Appreciate that.

Operator

Next question is from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi [Inaudible] about the average loan size [Inaudible]

Chris Gorman -- President and Chief Executive Officer

Terry --

Don Kimble -- Chief Financial Officer

We can't hear you very well, I apologize.

Chris Gorman -- President and Chief Executive Officer

You're breaking up on us, Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

Sorry about that. I want to have a follow-up question on the PPP program. Could you just talk about the average loan size because it does impact the process fee? And Don, in response to earlier question, you kind of added that fee into the yield. So I just want to make sure where that's going to run through the income statement in the second quarter, whether it's included in interest income, like you may be suggested or if it will come through fee income?

Don Kimble -- Chief Financial Officer

Sure. As we mentioned before, we've got about 38,000 applications, about $9 billion as far as the loan value there. So something north of the $200,000 per average loan size. And so it's been a broad mix of customers that's going from our small bank business banking accounts to business banking to even some of our middle-market customers still fall under that 500 headcount level.

So that it's been a huge program for us. I'm very pleased with those results. As far as the fee that we would be realizing though is 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 forgiven or prepaid, the unamortized portion of that fee would be taken in income at that time as well.

Terry McEvoy -- Stephens Inc. -- Analyst

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?

Chris Gorman -- President and Chief Executive Officer

So Terry, it's Chris. I'm proud of the fact that we at 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 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, they're about $600 billion. So it's not inconsequential. We're working hard on it as we speak.

Terry McEvoy -- Stephens Inc. -- Analyst

Thanks. And Beth, best wishes ahead for you. Thank you.

Beth Mooney -- Chief Executive Officer

Thanks, Terry. I appreciate that.

Operator

And next, we're on the line of Bill Carcache with Nomura. Please go ahead.

Bill Carcache -- Nomura Instinet -- Analyst

Don, I wanted to follow-up on John's question regarding your CECL assumptions. Your comments make it very clear that there's 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 declining even more sharply than originally expected and some going from expecting a V-shape 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 many over the last few Thursdays in April, are those increases contemplated in your allowance? Or would you need to book additional reserves if those elevated unemployment figures hold?

Don Kimble -- Chief Financial Officer

As far as the unemployment and GDP assumptions, again, we really have to wait until we get closer to the end of the quarter to make any assessments there. I would say, as you've highlighted that the near-term impacts that have been negative adjustments to the outlooks since April 1. But as far as I'm aware, I haven't seen any new Moody's scenarios and others that we hadn't used, considered in connection with our initial assessment. But I think we're just -- again, I apologize, but we're just way too early to try to predict what's going to happen as of June 30 as far as the economic outlook.

We're hitting a period here, which I think will be very informative. As we start to see how states and counties within states start to return to work and how quickly the economy starts to recover from that, how do these programs have been implemented to help bridge 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.

Bill Carcache -- Nomura Instinet -- Analyst

Understood. That's fair. Thanks, Don. And I guess, a separate question 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 what it would take for Key to halt its dividends?

Don Kimble -- Chief Financial Officer

We'll continue to assess that based on what we see for the depth and duration of the downturn that in our severely adverse scenario that I mentioned before, it takes our common equity Tier 1 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 percentage as far as the overall earnings capacity of the organization.

It's also something that's very important to our shareholders and especially our retail shareholders. So we'll take that all into consideration. We believe that we're well-positioned to continue to maintain that based on our current outlook and assessments. And so we don't see that as coming at risk, but we'll continue to reevaluate as we get through this quarter and beyond to see where we would see the economy trending at that point.

Bill Carcache -- Nomura Instinet -- Analyst

Understood. So to the extent that this were to be a prolonged downturn, do you think that is the decision over whether or not just spend the dividend when that you think banks should have the freedom to make on their own? Or would you prefer that regulators more broadly urge banks to suspend the dividend so the entire industry is sort of in the same boat other than having one-off cases across individual banks? Just curious what your views are.

Don Kimble -- Chief Financial Officer

I think if you talk to most banks, we have all significantly increased our capital levels and our liquidity position since the land crisis. 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 that we're well-positioned to do that. But also, where appropriate, continue to support our common dividend. Most, if not all banks, has cut out their share buybacks.

And that's 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 where they are recommending that the large banks do suspend dividend if they believe that the things are too dire. But I think that most banks would 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.

Bill Carcache -- Nomura Instinet -- Analyst

Thank you so much. And let me echo that, Beth, I've enjoyed the time we spent together and certainly echo everyone's congratulations as well.

Beth Mooney -- Chief Executive Officer

Thank you, Bill.

Operator

Our next question is from Ken Usdin with Jefferies. Please go ahead.

Ken Usdin -- Jefferies -- Analyst

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 talk about the nonmarket revenues, in your prepared remarks, you talked about a couple of extra negatives this quarter.

So when you're thinking about slightly lower off of the first quarter, should we be adjusting for those little dings, as well as much as, obviously, for the fair value marks?

Don Kimble -- Chief Financial Officer

Yeah. The fair value marks are more than little dings. And so credit spreads have already come in nicely since the end of the quarter. And if we would snap the line as of yesterday as opposed to March 31, that $73 million 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 that the ding that we mentioned as far as the operating lease adjustments. That was more of a onetime one-off type of an adjustment opposed to something we would see going forward. If you look at some of the other revenue categories, trust and investment services, about half of that is related to asset values, and about half of it is brokerage and/or 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 would say that cards and payments-related revenues are impacted by credit card, purchase card and merchant services revenues. It's about 50% of that is tied to that category and we did see declines of 20% to 30% of those 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 is sitting at $2 billion, which is two times what it was going into the first quarter. And so we should see some nice ramp-up in those revenues. And so that's why we think that we would see some of the other revenue categories down slightly reflecting some of that activity level.

But being offset by some of the benefit for residential mortgage and other fee categories.

Ken Usdin -- Jefferies -- Analyst

Yup. OK, great. And so then your markets-related presumes really speaks to the investment bank, and I'm 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 the CRE 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 while early, can you just maybe talk about the dynamics that the customers are talking through that you're hearing about with regards to whether pipelines move or not?

Chris Gorman -- President and Chief Executive Officer

Sure, Ken. It's Chris. So our pre-COVID-19, we had what 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 a knock-on effect of our syndication business because we finance many of the transactions in which we advise. So those deals, I don't think, are gone. But the question is, when do they come back? And that goes back to Don's 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. Our Cain Brothers platform is probably the No. 1 advisor 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 customers is three times the rate prior to COVID-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 is 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 a flavor maybe from both a product perspective and a vertical perspective.

Ken Usdin -- Jefferies -- Analyst

OK, got it. And then one just quick one on the expenses side. So really good first-quarter results, and you're talking about stable. Is part of that, again, the reflection of the uncertainty on the markets-related revenues and the slower start to the year? Or are there other things that you're also doing underneath what you had already done last year to continue to hold the line there? And best of luck, Beth.

Beth Mooney -- Chief Executive Officer

Thank you, Ken.

Don Kimble -- Chief Financial Officer

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 is provided, but also some of the additional efforts, including what we would be seeing from a branch distribution perspective, what we're seeing from a current operating expense levels for supporting our current team. And also includes some increased costs that we're expecting because of the shutdown that we're paying additional incentives to many of our team members that are required to be out in -- and that the application for their responsibilities, whether it's branch employees or others.

And we've also had to step up some costs associated with on-shoring some activities where we've seen some third-party vendors that haven't been able to provide the support that we need in certain areas, and it's requiring us to add some additional resources there and so each of those are reflected in that relatively stable expense outlook.

Operator

Our next question is from Brian Foran with Autonomous Research. Please go ahead.

Brian Foran -- Autonomous Research -- Analyst

Hey, good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Brian Foran -- Autonomous Research -- Analyst

I was just thinking about some of your comments about the differences now versus the crisis for Key. I guess, one of the things during the crisis that was tough was the PPNR, your pre-provision earnings, really kind of collapsed. They got down to $80 million in 3Q '09. And I guess, this quarter, even with all the charges, it was over $500 million.

And Don, I guess, is it fair with all your comments, even building an uncertainty for investment banking, it seems like you're kind of pointing to a number of maybe $600 million, a little north of that. And then bigger picture beyond the number, how do you think about the importance of that PPNR being so much higher just in terms of your ability to choose through whatever the ultimate losses are?

Don Kimble -- Chief Financial Officer

Great question. That's been a core focus of ours is continuing to improve or maintain our positive operating leverage to deliver improvements in that core performance to see a shift of our portfolio into more of a balanced approach. And so that we have a higher percentage of retail-oriented businesses today than what we did before, and those are critical to us. I would agree that that increased level of PPNR 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 PPNR to be able to support the increased -- or credit cost that might occur in those types of environments and that's why we believe we are able to maintain those capital actions based on that type of an outlook.

Brian Foran -- Autonomous Research -- Analyst

And then maybe one follow-up. As we think about the trajectory for capital going forward, can you remind us -- so all of the OCI is excluded from the CET1 ratio? And if that's right, how much flexibility would you see, whether it's the hedges or securities gains, if you needed to access a little bit more CET1, what would be a reasonable ballpark for the flexibility that the securities gains and hedges would give you?

Don Kimble -- Chief Financial Officer

The majority of the OCI is backed out 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 1 ratio up by realizing some of those security gains, if we wanted to. Our challenge for that would be that we don't want to do it for an earnings or liquidity perspective. And oftentimes, you'll see a degradation in the future earnings when you would swap out the securities for lower-yielding securities today, but it does provide us some flexibility there.

Brian Foran -- Autonomous Research -- Analyst

Great. Thank you so much.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Our next question is from Saul Martinez with UBS. Please go ahead.

Saul Martinez -- UBS -- Analyst

Hey, good morning . First of all, best of luck, Beth, and we'll miss working with you.

Beth Mooney -- Chief Executive Officer

Thank you.

Saul Martinez -- UBS -- Analyst

So most of my questions have been asked, but I'll follow-up on a CECL-related question. Maybe this is for Don and for Mark. And it's a little bit more of a broader question, but it's in response to Erika's question. And I guess, I would like to get your perspective on this DFAST stress tests and where they're useful as a gauge to look at CECL reserve adequacy in downside case scenarios and where they're not? And is there a risk of taking those results to literally.

And I asked that because beyond sort of the differences you highlighted, Don, in terms of the economic assumptions, DFAST is sort of a fundamentally different exercise. It's meant to measure loss-absorbing capital in a severe scenario. And hence, the construction of DFAST is conservative, whether it's line draw assumptions or until recent, the asset growth, it's a nine-quarter period, which is very different, obviously, from your corporate book, a lot of which is much, much shorter contract maturities are reserving over. And CECL is a best-guess estimate of a point in time estimate of what your reserves and your losses will be.

So it's sort of a fundamentally different construct. So I guess, my question is more, how should we use that as sort of a gauge? And is there a risk of taking those results and the $4 billion you mentioned too literally is sort of a gauge of where reserves could go to even in a really severe scenario?

Don Kimble -- Chief Financial Officer

Well, I think you've answered the question better than I can. But I would agree with your observation that the purpose for CCAR is one to stress the capital. And so the assumption sets that 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 rates that may not be reflective of the current environment or the current portfolio levels. The Fed testing would include some adjustments for where the data isn't present for their models, which elevates the loss content compared to what you might see.

Another nuance of it for CECL, you only provide though the reserve for the loan through its maturity, whereas in CCAR, again we'd assume those loans get rolled over and, therefore, could be subjected to future loss based on the economic scenario. So it's a challenge. And I would say that I'm surprised as tightly as some of the estimates and numbers have come out from the banks that have announced so far, as far as the ranges for the change in the CECL reserves. I thought they would be all over the board.

But if you think about the variability and the different types of economic outlooks, you could assume, the impact in the models, what kind of a reasonable and supportable period are people using and how do those revert back to the norms. I would have expected that even a wider variability than what we're seeing today as far as the earnings announcements have come through. And so I think it's helpful as far as a benchmark, but I don't think that it's necessarily predictive as far as if we would see the economy worse. That's the reserves that would be required.

Saul Martinez -- UBS -- Analyst

Right. OK. No, that's helpful. I guess, I just wanted a little bit of verification that the way I was thinking about it is broadly applicable.

I guess, it's just a quick follow-up then on the slide with that risk portfolios. A clarification. The leverage loan portfolio, how much overlap is there in that portfolio with some of the other segments that are at risk that you've highlighted there?

Don Kimble -- Chief Financial Officer

I would say there's very little overlap there that I would say that, generally, our leverage book, probably more is commercial industrial in nature as opposed to the categories that are shown. Chris, would you have any other insights there?

Chris Gorman -- President and Chief Executive Officer

Right. Our leverage book lines up very, very strongly with our verticals that we are deep in, and so there would not be a lot of overlap.

Saul Martinez -- UBS -- Analyst

Got it. And just on those risk buckets, like any -- there's a big variance within those buckets like travel, for example, hotels, tours, and then there's a airing water, I guess, like is there a more granular assessment, whereas how much hotels, for example, the riskier parts within those buckets? Is there a way to kind of gauge that? Because these are fairly broad categorizations for some of these -- for the consumer discretionary and travel buckets you highlighted.

Don Kimble -- Chief Financial Officer

There are some broader categories, for example, hotels. I believe that number is between the $700 million and $1 billion level. So a fairly small portion of the overall portfolio. That we'll see if we can provide some additional clarity or granularity around those buckets that many of our peers have been more granular as far as commenting on where there are very specific areas of risk and these are more broader subsets.

Chris Gorman -- President and Chief Executive Officer

And we have that, so we can provide it.

Saul Martinez -- UBS -- Analyst

Yeah, no, that would be helpful. Thanks a lot, guys.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

And our final question will be from the line of Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you. Good morning, Beth, Chris and Don. How are you?

Beth Mooney -- Chief Executive Officer

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Don, maybe you can share with us. Obviously, we know about the high-risk nature of certain parts of your portfolio and your peers. You just touched on about hotels and leisure types of credits. If you take that energy off the table for a moment, what are the other areas of the portfolio are you all focused on and making sure that you keep a really close handle on what's going on in case this downturn extends out longer than any of us expect?

Chris Gorman -- President and Chief Executive Officer

So Gerard, it's Chris. This isn't new to the pandemic. We've 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. 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 always start with leverage.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then, some of us on this call have 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 banks. You might recall how crisis with cyclic Tri Capital and what happened after that F.I.A.S.C.O. And of course, we had TARP and how they changed the rules on how to get out of TARP. What safeguards are you guys putting up in this new program, the PPP program, on the Main Street lending program where you're working with the government, you're helping your customers, which is great.

Everybody is working twice as hard to get this done. But a year and a half from now, we're going to see that there were some mistakes made by the industry, what safeguards are you putting in place to prevent any kind of pushback that you get -- I mean, not just you, but the industry may get a year and a half from now?

Chris Gorman -- President and Chief Executive Officer

Right. Well, first of all, Gerard, it's a great question. And obviously, when a program is put together in the matter of weeks that's $350 billion, we think, going to another $250 billion. 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, reps and warranties from the customers. Don, do you want to add to that?

Don Kimble -- Chief Financial Officer

No, I think you're right, Chris, that we've been very careful before we even send the app in for approval from the SBA that we have 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 the team's part to ramp up to be able to address that. But that's primarily our area of safeguard is making sure that we are following our understanding and our best interpretation and the guidelines and rules that are out there. So we, again, appreciate everything that's being done from the treasury, from the Fed, from others that are trying to help provide that bridge and we want to support our customers through that the best way that we can.

And so we just want to do it right, but hopefully, not subject ourselves to additional risk with hindsight after the dust settles.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. And then just finally, congratulations, Beth. You had a great run. You're providing a strong leadership to Key and to women, in general, and good luck in your future adventures.

Thank you.

Beth Mooney -- Chief Executive Officer

Thank you so very much, Gerard, and to all of you today.

Operator

And with that, I'll turn it back to the company for any closing comments.

Chris Gorman -- President and Chief Executive Officer

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, (216) 689-4221. This concludes our remarks. Thank you.

Operator

[Operator signoff]

Duration: 80 minutes

Call participants:

Chris Gorman -- President and Chief Executive Officer

Don Kimble -- Chief Financial Officer

Beth Mooney -- Chief Executive Officer

Scott Siefers -- Piper Sandler -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Mark Midkiff -- Chief Risk Officer

Ken Zerbe -- Morgan Stanley -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

John Pancari -- Evercore ISI -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Terry McEvoy -- Stephens Inc. -- Analyst

Bill Carcache -- Nomura Instinet -- Analyst

Ken Usdin -- Jefferies -- Analyst

Brian Foran -- Autonomous Research -- Analyst

Saul Martinez -- UBS -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

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