Q1 2021 KeyCorp Earnings Call
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Good morning, and welcome to key courts first quarter 2021 earnings call.
As a reminder, this conference call is being recorded.
And I'd like to turn the conference over to the Chairman and CEO, Chris Gorman. Please go ahead.
Thank you for joining us for Keycorp's first quarter 'twenty 'twenty One earnings conference call. Joining me on the call today are Don Kimble, Our Chief Financial Officer, and Mark Midkiff, Our Chief risk officer on slide two you'll find our statement on forward looking disclosures and non-GAAP financial measures. It covers our presentation materials.
<unk> comments as well as the question and answer segment of our call I am now turning to slide three our first quarter was a strong start to the year as we executed our strategy and delivered positive operating leverage relative to the year ago period, we continued to grow the number of clients across our franchise.
In the first quarter, we experienced the strongest growth in consumer households, and five years. Additionally, we continue to add commercial clients and deepen existing relationships.
We leveraged the strength of our business model by raising over 13 billion for our commercial clients of which we retained approximately 19% on our balance sheet, but let me just say that's exactly the way. Our model is designed to work taking advantage of attractive markets for the benefit of our clients.
Maintaining our credit discipline with that which we place on our balance sheet.
We also launched our National Digital Bank Laurel Road for doctors at the end of March I will comment more on that shortly in addition, we announced the acquisition of Ecu and strategies, a client focused analytics firm with deep expertise in the financial services industry the acquisition of <unk>.
Lines to key's relationship strategy and underscores our commitment to a data driven approach to grow our business.
We also identified 70 branches for consolidation representing approximately 7% of our network, we continue to lean into digital.
Most of these closures will take place in the second quarter.
Moving to our financial results for the quarter, we reported net income of $591 million or.
Our 61 cents per share for the first quarter on a per share basis. This is an increase of 9% from the fourth quarter results and up significantly from the year ago period.
We generated record first quarter revenue, which reflected broad based growth across our company driven by our fee based businesses.
Our investment banking business achieved record first quarter revenues with growth across the platform.
This is an area, where we have invested in our teammates and made targeted acquisitions to enhance our capabilities, including such areas as health care and technology.
We have grown this business in eight of the last nine years, including having a record year in 2020.
And we expect to grow this business again in 2021.
We reached another milestone in our consumer mortgage business with record loan originations of $3 billion for the quarter. In addition to adding high quality loans to our balance sheet consumer mortgage fees were up 135% from the year ago period.
Our outlook for this business remains positive as we continue to grow and take market share. We reported a record $8 3 billion of originations in 2020, and we expect to eclipse that level this year.
Other contributors to fee income this quarter were trust and investment services and cards and payments income.
Credit quality remains strong non.
Nonperforming loans net charge offs and criticized loans were all down from the prior quarter.
We continue to support our clients, while maintaining our moderate risk profile, which has and will continue to position the company to performed well through the business cycle. Finally, we have maintained our strong capital position, while continuing to return capital to our shareholders our common.
Equity tier one ratio ended the quarter at nine 8%, which is above our targeted range of nine to nine 5%.
Our strong capital position enables us to execute against our capital priorities organic growth dividends and share repurchases. This quarter, we repurchased 135 million of common shares our board of directors also approved our first quarter common stock dividend of $18.
A half cents a share.
Now turning to slide four before I turn the call over to Don I wanted to make a few comments regarding Laurel Road, we acquired Laurel Road a born digital company in April of 2019, the acquisition has exceeded all of our expectations.
It has accelerated our digital transformation and has been a great complement to our existing health care platform.
Since our acquisition Laurel Road has generated over $4 6 billion in high quality loan originations, adding high value digital relationships with health care professionals.
We also have the opportunity to continue to scale. This business at the end of March we took the next step on this journey with the launch of our digital Bank Laurel Road for doctors, serving the healthcare segment and expanding our consumer franchise nationally.
Importantly, our approach to our digital bank is differentiated historically many offerings have been product centric are focused on deposit gathering ours is a fully as fully aligned with our relationship strategy.
The launch broadened our offering for lower road clients to include deposits additional lending products and other value added services created to meet the unique financial needs of health care professionals.
The launch was an important milestone in our digital journey, which brings together critical elements of our strategy.
Targeted scale.
Digital healthcare and privacy.
Right now we are focused on physicians and Dennis but soon we will expand to other medical professionals.
Accordingly. This launch is not the end goal, but rather just the beginning I will close by or close my remarks by restating that I am pleased with our results for the quarter and our strong start for 2021 I am proud of what we have achieved as a team and remain optimistic about the future.
As we emerge from the pandemic and the economy continues to recover.
Key is well positioned to grow and deliver on our commitments for all of our stakeholders.
That I would like to now turn it over to Don to walk through the quarter Don.
Thanks, Chris I'm now on slide six as Chris said it was a strong start to the year with net income from continuing operations of <unk> 61 per common share up 9% from the prior quarter and over four times from the year ago period, the quarter reflected a net benefit from our provision for credit losses. The reserve release was largely driven by expected improvement in the economic environment.
<unk>.
Importantly, we generated record first quarter revenue driven by the strength in our fee based businesses.
I'll cover the other items on this slide later in my presentation.
Turning to slide seven.
Total average loans were 101 billion up 5% from the first quarter of last year driven by growth in both commercial and consumer loans.
Commercial loans, reflecting Keith participation in PPP, partially offset by decreased utilization PPP.
PPP loans had an impact of $7 billion in the first quarter of 2021 average balances.
Consumer loans benefited from the continued growth from Laurel Road, and as Chris mentioned record performance from our consumer mortgage business with $3 billion of consumer mortgage loans this quarter.
The investments we have made in these areas continue to drive results and importantly add high quality loans and relationships.
Linked quarter average loan balances were down, 1%, reflecting lower commercial utilization rates and reduction in average PPP balances.
Just under a $1 billion of PPP forgiveness in the current quarter.
Consumer loans were up 1% from the prior quarter again related to continued production consumer mortgage and Laurel Road.
Continuing on slide eight.
Average deposits totaled $138 million for the first quarter of 2021 up 28 billion or 25% compared to the year ago period, and up one 5% from the prior quarter, the linked quarter and year ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus.
The growth was offset by continued and expected decline in time deposits.
The interest bearing deposit costs came down another three basis points from the fourth quarter 2028.
Eight basis point decline last quarter we.
We continue to have a strong stable core deposit base with consumer deposits accounting for over 60% of our total deposit mix.
Turning to slide nine taxable equivalent net interest income was 101 2 billion for the first quarter of 2021 compared to $989 million, a year ago and $1 <unk> 3 billion for the prior quarter.
Our net interest margin was 261% for the first quarter of 2021 compared to three 1% for the same period last year and two 7% from the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by significant growth in our balance sheet compared to the year ago period.
The larger balance sheet benefited net interest income, but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter net interest income decreased $31 million and the margin declined nine basis points. The decrease in net interest income was caused by the day count of approximately $14 million lower loan fees of $8 million and lower loan balances, resulting in an additional $8 million reduction to NII.
Net interest margin also reflected a four basis point reduction due to the increases in our liquidity position.
Moving on to slide 10.
Continued to see growth in our fee based businesses noninterest income was $738 million for the first quarter of 2021 compared to $477 million for the year ago period, and the $800 million in the fourth quarter comp.
Compared to the year ago period, noninterest income increased 55%.
A record first quarter for investment banking debt placement fees, which reached $162 million.
Driven by broad based strength across the platform this quarter, both debt and equity markets were especially strong.
Record mortgage originations drove mortgage consumer mortgage fees, this quarter, which were up $27 million or 135% from the first quarter of 'twenty.
Cards and payments income also increased $39 million related to higher prepaid card activity from state government support programs as well as the growth and then the.
Core platform.
Excuse me.
Other income in the year ago period included $92 million of market related valuation adjustments.
Impaired to the fourth quarter noninterest income decreased by $64 million.
The largest driver of the quarterly decrease with seasonality in our investment banking loan coming off an all time high record quarter.
This was partially offset by the strength in trust and investment services income and cards and payments income.
I'm now on slide 11, total noninterest expense for the quarter was 1.071 billion compared to $931 million last year and $1 1 billion in the prior quarter the.
The increase from the prior year is primarily in personnel expense related to higher production related incentive compensation, which increased $58 million.
And the increase in our stock price, resulting in a $36 million increased compared to last year.
Employee benefit costs also increased $15 million.
Year over year payments related costs reported in other expenses were $32 million higher driven by higher prepaid activity.
Peter processing expense this quarter was elevated related to software investments across the platform accounting changes and timing differences.
Compared to the prior quarter non interest expense decreased $57 million. The decline was largely due to lower production related incentives and severance cost.
Moving now to slide 12, overall credit quality continues to outperform expectations for the first quarter net charge offs were $114 million or 46 basis points of average loans.
Our provision for credit losses was a net benefit of $93 million.
This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production.
Nonperforming loans were $728 million this quarter or 72 basis points of period end loans, a decline of almost $60 million from the prior quarter.
Additionally, criticized loans declined 8% in the 30 to 90 day delinquencies also improved again quarter over quarter with a five basis point decrease.
While the 90 day plus category remained relatively flat.
Now on to slide 13 keys.
<unk> capital position remains an area of strength, we ended the first quarter with a common equity tier one ratio of nine 8%, which places us above our targeted range of nine to nine 5%. This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, we continue to return capital to our shareholders in accordance with our capital priorities.
Our board of directors approved a first quarter dividend of $18.05 per common share.
We also repurchased $135 million of common shares under the share repurchase authorization, we announced in January of up to $900 million.
This leaves us with a capacity of up to $765 million for the next two quarters.
On slide 14, we provide our full year 2021 outlook, which we've adjusted to reflect our strong start to the year positive momentum in our business and more favorable revenue outlook.
Consistent with our prior guidance, we expect to deliver positive operating leverage for the year.
Average loans are expected to be relatively stable, reflecting continued momentum in our consumer areas the impact of PPP and stronger commercial growth in the second half of the year.
The first quarter should be the low point of the year with expected growth from here.
We expect deposits to be up mid single digits and that we will continue to benefit from our low cost deposit base.
Net interest income should be up low single digits.
Net interest income will benefit from higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity offset by the ongoing impact of low rates.
Noninterest income should be up mid single digits, reflecting the growth in most of our core fee based businesses.
Noninterest expense to be relatively stable, reflecting higher production based incentives related to our improved revenue outlook, our continuous improvement efforts and branch consolidate consolidation plans remain on track and will help support our ongoing investments in talent and to stay at the forefront of our digital offerings.
Moving on the credit quality.
<unk> reduced our net charge off guidance, which is now expected to be in the 35% to 45 basis point range for the year.
This reflects the quality of our portfolio and our current outlook.
And our guidance for our GAAP tax rate remains unchanged at around 19% for the year.
Finally shown at the bottom of slide on our long term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns.
Overall it was a good start to the year and we remain confident in our ability to deliver on our commitments to all of our stakeholders with that I will now turn the call back over to the operator for instructions on the Q&A portion of our call operator.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one and then zero on your Touchtone phone.
EMEA tone, indicating that you had been placed in Q.
Yourself from the queue again by pressing one zero command.
And our first question will come from the line of Scott Seabreeze.
With prices standard and your line is open.
One moment.
Given these go ahead Kim.
Hello.
Scott how are you good morning, Scott.
Okay Alright.
On mute or something there good day talking to you guys. This morning I appreciate you taking the question.
First question was just on given that you guys sort of have a broader product mix than other traditional regional banks given your capital markets exposure I guess I am curious if you guys are seeing any preference from your corporate clients in terms of.
Traditional banking products versus opting for capital markets.
Products that you might have expected to be just sort of more traditional banking has there been any preference shift there.
So Scott it's Chris.
We have seen a preference to kind of take our clients to where the most advantageous financing is.
And one of the areas that I would point you to our real estate book in it Youll notice if you look at the H eight data we underperform.
Some of our competitors in terms of what we're putting on our balance sheet, but yet we're only putting about 19% or 20% of the capital. We raise so if you think about really attractive non recourse 10 year Fannie.
Fannie Freddie FHA the life companies the <unk> market that would be an example of where these middle market companies are consistently opting.
To go to other other.
Other sources of funding other than than the banks and obviously for us that ties in really well with our business model. So that would be an example.
Okay perfect. Thank you and then I guess actually gets sort of Tiki Tak one for Don I thought the $7 billion of average balances of PPP loans do you happen to have the end of period just for modeling purposes, I'm guessing somewhere in the $6 $5 billion range, given what you said about.
Forgiveness in the first quarter, but was curious if you had a more pinpointed number sure the ending balance was $7 7 billion, because we actually originated $2 billion of new loans under the.
The current program and we also have a pipeline of approved through the SBA of an additional $700 million will be expected to close in the second quarter.
Okay, perfect Alright, glad I'm glad I asked there. So that is helpful. Clarification I appreciate you guys taking the questions.
Thank you Scott.
Thank you next question comes from the line of Ken Zerbe with Morgan Stanley and your line is open.
Good morning, Ken.
In terms of tier.
Laurel Road for doctors can you just help us understand is that a I guess a marketing decision of how you are positioning Laurel road or does it actually.
Require you guys to build out capabilities talent people to be able to offer services specific to doctors, where it's not just a marketing.
Gimmick. Thanks.
It certainly is a lot broader than just marketing and kind of a couple of proof points. Just since we launched Laurel road for doctors on March 30th our website traffic Ken is up 100%. We've had 50 discrete sessions with doctors and Dennis on the website. We also have garnered 300.
Net.
New Dr. Dennis.
Households, and obviously, we will start building this out in concentric circles. So what this is is a.
It is a complete digital offering focused on doctors and dentists and so it's it's much broader than a single product. It has to meet the needs of doctors and dentists, which are both unique and to some degree homogeneous. So it isn't just marketing for sure it's very focused.
Got it understood. Okay, and then just a different follow up question. How do you guys see seasonality playing out in the investment banking and debt placement fees, because I, if I'm not mistaken I believe first quarter tends to be the.
The seasonally weak quarter, but it was obviously very strong this quarter.
Sure well as I am.
It was a record first quarter for us and our investment banking business seasonality typically is backend loaded as people, there's always a big push to get transactions done by year end.
We obviously had been pleased by the trajectory of the business and we also are pleased that as things come out of the pipeline the pipeline is being.
Our replenished.
The pipelines are strong so we feel good about it and we think we will have another record year of our investment banking business day.
One other interesting things is there is a lot of M&A activity, so while theres not a lot of borrowing.
In our strategic discussions with the people that are running these mid market and mid sized companies. They are looking to do.
T J things, which really opens the door for us to provide a lot of services.
Alright, great. Thank you.
Thank you. Our next question will come from the line of Bill.
With Wolfe Research and your line is open.
Thank you good morning, Christian Don I wanted to ask about your loan pipeline, we're hearing varying degrees of optimism around growth in the second half of 2021 post reopening can you give a little bit of color on the tailwind that you're anticipating based on the discussions youre having with clients.
The extent to which the liquidity on their balance sheets.
Packing their appetite to borrow.
Sure Thats a great question, let me kind of break it into a consumer and commercial.
On the consumer side, we had a we had a record year in terms of record quarter I beg your pardon in terms of number of new households, We also had a record quarter in terms of mortgage originations at $3 billion. So we have a lot of trajectory on the consumer side the consumer is spending.
And while you don't see it in credit card balances because at origination our average consumer has a FICO score of around 770, what you do see it in is the velocity in both debit and credit.
We believe that our growth engines in consumer last year, we generated about $10 billion of originations between Laurel Road and mortgage we think we will do more than that this year and that trajectory is they're up and running let's talk about commercial a little bit which is which is clearly.
Delayed.
First of all commercial right now we have.
Really unprecedented utilization is in low utilization. So I think one other areas, where we can grow from a commercial perspective is as there are supply chain challenges as there is clearly some in some inflation out there I think youll see people start to build their inventory and.
I would suspect we will see utilization improve from the low point that it is now.
Mentioned theres a lot of strategic discussions going on that should generate loan growth. What we're not seeing right now is investment in people and property plant and equipment and I would guess.
On the people front one of the challenges for our customers is it's hard to hire people. So that's one of the challenges, but on property plant and equipment I would expect that to ramp up in the second half of these projects as you know take a fair amount of lead time, so consumer strong throughout the year I think commercial is going to be relatively flat in the first half and will pick up in the.
Half.
That's very helpful. Thanks, Chris.
John as.
As a follow up I'm, sorry, if I missed this but.
Driving the improved NII outlook, you still expect relatively stable loan growth. So is the improvement coming from PPP and non PPP can you tell us what the anticipated total revenue benefit is after factoring in forgiveness will most of that come in 2021, just trying to get a sense. If you could clarify force.
Within the outlook, what kind of NII growth you guys expect ex PPP.
Sure. If you look at the full year outlook that we would have provided in January compared to what we have today and just using the midpoint net interest income was up about $80 million and roughly 45% to 50 of that is coming from the improved rate outlook that we've seen with <unk>.
The rate curve, moving up and just the impact of that in the overall portfolio.
If you take a look at the loan balances overall, but I would say that theyre up very modestly, but it really shows a little bit more of a mix improvement there as far as the yield impact as Chris highlighted that we had record mortgage originations of $3 billion. This past quarter, we've increased our outlook as far as the overall.
All <unk>.
Mortgage balances going onto the balance sheet and pulled back a little bit on the commercial given the lower utilization rate. We saw in the first quarter and so that mix shift also helped a little bit.
Interest PPP, we talked on the call in January about we thought that with the new loans that we'd be seeing coming through with the current wave of PPP. If you take a look at the net interest income which includes both the 1% interest plus the fee income we thought that would be up about $80 million year over year and that's about the same as what we.
We're seeing this year as far as our outlook in April and so.
We are still seeing that kind of incremental benefit.
And then as far as the forgiveness, we would expect.
Last year's production of the $8 billion, but 85% of that to be forgiven throughout the remainder of this year and so we will see that.
Acceleration occur as far as some of the fee income in future quarters compared to what we experienced in the first quarter, but.
Generally fairly consistent with what we would have expected back in January.
That's very helpful. Christian debt. Thank you very much for taking my questions. Thank you.
Thank you.
Our next question comes from the line of John.
Pam Kearney with Evercore ISI and your line is open.
Good morning, Hey, John John.
On the.
On the margin side, just wanted to see Dan if you can kind of walk us through your expectations.
How do you expect the margin to traject here over the remainder of the year and what's assumed in your <unk>.
Up low single digit outlook I guess, if you can give it perhaps with the PPP impact and without that would help thanks.
Share that.
As far as the margin outlook, we would expect it to be stable to slightly up from here. So maybe up a couple basis points throughout the rest of the year really reflecting some of the improvement in the loan fees and as we mentioned earlier from.
From the fourth quarter to the first quarter one of the drivers of why our NII was down was about $8 million lower loan fees and some of that was related to the PPP, because we had higher levels of forgiveness in the fourth quarter than what we actually did in the first quarter of this year and so.
As far as the PPP impact, we would expect that the total NII level contributed for first quarter versus the rest of the year to continue to trend down a little bit very modestly at first in thinking of a million or two a quarter coming from that just with the impact of the forgiveness of those loans.
But generally again fairly consistent with what we would've expected coming into the year as far as the trajectory in.
And our outlook for those balances.
Okay. Thank you that's very helpful and then separately on.
The healthcare banking effort.
One question I've been getting about this is.
The expected longer term impact that you may forecast from this whole effort not just the digital effort ballroom for doctors, but I guess also when you look at the combined effort that you've flagged before by involving your Cain brothers business as well as the emerging relate.
<unk> ship in your backyard, there with the Cleveland clinic.
When you look at this long term.
How do you size up the expected overall impact and maybe as a percentage of revenue or earnings or returns or even percentage of loans on the loan side or deposit is just want to help people think about how.
How big this thing could be thanks.
John It's Chris we have not yet frame that for the investors. Obviously this is we just launched the national digital affinity bank just at the end of March obviously health care is rapidly approaching 20% of the GDP. So there is a huge opportunity and as you.
Look throughout key we do a lot of business in healthcare throughout our franchise.
For example, while not part of Laurel Road doctors and dentists are a significant driver of our mortgage business. For example, and if you think about serving these large hospitals and what we can do for.
The CEO in terms of provide him strategic strategic advice raised capital at the dealing.
Dealing with the CFO lot, we can do around payments and then with the chief Human resources officer, the ability to refinance.
Student loans, the ability for docs to manage their money, we have 45 billion of AUM. So it is a huge opportunity we havent yet.
Laid out for us for the public yet what our targets are as it relates specifically to Laurel Road last year, we generated.
$2 3 billion in loan refinancing.
This year in spite of frankly, some of the noise around student lending in general.
We'll continue to grow that business. So that's that's just a data point for you.
Got it that's helpful. Thanks, Chris.
Thank you.
Next question will come from the line of.
Erika Najarian with Bank of America, and your line is open.
Hi, good morning, good morning.
My first question is for you Chris I, just wanted to tap into your experience now.
<unk> is uniquely positioned to benefit from.
Capex coming back online now and as we think about the excess liquidity in the system.
Our deposit is going to be a leading indicator for line utilization or are your clients, telling you that they're going to keep.
Excess levels of cash for the time being.
Additionally.
This curve Steepening from go along and.
Rising.
How does that play in tier historically, the decision between capital markets and revolver.
Sure. So first as it relates to deposits I think its probably somewhere in between your two scenarios.
Think based on what we've all been through over the last 12 to 18 months I think youll see people carry a little higher levels of cash, but clearly I think they will definitely.
Burned down some of those.
Excessive deposits before they start borrowing.
And I think as you think about going forward the use of revolvers or going to various markets I think to the extent that people have.
A defined use of proceeds I think youll see people try to lock in longer term money because at current rates just think that makes a lot of sense for some of these long term projects.
Got it and just took a follow up on a question whether or not.
The steeper curve from higher long end is that the impact that decision between capital markets and revolver rate.
In terms of funding preference.
I don't I don't think the steepness of the curve, while it matters a lot to us I think what our clients really think about from a strategic perspective is this a long term asset and if I go out if I term it out as opposed to use my revolver or is that an advantageous financing for the long term I don't think there is I don't think they are driven by the steepness of the curve.
Got it and just.
Don.
Outlook for non interest expense being relatively stable does that contemplate another record year in investment banking and debt placement fees.
That does contemplate that as Chris highlighted that we expect that to show growth on a year over year basis, and also to share the stronger.
Residential mortgage production as well and so both of those are part of the reasons why the fee income is up and also the expenses are up on a corresponding basis.
Great. Thank you. Thank you.
Thank you.
Next we'll go to the line of Chris <unk>.
With Jefferies.
And your line is open.
Hey, good morning. Thanks.
I was wondering if you could talk a little bit about the Reinvestments that you said you made this quarter $6 5 billion ending balance increase can you just help us understand just where that front book back book.
Math is at this point.
Both Securities and also if you have any comments on loan pricing and spreads too. Thanks.
Sure Ken.
As far as our securities portfolio that we did add to both the core book as well as.
Short term Treasury book, we've got.
As of the end of the period about a $5 billion over the last two quarters increase in the core bond portfolio that was really done in some of the core type of products and investments we would normally invest in which will include <unk> and 15 year pass throughs. We also did some commercial mortgage.
The agency securities as well an attached swaps to those so that.
Basically it locks in a fixed rate for the first safety.
Say four to six years, and then convert it to a nice floating rate for us and so the.
The average yield on purchases was around a 140.
The roll off of our existing portfolio is around $2 35 to $2 40 range and so we do see continued pressure there based on where the current rates are but.
As.
Just consistent with what we're seeing in the markets overall as far as that short term treasury portion of the portfolio we added.
Then about $5 billion also over the last two quarters. The average yield on that is about 40 basis points and well that's fairly low it's fairly short duration of the portfolio and really is just representing a substitute for the cash position is because we're continuing to maintain cash levels of about $15 billion, which is.
From our targeted level of about $1 billion in no more than $2 billion.
Just something we'll continue to evaluate as far as the overall.
Outlook as far as putting some of those additional dollars to work and hopefully we start to see some of that additional commercial growth and utilization rates pick up which would be a much better option for us as far as.
Using some of that excess liquidity on the loan side that.
We are seeing.
Some some tightening from the competitive perspective on the commercial side that as you might imagine there is stronger demand coming from from banks to provide those.
Loans and so we are seeing a little bit tightening there compared to where we were a year ago and on the consumer side spreads on AR.
Curve adjusted basis continue to be pretty good for us, both Laurel road and residential mortgage or wider spreads where they would typically be even though the yields are still low compared to.
Where we might want to see that overall portfolio, but generally holding up pretty well.
Okay, and then Don just one more follow up on PPP do you have the first quarter contribution from just the NII contribution of PPP in total.
Will the net interest income or excuse me. The interest income. So this wouldn't include any funding costs associated with it it was $65 million and that was down from $70 million.
Last quarter.
And we would expect just some very slight to reductions in that $65 million level over the next few quarters as an essentially with the forgiveness triggering some acceleration of the fee income offsetting some of the reduction in the future balances as debt forgiveness goes through.
Yep understood. Thank you Don.
<unk>.
Thank you. Our next question comes from the line of Mike Mayo with.
Wells Fargo and your line is open.
Hi.
Good morning, Mike, Chris I know you I know you've built the investment banking business and you expect another record year.
It seems a little.
Bold this early in the year or so.
What gives you confidence.
What are your backlogs are they record in house.
Far above are they.
The prior record backlog if that's the case.
And maybe just a little bit about how you see the size of the pie in your wallet share.
What percentage of your middle market customers have investment banking or just a little bit more color that gives you confidence.
Sure so.
As we look at the pipelines as I mentioned like our pipelines R. R.
Our strong and they're strong in the areas that have long lead times, but they're also in a strong in the areas that have a fair amount of velocity think about the debt markets. For example, so the pipelines are there also as we look at the mix and I've mentioned this before.
The level of M&A activity.
Tends to have a multiplier effect and so as we're advising on a lot of significant transactions that gives us the opportunity to do what.
What we do for our clients provide capital after providing advice also provide enterprise payments helped them hedge. So those are the things that give me confidence.
That we're going to be able to grow the business again. This year. We also have a lot of repeat customers.
We're really proud of the fact that a lot of our customers go to the markets relatively regularly and we do a good job for them and so they hire us.
Repetitive fashion those are some of the reasons that I feel confident about the business. We also continue to.
To hire quality people to bring onto our platform.
We have what we think is a unique platform candidly I still think it's under leveraged and there is an opportunity for us to in a very targeted way go out and hire people that we think can advance the business.
And then a follow up your CEO letter says that you guys are the number one provider.
Alright.
<unk> provider of renewable energy financing.
So what does that include is that bank Glen day, one capital markets.
Yes.
And what's the total addressable market and where are you in that market share sure. So that we have been a leader and we always talk about targeted scale and renewables is a great example that way back in 2004 as.
As we saw the utilities pivot to renewable energy, we built a business around both wind and solar.
On our books today, Mike we have about $5 billion of exposure, obviously over the years, we've raised tens of billions of dollars for the benefit of our clients.
I think our pipelines in that business, probably we probably have visibility on to.
$2 billion or so what's really interesting is I think as.
As the whole plan comes together for the American jobs plan, I think there'll be a big focus on renewable energy and we feel like we're really well positioned and so we'll continue to lean in we will continue to invest we have good relationships with the people with the whole ecosystem and so.
That would be an example of targeted scale it wasn't that big of a business. When we started it but it will continue to growth.
Alright, thank you.
Do you.
Thank you.
Next we will go to the line of Gerard Cassidy with RBC.
Your line is open.
Thank you, Chris and good morning.
Thanks.
Okay.
Can you guys share with us.
We all know what has happened with quantitative easing.
The increase in the industry's deposits as evidenced by the over three trillion dollar growth. We saw last year in the banking industry as deposits you guys have certainly seen it on your balance sheet and it shows up and you mentioned that the stimulus programs have contributed to your deposit growth.
Can you share with us how do.
Do you see your customers using these deposits and is there any evidence yet from the earlier stimulus plans that we saw in the spring of last year. The initial checks that individual's received as well as the initial PPP programs.
That theyre actually drawing down the deposits or do you think that your deposits could remain elevated for an extended period of time because of the continuation of QE and the government deficit spending we expect over the next 12 to 18 months.
So I think that consumers are spending part of it. So you are right. The industry has about three trillion of excess deposits. We had key have about $3 billion and if you looked on our consumer.
Balances are consumer balances are up year over year, Gerard about 17% importantly on the on the deposits that are non rate sensitive they are up 42%, but I think you will see those particularly if there is not additional stimulus. We've had three waves now I think youll start to see those.
Down we're certainly seeing it in card spend for.
For example, Don what would you add to that.
Right I mean, the first quarter I think we saw card spend up about 7% across our customer base and maybe that's a leading indicator there, but but but gerard the those deposit balances have been amazingly sticky and I think it reflects the impact of the ongoing stimulus programs that come through in the the checks that have been cut to the consumer and so.
Those have been very resilient as far as the overall balances I think we will see balances remained strong for a period of time, even as the economy starts to pick up.
We would expect probably as we are also expecting to see commercial lending picking up in the second half of the year I would expect some other commercial deposits to start coming under a little bit of pressure to as Chris highlighted maybe do a little bit of both where you pulled back a little bit on that liquidity on the balance sheet, but also start to borrow against some of the lines to help fund some.
The needed investments in inventory and just other growth.
Very good and then Chris.
In terms of using excess capital for acquisitions.
Key over the years has been successful in acquiring.
Not necessarily depositaries, but the complementary businesses, particularly in the investment banking and then lower roll Laurel Road of course can.
Can you share with us your thoughts and not so much on that too interested in and if you're looking at a depositary, but more just the add on businesses are there opportunities or needs for you.
You can buy another.
Our broker dealer, our advisor or something like that to enhance the investment banking business as you go forward.
I think theres always niche businesses and what we've found Gerard is when we bring on these niche businesses I'm really proud of the way we've been able to integrate them because most of these businesses by definition are entrepreneurial businesses. The most recent one obviously was just last quarter. When we purchased <unk>, which is an analytics business, but there are.
Clearly opportunities with our targeted scale for us to go out and acquire these entrepreneurial companies that by the way are good companies that were able to integrate but they really bring a skill set to key as well.
Laurel Road I think we acquired 40 full stack.
Software Engineers for example, and that clearly will be helpful. As we advance our digital strategy throughout key so yes, there are opportunities and we will keep our eyes open for those.
Very good thank you.
Thank you.
Thank you next.
Next we'll go to the line of.
K mcevilly with Steven and your line is open.
Thanks, Good morning.
Gary.
Actually just one question for you Don the cards and payments income up 60% and over $100 million in the first quarter I was hoping you could just talk about how the stimulus plan kind of impacted prepaid card activity.
And maybe a better way to think about the run rate in a more normal operating environment.
Sure that.
If you look at the increase year over year that was about $39 million I would say 32 ish of that is really related to the prepaid card business that we've talked about before thats used to support.
Various state government programs in this environment at the same time, we saw that increase we also saw a corresponding increase in our expenses of $32 million and so.
Near term the benefit really is from those deposits are being maintained there and so we would expect those programs to continue to wind down throughout the year and so we will see that.
Cards and payments related revenue line item coming down for that but also see a corresponding impact on the expense side as well.
As we mentioned earlier, we were starting to see in the first quarter. Some some nice trends as far as the year over year growth rates in all of our card programs, whether it was consumer credit card or debit card or whether it was the commercial card products that we have and so.
We're excited about that core momentum and probably would expect to see growth there on a core basis, but my.
I might be a little cloudy to see that as we would expect to see some of that prepaid balance.
Activity flow throughout the year.
Alright, and then just as a quick follow up the revised outlook for expenses up since January.
Is any of that connected to the announcement last month and the Buildout of Laurel Road Laurel Road for doctors.
Well I would say that we will have increased costs associated with that.
The run rate in the build out was reflected in our January outlook and so none of that really came through there that.
So as you think about what the change in our outlook was and just using the midpoint of those guidance ranges that.
Total revenues were up $160 million from from what we would've shown before expenses are up $80 million and so.
The efficiency ratio of about 50% on that revenue growth and that really relates to the growth coming from higher expected capital markets related revenues and higher consumer mortgage revenues, which both have a strong variable expense component to it.
I appreciate that thanks, Dan Thank you.
Thank you.
Our next question comes from the line of Steve Alexopoulos with Jpmorgan. Your line is open.
<unk>.
Good morning, this is gently Steve alexopoulos.
Good morning Janet.
Good morning.
Going deeper into your NII guidance.
Low single digit in your NIM outlook for stable to slightly up for 2021 can you provide more details around what you're assuming in terms of the level and deployment of excess liquidity on your balance sheet. So how much of the $15 billion of short term investments in the first quarter at San Francisco and two securities I sneak lookout.
Yes.
We would expect very incremental changes as far as deploying some of those that.
Initially the liquidity will be absorbed through additional loan balances and so as we mentioned before we expect the first quarter to be the low point for us for average loan balances for the year and Thats really led by the consumer growth initially and then.
We would expect to see line utilization rate pick up in the second half of the year for commercial and so that will be helpful. And then as far as the investment portfolio that over the last couple of quarters, we put to work.
Our net say $2 billion to $3 billion of additional <unk>.
<unk> outside of that the treasury portfolio, and so I would think that that would be an expected pace of maybe.
Deploying a $1 $2 billion per quarter as far as shifting out of cash and putting that into the investment portfolio. In addition to the loan growth.
Alright, that's helpful and shifting to fee income can you talk to why service charges on deposits.
Client sequentially in the first quarter back to sort of pre pandemic levels is this more of a more of a function of customers, having elevated deposit balances and not incurring overdraft fees or is there something else going on.
You nailed it thats essentially whats happened here is on the service charge on the deposits.
The primary reason for the decline is related to just that very fact that the consumers have stronger balances until they have lower NSF fees and also the commercial customers have stronger balances, which results in fewer service charges for those accounts as well and so that excess liquidity is providing.
Relief for the customers as far as fee income.
Alright, thanks for taking my questions. Thank you.
Thank you.
And with that we have no further questions I'll turn it back over to the speakers for any closing comments.
Well, thank you and again I want to thank all of you for participating in our call. Today. If you have any follow up questions. You can direct them to our Investor Relations team to 106 68942 to one this concludes our remarks. Thank you.
Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation for using AT&T Executive Teleconference Service you may now disconnect.