Q1 2022 KeyCorp Earnings Call
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[music] Your conference will begin momentarily please continue to hold.
Yes.
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Yeah.
Good morning, and welcome to <unk>.
Corp's first quarter 2022 earnings conference call.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to the Chairman and CEO , Chris Gorman. Please go ahead.
Well. Thank you operator, and thank you for joining us for Keycorp's first quarter 2022 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 disclosure and non-GAAP financial measures. It covers our.
<unk> materials and comments as well as the question and answer segment of our call.
Now turning to slide three this morning, we reported earnings of $420 million or <unk> 45 per share our results reflect strong underlying operating performance expected seasonality and the impact of current market conditions.
Our results also included <unk> <unk> per share of additional loan loss provision in excess of net charge offs.
One of the standouts this quarter was our strong loan growth average loans were up 4% from the last quarter driven by both our consumer and commercial businesses.
Adjusting for the planned runoff of PPP and the sale of our indirect auto business, we grew loans by 15% year over year.
Our strong loan growth benefited net interest income, which came in above our expectations. We also revised our net interest income outlook higher reflecting both stronger loan growth and the ongoing benefit from higher interest rates.
In our consumer business, we continue to focus on adding and deepening client relationships and our two growth engines consumer mortgage and Laurel Road, we originated $2 $6 billion in consumer mortgages in the first quarter and Laurel Road had a record quarter with originations of 800.
$20 million.
It's worth noting that our Laurel road results were accomplished with the federal student loan payment holiday remaining in place.
The outlook for this business remains strong with a new offering for nurses the largest segment of the healthcare industry planned for May six national nurses day.
We also experienced strong core loan growth in our commercial businesses as we grew our targeted industry verticals. Additionally, we benefited from a 2% increase in C&I line utilization.
In the first quarter, we raised over $24 billion in capital for our clients retaining 23% on our balance sheet.
This is a 500 basis point increase from the amount retained in 2021 as.
As we discussed at our recent Investor Day. This is exactly the way our business model is designed to work offering our clients the best solution and execution, both on and off balance sheet through various market conditions. This quarter, we were able to offer attractive balance sheet alternatives for our clients.
Our pipelines in outlook for loan growth across our franchise remains strong which will continue to provide us with an opportunity to deploy our liquidity into higher yielding assets.
Market conditions impacted several parts of our business this quarter fee income reflected a slowdown in capital markets activity late in the quarter, which adversely impacted our investment banking results. We also experienced various mark to market adjustments that Dan will cover in his remarks.
Accordingly, our long term outlook for our investment banking business remains positive. Our pipelines remained strong. We will also continue to add senior bankers to support our growth expense.
Expense levels this quarter reflected normal seasonality as well as lower production related incentives consistent with our variable cost structure in many of our businesses.
Also benefiting expenses this quarter was lower prepaid volume related to state benefit programs.
We also remain committed to delivering sound profitable growth by maintaining our risk discipline credit quality remained strong this quarter with net charge offs as a percentage of average loans up 13 basis points nonperforming loans and criticized loans also declined this quarter.
We continue to support our clients, while maintaining our moderate risk profile, which has and will continue to position the company to perform well through all business cycles.
Our capital remains a strength, providing us with sufficient capacity to support our clients and return capital to our shareholders. Looking ahead. We are encouraged by our first quarter business trends and outlook, which has led us to make a number of positive revisions to our full year 2022 guidance. These.
Include.
Stronger loan growth.
Based on the pipelines, we see across our company.
Higher net interest income driven by loan growth liquidity deployment.
And our interest rate positioning and lastly, lower net charge offs, reflecting our strong risk profile.
Fortunately, we remain confident in our ability to generate positive operating leverage again in 2022 and make continued progress against each of our long term goals Don will cover the specifics of our full year guidance in his comments overall despite market headwinds key.
A levered another solid quarter I remain confident in our future and our ability to create value for all of our stakeholders now before I turn it over to Don I want to take a minute to share some exciting news as it pertains to ESG priorities and commitments Tomorrow April 22 is Earth day.
Fittingly earlier this week, we published our 2021 ESG report.
It is designed to complement our annual Shareholder's report, which we which was released last month.
Our ESG report provides all stakeholders with an update on our priorities and progress as both a responsible bank and citizen and.
In 2021, we refreshed our ESG strategy with input from our stakeholders identifying four major priorities climate stewardship financial inclusion diversity equity and inclusion and data privacy and security.
Specific to climate stewardship, we are committed to leveraging our expertise our relationships our market influence and our resources to help address the pressing challenge of climate change. We are proud to announce a number of expanded climate commitments included in our ESG report. These include <unk>.
<unk> around sustainable financing an area, where we are a market leader.
We look forward to continuing an open and transparent dialogue with all of our stakeholders as we work to address the needs of our communities.
With that I'll turn it over to Don to provide more details on the results of the quarter and our outlook for the balance of 2020 to dawn.
Thanks, Chris I am now on slide five for the first quarter net income from continuing operations was <unk> 45 per common share down 16 from last year. Our results in the current quarter reflect the benefit of strong core operating performance combined with the challenge of the current market conditions are.
Our strong loan growth up four 4% from last quarter resulted in better than expected net interest income and positions us well for future growth.
The challenging market conditions at the end of the quarter were reflected in a few areas, including in investment banking fees and market related adjustments in other income.
Finally, the increase in our allowance this quarter reflected a qualitative adjustment to reflect the economic uncertainty given the current events with Russia and Ukraine absent.
Absent the qualitative adjustment our provision would have approximated our net charge off level.
I'll cover the other items on this slide later in my presentation.
Turning to slide six.
Average loans for the quarter were $103 8 billion up 3% from a year ago period and up 4% from the prior quarter.
Strong loan growth continued through the first quarter commercial.
Commercial loans increased 4% from last quarter line utilization rates improved this quarter, increasing 200 basis points.
PPP loan balances were $1 2 billion on average this quarter compared to $7 billion last year and $2 3 billion.
Last quarter.
Our consumer business continued its strong performance as we saw residential real estate originations of $2 6 billion.
Resulting in an increase in balances of eight 6% from last quarter.
We achieved record Laurel road originations of $820 million this quarter, despite the ongoing federal student loan payment holiday.
Year over year comparisons were impacted by the sale of our indirect loan portfolio late in 2021.
If we adjust for the sale of the indirect auto portfolio last year as well as the impact of PPP, our core loans were up year over year by approximately $14 billion.
15%.
Our outlook for 2022 now reflects an increase for loan growth for the year of mid single digits on a reported basis or mid teens growth on a basis adjusted for both PPP and the sale of the indirect auto portfolio.
Continuing on to slide seven average deposits totaled $150 billion for the first quarter of 2022 up $12 billion or 9% compared to the year ago period, and down $1 billion or 1% from the prior quarter.
The current quarter change was consistent with previous seasonal trends compared to the previous year, we have experienced nice growth in both commercial and consumer deposits.
Our cost of interest bearing deposits remained unchanged at six basis points. We continue to have a strong stable core deposit base with consumer deposits accounting for approximately 60% of our total deposit mix.
Turning to slide eight taxable equivalent net interest income was $1 2 billion for the first quarter compared to $1 <unk> 2 billion, a year ago and $1 <unk> three 8 billion for the prior quarter.
Our net interest margin was 246% for the first quarter compared to $2 six 1% for the same period last year and 244% for the prior quarter.
Year over year and quarter over quarter, both net interest income and net interest margin reflect the PPP forgiveness.
Current quarter reflected $21 million of net interest income from PPP down $30 million from the prior quarter and $38 million from the prior year.
This negatively impacted net interest margin by six basis points compared to the last quarter.
PPP is impacting key disproportionately compared to peers given the success, we achieved in delivering this product to our customers.
Offsetting this impact was the benefit from deploying some of the excess liquidity through strong loan growth.
We have increased our 2022 outlook to reflect the strength of our loan growth as well as the impact of higher interest rates.
Our current rate outlook follows the forward curve and our beta assumption beginning in the high single digits in the second quarter and trending towards the 30% level later in 2022.
This outlook results in a high single digit increase in net interest income from 2021 or between 6% and 9% adjusting.
Adjusting this for the impact of PPP, our growth would have been 11% to 14%.
Also included in the appendix as additional detail on our investment portfolio and asset liability positioning.
Moving on to slide nine as mentioned before our noninterest income was negatively impacted by changes in market conditions late in the quarter, which impacted several line items.
Noninterest income was $676 million for the first quarter of 2022 compared to $738 million for the year ago period, and $909 million for the fourth quarter.
Compared to the year ago period. The decrease was primarily driven by market related adjustments included in other income representing about $50 million of the year over year variance.
This included both changes in write downs of certain holdings and reversals of derivative reserves last year the.
The reductions in cards and payments fees are related to the lower level of prepaid card activity from the states supported programs, which is offset by a corresponding reduction to the related expense.
Additionally, during the quarter, our consumer mortgage fees were lower reflecting higher balance sheet retention and lower gain on sale margins. These declines were partially offset by stronger corporate services income, resulting from customer derivative activities.
Compared to the fourth quarter noninterest income decreased $233 million, primarily driven by lower investment banking and debt placement fees coming off a record level in the fourth quarter of last year.
Market related adjustments negatively impacted the quarter over quarter variance by $55 million as last quarter included market related gains in this quarter experienced losses.
Im now on slide 10.
Total noninterest expense for the quarter was $1 7 billion compared to $1 7 billion last year, and one $1 7 billion in the prior quarter.
<unk> to the year ago quarter, our expenses reflect lower production related incentive compensation offset by higher salaries, including the impact of our direct investments into the businesses.
On the non personnel side, our other expense category reflects lower prepaid card related expenses offset by higher travel and entertainment expense and FDIC assessments.
Now moving to slide 11 Hoover.
Overall credit quality continues to perform well for the first quarter net charge offs remained low and were $33 million or 13 basis points of average loans non performing loans delinquency and criticized classified levels all remained relatively stable.
Based on this performance the quantitative level of our allowance remained flat with last quarter.
However, we did add a qualitative adjustment to our allowance to reflect the economic uncertainty given the current events with Russia, and Ukraine, as well as potential impact of higher rates.
The qualitative adjustment is driven by the impact from changes in the overall economy and their potential impact on our customers.
As a result, our provision expense exceeded our net charge offs by about $50 million, we have no direct exposure to Russia or Ukraine.
Now on to Slide 12, we ended the first quarter with a common equity tier one ratio of nine 4% within 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.
Importantly, we continue to return capital to our shareholders in accordance with our capital priorities.
On slide 13 is our full year 2022 outlook. The guidance is relative to our full year 2021 results in ranges are shown at the bottom of the slide.
Importantly, using the midpoint of our guidance range with support Chris's comments about delivering another year of positive operating leverage in 2022.
Average loans will be up mid single digits on a reported basis, excluding PPP and the impact of the sale of our indirect auto loan business average loans will be up mid teens.
We expect average deposits to be up low single digits. Net interest income is expected to be up high single digits, reflecting growth in average loan balances and higher interest rates offset by lower fees from PPP forgiveness.
Our guidance is based on the forward curve was eight additional expected rate increases this would assume a fed funds rate of 225% by the end of 2022.
On a reported basis noninterest income will be down mid single digits, reflecting the lower prepaid card revenue related to our support of government programs and our first quarter actual results.
We expect noninterest expense to be down low single digits. Once again adjusting for the expected reduction in expenses related to prepaid cards expenses would be relatively stable.
For the year, we expect net charge offs to be in the range of 15% to 25 basis points, given our strong credit trends, we would expect loss rates to remain below the targeted range early in the year and moved modestly higher levels later in the year.
And our guidance for the GAAP tax rate is approximately 19%.
Finally shown at the bottom of slide our long term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining a moderate risk profile and improving our productivity and efficiency, which will drive returns.
Overall, it was a solid quarter and we remain confident in our ability to grow and 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 the call operator.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press one then zero on your telephone keypad.
You may withdraw your question at any time by repeating the ones Youre welcome Matt.
Once again, if you have a question you May press one zero at this time.
Our first question will come from the line of Peter Winter with Wedbush Securities. Please go ahead.
Good morning.
I wanted to ask about the loan outlook. It was a nice surprise to see that increase in loans.
So two part question can you just talk about the growth dynamics between commercial and consumer and because on the consumer.
I would've thought some pressure just.
Mortgage on resi mortgage with the higher rates.
ROE just given the extension of the student debt moratorium.
Sure. Peter So we were fortunate to have growth really on both sides, both the consumer and the commercial side on the consumer side, one of the things to keep in mind on our residential mortgage business is that it is a relationship based business also it's a business that's not very mature and that we just.
Started it really in 2016, so it has a really good trajectory.
As Don mentioned, we had a very productive quarter and frankly, the application backlog is greater going into the next quarter. So we feel good about that the other thing that we've done is we've built it to.
We focus a lot on purchased more than half of the business is directed at purchase which is obviously more durable now having said that we certainly expect like all mortgage businesses to be down in absolute terms, but we will gain share on the mortgage side as it relates to Laurel Road, obviously, we've got a really great niche there and we're going.
Continue to play that where there is there was $1 1 million doctors and dentists in the United States and we're going to expand it in early may to the 4 million nurses and so I think thats a business youll see us be able to continue to grow now on the commercial side, we obviously benefited from <unk>.
Utilization that was up 200 basis points. So that obviously is a benefit. We also are in certain areas that are just very capital intensive. If you think about affordable housing in renewables both of which we are and the number two position in North America.
Those are businesses that are repeat customers and we're able to provide a lot of capital to the other thing I would I would share with you and I mentioned this in my remarks, if you think about going from 18% on balance sheet to 23% on balance sheet due to some market dislocation that in and of itself on <unk>.
$4 billion of capital raised is another $1 $2 billion or so so that's kind of a kind of on both sides, what's driving it.
One other thing I should mentioned, we also obviously entered the year with 8% more bankers than we had than we had last year, which is also helpful.
Got it thanks, Chris very helpful and then.
Just another question just I understand you.
You lowered the outlook on fee income it seems to imply that most of the pain is felt in the first quarter and you are looking for based on the guidance just a pretty strong rebound in the second quarter and for the rest of the year.
Can you just provide a little bit more color and maybe some guidance to what youre looking for in the second quarter.
Sure well, we never provide specific guidance on the second quarter, but just as it relates to our investment banking fees are.
Our pipelines are actually up now with a realization of those pipelines, obviously is somewhat market dependent but your assumption is correct.
Weaker first quarter than we would have expected and the rest of the year generally in line Don the other thing that I would like to highlight there too Peter is that within that other income category. We did have losses of about $25 million this quarter compared to gains in the previous two quarters, whether it was a year a year over year or quarter to quarter.
And we wouldn't expect those to continue and then we're also expecting to see continued growth in a few of our categories, we've talked about before with the.
The wealth management asset management investment services and cards and payments related revenues as well that we think will be nice additions to that.
For the second quarter through the fourth quarter of this year.
Got it thanks for taking my questions. Thank you.
Thank you and our next question comes from the line of Ebrahim <unk> with Bank of America. Please go ahead.
Good morning, good morning.
I guess.
Don maybe I wanted to focus just on the side of the balance sheet, we did see.
You mentioned seasonality in deposits, but give us a sense of your outlook on deposits. I think you interest you have talked about some level of consumer deposits that you think could leave the bank. So what's the outlook for consumer deposits and then how do we think about the size of the balance sheet.
D payment on the debt side doing so would appreciate any color there.
Sure as far as the deposits, we have about $150 billion of deposits for the first quarter.
With our guidance being up low single digits for deposits compared to the previous year that would imply deposits remain around that same general range of what we're seeing is nice household growth.
In our retail business and we expect that to continue we're also seeing growth in our core operating accounts on the commercial side, we're up to 83% of our commercial deposits are our core operating account balances and so thats very important for us and so we expect that to continue to grow that to where we saw a seasonality of this quarter is that some of our.
Our state and government related.
Deposits and also some of our escrow deposits are at seasonal highs in the fourth quarter and we do see those come down a little bit in the first quarter.
And then we would see pressure for some of the excess balances outside those core operating accounts going forward, which will be offset by the other growth that we would expect to see.
By growing our households, and new commercial customers as far as the rest of the balance sheet. Our long term debt did decline a little bit I would say that.
It will be probably seen a few issuances here over the next.
A few quarters, and probably especially in that tier two category as we're focused on continuing to support that capital with the balance sheet growth that we're seeing so.
We're in good shape as far as the deposit is pleased with the trajectory, we have and I am more pleased with the the.
The customer growth, we're seeing there as well.
So fair to assume we expect earning assets to grow from here from what we saw in <unk>.
We would expect some growth in earning assets Thats correct with the loan growth assumptions and I've seen some.
Modest growth.
On the liability side correct.
Got it.
Just one quick question on the investment banking fees.
Appreciate that loan growth picked up as a function of that.
Tougher capital markets backdrop talk to us if you can just about the expense leverage in that business.
To remain weaker for a prolonged period of time.
Any specific expense offset to that that we should think about.
We've talked before about the for.
<unk> for the investment banking fees for our capital markets revenues overall, there's about a 30% correlation with just the incentive compensation alone and so you saw that clearly in our numbers for this quarter, our incentive comp numbers were down linked quarter and year over year, given the production overall and so there is that variable component to the business.
And as Chris mentioned, we have been adding senior bankers and we still expect that we're going to see growth opportunities going forward and so we will still expect to grow that but but if we see a different economic outlook. We can toggle back on some of those investments. If we just don't see the opportunity in return for those investments near term.
Got it thanks for taking my questions.
Q.
Thank you. Our next question will come from the line of Steven Alexopoulos with Jpmorgan. Please go ahead.
Hey, good morning, everyone. Good morning.
Not to beat a dead horse on the IV debt placement fees, but.
This is what I wanted to start so if we look at this quarter. Your launch point is basically the same as where it was last year I think a lot of us were surprise, even at the Investor day that the message was you thought you could grow that over where we were in 2021, maybe can you can you dial listen Don and like what are you expecting.
For full year 'twenty two for that line item.
Well, Steve what we are seeing is strength in the pipelines. The pipelines are up year over year, we're seeing activity is still going forward.
As far as the first quarter if on March one we were thinking in IBD fees would have been about $40 million higher than where they actually came in at and so we saw a number of transactions basically pushed and so we're seeing some of those close here in the second quarter, but our outlook would would essentially be that based on the pipeline, we're going to see a rich.
Covered a recovered to where we would have expected going into the year for the second through fourth quarter, but.
I don't want to make a commitment that it could be up year over year. Some of that's based on the market volatility that we're seeing and seeing what's going to happen from from this point forward, but believe we are expecting to see a significant pickup from the first quarter levels for the rest of the year.
Okay.
I mean do you think you can hold it flat on where you were last year.
Is that a stretch goal at this point.
Steve I think what we've got here really is showing strong growth in our revenue outlook.
Our fee income category, where we're showing the moved down as far as our outlook for this year, which implies basically the January one guidance adjusted for the actual results in the first quarter. So, let's not assuming that we make the recovery of that shortfall in the first quarter, but we think we will show strong growth from here and excited.
The pipeline and the prospects from this point forward.
Okay. Okay.
Okay. That's helpful. And then I wanted to follow up on Ebrahim <unk> question on deposits I was actually surprised you kept the deposit guidance I mean, what we're hearing from other banks is that businesses are finally, starting to use deposits to invest in their business and we know the fed's now about to embark on Q T. So.
And this is probably even more important and then when we think about NII for 2022 could you could you drill down further why youre not expecting deposit balances to fall just liquidity comes out of the system overall Steve.
Steve We spent a lot of time when when when we were really we had so much liquidity. We spent a lot of time really focusing on what commercial deposits, we wanted and as Don mentioned in his comments, 83% of our commercial deposits are operating accounts and so that's probably a pretty good place.
From which to start.
<unk> said that.
There's no question that commercial deposits, we will have a higher beta than consumer deposits and we will see how it plays out, but we feel pretty good about our our assumptions with respect to betas and also kind of.
The composition of our commercial deposits.
Okay.
But Chris when you think I hear you on the 83% being operating accounts, but when you look you drill down to the account level. So when you find operating accounts are inflated where they were.
From even a year or two years ago I think there is some risk that operating account balances contract as well.
It moves forward Qt.
I do think I do think there is a risk, particularly if interest rates start moving up at 50 basis points at a crack.
Actually on our balance sheet the more elevated deposits are really on the consumer side at this point.
Okay.
If I could squeeze one more in done NII guidance is that the current forward curve is that what youre, assuming that's correct. It's up eight additional rate moves are a 25 basis point increases.
There might be some 50 isn't there that we would expect and it gets to a fed funds rate or two in a quarter by the end of the year.
Thanks for taking my questions.
Thank you. Our next question comes from the line of John <unk> with Evercore ISI. Please go ahead.
Good morning, good morning.
John .
Just a question on the expense side. So it sounds like you did you do expect potentially somewhat lower capital markets revenue for the full year. Despite the recovery and you lowered your overall non III guidance, partly also reflected in the first quarter.
But you kept your expense range for the year does that does that reflect some of the better loan production or is it just a function of the range.
Yes, there is some of the range there I would say that keep in mind too the impact for the first quarter wasn't all <unk>. Some of it was the market valuation adjustments and there really isn't any IC attached to that we don't pay on those revenues to any of our business units and so there isn't that correlation so.
Only a portion of it was the timing within the IB fees and so if you look at our outlook for expenses going forward. There is an increase.
Assume there for the second through fourth quarter compared to the first quarter levels and Thats reflective of the increased revenue that we're expecting throughout the capital markets areas.
And John the only thing I would add to that is we will continue to invest in our business and so that.
That too, we're obviously always taking expenses out but at the same point were making investments.
Got it okay. Thanks, Chris and then on the loan growth side.
The increased loan growth guidance up to the mid teens level now could you just possibly unpack that a bit in terms of how you think that growth can breakdown by C&I.
<unk>, which also saw some pretty good growth in consumer.
The CRE growth that Youre seeing really is because of the affordable housing that we're seeing come through and so we are seeing growth there I would say that as far as the prospective growth its really reflective of what we've seen over the last three quarters each of the last three quarters, we've grown our our average.
Average loans about 4% from the previous quarter or an annualized about 16% clip.
I would say that in the third and fourth quarter of last year. It was more focused on the consumer we did get benefit this quarter from a commercial with utilization rates picking up 200 basis points and so that also grew at a 4% clip going forward, we think that.
Split.
It will remain fairly consistent both commercial and consumer showing about 4%.
Growth rates two to end up being that mid single digit kind of a mid double digit kind of growth adjusted for PPP and indirect auto.
Got it okay. Thanks, Tom if I could.
Just ask one more.
What your new money loan yields are.
For your new loan production that youre, putting on.
Look you have to break that out by bucket I'm, just curious because I know you've made a point dimension that youre seeing the loan growth opportunity to actively put liquidity to work in higher yielding areas. Thanks.
The liquidity to work in higher yielding areas is in the loan growth and what we're seeing on the commercial side is spreads are still a little tighter today than what they were a year ago.
But we're seeing a decent pickup there compared to what we're yielding on.
Cash or or the short term investments we have in the portfolio as far as Laurel Road, we target.
Yes.
Price spread to the cost of funds for that type of asset duration of about 200 to 225 basis points and so.
If that were a fixed rate loan and an average life of four years, you would have something in the 4% type of handle for yield there and with the residential mortgages were seeing a nice mix of arms and 15 year product. We do have some 30 year of jumbos, but those are declining and.
Those would be consistent with what you would see in the jumbo market rate market going forward. So that's just a little bit of flavor as far as the spreads.
Great Alright, thanks, Tom Thank you.
Thank you. Our next question comes from Gerard Cassidy with RBC. Please go ahead.
Hey, Chris Hey.
Hey, good morning Gerard.
Chris.
Can you guys elaborates on the positive operating leverage outlook, you're talking about it's going to continue to be positive, but if the world changes from where we are today what are some of the levers that you guys have on the shelf to be able to use to make sure that you do achieve your positive operating.
Our leverage goals.
Sure. So the first thing is we have several businesses that are really variable cost businesses. So Gerard that's a huge advantage that is why you see our expenses on a linked quarter basis, theyre down a $100 million.
Linked quarter. The other levers that we have is we're always focused on continuous improvement and.
Every place we can and this is not new we've been talking about this for some time, we are replacing clumsy handoffs with software front middle and back office and those continue.
To provide benefits.
Other areas, where we focused last year. For example, we had some kind of one time things. We contributed for example to our foundation in a large way. So we had some one time things last year and then the other thing that I think is a huge opportunity for us.
On the expense side is just real estate I mean, the world has changed dramatically.
Pre pandemic and we like a lot of people.
As leases come up I think we've used the number of 25% of our non branch non ops real estate.
I think it's probably probably even higher than that so those are a few things that we have going for us levers that we can and will pull if required.
Very good and then it looked like from the average balance sheet, you have about $45 billion or so and available for sales securities can you share with us your thinking on.
Are they all going to remain in that category I know you don't have to take any Aoc marks.
Remarks through your CET, one ratios and should not in an advanced approach bank, but can you just share with us what youre thinking on whether some should be moved into held to maturity and then what was the OCI mark in the quarter. If you have that.
Sure that.
One on the 45 billion and <unk> keep in mind that.
About $9 5 billion of that is in short term treasuries and so we bought those throughout last year and half.
Had a life of two to three years and so we will see that burn off over time.
Another two plus billion dollars is in the securities we had from the.
Indirect auto securitization transaction and so we will see that.
Again.
Wind down over time, and so the majority of the growth that you would've seen in that category compared to a year ago was from those two areas and so it was fairly.
Stable absent those two changes.
With that we continue to evaluate whether or not we should have new purchases going into held to maturity versus.
Yes.
We will continue to reevaluate that but.
Economically it's not much different for us as far as where it sits there is an accounting implication to it in and we're seeing the impact of that through the OCI that it's up over $2 billion.
Linked quarter, and it's driven by both the marks on the investment portfolio as well as the swap book.
And compared to our peers, we have a higher percentage of assets in that category are those categories and that really reflects the impact of our balance sheet. Overall, there are loans or about 70% floaters and 30% fixed compared to most peers are at 50, 50 and and for whatever reason the loans don't get mark to market.
But the investment securities and the swaps do and so it comes through a little bit disproportionate for us as well.
And then just on the duration you said that new investments are coming in around two maybe three years, if I heard you correctly and what's the overall duration of the portfolio.
I apologize Gerard.
Short term treasuries had a yield to maturity of two to three years that the overall duration of the portfolio now is close to five years.
And.
It would typically be buying CMO structures that are in that range and we do buy some 15 year pass throughs, there, but that would also be around that same type of duration.
And if we look at the yield on those new purchases going forward. It's currently in that three to three 5% range there will be a nice pickup compared to the 2% yield that we're seeing on the runoff of the existing portfolio.
Great. Thank you for the insights I appreciate it thank you.
Thank you. Our next question comes from the line of Erika.
Now as Huron with UBS. Please go ahead.
Hi, good morning.
Erica.
Chris I just wanted to ask you this directly because the stock is indicating down the market a lot of analysts have asked different ways already but.
Good.
Core fee income like investment banking.
Pipeline not materialize as.
As much as it indicating.
Is your commitment to positive operating leverage strong enough that you will adjust expenses.
In order to achieve that even if the core fee income outlook gets worse.
That's correct.
Committed to having positive operating leverage and.
As I was just sharing with Gerard we have a lot of levers that we can pull including.
We could we could cease to make some of the investments, we're making we don't see that as well.
We don't see that as the base case, but that's obviously an option that we have.
Got it.
Second question is for Don.
Don you.
Slow up on how we should think about the balance sheet.
When you think about a rising rate environment number one to Ebrahim <unk> question, and earning asset growth should we assume an earning asset growth should be about equivalent to that 2% deposit growth that you are forecasting for the year of snacking.
Josh I'm just curious it looks like it's now under $4 billion.
<unk> reached the bottom in terms of absolute cash level.
And third I'm wondering if you could give us an update on.
The value of each 25 basis points to the NIM and Im guessing that obviously the value would be greater than the first 100 versus the next 100 given deposit betas.
Loaded question, there I'll try to take care of those Erica in order here, but as far as the average balance sheet growth year over year I think that.
Low single digits or about 2% growth as appropriate.
I'd say that the incremental growth from here probably is slower than that that would it be implying that our deposit balances are relatively stable.
We will have some growth in some of our debt, but not a lot.
As far as the cash position that what we've talked about before is that cash plus that short term treasury position is really a view of our excess liquidity and so that was about $20 billion.
Year end and it's about $12 billion on a combined basis here at <unk>.
The first quarter.
We do see that cash position coming down from that $3 $8 billion. We typically run that in the 1 billion to $2 billion range and so we would expect to see.
See that come down.
But not dramatically from where it is today.
And then as far as the impact for net interest income for a 25 basis point increase in rates across the board.
It would be up a $50 million range as far as the NII impact as far as the the NIM impact.
I'd have to go back and work through the math on that but it would be based on that that same upper $50 million range.
We are forecasting that over the next early rate increases deposit betas will be low and as we mentioned in the speaker notes that.
Second quarter, we would expect deposit betas to be in the upper single digit.
A range and then <unk>.
Listening to the 30% range in the second half of the year. So we.
We would expect to start to see that deposit beta pickup as you would see rates go up.
About 100 basis point, plus range compared to where we started the year.
Thank you sorry can you add a third question, but John your peers are thinking.
25 for the next I.
I guess 25 to 30, I guess I guess, that's pretty much in line.
Do you think that 30% is it.
<unk> forecast, it's about appropriate relative to what you are saying.
The 83% of your commercial deposits being operating with very strong statistics.
But I would say that compared to where we were before that 30% is a strong number and is reflective of what we're expecting for that commercial performance given that strong operating account level in many of our commercial posits are contractually set as far as how they reprice based on changes in <unk>.
Rates.
We do think there could be some upside, but we think it's a reasonable forecast given the pace of rate increases and what we're starting to hear speculate as far as the market change overall.
Okay. Thanks for taking my question. Thank you.
Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi, not to Miss the forest the trees right.
From these numbers, but going back to the base case.
First quarter operating leverage negative 3%.
2022 guidance using midpoint up 4%.
Yes.
Youre, saying youre going to come from behind.
Kind of like the Cleveland Cavaliers, and the 2016 NBA finals.
If you don't then you won't meet those expectations and I'm not sure you have a law Brian So in very simple terms, how do you go down by three three percentage points to up 4% by the end of the year.
A couple of things on that Mike is first quarter, we would have expected to see some decline in our operating leverage compared to the year ago first quarter that.
We knew that we had some gains in the first quarter of last year and that other income category and so we thought we would see some some pressure there. So our initial outlook would have suggested a positive operating leverage without the changes that we just made and to your point, Mike we are forecasting a better.
<unk> and therefore, better operating leverage number for us.
With this outlook, including the rate changes in our balance sheet growth than what we had before so we think thats a <unk>.
A real positive.
I think that the.
To your point.
Chris the answer before I think some of the strength of the model and why we have confidence in our ability to achieve that positive operating leverage as many of our growth categories are highly variable and so if the growth doesn't come through we'll see.
Costs come down because it doesn't.
Come through there and so we.
We feel confident in our ability and I think we've got 17000 law bronze running around here trying to deliver our business and have success. So.
We're optimistic about where we're going forward.
Okay and did the math right, you're basically guiding for up 2% revenues and 2% down expenses.
That's correct the guidance ranges Thats correct, yes.
Okay, and then just separately I mean, Netflix was in the news good subscriber growth went down or something and I guess it would be measured your own subscriber growth I don't know.
Customer growth is it up and how much is it up.
How much do you measure that clearly gaining wallet share, it's greater loan utilization I get that but how much are you growing customers say in Laurel road or elsewhere.
Sure, Mike and as you know on Investor Day, we made some commitments and we will be reporting on those twice a year. So we'll report on it for the first time this fall, but I can tell you to use your analogy, we are growing subscribers and our retail business, which is really household relationships we clearly.
We are growing subscribers as it relates to Laurel road. It was a record quarter. Both in terms of funded volume and number of new households, and the other equivalent.
Obviously, we'll be talking about is just the number of bankers that we have out on the street that then translates into subscribers as they are out calling on people.
And so have any new households at Laurel road, this past quarter or year over year RV measure if you could disclose it.
Not disclosing it until.
Until September and then Mike what we'll do is we'll roll forward I can tell you that it's up and then we will actually report on it twice a year, we will report in September .
Alright, thank you.
Sure.
Thank you. Our next question comes from the line of Betsy <unk> with Morgan Stanley .
Hanley. Please go ahead.
Hi, good morning, good morning.
Looking at slide 18 on the Alco position and I know earlier you spoke about this with Gerard as it relates to the quarter.
I just wanted to understand how it's Ed.
Changes that you've made in the Alco book.
Are likely to impact.
Not only NII over the next the rest of this year and into next but also.
The OCI because it looks like you've done some stuff to try to protect against a OCI risk and <unk> and I raise it because obviously, we all know the 10 year's backed up since March 31.
Some color there would be helpful. Thanks.
Sure can.
As far as what we've done that we have shown some of our asset sensitivity come down a little bit and that's just based on some of the positioning that we did throughout the quarter. One of the things I think is unique for us that is helping us position the balance sheet and helping us position our earnings overall.
We had about $6 billion of MBS agency securities in the portfolio, where we did a forward starting swap for those that actually converted those to floating.
We actually want.
Wound down about $3 $5 billion of those swaps in the first quarter and will unwind.
Another $2 $5 billion in the second quarter.
With those unwind it really converts that floating component to fix and it adds an additional 75 basis points and yields that six 6 billion.
Over the remaining life of the securities and so we think that will be a nice lift up for us going forward.
On the overall swap position it was fairly stable for the core cash flow swaps that we use for asset liability purposes, and we will continue to reassess that and we'll start to think about how we can.
Manage that debt position overall as far as the rate changes since.
Quarter end, that's where.
Where we've been able to take advantage of that with some of these.
Starting a forward starting swaps like I mentioned and when we will start to see some of that help help them position overall going forward as well.
Okay. So based on the backup and long and that we've had since March 31, how much less impact would you say would be exposed to if this is what prints on June 30 relative to what we experienced in <unk>.
Betsy I don't have that exact math right now that.
We can go through that and let you know, but I would say that.
Our rate position and our outlook for NII going forward it would not be changed.
Reflecting the current rates and current curve today compared to what it would have been as of March 31.
And then just.
Other question I had is on funding the loan growth that youre looking for and the rest of this year.
It seems like in this quarter.
There was a partial funding from deposits partial funding from cash and I'm just wondering if I'm thinking about the rest of the year given that you are looking for deposit growth to slow.
And really as I mentioned earlier be flat here from here on.
Are you thinking about funding that that loan growth is it drawing down more on cash or is it.
Yeah, more drawing down on securities or just or just cash flow from the securities book that would be helpful. Thanks.
Sure that you hit on all the levers that we're looking at Sn.
Essentially that we would see that cash position come down a little bit from where it is I would say that the bond portfolio puts out about $1 billion to $2 billion a quarter of cash flow just from the maturities and as I mentioned earlier in the call. We would expect to have some debt issuances through the second and fourth quarters of this year to help.
Reset that and so all of those combined will be used to help.
Some of that future growth and are reflected in our forecast.
Alright, thanks, so much thank you.
Thank you. Our next question comes from the line of Ken <unk> with Jefferies. Please go ahead.
Hey, Thanks, Good morning, Don just wanted one more follow up on the balance sheet. So you're four for rate sensitivity the <unk>.
Starting swaps I guess do we know how much is still yet to start and how much would those forward starting as change that four 4% sensitivity if at all.
The forward starting that we didn't close out by the end of the first quarter was $2 $8 billion and then the other component I think we've got about an additional $1 billion of half that are forward starting that will start later in the year that will.
They are already reflected in that.
We fully phased in by the end of the year.
Okay and then just.
Is this your comfort zone, with where you want the asset sensitivity sit in that four five.
Percent zone, I know you'd brought it down a little bit, but do you anticipate either adding more or changing the.
The other complexities of what youre, adding on the fixed rate side to take to change that at all from here.
We could see that continuing to trend down a little bit we tend to be focused on about a plus or minus 3% range and depending upon what we're seeing for our expectation for rates versus what the market would have I think you could see that closed down a little bit, but not a lot from that <unk> level.
Okay. So we're pretty much.
Looking at like what the balance sheet should look like aside from the growth dynamics that you've talked through you will see the impact of the growth dynamics correct.
Seeing material changes from here as far as the overall balance sheet correct.
Great. Thanks, John Thank you.
Thank you. Our next question comes from the line of Matt O'connor with Deutsche Bank. Please go ahead. Good morning, <unk> had a lot of growth in commercial real estate this quarter and really over the past year or so so it's coming from affordable housing, maybe just remind us like what type of loans. Those are just a risk <unk>.
A mix of it and if there is some sort of government backing are encouraging.
How those are appealing.
Matt It's Chris these loans are what you would typically see kind of in a multifamily environment the affordable.
Feature of it changes a little bit some of the economics, but actually the lending parameters don't change.
There is not a backstop per se, but.
As you know we have dramatically derisked, our real estate book over the years, we have.
Very very little construction.
At one point I think we had going into the global financial crisis, I think we had like 42% in terms of construction today that is a high single digit. So it's a it's a very solid book with solid developers that we know and it is.
We've mentioned before it's a huge unmet need that will I believe will continue to be funded.
And then somewhat.
Maybe related or unrelated the corporate service income line are there what's the key driver. There that was very strong are there are low season, there or whats the key drivers there there were some loan fees there.
But more of it Matt was in derivative production that we saw in the quarter and have seen over the last couple of quarters going forward on that category.
Okay. Thanks.
Thank you. Our next question comes from the line of Brian Foran with Autonomous. Please go ahead.
Hey, good morning.
Don I get done in Chris on Slide 12, you show the CET one on top in the TC on the bottom.
Don you made a bunch of great points about the funkiness at the OCI concept, it's very logical and very consistent.
What we hear from other banks.
So I want to acknowledge that but.
As you think about capital this cycle clearly CET. One is the main one is the TCE matter at all is there any level of TCE that wood.
Make that a limiting factor, whereas TCE just kind of.
Not relevant this cycle, because it's about rates and all credit.
That's a great question, Brian I would say that our as you suggested our primary focus is on common equity tier one ratio and so thats. The one that we're managing to and using and so that's our focus as we look at our capital priorities as far as supporting that organic growth, making sure we maintain that strong dividend and.
Then using share buybacks to manage within that range. The TCE ratio has clearly impacted because of the dramatic change we saw in rates.
What helps us in that side is that.
And before between those short term treasuries in the swap book a third of that OCI.
Adjustment actually goes away in the next two and a half years and so we will see that burn in fairly quickly and so that will help us and deciding what's the appropriate level of TCE.
We do watch that we do pay attention to it we do have some some goals and objectives there as far as we don't want to see it drop below certain levels.
But we're still above that threshold and it hasnt required us to make any additional changes to how we're managing our capital our overall balance sheet.
Great. Thank you. Thank you.
Thank you. Our next question comes from the line of Scott Schaeffer Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking the question I think.
I kind of asked and answered, but maybe a tick tack one that hopefully is fairly straightforward and just other fee income. So you have the.
Market related adjustments, so that led to the loss of $4 million or so versus a typical number kind of in that $50 million to $60 million range with the losses kind of behind you does that reverse state back up to 50 or would that necessitate some sort of recovery in that in other words does it split the difference with no change in.
Market dynamics, how should that all flow through.
Typically before last year, we would've seen something in the $2000 for that category. So it's more of a split the difference there like you said, Scott and that would be our expectation going forward.
Okay perfect Alright.
So thank you very much thank you.
Thank you and we do have a follow up question from Gerard Cassidy. Please go ahead.
Thank you Lauren I mean done.
Okay.
Can you touch upon Chris's comments I think in his opening remarks, he talked about the student loan holiday.
You guys kind of trying to dig into your customer base about the potential once the holiday ends or the deferments and how much refinancing business is sitting there for you guys to capture.
Yeah, Gerard it's Chris we.
Clearly think there is a backlog we've seen it before just when people thought the holiday was ending.
We've seen ramp ups. So I'm sure there are people out there that logically have differed.
And if and when it were to and I think there is some pent up demand we've seen that play out with sort of a.
A couple of deadlines that have been out there and have been extended.
And Chris is it more for the existing customer base or is it just the general pool of medical school debt Thats out there that you guys would try to go after.
No. We would we would go after the entire pool of medical school that so theres the medical school that is.
That's with the government and there is also the refinanced debt.
Very good thank you thank.
Thank you.
Thank you there are no further questions in the queue at this time I'll pass it back to Chris for any closing remarks, well. Thank you operator and again. Thank you for participating in our call. Today. If you have any follow up questions. You can direct them to our Investor relations team to $1. Six 680 942 to one this concludes our remarks. Thank you.
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