Q2 2019 Earnings Call
Good evening and welcome to the key core second quarter 2019 earnings Conference call. As a reminder, this conference is being recorded I would now like to turn the conference over to the chairman and C.E.O. Beth Mooney. Please go ahead.
Thank you operator.
Good morning, and welcome to Keycorp's second quarter 2019 earnings Conference call.
Joining me for the call is Don Campbell, our Chief Financial Officer, Chris Gorman, President of banking and Mark Midkiff, our chief risk Officer.
Slide two is our statement on forward looking disclosure and non gas financial measures.
It covers our presentation materials and comments as well as the question and answer segment of our call.
I am now moving to slide three.
This morning.
We reported earnings per common share a 40 cents, which included for sense of notable items, consisting primarily of efficiency related expenses.
Adjusting for notable items.
Our results were 44 cents per share the same as the year ago period, and up 10% from our first quarter results.
To provide a consistent view of our financial trends and prior period comparisons My remarks. This morning will focus on the adjusted numbers, which exclude notable items in all periods.
Our results this quarter highlight the momentum we continue to see across our company.
And highlight for that and quarter included solid revenue trends, reflecting balance sheet grow.
And momentum and our fee based businesses.
Focused expense management.
Including the realization of substantially all of our $200 million in cost savings by the end of the corridor.
Continued strong credit quality.
With net charge offs well below are over the cycle range.
And disciplined capital management.
Which includes retaining a significant returning a significant amount of our net income to our shareholders through dividends and share repurchases.
Turning to the balance sheet.
We saw continued growth in both loans and deposits.
Slow growth continues to be driven by commercial and industrial loans.
With average balances up 5% from the year ago period, and 3% from the first quarter.
Roses broad based and focused on high quality credits.
Our outlook remains positive as clients sentiment remains constructive and our pipelines continue to be strong.
We also benefited from gross on the consumer side, including our residential mortgage business, which generated $1 billion of loan originations in the second quarter, 60% of which we held on our balance sheet.
This is double the volume from the prior quarter and last year and resulted in a 6% year over year increase in residential mortgage loans.
Also adding to our consumer loan growth with Laurel road with over $400 million and loan originations in the second quarter.
We remain very excited about our Laurel Road acquisition.
Which bolsters, our digital capabilities and the production from Laurel Road has exceeded our initial expectations.
In total are direct consumer loans were up 33% year over year.
Average deposits from both commercial and consumer clients grew 5% for the year ago period.
Our growth reflects the success of our business model and focus on relationship clients.
Noninterest income this quarter adjusted for notable items reflected broad base momentum.
In our first quarter call, we guided to a link quarter double digit increase in fees driven by stronger investment banking in debt placement.
And adjusting for notable items non interest income was up $86 million or 16 per cent compared with the first quarter.
And we reached a reference records second quarter level of investment banking adept placement fees, which were up $53 million or 48% for the prior quarter.
Our pipelines remains strong and client engagement as high which should position as well for the remainder of the year.
We also saw link quarter double digit increases in areas, where we have been investing.
Including cards and payments and our residential mortgage business.
Expenses were also a positive story this quarter, reflecting our success in achieving our cost saving targets and positioning the company to reach its targeted assist cache efficiency ratio of 54% to 56% in the second half of the year.
And strong expense management will continue to be our priority.
Moving to credit quality, we had another very strong quarter with stable credit metrics and a net charge off ratio of 29 basis points well below are over the cycle range.
We remain committed to discipline to underwriting and maintaining our moderate risk profile.
The final item on the slide is capital, where we have remained focused on maintaining our strong position, while returning a large portion of our earnings to our shareholders through dividends and share repurchases.
And just last week.
Our board of directors approved and 9% increase in our common share dividend to 18, and a half cents beginning in the third quarter of this year.
Before I turn the call over to Dawn, let me comment on a disclosure that we made last week concerning fraudulent activity by one of our long standing business clients.
Since this is part of an ongoing investigation were limited in what we can say.
But we are pursuing all available sources to mitigate the potential loss that could be up to $90 million net of taxes.
The potential loss will be recognized as a third quarter event.
Importantly, I want to underscore.
That we believe this is an isolated occurrence.
This was a fraud.
Perpetrated by a single longstanding business customer.
And we will provide appropriate updates in our public filings.
Now I will ship back to today's news and conclude my remarks by restating that it was a good quarter.
Broadbased grows across our franchise.
We added and grew low relationships.
Driving growth in both our consumer and commercial businesses, we grew loans, including 5% year over year growth and C.N.I. and experienced growth in consumer loans from residential mortgage Andaloro Road.
We grew fees for the record second quarter for investment banking and debt placement fees.
We managed expenses.
Reaching our 200 million dollar costs savings targets, which keeps us on a path to reach our targeted cache efficiency ratio in the second half of this year.
We maintain credit quality underpinned by our discipline blown underwriting.
And we continue to return capital to our shareholders, including a 9% increase in our common share dividend approved last week by our board of directors.
And finally, we remain committed to achieving our long term targets and to continue delivering value for our shareholders.
With that I will close and turn the call over to Don.
Think so I'm not one slide five.
As mentioned earlier, we reported second quarter net income from continuing operations or 40 cents per common share.
Adjusting for notable items earnings per share it was 44 cents.
Are adjusted results compared to 44 cents per share in the year ago period. Some 40 cents in the first quarter of 2019.
Notable items for the quarter totaled $52 million, including 32 million or personnel largely severance.
As well as 17 million real estate expenses, both related to our efficiency initiatives.
Notable items also included 2 million at one time charges related to the closing of our law wrote acquisitions in April .
As best mentioned, we achieved or 200 million dollar cost savings targets.
With the full amount expected to be in the run right next quarter. Importantly, we also remain committed to reaching or 54% to 56% cash efficiency ratio target in the second half of this year.
I will cover many of the remaining items on the slide and the rest of my presentation. So now I'm dream is like six.
Or business model continues position us well to real relationships and loan balances.
Total average loans were $91 billion up 2% from the second quarter of last year, driven by growth in commercial and industrial loans, which were up 5%.
Link quarter growth an average balances was also driven primarily by commercial and industrial loans up 3%.
Or growth continues to be broad based across or footprint as well as through our targeted industry verticals.
Growth was partially offset by a decline in commercial real estate balances due to elevated paid.
Importantly, this quarter, we saw strong growth on our consumers wide as well.
Laurel Road and investments in a residential mortgage business contributed to our growth this quarter and we expect to continue to benefit from both moving forward.
For lower road, we originated over $400 million of loans this quarter.
For the residential mortgage production, we originated over a billion dollars of loans in the second quarter double the volume from a year ago and from last quarter.
Oh this production approximately 60% was related.
Where the retained on balance sheet.
We expect to continue to grow loan balances consistent with the top end of our 2900 full your games.
Has we support our relationship clients.
The tone and cinema with our clients remains positive or pipelines are solid that said it we remain committed to our moderate risk profile and we will continue to walk away from business with does not meet our risk grammars.
Continued on the slide seven average deposits totaled $110 billion for the second quarter of 2019.
$5.6 billion or 5% compared to the year ago period, and up 2% from the prior quarter.
Growth from the prior year was driven by both consumer and commercial clients.
When I link quarter basis, the increase in deposit balances also driven by both consumer and commercial clients.
As well as elevated levels of short term deposits from certain commercial customers.
The cost of our total deposits was up six basis points from the first quarter plucking. The continued migration that word portfolio into higher yielding products.
As expected or deposit beta increase from the first quarter are bringing or cumulative data to 38%.
We continue to have a strong stable core deposit base with consumer deposits accounting for 66% of our total deposit mix.
[noise] turning slide eight.
Taxable equivalent net interest income was $989 million from the second quarter of 2019.
And then it's just merging with three point O., 6%.
The results compared to a textbook with <unk> net interest income of 987 million and a net interest margin, 3.19% for the second quarter of 2018.
And $985 million in 3.13% in the first quarter.
The increase in net interest income from the second quarter of 2018, and was driven by earning asset growth and the benefit from higher interest rates.
Partially offsetting this was a lower net interest margin driven by higher interest bearing deposit costs lower loan fees and 11 million dollar decline and purchase accounting accretion.
Yeah interest income.
<unk> $4 million or 0.4% from the per quarter, driven by higher earning asset balances and one additional day in the quarter.
These benefits were partially offset by decline and that interest margin good about higher interest bearing deposit cost.
Elevated levels of liquidity as well as the Klein and purchase accounting the creation.
Going forward, we expect our net interest margin remain relatively stable and then interest income to grow consistent with the games we have provided.
The appendix or slide deck, you can find additional information on our asset liability positioning.
With continued to actually reduce our exposure to declining rates executing approximately $3 billion, an interest rate swaps and floors in the second quarter.
This is a move that we began back in the third quarter of last year enter into a total swabs enforce a $15 billion. During this time.
Today or an interest income impacts were 100 basis points girl increase or decrease from current levels is less than 1%.
We're going to fly nine.
Keys noninterest income was $622 million for the second quarter 2019, compared to 660 million for the year ago quarter.
Yearago quarter included notable items within that impact of $36 million, including a gain from the sale of key insurance and benefit services and the least residual loss.
Excluding these items total income was down $2 million year over year.
The change from the year ago period reflects continued momentum and core fee based businesses, resulting from ongoing investments, including grow turn investment banking to placement fees.
As well as positive trends that are mortgage business.
Oh setting this growth was a year over year reduction and trust and investment services income.
The sale of key and insurance and benefit services and a 6 million dollar impact from the revenue risk classification changes mid 2018 on deposit service charges.
Compared to the prior quarter noninterest income was up $86 million or 16%. This change was largely related to a rebound in investment banking debt placement fees, which increased $53 million to a record second quarter level.
We continue to see momentum in other p. based businesses as well as including a 7 million dollar increase in those cards and payments related income and trust and investment services income from the first quarter.
[noise] turn is like 10 expense management has remained an area of focus worse.
As we mentioned at the end of the second quarter, we have implemented substantially all of our next expense initiatives tied to our $200 million continuous improvement targets, which we expect to be fully reflected in our runrate next quarter.
Second quarter non interest expense with just over a billion dollars or 967 million, excluding the $52 million of efficiency related expenses.
This compares the $966 million in the second quarter of 2018, and 937 million in the prior quarter, both excluding notable items.
The table in the bottom left side of the slide breaks out the r. detail of the notable items.
Expenses are relatively flat compared to the year ago period again, excluding notable items.
The year over year comparison reflects or lower wrote acquisition in April 2019, as well as the successful implementation of the company's expense initiatives.
Compared to the prior quarter noninterest expense increased $30 million, excluding notable items.
The increase reflects the impact of the Laurel wrote acquisition as well as or higher variable cost related to increase in the capital markets activity.
Marketing expenses also seasonally higher in the second quarter, well employee benefits costs for a seasonally lower.
We're going to slide 11, or credit quality remains strong and we continue to be consistent and discipline in our underwriting.
No charge us for $65 million or 29 basis points of average total loans in the second quarter, which continues to be below or over the cycle range of 40 to 60 basis points.
The provision for credit losses, with $74 million for the quarter, reflecting ongoing lung growth.
Nonperforming loans were 561 million this quarter and represent 61 basis points appeared in loans consistent with a <unk> recorder.
During the slide 12.
Capital also remind remains the strength of our company with an estimated common equity tier one ratio at the end of the second quarter of 9.6%.
The best mentioned earlier, we have remained true to our capital priorities, including returning a significant amount to our shareholders.
In the second quarter, we declared a common dividend of 17 cents per share. We also continued to repurchase common shares with $180 million repurchase this quarter.
We also announced or 2019 capital plan in April .
This was for the third quarter of 2019 through the second quarter 2020.
The plan includes a 9% increase in our common stock dividends to 18, and a half cents per share in the third quarter, which was approved last week by a board of directors.
We also plan to repurchase up to a billion dollars in common shares over the four quarter period.
Or a strong capital position supports or or or panic growth along with our plan capital actions.
[noise] on slide 13, we provided our outlook for 2019 or guidance excludes the impact of the fraud loss. It was disclosed an eight k. filing on July 16th.
Excluding the same singular occurrence or outlook has not changed from what we provided earlier this year.
This reflects or performance through the first six months and expectations for the remainder of the year.
We continue to expect another year, a strong positive operating leverage 'cause improved efficiency.
Average loans should be in the range of $90 billion to $91 billion once again, driven by our commercial businesses.
But also benefiting from grows in our consumer lines, including lower road and residential mortgage.
With the contribution for mortgage origination and Laurel Road, we would expect to be toward the higher end of our guidance range.
Average deposits should remain relatively stable as or continue to count growth will offset by declines in temporary deposit balances.
Reaching the hundred and 809 billion dollar range.
Despite a more challenging interest rate environment in assuming one more 25 basis point rate.
<unk>.
We still expect and then interest income to be in the range of 4 billion to $4.1 billion.
As a result of the projected rate decrease in the shape of the yield curve, we would expect to be at the lower end of this range.
The lift we saw this quarter and nine interest income keep display path to reach our full year range of $2.5 billion to $2.6 billion.
We expect growth in most of our P. based businesses, including investment banking ended up placement fees.
Our current outlook would place us toward the lower side or guidance range.
Although we may operate at the lower end of our revenue range. We also believe that we're likely to outperform on expenses.
You have achieved or 200 million dollar cost savings target and we continue to identify opportunities for further expense reduction.
At this point, we have not change your expense outlook of $3.85 billion to $3.95 billion.
Based on the first half results the completion of our expense initiatives in our focus on continuous improvement. We believe that we can come in at or slightly below the lower end of the range.
And we also expect to reach our target a cache efficiency ratio of 54% to 56% in the second half of the year.
[noise] our credit quality.
[noise] on credit quality, we've seen nothing on the horizon that changes our outlook.
With net charge awesome provision expense remaining below are over the cycle range of 40 to 60 basis points.
Her loan loss provision should slightly exceed net charge off to provide for a loan growth.
And our gains for our gap tax rate remaining in the range of 18 and 19%.
With some opportunity to come in at or slightly below our range.
Overall, we expect 2900 to be another good year for key building on the momentum across our businesses with this Clint expense management.
Clear focus on risk and strong returns.
On the bottom this line.
Our long term targets I remain confident in our ability to achieve these targets.
Continue to move toward the top tier of our peer group and overtime I believe our market valuation will reflect our progress and improved results.
I'll now turn the call back over the operator with instructions for the Q. and a portion of the call.
Later.
Q, ladies and gentlemen, if you'd like to ask a question. Please press Star then one once again for questions. Please press Star then one.
One moment. Please for your first question.
Your first question comes from the line of Scott Siefers from Sandler O'neill. Please go ahead.
Everyone.
Hi.
Time, or something you can walk through and with a little finer points. The thoughts on the margin I think you you said in your prepared remarks that that margin overall I should hold stable I know you had too little liquidity built in the two two and I think that tends to be a seasonal issue that comes out in the three queues up presumably that helps but I guess I'm just curious regarding the puts and takes.
As you see them.
And then if when you made those kind of two talking the core margin or.
Report it maybe if you can sort of bisect that as well please.
Sure and Scott as you highlight we did have some seasonal trends in in the deposits, especially the cause some of the pressure on liquidity and so in the second quarter. Our margin came down by three basis points from liquidity not any impact on nitrous income, but that that did have an impact on on the overall margin.
We also saw a reduction that wasn't expected as far as our purchase accounting accretion last quarter first quarter, we are $22 million second quarter, we came in at $17 million.
We would expect that to be relatively stable with maybe slight declines from here, but not having the kind of pressure that we saw this past quarter.
Going forward, we expected marginal on a reporter basis to be relatively stable and so to your point, we should see some of that liquidity come back in overtime.
And that could help offset some of the pressure associated with the most recent or expected to 25 basis point rate decline and and so we think that position just to have more stability in that margin prospectively.
Okay. That's perfect I appreciate that and then just one sorry.
Question, just on the accounting for the the fraud.
It just it.
Is the reason that that becomes a three q. event is that that just because of the difficulty in estimating the potential loss now.
The books from an accounting standpoint.
Closed at the time disclosure did just curious about that dynamic.
On that point the events that resulted in the broad actually took place here in the third quarter and that's why the timing of the losses recognize in the third quarter as opposed to the second quarter.
Okay.
Alright.
That's perfect. Thank you guys very much I appreciate it thank you.
Your next question comes from the line of Cleanser Me from Morgan Stanley . Please go ahead.
Great. Thanks mourning mourning.
I guess <unk> devasis silly or simple question enter your building in one rate cuts into your Guy and how does your <unk> and I I. It's change if we actually get a cut both in July and September .
Yeah, if we would get a an additional rate a decrease of an additional 25 basis points. We think near term that would have a negative impact of about two to three basis points and essentially what causes that is that.
Our deposit pricing legs, a little bit as far as the current market and and so we would see a little bit of a a and near term negative impacts from that.
Gosh and and are you building in the July cutters September .
We are building a July cut.
Gotcha, Okay understood and then just as a as a follow up question turned to lower road, obviously good gross.
From them this quarter, how I guess, when you think about the longer term growth or maybe the next year or two years like well what kind of pace of growth are you comfortable.
Putting onto your balance sheet from lower road.
Well, we're very pleased with the credit quality of the originations, we we love the customer base that we're approaching with a lower road and and.
As far as the just this product I don't know that were to see tremendous growth from from that that we think there's a lot of additional opportunities for expanding the relationships with these customers whether it's.
Residential mortgage or or savings products or other potential relationship building. The services that we can provide for that customer base. So we do expect to see nice growth there, but maybe not at the same pace on the.
A student loan consolidation a product.
Okay. Thank you.
Your next question comes from the line of Stephen elects a pull us from J.P. Morgan. Please go ahead.
Hey, good morning, everybody.
Even if I could start on the scene com.
So you're today or a 41.2 billion and if we just like to get to the low end of the guided range. I think you need to do somewhere around 670 million per quarter, and I don't think you've ever done that in a single corner.
You walk us through what gives you confidence to I know you said it'd be the low wage.
Low end of the range, but even to maintain them reach.
Sure that I think your your math is right there Steve So what what I would offer up is is that.
First of all if we take a look at our investment banking debt placement fees and we compare what we are reported in the second quarter of last year.
To the run rate for the second half of last year, it's an increase of $42 million and we believe that our pipelines are strong and activity level support seeing that same type of continued growth from here.
In addition to that 42 million dollar increase we would see seasonal increases a number a few categories, including coli, which we believe adds about $20 million to the second half a year compared to what we saw in the second quarter.
And then we also have about $30 million of other growth and and I would say that growth is coming from areas, we might not have seen as much in the past that we talked about our mortgage production <unk> a quarter and that's the first time, you've really see that come through and and we were generated over a billion dollars in the second quarter.
Our application volumes, and our pipelines or even stronger going into the third quarter than they were the second quarter and so we think we're position there.
We also think there there's other categories, where we're seeing a a lot of growth and so if if you would assume about $30 million for additional growth. The 20 million dollar for seasonal increases and ran roughly the 40 plus million dollars for the.
Into your revenues, we we believe that will be at that 95 kind of million range that you're talking about as far as needed to to achieve that kind of growth for the second half. Okay. That's helpful. Don.
And then as a follow up in your response to Cannes question about the NIMH, knowing down two to three basis points. If you get that additional cuts is that about the math of what you would expect her 25 basis point cut two to three.
<unk> initially, we would and and and so for example on our average rates paid on deposits. The first quarter. After that rate decrease we think the deposit rates will go down by about five basis points in that second quarter that cumulative reduction would be about 10 basis points and so that's how that two to three basis points initial hit will go away over time.
I think is then just finally for bad once we get into the 54% to 56% cash efficiency ratio.
Where do you go from there.
Stay in the range do we do we improve further how do you think about that.
You know, obviously when with our fourth quarter call in January we will update are thought for the coming year.
And so I think some piece of that will be predicated on the expectation for the macro environment, but I do know that we hear us talk with a degree of relative confidence in that are targeted business strategies and our commitment to continuous improvement and we have a diversified business model. So you know we continue to see the ability to drive our performance in the future, but what that looks like his descendants absence of our fourth quarter call. Okay.
Fair enough. Thanks for taking my question Yeah.
Your next question comes from the line of John Pen Curry from Evercore. Please go ahead.
Mourning mourning the morning I related disease question there on on the on the efficiency against a another way I'd like ask it. Just is is if you could talk about the leverage you would have on the expense side if see revenue.
Outlook catch more challenging if we are looking at for example, another cat.
In addition to the one cut the model if we get another cut this year.
Do you talked about the impact on your efficiency ratio expectation and then went to leverage our to dig deeper on on expenses. Thanks.
Right in in in in our comments, we did allude to that we've already achieved the $200 million, but we still have other efforts and and steps and identified in Ecuador executing against for further continuous improvement and so we are very committed to delivering that 54% to 56% range and and and so we believe that that will help provide some some some support for that so.
It's critical that we continue to to manage that we're always gonna be focus on further continuous improvement efforts to to manage that efficiency ratio down and and generate the positive operating leverage.
I think one thing else, it's a unique for us compared to many of our peers too as the steps we did take as far as managing or overall, that's a liability position.
As we noted in our comments that we the additive $15 billion worth of swaps and floors to help protect against that downward rate pressure.
And that didn't cost us some margin over the last few quarters that we think that it was prudent for us to be able to manage to that level, especially given the the current outlook that we see for interest rates.
Okay got it all right and then separately I know you can't speak much about the the the fraud specifically, but.
You know <unk> as the investigation continues and even though it's an isolated thing is there any risk that there is an increased focus around your risk controls and and the expenses related to that as a result of this thanks.
Well sure and and and maybe I'll take the more of a comprehensive look at this issue because I'm sure that people have lots of questions about this but as as we didn't know it in our form eight k. that we are limited as to what we can disclose given our current investigation and litigation that's in process.
So just let me share a few things that we are able to say at this point.
So earlier this month, we discovered fraudulent activity by a longstanding business client. We believe that this was an isolated incident involving a single business relationship.
We are pursuing all available sources of recovery and means of mitigating the potential loss, which could be as high as $90 million net of taxes.
We're conducting a comprehensive assessment of all procedures unrelated controls.
And we've reported the incident to law enforcement.
The potential loss will be recognized as a third quarter event. Importantly, this is not a sabre event or a data breach.
And we do not believe this to impact or capital plans, which would include both dividends and share repurchases.
We've also do not believe that this will materially impact core expenses going forward and we remain on track to achieve our cash efficiency ratio target in the second half of this year.
And due to the ongoing nature of the investigation and litigation will not be able to further comment at this point and will provide appropriate updates and public firing filings in the future.
Got it all right. Thanks time, thank you.
Your next question comes from the line of Peter Winter from Wedbush Securities. Please go ahead.
Good morning morning.
You guys had a very good momentum on the loan site and I'm just wondering if that continues it it does seem like you could come in above.
The high end of of your range for average loan growth.
Yeah, Peter we were very pleased with our production, especially on the consumer side. This quarter, that's getting a commercial has always been a core string for us and we're seeing that momentum maintain but but.
We've been talking for the last couple of years about what we're doing it from a residential mortgage perspective, and this is the first quarter I can really say that we're we're starting to achieve that and and that.
Billion dollars were production and 60% of that going on balance sheet will clearly help our our loan growth from that side.
Lower road over $400 million this month as or this quarter excuse me as far as originations and that's also another strength for us and so if we just continue to grow loans like we did in the second quarter and and I think that our ending balance in our pipelines would suggest that.
We'd be growing average loans each quarter by about a billion dollars, which will put a slightly above that a 91 billion dollar top and never guidance range and so I think that.
You're you're you're on track there as far as what we're seeing for for for potential dynamics in in in that in that category.
Okay.
And if I could just ask one just a housekeeping item within the fee income.
Operating leasing come and <unk> was a little bit elevated relative to the the run rate.
Last four quarters, just just wondering if there was anything unusual or if this is a new run rate for you guys. <unk>, we had a a small gain a in the quarter an interesting enough that we actually had some losses on residual value.
Declines to actually go through provision expense in the in the current quarter and so the the the two of those.
Essentially net each other out and and they they could be just a little high as far as the the operating lease income.
Okay. Thanks very much.
Your next question comes from the line of Matt O'connor from Deutsche Bank Things go ahead.
Good morning morning, Hi, how much of that how much of a 200 million of savings within that sector.
<unk>.
What we said is we were there at the end of the quarter I would say that a number of the expense programs really had a a launch date of around June 30th and so we still have upwards of about $20 million and run right going into the third quarter for a for a lift for for future savings.
Okay, and then I guess, what else is driving the costs down as we think about yeah gone from two to three care that's 20.
Are there are some other things like I I know seasonality tends to be kind of some puts and takes there.
Yeah. The the biggest variable met for for expenses beyond that really is is the capital markets related revenue and and as we've shown before there is a direct connection between the the incentive the associate with that and and the revenues.
But we also highlight of that we have other efforts in flight as far as continuous improvements so even though we've achieved or 200, we're we're not done yet.
Okay, and then any additional repositioning or efficiency charges. He expect in the second half and beyond.
Our guidance would incorporate those charges and we don't think that was the material going forward.
Okay, Alright, perfect. Thank you. Thank you.
Your next question comes from the line of Psalm Martinez from U.B.S. Please go ahead.
Good morning.
It just I I don't know if you.
If you mention this maybe I missed it but how much of how it how much good Lord raid contribute to your expense space and not the not the one off items, which is the overall the overall level of expenses. This quarter. Yeah. This quarter. We had reported a lower wrote expenses are $22 million in as we noted the there was.
Some in that notable items as far as the the deal related expenses.
Right, but in terms of the core expenses you whiz.
I think that the one time item was two 2 million if I'm not mistaken correct. So the court was was a little less than 20, but but in that range. Okay.
Any material revenue contribution yet.
Well the the revenue contribution really so far has been in that that loan growth and so we originated over $400 million. So it will be building over time and then so that's.
Really didn't have a dramatic impact the the second quarter, but that will be the building that annuity stream overtime.
I didn't know that 400 million, how I think you mentioned that you retained 60 per cent, yeah, if I'm not mistaken dad, plus yeah, so you're residential mortgages, but how much of you is that the 400 million did you retain.
We retained 100 per cent of the law road originations at 60% was for the residential real estate originations we had now.
What we do have in the second quarter, though as as we have transferred about $250 million of the lower road production into a held for sale in the we're in the process of working through a securitization transaction on those assets just to make sure that we stay current on the the markets and and see potential equities.
Avenues for us going forward.
But your your attention going forward is to retain the vast majority of that that's correct. Yeah. What what are the terms on those.
Can you just give us a sense of what kind of deal.
Just to get a sense of what kind of interesting come pick up we could expect if you maintain something close to this level origination as we ended up the second quarter, we were talking about yields of around 5%. The the long into the curve is moved down by about 50 basis points or probably in the 450 to 460 range as far as current yields and and so it's it's more that that spread.
Average life on those loans tend to be around for years, and and again very strong psycho scores and and very low low loss content content based on the consumers that we're working with.
God. It does that's helpful. Thanks, a lot.
Your next question comes from the line of Mardi most be from sending Sparks. Please go ahead.
Thanks.
Good morning.
Good morning, I want a garland.
And I I, because if you look at your margin.
The core margin actually peaked out around three <unk>.
Hey, it start at around 285.
And now we're down to you know almost 3%.
So how much yeah cause you mentioned earlier the cost of the hedges that actually limits your downside how much of the cost is related to what's going on.
From the 310 to the 3% to lock in as close to 3% as you can as you move forward. So in this.
Particular quarter is they're close to 10 basis points of costs related to these hedges.
You know a couple of things on their Mardi. One is is that loan fees are down significantly in this quarter, we were expecting to see a a slight recovery there and we actually saw loan fees come down and so [noise] compared to that peak period, our our loan fees or costs about three basis points on the on the margin.
If you look at the net cost from our our swaps the in the second quarter. It was around eight or nine basis points, that's down from 11 basis points in the first quarter, but they're clearly has been a cost there and that's a about five or six basis points.
Additional costs compared to that peak period that you would've talked about as well and and and so.
Those both have had a negative impact on on margin and and we're continuing to hopefully see the the the benefits from positioning for more of a neutral asset position prospect of leave it there was a costs for us to initially established that.
On the loan fee front, what we're seeing there is is it just the refinance activity has been much slower and especially in some of the syndicated loan products were seen that across the board as far as being down your every year and and we would expect to see that start to pick up again once a week, we see the the the refinancing start to to to pick up again in that category.
Oh, Oh I want to emphasize you know for you folks are saying someone that's compression in March in this corner.
A significant amount of that is also just related to putting on insurance certain limits the downside.
So for looking at the 3% and then the the lower the cycle last time was 285.
That restructuring.
Gives you how much confidence in a sense a weren't even land you know in the worst case scenario, we get back to zero interest rates like we did before somewhere between three and 285, but are we to the upper end of that range on the lower end of that range. Once it's all said and done.
I I wish I could predict accurately I think one of the things that we've continued to be surprised that as we position or as a liability.
In a way that we think is is neutral, but but the yield curve can take plenty changes and and movement. If you look at the longer into the curve, we're probably down 70 580 basis points over last.
90 days, whereas the short end of the curve is now just coming down 25 basis points. We expect later this month so.
But that we think that we are <unk> better position than than our peers and and and we've been very deliberate and that are approach and and looking to make sure that we can maintain as as as much stability in that margin prospectively as we can.
And then just lastly, what's the timing of the share repurchase activities and even over the next four quarters or any front loading to you know get more into this year.
I would say that there there's a couple of quarters, where that might be a little outside but I would generally assume fairly consistent throughout the time period that there are some quarters, where we have employee a issuance for different compensation programs were were able to buy back more but but generally pretty consistent throughout the four quarters.
Thanks, Thank you.
Your next question comes from the line can now send from Jeffrey's. Please go ahead.
[noise] banks good morning, I've done a couple it just bought yield follow ups.
Can you talk about this quarter you mentioned in the deck that you had 50 basis points still a positive role over on the securities portfolio, where do you see that happening.
Given the rate environment going forward, Yeah that you know you're you're right in the first quarter, we had 105 basis points. So this last quarter. It was 50 and when we're probably closer to the 20 to 30 basis point range. Today. So we still have a fairly low yield on our investment portfolio. So they're still is pick up there, but but it's a lesson today's market than what we would have seen last quarter.
Okay, and then what what are the yields that you're putting on Laurel Laurel Road <unk> and how does that compare to the you know the average she'll do alone book you know that when we started this the end of the first quarter, we ever seen a yield of about 5% I would say today, we're down closer to the 450 to 460 range because you'll curve is moved down by that much and so really it's it's focus on that kind of spread and and so you know compared to that category I think it's fairly neutral, but but but compared to the overall loan yields I think it should be added up to us going forward.
Okay, and lastly, one of the things I think you mentioned last quarter was that part of.
You had a lower.
A bird in from the terminated swaps in the first half of the year, how much of a helper.
Does that continue to be incrementally from here.
Oh, it was about $7 million of hit in the second quarter, It's about 5 million in the third quarter in about 2 million in the fourth quarter. So there there is some slight pick up on an incremental basis each quarter.
Okay got it and one last one just on the deposit costs, you know I <unk>, you mentioned the pace of which the deposit costs should roll over is that mostly due to the index part and if if so then what do you see happening with the non index part just the customer behavior as far as the rates coming down the index parts move very quickly with the overall rate changes and and so it's more these administered rates that takes some time to phase in and so that's why we only see about five basis points of of benefit in our deposit rates in the first quarter.
And then would expect that to be up to 10 basis points in the second quarter and and so it it really is more managing through those administered rates.
Thanks, a lot on thank you.
Your next question comes from the line of Brian Sore on from Autonomous Research. Please go ahead.
Hi, Good morning morning, maybe one just housekeeping the fraud do we put it through the expense or charge off line and can I just confirm that it's it's excluded from the full year guide.
Yeah. It is excluded from the full year guidance and we do believe that we going through as an expense as a fraud loss as opposed to through charge us.
Okay, and then on the core expenses or the full year got and expenses. When you were talking about being at the low end or maybe even below the range.
You know, we said linked with the revenue outlook or or independent or maybe set. Another way is is there a scenario in your mind, where you hit the low end to the revenue guide, but feed on expenses or would it more be like you'd only beat on expenses. If if the revenue came up a little short.
I I would say that our our expenses being at or slightly below is consistent with our our revenue outlook what would cause that expense number to be higher is is if the the the the revenues come and stronger in the corresponding expenses associated with that would would come through.
And if.
For a going forward, if if we would miss our our revenue guidance I think there's even further opportunity on the expense side to come down.
And then very quickly and I apologize I missed this you know the hedges are obviously proven to be a big.
Differentiator, so well done whoever puts them in did you say, what the term or the duration and how long they'll last is.
Yeah on average there a little over two years as far as the interest rate swaps. The floors have an average life of about two and a half years and we've been to enter into some longer dated swaps here recently and going into the four years for for some of the the new once we've been putting in place to more match with some of the more recent balance sheet.
Improvements that we've had and and making sure that we keep that consistent so.
It's something that we watch very closely and then we try to be fairly conservative as far as how we manage at overall position.
Great. Thank you.
Q.
Your next question comes from the line of Gerard Cassidy from RBC. He's go ahead.
In the morning, Beth mine done mourning.
Can you can share with us.
What your customers are saying.
From the standpoint that the <unk> curve.
He's expecting three fed fund rate cuts this year.
And it seems rather dramatic considering our macro economic environment doesn't appear to be that week.
<unk> <unk> is air disconnect you think between the forward curve and what your customers commercial customers in particular are seeing on the ground.
<unk> I would say to some degree there is.
There's kind of what we're hearing from our clients the tone in sentiment with our clients continues to remain positive.
We're having you know a lot of strategic discussions with them I would say, it's been about flat kinda quarter over quarter, if I could give you a redid the sentiment.
Some of the areas are concerned continue to be labor very hard to staff up their operations, both knowledge workers and also non skilled workers and also there's a real just did you know to to hire a employs away I'd say the trade tension certainly doesn't help because it's uncertainty but on balance it doesn't feel out talking to our clients, which we're doing very regularly it doesn't feel the same as you would think it would feel as you look at the forward curve.
Very good and then.
Your credit obviously is quite strong this quarter, but some of your smaller regional peers have had so called one off credit announcements and they seem to be concentrated in their private equity area leverage loans and also some restaurant credits can you guys give any color on your <unk> I know, it's been stable for a number of years, it's not as a percentage of total loans, a giant number but it would be curious to see what you're if you're seeing any trends in there that shows some weakening or no it's fairly stable.
<unk>, that's obviously a portfolio that we look at very very closely at this point in the cycle. There is nothing in our portfolio that we believe is a sign of deter a deterioration in that portfolio.
It's a 2 billion dollar portfolio, which by the way is what it was before we even acquired first Niagara. So we have been very very consistent AD staying at that 2 billion dollar level. It has a lot of philosophy as you can well imagine and these are middle market companies that are in our areas of focus so we feel good about the portfolio, but it is a portfolio we watch very closely.
Very good and then just finally, maybe for done you you mentioned about if I heard it correctly selling off some of the Laurel Road Morgan a mortgage loans I assume.
I assume you're keeping the servicing so that you can cross sell into their customer base and speaking of that cross selling when do you folks think you can actually starts and gains from traction where you are able to get other business business from these from these customers yeah draw, we're actually I'm securitizing off some of the consolidation student loans and Okay. This is something that lower road had done before and we just want to make sure. We kept those avenues open and and and so we're we're doing a small securitization transaction and to your point as far as additional products Lower road is already launched a mortgage product. We're we're continuing to refine some of those capabilities they've offered and hopefully be in a position to offer that to our existing retail customers as well and so we'll start to see some some traction there and and we're continuing to work on plans to further a increase the the types of products and services. We can offer to that customer may. So we're we're real excited about the digital capabilities that they bring in.
Think it has a a bright future for us.
Thank you.
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And at this time there are no further questions.
All right well. Thank you operator, and we 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 at 216689 for Q2, one and with that that concludes our remarks on our call today and have a great day. Thank you.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using the TNT Executive teleconference. You may now disconnect.
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