This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good morning and welcome to Key Corp's second quarter 2021 earnings conference call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to the chairman and CEO, Chris Gorman. Please go ahead, sir.
spk04: Well, thank you for joining us for Key Corp's second quarter 2021 earnings conference call. Joining me on the call today are Don Kimball, our chief financial officer, and Mark Midkiff, our chief risk officer. On slide two, you will find our statement on forward-looking disclosures and non-GAAP 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. We delivered another strong quarter with earnings per share of 72 cents. This is an increase of 18% from the first quarter and up significantly from the year-ago period. Our results reflect our success in acquiring and deepening relationships across our franchise, further improvement in credit quality, and contributions from targeted investments. We generated positive operating leverage on a year-to-date basis and remain on track to deliver positive operating leverage for the full year. We generated record second quarter revenue driven by an 8% year-over-year increase in non-interest income. In our consumer business, we experienced record growth in new households in the first six months. In every one of our markets and in every age group. Importantly, some of our strongest growth has come from younger clients in the western part of our franchise. Our new client growth over the past six months exceeds our growth in any full year period over the last decade. Additionally, our consumer business generated over $4 billion in loan originations for the quarter. Mortgage originations reached another all-time high, and we expect to exceed last year's record level of $8.3 billion for the full year. Laurel Road also had another strong quarter, despite the federal student loan holiday. Since the launch of our national digital bank, Laurel Road for Doctors, we have added over 2,500 new doctors and dentists. The launch was an important milestone in our digital journey, which brings together several critical elements of our strategy. Targeted scale, digital, healthcare, and primacy. Moving to our commercial businesses, we had another strong quarter. Our investment banking business generated fees of 217 million, a record second quarter level, and the second highest quarterly level in our history. We experienced growth across the entire platform. We have grown this business consistently over the past decade, and we expect to grow it again in 2021. Importantly, this is a business driven primarily by repeat clients. Our pipelines are currently at record levels, supporting our strong growth outlook for the business. This quarter, we raised $21 billion for our clients, of which we retained approximately 20% on our balance sheet. Expenses this quarter reflect higher production-related incentives and the investments we continue to make across our franchise, in digital, in analytics, and in our teammates. Let me highlight just a few of these investments. I've already mentioned Laurel Road and the launch of our National Digital Bank. Not only have we accelerated client acquisition, but our new clients are doing more with us, with approximately half of our new doctor and dentists using multiple products. We also continued to build out our analytic capabilities. Including our recent acquisition of AQN Strategies, we have doubled the size of our analytics team. Year-to-date, we have increased our senior bankers by 5 percent in our targeted growth areas. This has resulted in a 21 percent increase in client pitches on a year-to-date basis. We also consolidated 54 branches this quarter with an additional 14 planned for next quarter. These consolidations will drive future cost savings and support our ongoing investments. Shifting to credit quality. Our trends remained positive this quarter. Non-performing loans, net charge-offs, and criticized loans were all down from the prior quarter, and net charge-offs to average loans were nine basis points. 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. Finally, we have maintained our strong capital position while continuing to return capital to our shareholders. Our common equity tier one ratio ended the quarter at 9.9%, which is above our targeted range of 9% to 9.5%. Our strong capital position enables us to continue to execute against each of our capital priorities, namely organic growth, dividends, and share repurchases. Combining our share repurchases and dividends paid this quarter, we have returned capital representing 50 cents a share for an annualized return of capital of approximately 11% at our current valuation. Earlier this month, our board of directors approved a new share repurchase authorization of up to 1.5 billion, beginning in the third quarter of this year and continuing through the third quarter of 2022. The Board will also evaluate an increase to our common stock dividend in the fourth quarter of 2021. Overall, I was very pleased with the quarter, which reflects the hard work and dedication of our team. We grew our top line and we made targeted investments to position the company for continued growth. As always, we remain committed to our disciplined approach to risk management and our commitment to return capital to our shareholders through dividends and share repurchases. I will now turn the call over to Don, who will provide more details on the results of the quarter. Don?
spk10: Thanks, Chris. I'm now on slide five. As Chris said, it was a strong quarter with net income from continuing operations of 72 cents per common share, up 18 percent from the prior quarter and four times from the year-ago period. The quarter reflected a net benefit from our provision for credit losses. The reserve release was largely driven by our strong credit metrics and expected improvement in the economic environment. Importantly, we generated record second quarter revenue driven by strength in our fee-based businesses. Our reported return on tangible common equity for the quarter was 22.3 percent. Adjusting for the reserve release, or ROTCE, was 16 percent within our targeted range of 16 to 19 percent. I will cover the other items on this slide later in my presentation. Turning to slide six. Total average loans were $101 billion, down 7% from the second quarter of last year. CNI loans were down $9 billion, reflecting decreased utilization levels. Consumer loans were up 9%, benefiting from continued growth from Laurel Road and, as Chris mentioned, record performance from our consumer mortgage business. Combined, we had over $4 billion of originations this quarter between our residential mortgage and Laurel Road production. The investments we've made in these areas continue to drive results and, importantly, add high-quality loans and relationships. Link quarter average loan balances were relatively flat as commercial loans declined due to the commercial utilization rates, partly offset by growth in PPP loans. Consumer loans grew 2 percent, again related to the continued strength from our consumer mortgage and lower road. PPP average balances were $7.5 billion for the quarter, up from $7 billion in the first quarter. The PPP balances ended the quarter at $5.7 billion, reflecting $2.8 billion of forgiveness and $900 million of new production. Continuing on to slide seven, average deposits totaled $144 billion for the second quarter of 2021, up $16 billion, or 13% compared to the year-ago period. and up 5% from the prior quarter. The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus. The growth was partially offset by a continued and expected decline in time deposits. Total interest-bearing costs came down another two basis points from the first quarter, following a three-basis point decline last quarter. We continue to have a strong, stable core deposit base, with consumer deposits accounting for over 60% of our total deposit mix. Turn to slide eight. Taxable equivalent net interest income was $1.023 billion for the second quarter of 2021 compared to $1.025 billion a year ago and $1.012 billion from the prior quarter. Our net interest margin was 2.52% for the second quarter compared to 2.76% from the same period last year and 2.61% for the prior quarter. Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to the year-ago period. The larger balance sheet benefited net interest income but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows. Compared to the prior quarter, net interest income increased $11 million and the margin declined nine basis points. Lower interest-bearing deposit costs and higher loan fees from PPP forgiveness were offset by lower earning asset yields and continued elevated liquidity levels. For the quarter, PPP loan fees, including the impact of forgiveness, totaled $50 million, up $2 million from the prior quarter. The significant build in liquidity continues to be the largest driver of our net interest margin. We are maintaining around $20 billion in excess cash. Cumulatively, excess liquidity has negatively impacted our net interest margin by about 35 basis points, with seven basis points of incremental impact for the second quarter. Moving to slide nine, we've continued to see strong growth in our fee-based businesses, which have benefited from the investments we've made. Non-interest income was $750 million for the second quarter of 2021, compared to $692 million for the year-ago period, and $738 million in the first quarter. Compared to the year-ago period, non-interest income increased 8%. We had a record second quarter for investment banking and debt placement fees, which reached $217 million, driven by broad-based growth across the platform, including strong M&A fees. Commercial mortgage servicing fees increased $32 million. Cards and payments income also increased $22 million related to broad-based growth across product categories including debit, credit, and merchant products. This growth was offset by lower consumer mortgage fees resulting from lower gains on sale margin and also the impact of MSR valuation changes. Lower operating lease income resulted from leveraged lease gains in the year-ago period. Compared to the first quarter, non-interest income increased by $12 million. The largest driver of the quarterly increase was the record second quarter and the second highest ever quarter for investment banking and debt placement fees. Service charges on deposit accounts and commercial mortgage servicing income also showed strength versus the prior quarter. These were partially offset by lower other income due to positive market-related valuation adjustments in the prior period, offset by negative adjustments in the current quarter. I'm now on slide 10. Total non-interest expense for the quarter was $1.076 billion compared to $1.013 billion last year and $1.071 billion in the prior quarter. Our expense levels reflect production-related incentives and the investments we've made to drive future growth. We have highlighted some of the significant investments on the lower left of this slide. We continue to invest in Laurel Road, including the launch of the National Digital Bank, including spend in marketing and technology. We also grew senior relationship bankers by 5% year-to-date in our targeted focus areas, including renewables team that we added in May. We've also continued to invest in our digital capabilities as well as analytics. Our analytics team has grown by two and a half times, including our recent acquisition of AQN. The increase from the prior year is primarily in personnel expense related to higher production-related incentive compensation and an increase in our stock price. Employee benefit costs also increased $16 million as healthcare-related costs were low in the second quarter of last year. Computer processing expense this quarter was elevated related to software investments across the platform. Compared to the prior quarter, non-interest expense was relatively stable. Higher incentive and stock-based compensation was offset by seasonally lower employee benefit costs. Marketing costs were up $5 million, primarily related to the launch of the Laurel Road for Doctors. I'm now on slide 11. Overall, credit quality continues to outperform expectations. For the second quarter, net charge-offs were $22 million, or nine basis points of average loans. Our provision for credit losses was a net benefit of $222 million. This was determined based on our continued strong credit metrics, as well as our outlook for the overall economy. Non-performing loans were $694 million this quarter, or 69 basis points of period in loans. a decline of $34 million from the prior quarter. Additionally, criticized loans declined and the over 90 day delinquencies improved quarter over quarter. Now onto slide 12. Key's capital position remains an area of strength. We ended the second quarter with a common equity tier one ratio of 9.9%, which places us above our targeted range of nine to nine and a half percent. This provides us with sufficient capacity to continue to support our customers and their borrowing needs, and return capital to our shareholders. Importantly, we continue to return capital to our shareholders in accordance with our capital priorities. We repurchased $300 million of common shares during the quarter, and our Board of Directors authorized a second quarter dividend of 18.5 cents per common share. As Chris mentioned, combined, this return of capital represents 50 cents a share this quarter, an annualized return of 11% of our current valuation. Earlier this month, the Board of Directors approved a new share repurchase authorization of up to $1.5 billion beginning in the third quarter of this year and continuing through the third quarter of 2022. The Board will also evaluate and increase the common stock dividend in the fourth quarter of 2021. On slide 13, we provide our updated full-year 2021 outlook, which we've adjusted to reflect our outlook for the remainder of the year. Consistent with our prior guidance, we expect to deliver positive operating leverage this year. Average loans are still expected to be relatively stable, reflecting continued momentum in our consumer areas, the impact of the PPP program, and a pickup in commercial loan growth later this year. We expect deposits to be up high single digits, reflecting the continued outperformance we have seen today. We will continue to benefit from our low-cost deposit base. Net interest income is now expected to be relatively stable, reflecting the low rate environment as well as the slightly lower than expected loan balances. Our net interest margin will continue to reflect the impact of excess liquidity on our balance sheet. Non-interest income should be now up in the high single-digit to low double-digit range, reflecting the broad base growth in most of our core fee-based businesses, including what is expected to be another record year for our investment banking business. Given the stronger revenue outlook, we now expect non-interest expense to be up low single digits, with the primary driver being higher production-related incentives. As we identified on our expense slide, we are also continuing to invest in areas that will drive future growth, namely teammates, technology, and also rolling out new capabilities, such as Laurel Road. This does not change our focus on core expenses and driving further efficiencies, including our commitment to generate positive operating leverage for the year. Moving to credit quality, we have reduced our net charge-off guidance once again, which is now expected to be in the 20 to 30 basis point range for the year. This reflects the quality of our portfolio, our current outlook, and performance to date. And our guidance for the GAAP tax rate has increased to 20% for the full year, reflecting the higher expected earnings for this year. Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns. Overall, it was another strong quarter, and we remain confident in our ability to deliver on our commitments to all of our shareholders. With that, I'll now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator?
spk00: Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press 1, then 0. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you wish to ask a question, please press 1, then 0 now. And our first question comes from the line of Scott Seifers with Piper Sandler. Your line is open.
spk07: Thanks, guys. Good morning. Hey, good morning, Scott. Hey, guess first question is on sort of CNI utilization and the outlet for improving trends in the second half. Definitely understand the rationale for it, but just curious sort of what's giving you that confidence. And I guess maybe more specifically, are you seeing any pickup in utilization, or did you see any throughout the course of the second quarter? Just maybe any color there would be quite helpful.
spk04: Sure, Scott. So kind of as you think about it, we always look at revolver utilization in the CNI space. So typically for us, it's been mid-30s for a long time. It would have peaked last year at 40 when people were drawing on their lines. And then it's been a steady grind down to 27 where we are now. Now, the good news is that it has stabilized at 27. And as we look at kind of some of the metrics, we think we've stabilized at 27. The other part of your question about what gives us comfort that we'll be able to have CNI growth in the back half. And you're right. We're guiding the relatively stable loans throughout 2021. Our consumer business will be the growth engine. But kind of the green shoots, so to speak, that we see in CNI are sort of as follows. Leasing, which we think is a leading indicator, our pipelines are up 35% year over year. And for us, Scott, as you know, that's typically around renewables, technology, and healthcare, which are some of our focus areas. Other things that I think will help us is our focus on both technology and healthcare and also our subspecialties in renewables and affordable housing. And then lastly, the only other thing I would add is our M&A pipeline is at record levels. and that generally pulls through financings as well. That's kind of how we're thinking about it.
spk07: Okay. That's perfect, and I definitely appreciate that. And then, Don, I was hoping I could ask you about that. I guess it's on page 18 of the release. We've got the securities yield. Can you go into, and I apologize if I missed it in any remarks, but just that Pretty substantial increase in the securities available for sale yield. What's going on there?
spk10: I would say that as far as the actual yield, I'm trying to go back to the page you were referring to.
spk07: I apologize. Yeah, sorry. More specifically, it's the 313 yield on securities available for sale versus like 176 in the first quarter.
spk10: We'll have to get back to you on that, Scott, because I would say that if we look at the total portfolio overall, that we would see a yield closer to the 230 range overall. I would say that part of the first quarter of 2021 might be the impact of the short-term treasuries and would have had a change there. But we'll follow up with you on that overall, because if you look at the
spk07: net interest income for the first quarter of 2021 versus the second quarter of 2021 it's only changed by about three million dollars so uh yeah we'll clarify that for you so i apologize okay perfect i just want to make sure that wasn't some accounting change or something that was was obvious that i wasn't aware of so um thank you okay awesome thanks a lot appreciate it thank you
spk00: Thank you. And our next question comes from the line of Bill Karkash with Wolf Research. Your line is open.
spk03: Good morning. Good morning, Bill. Can you remind us what kind of rate environment is necessary to achieve the long-term targets, particularly the efficiency and ROTC targets that you guys have on the bottom of slide 13?
spk10: Well, we would believe that rates will help achieving each of those. I would say that just from the return on tangible common equity, though, that We had highlighted that we acknowledge that the report, it isn't sustainable at a 22 plus percent range, but if you back up the reserve release, that gets us to 16 percent. And even if you normalize the current quarter for normalized credit costs of, say, 80 to 90 million dollars a quarter, we're in that 15 percent range. And then if you adjust for our outside capital position, that still brings us back close to that 16 percent kind of return on tangible common equity level. based on the current year's performance. And so, as far as the efficiency ratio, we are down to the 59 percent, 59.9. We also have some unusual activity in there related to certain government support programs, but those would normalize. We'd be toward the 59 percent range and would allow us to continue to make progress as we see enhancements in our operating results to drive that down closer to that 54 to 56 percent range long term.
spk03: That's helpful. Thank you. And Chris and Don, can you expand on your Laurel Road comments? How far through their medical school journey is the typical customer before they're acquired? What's the secret sauce that differentiates Laurel Road from other lenders? And at the end of their medical school journey, what are the wealth management opportunities? Just those types of, if you could just paint the picture for us.
spk04: Sure. So the typical point of capture for our customers at Laurel Road is is when they begin their fellowship. So think about somebody that is accredited, that's a doctor, that is, wouldn't be unusual for them to have $200,000 of debt and have a FICO score of like 770. And it's a great time for us to bring a new customer onto the platform because typically they're being placed through the matching process. And at that point, Not only do they refinance their debt, but thankfully for us, they do a lot of other things. A lot of times they buy their first house and get a mortgage. We also now have the ability to, you know, savings, payments, so we can offer a digital-based kind of full relationship. And what that does for us is not only does it enable us to capture these customers, It gets us out of the 15-state footprint because we can target these customers throughout the country. So far, we've targeted the 1.5, I'm sorry, 1.1 million doctors and dentists. We'll build that out in concentric circles. The next build-out will be nurses that number about 4.4 million. Is that helpful?
spk03: That's very helpful. Thank you. Appreciate you taking my questions. Sure, Bill. Thank you.
spk00: Thank you. And our next question comes from the line of John Pancari with Evercore ISI. The line is open.
spk09: Good morning. Good morning, John. I appreciate the color you gave on the commercial loan growth outlook. On the consumer side, can you maybe elaborate a little bit more, maybe unpack the expectation, the growth expectation as you look at the different portfolios? I know you're constructive on your on the Laurel Road progress there. Maybe if you can help us size up the growth expectation on balance sheet and then separately in terms of on the mortgage side, I'm interested in what type of balance sheet retention you expect coming out of your production there. Thanks.
spk04: Yeah, so let me start with the mortgage and give you kind of a flavor for that. Our mortgage business, which obviously has enjoyed a lot of growth, we generate about 55 percent on the purchase side, 45 percent is actually sold. About 70, I'm sorry, 55 is purchased, 45 is refinanced, 70 percent is on balance sheet. And interestingly, as it ties into the discussion we were just having, about 20 percent of that is to doctors, just as a point. So we're expecting that business to continue to grow. I said we originated $8.3 billion last year, and we will exceed that this year. Laurel Road continues, and as I mentioned, in spite of the loan, federal loan holiday, they continue to generate good numbers. This quarter they generated about $400 million of new loans, and we would expect that to continue to grow as well.
spk09: Okay, thank you. That's helpful. In terms of your excess liquidity, I know you're sitting at about $20 billion. If you could just maybe help us in terms of your thoughts on what options you have there as you look at the bond portfolio, which is understandably tougher right now, as well as incremental swaps. We could just talk about the potential opportunity to redeploy.
spk10: Sure. You're right. We're sitting at about $20 billion of cash. We also have about $5 billion worth of short-dated treasuries in our bond portfolio as well. And so we do have plenty of excess liquidity. We would typically target, say, between $1 billion and $2 billion of liquidity from that perspective. And so even if we turned around and invested in today's rate environment, it would be a meaningful lift. In the second quarter, we bought about $2.2 billion worth of securities that had an average yield of a 141. Today's market environment would still have, say, 125, 130 range for the same type of securities. So if you look at $20 billion of excess liquidity and apply that kind of a yield to it, it would be a lift. of over $200 million, probably close to $250 million as far as the added revenues compared to where we would be today. And so that is meaningful. That being said, we're still looking for opportunities to when we start to invest. We've been more holding water as far as replacing some of the runoff with new purchases. We do expect rates over the next several quarters to start picking up again and giving us some opportunities to buy there. On the hedge or swap portfolio that you might have seen in the slide deck, that we actually terminated swaps that were maturing throughout 2021. And so the value of those swaps, the notional value of the swap book has actually declined. We're not looking to add additional swaps there, but we'll continue to assess that and just assessing the overall asset sensitivity. Right now, we don't have a whole lot of downside risk because rates, even if they do go below zero, we have a lot of floors in place in some of our commercial portfolios, and so we're protected on the downside. And so we're, again, looking for some more opportunities to start to deploy some of that excess cash. Got it. Thanks, Don.
spk09: That's helpful.
spk10: Thank you.
spk00: Thank you. And our next question comes from the line of Peter Winter with Wedbush Securities. Your line is open.
spk05: Good morning. Can you talk about the outlook for the cards and payments business between the core growth and maybe some slowdown in the prepaid activity from the government stimulus and just the impact on the expense from that?
spk04: Yeah, so you kind of have to bifurcate the two of them. We've seen strong growth kind of across the board in cards and payments. The spend, both credit and debit, is up about 25%, Peter, year over year. Now, as it relates specifically to prepaid, and keep in mind, our prepaid assume that our revenues and expenses about equal each other. We would expect prepaid to wind down, but we would still expect to see growth in cards and payments based on the underlying growth of the other pieces and parts of the business.
spk10: And, Peter, just to provide a little more clarity there as well, that the prepaid revenues and expenses were both about $37 million as a fee income and the expenses in the current quarter. And so we would expect to start seeing that wind down throughout the second half of the year.
spk05: Got it. Thanks. That's helpful. And then, Don, if I could just ask, maybe if you can give some color maybe about what the margin outlook for the second half of the year?
spk10: Well, I would say there's a number of factors that are going to impact that. One is liquidity levels, and that's been the big determinant as far as the overall margin. And this last quarter we saw that seven of the nine basis point decline was related to the impact of higher levels of liquidity that Our outlook would not assume that liquidity position build from here, and so we shouldn't see that kind of pressure given the overall loan balances and deposit outlook. We'll also see some impact from PPP that, as I mentioned earlier on the call, that we had about $50 million in fee income coming through from the PPP loan balances for forgiveness and other fee recognition. We would expect to see that decline as well, and so we'd see some modest decline on the NIM from the core impact of lower rates and the PPP program, but should not see the same pressure for liquidity going forward. Got it.
spk05: Thanks for taking my questions. Thank you.
spk00: Thank you. And our next question comes from the line of Gerard Cassidy with RBC. Your line is open.
spk01: Thank you. Good morning, Chris. Good morning, Don. Good morning. Don, can you talk a little bit about credit quality in the sense that in the net charge-off number that was at, what, nine basis points, were there any material recoveries that helped drive that number down? And then second, when you show your data on slide 21, it's obviously very strong and even stronger than first quarter of 20 when the day one – But with the outlook for the economy arguably being stronger today than it was on the day one number, what's the likelihood that your reserves today, which I think are what, 160 some odd basis points versus what they were in the day one, I think at 122 basis points, of your reserve levels to loans coming down closer to the day one or maybe even surpassing that number?
spk10: All good questions, Gerard. I would say as far as the recoveries, we did have recoveries of about $20 million that were unusual, and even adjusting for that, our net charge-offs would have been 17 basis points for the quarter, so still very low absent that one recovery. If you look at the CECL reserves that we have, I think your math is pretty close to where we would see it as well. while the economic outlook is probably stronger on a relative basis as far as improvements from here, I would say that if you look at the underlying nature of the portfolio, we still have a little bit higher level of criticized classified loans today than what we did as of January 1 of last year. And so, it would suggest that we should have a higher level of reserve That being said, we've continued to increase our qualitative component to the reserve. And so if you look at the qualitative component along with certain model overlays, it's about 25% of the total reserve. So it's higher than what we would have expected in a CECL world to deploy. And it's just given some of the uncertainty as to how things will continue to evolve from here. and could allow the opportunity to see some further reserve releases. Now, I don't want to set the expectation that we're going to have another $220 million negative provision expense or reserve recapture in the near-term quarters, but we do expect to see that reserve level probably continue to trend down from here to reflect the current status of our loan quality and the economic outlook that we're seeing in front of us.
spk01: Very good. Thank you. And then maybe, Chris, you guys talked about, you know, the strength that you saw in the quarter in investment banking. And you also pointed to that as a result of that, the production-related incentive expenses were higher and you got it a little higher for the remainder of the year. Can you frame out for us, because we've heard this from a few of your peers about the, you know, production-related incentives as, quote, being a good expense. What's the relationship for the dollar of revenue that this expense represents? For every dollar of this expense, do you get an incremental dollar and a half of revenue? Is there any way of framing that out for us?
spk04: First of all, it's a great question, and it's one we look at all the time. Clearly, that business does have operating leverage. You can think about half of about $0.50 on the dollar. falling to the bottom line, just as a rule of thumb. It obviously depends if they're M&A revenues, if they're financing revenues. It's fairly complex. The other thing that is in there, Gerard, that is part of the equation is we continue to invest heavily in new bankers. And typically, new bankers, you have to pay a little bit of money up front. And we always think it takes about 18 months on our you know, very intricate platform to be really, really productive. So part of what you're seeing is a lag that's part of the hiring that we've done around in the business as well.
spk01: Okay, thank you. Appreciate it.
spk00: Thank you. And our next question comes from the line of Ken Houston with Jefferies. Your line is open.
spk08: Thanks, guys. Good afternoon. Good morning. Just a follow-up on the pipeline on the Laurel Road side. Now, how fast do you expect the new digital bank to be able to ramp up, and how quickly could we see that layer into the production levels as you go forward?
spk04: Sure, Ken. Well, thanks for the question. Just to give you kind of a starting point right now, the nice thing about that business is we already have fair amount of critical mass we've got about 46,000 we called members customers and we have since legal day one we funded about five point three million or billion dollars I think what you'll see and what we're going to do as we go forward is to lay out sort of the path for growth for Laurel Road but what you'll see is we'll continue to to capture a lot of clients and and and we will see it being a material contributor to Key as we go forward.
spk08: And any updates in terms of the types of yields that you're seeing now in that marketplace and does the new business look any different than that in terms of what you can get on those loans?
spk10: I would say that when we look at the new originations, we're looking for something with a spread compared to the cost of funds that we assigned to about 240 basis points, which is up from when we originally started at about 220 a couple years ago. So pricing has held up well, and it's something that we'll continue to manage going forward.
spk08: Okay. And last follow-up, Don, any update in terms of the pacing of the indirect portfolio runoff and how quickly you expect that to to dissipate, thanks.
spk10: Yeah, we've got a little over $3.5 billion left of that, and I would say that it runs off somewhere close to $400 million to $500 million a quarter would be a general range.
spk08: All right, got it. Thanks a lot. Thank you.
spk00: Thank you. And our next question comes from the line of Steve Alexopoulos with JP Morgan. Your line is open.
spk02: Good morning. This is Janet Li on for Steve. First of all, I would like to make sure that I understand your name outlook correctly. I understand that there are many pieces and factors that come into play here, but are you saying that the net interest margin looking out into the back half of 2021 may see some pressure assuming you deploy around one to two billion of cash into securities or assuming liquidity level stays sort of the same at 20 billion? And also, should we expect loan and security seals to grind down from here?
spk10: Yeah, a couple things. One, what we've said is that most of the pressure we've seen in NIM has been because of liquidity, and our outlook for the rest of the year would have liquidity levels, in other words, the cash position remaining relatively stable from here. And so shouldn't see that kind of pressure as far as – overall impact from liquidity. I would say that the impact of rates, and we've shown on the current slide, other than liquidity, we had about two basis points of margin compression this quarter, and that was mainly because of lower rates. And then another component that will impact this is the PPP forgiveness, which had elevated levels here in the second quarter and would expect to see that come down in future quarters. As far as the impact for both security purchases and also for fixed-rate loans. An example would be in the second quarter, we had about $2.2 billion of runoff, and it had an average rate on that of $2.26, and the average purchase yield for the same $2.2 billion we bought during the quarter was $1.4. So about 80 basis points of compression on that specific asset class. We would also expect to see fixed rate loans, which isn't as large for us as it probably is for other peers, have somewhere in that 60 to 80 basis points of compression there as well for the rollover of those assets as well.
spk02: Thank you. That's very helpful. On Laurel Road for Doctors, you commented about $5.3 billion of loans from there. As it relates to 2Q growth, can you comment on how much of the $400 million in Laurel Road Origination volumes came from Laurel Road for Doctors and how much deposit growth did it contribute in the second quarter?
spk04: I don't have the deposit numbers in front of me. I know that half of Our new customers, which we said were 2,500, were multiple product customers. But you should assume that the $400 million that we originated in the second quarter relates to Laurel Road for Doctors.
spk02: Got it. And just last follow-up, on commercial mortgage servicing fees, can you talk about what led to a fairly significant jump in the second quarter and whether this level is sustainable?
spk04: Thanks. Yeah, so that's a really interesting business for us, Janet. We are servicing, and these are loans that are off us loans. We're servicing $500 billion worth of loans. $330 billion, we're the primary servicer. So think about real estate, principal interest, taxes, insurance. The other 170, we're the named special servicer. So when things go into workout, we're basically the workout agent. And as you can imagine, at this point in the cycle, there's a lot of activity. You might find it interesting that the percentage of things that are in active special servicing, 72% of that which is in active special servicing is in the retail sector, and another 13% is in lodging. So it's an episodic business. It's not a business that you can count on kind of a straight line. But you can imagine at this point in the cycle, particularly in areas like retail, that there's going to continue to be a fair amount of activity.
spk10: Just to follow up on that, too, as far as the linked quarter, that truly was activity-related fees that drove the change. And if you look at the year ago for that line item, we did have some impairments that came through that category. And so the second quarter of 2020 was artificially low.
spk02: Great. Thanks for taking my questions.
spk10: Thank you.
spk00: Thank you. And our next question will come from the line of Matt O'Connor with Deutsche Bank. Your line is open.
spk06: Good morning. Kristen, your opening comments, you mentioned record levels of either new accounts or new customers. I was just wondering if you could elaborate on that. Is it on the commercial consumer side or just across the firm? And then, you know, which specific products are kind of the drivers there? Is it lines and deposits, or just a little color on it, because it was a pretty interesting stat.
spk04: Sure, Matt. Thanks for the question. The comment I was making pertained to new households. And what I said is that we generated more new households in the first half of this year than we have in any complete year in the last decade. So it was really focused exclusively on consumer and specifically new household growth.
spk06: And is that being mostly driven by deposit accounts or also some acceleration because of rural road and everything, or maybe just a little bit on the product mix there? Thank you.
spk04: Most of it. We focus a lot on primacy, so the preponderance of it is on capture of checking accounts.
spk08: Got it. Thanks. Bye.
spk04: Thank you.
spk00: And at this time, we have no further questions.
spk04: Well, good. 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. Their number is 216-689-4221. Thank you for your interest, and this concludes our remarks. Goodbye.
spk00: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T Event Conferencing Services. You may now disconnect. We're sorry, your conference is ending now. Please hang up.
Disclaimer