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spk13: Good morning and welcome to Key Corp's first quarter 2021 earnings call. As a reminder, this conference call is being recorded. I'd now like to turn the conference over to the chairman and CEO, Chris Gorman. Please go ahead.
spk12: Thank you for joining us for Key Corp's first quarter 2021 earnings conference call. Joining me on the call today are Don Kimball, our Chief Financial Officer and 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'm now turning to slide three. Our first quarter was a strong start to the year as we executed our strategy and delivered positive operating leverage relative to the year-ago period. We continued to grow the number of clients across our franchise. In the first quarter, we experienced the strongest growth in consumer households in five years. Additionally, we continued to add commercial clients and deepen existing relationships. We leveraged the strength of our business model by raising over $13 billion for our commercial clients, of which we retained approximately 19% on our balance sheet. And let me just say that's exactly the way our model is designed to work, taking advantage of attractive markets for the benefit of our clients while maintaining our credit discipline with that which we place on our balance sheet. We also launched our national digital bank, Laurel Road for Doctors, at the end of March. I will comment more on that shortly. In addition, we announced the acquisition of AQN Strategies, a client-focused analytics firm that With deep expertise in the financial services industry, the acquisition aligns to Key's relationship strategy and underscores our commitment to a data-driven approach to grow our business. We also identified 70 branches for consolidation, representing approximately 7% of our network. We continue to lean into digital. Most of these closures will take place in the second quarter. Moving to our financial results for the quarter, we reported net income of 591 million, or 61 cents per share for the first quarter. On a per share basis, this is an increase of 9% from the fourth quarter results and up significantly from the year ago period. We generated record first quarter revenue, which reflected broad-based growth across our company, driven by our fee-based businesses. Our investment banking business achieved record first quarter revenues with growth across the platform. This is an area where we have invested in our teammates and made targeted acquisitions to enhance our capabilities, including such areas as healthcare and technology. We have grown this business in eight of the last nine years, including having a record year in 2020. and we expect to grow this business again in 2021. We reached another milestone in our consumer mortgage business with record loan originations of $3 billion for the quarter. In addition to adding high-quality loans to our balance sheet, consumer mortgage fees were up 135 percent from the year-ago period. Our outlook for this business remains positive as we continue to grow and take market share. We reported a record $8.3 billion of originations in 2020, and we expect to eclipse that level this year. Other contributors to fee income this quarter were trust and investment services and cards and payments income. Credit quality remains strong. Non-performing loans, net charge-offs, and criticized loans were all down from the prior quarter. We continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through the business cycle. Finally, we have maintained our strong capital position while continuing to return capital to our shareholders. Our common equity tier one ratio ended the quarter at 9.8%, which is above our targeted range of 9 to 9.5%. Our strong capital position enables us to execute against our capital priorities, organic growth, dividends, and share repurchases. This quarter, we repurchased 135 million of common shares. Our board of directors also approved our first quarter common stock dividend of 18 and a half cents a share. Now turning to slide four. Before I turn the call over to Don, I wanted to make a few comments regarding Laurel Road. We acquired Laurel Road, a born digital company, in April of 2019. The acquisition has exceeded all of our expectations. It has accelerated our digital transformation and has been a great complement to our existing healthcare platform. Since our acquisition, Laurel Road has generated over $4.6 billion in high-quality loan originations, adding high-value digital relationships with healthcare professionals. We also have the opportunity to continue to scale this business. At the end of March, we took the next step on this journey with the launch of our digital bank, Laurel Road for Doctors, serving the healthcare segment and expanding our consumer franchise nationally. Importantly, Our approach to our digital bank is differentiated. Historically, many offerings have been product-centric or focused on deposit gathering. Ours is fully aligned with our relationship strategy. The launch broadened our offering for Laurel Road clients to include deposits, additional lending products, and other value-added services created to meet the unique financial needs of healthcare professionals. The launch was an important milestone in our digital journey, which brings together critical elements of our strategy, targeted scale, digital, healthcare, and primacy. Right now, we are focused on physicians and dentists, but soon we will expand to other medical professionals. Importantly, this launch is not the end goal, but rather just the beginning. I will close my remarks by restating that I am pleased with our results for the quarter and our strong start for 2021. I am proud of what we have achieved as a team and remain optimistic about the future as we emerge from the pandemic and the economy continues to recover. Key is well positioned to grow and deliver on our commitments for all of our stakeholders. With that, I'd like to now turn it over to Don to walk through the quarter. Don?
spk01: Thanks, Chris. I'm now on slide six. As Chris said, it was a strong start to the year with net income from continuing operations of $0.61 per common share, up 9% from the prior quarter and over four times from the year-ago period. The quarter reflected a net benefit from our provision for credit losses. The reserve release was largely driven by expected improvement in the economic environment. Importantly, we generated record first quarter revenue driven by the strength in our fee-based businesses. I'll cover the other items on this slide later in my presentation. Turning to slide seven, total average loans were $101 billion, up 5% from the first quarter of last year, driven by growth in both commercial and consumer loans. Commercial loans reflected key participation in PPP, partially offset by decreased utilization. PPP loans had an impact of $7 billion in the first quarter of 2021 average balances. Consumer loans benefited from the continued growth from Laurel Road and, as Chris mentioned, record performance from our consumer mortgage business, with $3 billion of consumer mortgage loans this quarter. The investments we have made in these areas continue to drive results and, importantly, add high-quality loans and relationships. Blink quarter average loan balances were down 1%, reflecting lower commercial utilization rates and reduction in average PPP balances. We had just under $1 billion of PPP forgiveness in the current quarter. Consumer loans were up 1% from the prior quarter, again related to continued production from consumer mortgage and Laurel Road. Continue on to slide eight. Average deposits totaled $138 billion for the first quarter of 2021, up $28 billion, or 25%, compared to the year-ago period, and up 1.5% from the prior quarter. The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus. The growth was offset by a continued and expected decline in time deposits. The interest-bearing deposit cost came down another three basis points from the fourth quarter of 2020, following an eight 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. Turning to slide nine. Taxable equivalent net interest income was $1.012 billion for the first quarter of 2021 compared to $989 million a year ago and $1.043 billion for the prior quarter. Our net interest margin was 2.61% for the first quarter of 2021 compared to 3.01% for the same period last year and 2.7% from the prior quarter. Both net interest income and net interest margin were meaningfully impacted by significant growth in our balance sheet compared to the year-ago period. The larger balance sheet benefited net interest income but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows. Compared to the prior quarter, net interest income decreased $31 million and the margin declined nine basis points. The decrease in net interest income was caused by the day count of approximately $14 million lower loan fees of $8 million and lower loan balances resulting in an additional $8 million reduction to NII. Non-interest margin also reflected a four basis point reduction due to the increases in our liquidity position. Moving on to slide 10, we have continued to see growth in our fee-based businesses. Non-interest income was $738 million for the first quarter of 2021 compared to $477 million for the year-ago period and $802 million in the fourth quarter. Compared to the year-ago period, non-interest income increased 55%. We had a record first quarter for investment banking debt placement fees, which reached $162 million, driven by broad-based strength across the platform. This quarter, both debt and equity markets were especially strong. Record mortgage originations drove consumer mortgage fees this quarter, which were up $27 million, or 135% from the first quarter of 2020. Cards and payments income also increased $39 million related to higher prepaid card activity from state government support programs, as well as a growth in the core platform. Other income in the year-ago period included $92 million of market-related valuation adjustments. Compared to the fourth quarter, non-interest income decreased by $64 million. The largest driver of the quarterly decrease was seasonality in our investment banking line. coming off an all-time high record quarter. This was partially offset by the strength in trust and investment services income and cards and payments income. I'm now on slide 11. Total non-interest expense for the quarter was $1.071 billion compared to $931 million last year and $1.1 billion in the prior quarter. The increase from the prior year is primarily in personnel expense. related to higher production-related incentive compensation, which increased $58 million, and the increase in our stock price, resulting in a $36 million increase compared to last year. Employee benefit costs also increased $15 million. Year over year, payments-related costs reported in other expense were $32 million higher, driven by higher prepaid activity. Computer processing expense this quarter was elevated related to software investments across the platform, accounting changes, and timing differences. Compared to the prior quarter, NIOSH's expense decreased $57 million. The decline was largely due to lower production-related incentives and severance costs. Moving now to slide 12, overall credit quality continues to outperform expectations. For the first quarter, net charge-offs were $114 million of 46 basis points of average loans. Our provision for credit losses was a net benefit of $93 million. This was determined based on our continued strong credit metrics, as well as our outlook for the overall economy and loan production. Non-performing loans were $728 million this quarter, or 72 basis points of period-end loans, a decline of almost $60 million from the prior quarter. Additionally, criticized loans declined, and the 30 to 90-day delinquencies also improved, again quarter over quarter, with a five basis point decrease, while the 90-day plus category remained relatively flat. Now on to slide 13. Key's capital position remains an area of strength. We ended the first quarter with a common equity tier one ratio of 9.8%, which places us above our targeted range of 9 to 9.5%. This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders. Importantly, we continue to return capital to our shareholders in accordance with our capital priorities. Our board of directors approved a first quarter dividend of 18.5 cents per common share. We also repurchased $135 million of common shares under the share repurchase authorization we announced in January of up to $900 million. This leaves us with a capacity of up to $765 million for the next two quarters. On slide 14, we provide our full year 2021 outlook, which we've adjusted to reflect our strong start to the year, positive momentum in our business, and more favorable revenue outlook. Consistent with our prior guidance, we expect to deliver positive operating leverage for the year. Average loans are expected to be relatively stable, reflecting continued momentum in our consumer areas, the impact of PPP and stronger commercial growth in the second half of the year. The first quarter should be the low point of the year with expected growth from here. We expect deposits to be up mid-single digits and that we will continue to benefit from our low-cost deposit base. Net interest income should be up low single digits. Net interest income will benefit from higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity offset by the ongoing impact of low rates. Non-interest income should be up mid-single digits, reflecting the growth in most of our core fee-based businesses. Non-interest expense should be relatively stable, reflecting higher production-based incentives related to our improved revenue outlook. Our continuous improvement efforts and branch consolidation plans remain on track and will help support our ongoing investments and talent and to stay at the forefront of our digital offerings. Moving on to credit quality, we have reduced our net charge off guidance, which is now expected to be in the 35 to 45 basis point range for the year. This reflects the quality of our portfolio and our current outlook. And our guidance for our GAAP tax rate remains unchanged at around 19% for the year. Finally, shown at the bottom of 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 a good start to the year, and we remain confident in our ability to deliver on our commitments to all of our stakeholders. With that, I will now turn the call back over to the operator for instructions on the Q&A portion of our call. Operator?
spk13: Thank you, and ladies and gentlemen, if you wish to ask a question, please press 1 and then 0. on your touch-tone phone. You'll hear a tone indicating that you've been placed in queue. You can remove yourself from the queue again by pressing the 1-0 command. And our first question will come from the line of Scott Severs with Pricers Standard, and your line is open. One moment.
spk09: And please go ahead. Hello? Hey, Scott. How are you?
spk12: Morning, Scott.
spk09: Hey. Hey, sorry. I think I was on mute or something there. Good to talk to you guys this morning. Appreciate you taking the question. The first question was just on, given that you guys sort of have a broader product mix than other traditional regional banks, given your capital markets exposure, I guess I'm curious if you guys are seeing any preference from your corporate clients in terms of traditional banking products versus opting for capital markets, products that you might have expected to be just sort of more traditional banking. Has there been any preference shift there?
spk12: So, Scott, it's Chris. We have seen a preference to kind of take our clients to where the most advantageous financing is. And one of the areas that I would point you to would be our real estate book. And you'll notice If you look at the H8 data, we underperform some of our competitors in terms of what we're putting on our balance sheet, but yet we're only putting about 19% or 20% of the capital we raise. So if you think about really attractive, non-recourse, 10-year money, Fannie, Freddie, FHA, the life companies, the CMBS market, that would be an example of where these middle market companies are consistently opting to go to other sources of funding other than the banks. And obviously for us, that ties in really well with our business model. So that would be an example.
spk09: Okay. Perfect. Thank you. And then I guess actually just sort of a ticky-tack one for Don. I saw the $7 billion of average balances of PPP loans. Do you happen to have the End of period, just for modeling purposes, I'm guessing somewhere in the $6.5 billion range, given what you said about forgiveness in the first quarter, but was curious if you had a more pinpointed number.
spk01: Sure. The ending balance was $7.7 billion because we actually originated $2 billion of new loans under the current program, and we also have a pipeline approved through the SBA of an additional $700 billion that will be expected to close in the second quarter.
spk09: Okay. Perfect. All right. Glad I asked there. So that is helpful clarification. I appreciate you guys taking the questions. Thank you, Scott.
spk13: Thank you. Next question comes from the line of Ken Zerbe with Morgan Stanley. And your line is open.
spk12: Morning, Ken.
spk10: In terms of the Laurel Road for doctors, can you just help us understand, is that a I guess, a marketing decision of how you're positioning Laurel Road, or does it actually require you guys to build out capabilities, talent, people, to be able to offer services specific to doctors where it's not just a marketing gimmick? Thanks.
spk12: No, it certainly is a lot broader than just marketing. And kind of a couple proof points, just since we launched Laurel Road for Doctors on March 30th, Our website traffic, Ken, is up 100%. We've had 50,000 discrete sessions with doctors and dentists on the website. We also have garnered 300 new doctor-dentist households. And obviously, we'll start building this out in concentric circles. So what this is, it is a complete digital offering focused on doctors and dentists. It's much broader than a single product. It is to meet the needs of doctors and dentists, which are both unique and to some degree homogeneous. So it isn't just marketing for sure. It's very focused.
spk10: Got it. Understood. Okay. And then just a different follow-up question. How do you guys see seasonality playing out in the investment banking and debt placement fees? Because if I'm not mistaken, I believe first quarter tends to be a a seasonally weak quarter, but it was obviously very strong this quarter.
spk12: Sure. Well, as I mentioned, it was a record first quarter for us in our investment banking business. Seasonality typically is back-end loaded as people, there's always a big push to get transactions done by year-end. We obviously have been pleased by the trajectory of the business, and we also are pleased that as things come out of the pipeline, the pipeline is being – you know, replenished, and the pipelines are strong. So we feel good about it, and we think we'll have another record year in our investment banking business. One of the interesting things is there's a lot of M&A activity. So while there's not a lot of borrowing, in our strategic discussions with the people that are running these mid-market and mid-sized companies, they are looking to do strategic things, which really opens the door for us to provide a lot of services.
spk10: All right, great. Thank you.
spk13: Thank you. Our next question will come from the line of Bill with Wolf Research and your line is open.
spk00: Thank you. Good morning, Chris and Don. I wanted to ask about your loan pipeline. We're hearing varying degrees of optimism around growth in the second half of 2021 post reopening. Can you give a little bit of color on the tailwind that you're anticipating based on the discussions you're having with clients? and the extent to which the liquidity on their balance sheets is impacting their appetite to borrow?
spk12: Sure. That's a great question. Let me kind of break it into consumer and commercial. On the consumer side, we had a record quarter in terms of number of new households. We also had a record quarter in terms of mortgage originations at $3 billion. So We have a lot of trajectory on the consumer side. The consumer is spending. And while you don't see it in credit card balances because at origination our average consumer has a FICO score of around 770, what you do see it in is the velocity in both debit and credit. We believe that our growth engines in consumer, last year we generated about $10 billion of originations between Laurel Road and mortgage, we think we will do more than that this year. And that trajectory is, they're up and running. Let's talk about commercial a little bit, which is clearly delayed. First of all, commercial right now, we have really unprecedented utilization, as in low utilization. So I think one of the areas where we can grow from a commercial perspective is as they're are supply chain challenges, as there is clearly some inflation out there. I think you'll see people start to build their inventory, and I would suspect we'll see utilization improve from the low point that it is now. As I mentioned, there's a lot of strategic discussions going on. That should generate loan growth. What we're not seeing right now is investment in people and property plant and equipment. And I would guess On the people front, one of the challenges for our customers is it's hard to hire people, so that's one of the challenges. But on property, plant, and equipment, I would expect that to ramp up in the second half. These projects, as you know, take a fair amount of lead time. So consumer, strong throughout the year. I think commercials are going to be relatively flat in the first half and will pick up in the second half.
spk00: That's very helpful. Thanks, Chris. Don, as a follow-up, I'm sorry if I missed this, but What's driving the improved NII outlook? You still expect relatively stable loan growth, so is the improvement coming from PPP and on PPP? Can you tell us what the anticipated total revenue benefit is after factoring in forgiveness? Will most of that come in 2021? Just trying to get a sense, if you could clarify for us, within the outlook, what kind of NII growth you guys expect ex-PPP?
spk01: Sure. If you look at the full-year outlook that we would have provided in January compared to what we have today, and just using the midpoints, net interest income is up about $80 million. And roughly 45 to 50 of that's coming from the improved rate outlook that we've seen with the rate curve moving up and just the impact of that in the overall portfolio. If you take a look at the loan balances overall that... I would say that they're up very modestly, but it really shows a little bit more of a mixed improvement there as far as the yield impact. As Chris highlighted, we had record mortgage originations of $3 billion this past quarter. We've increased our outlook as far as the overall mortgage balances going onto the balance sheet and pulled back a little bit on the commercial given the lower utilization rates we saw in the first quarter. And so that mixed shift also helped a little bit. As far as PPP, we talked on the call in January about we thought that with the new loans that we'd be seeing coming through with the current wave of PPP, if you take a look at the net interest income, which includes both the 1% interest plus the fee income, we thought that'd be up about $80 million year over year. And that's about the same as what we're seeing this year as far as our outlook in April. And so we're still seeing that kind of incremental benefit. And then as far as the forgiveness we would expect of last year's production of the $8 billion, about 85% of that to be forgiven throughout the remainder of this year. And so we will see that increase. acceleration occur as far as some of the fee income and future quarters compared to what we experienced in the first quarter, but generally fairly consistent with what we would have expected back in January.
spk00: That's very helpful, Chris and Don. Thank you very much for taking my questions.
spk01: Thank you.
spk13: Thank you. Our next question comes from the line of John Pancari with Elcor ISI, and your line is open.
spk11: Good morning. Hey, John. John. On the margin side, just want to see, Don, if you can kind of walk us through your expectations of how you expect the margin to traject here over the remainder of the year and what's assumed in your NII upload single-digit outlook. I guess if you can give it perhaps with the PPP impact and without, that would help.
spk01: Thanks. Sure. As far as the margin outlook, we would expect it to be stable to slightly up from here, so maybe up a couple basis points throughout the rest of the year, really reflecting some of the improvement in the loan fees. And as we mentioned earlier, from the fourth quarter to the first quarter, one of the drivers of why our NII was down was about $8 million lower loan fees, and some of that was related to the PPP because we had higher levels of forgiveness in the fourth quarter than what we actually did in the first quarter of this year. And so As far as the PPP impact, we would expect that the total NII level contributed for first quarter versus the rest of the year to continue to trend down a little bit, very modestly at first, and thinking of a million or two a quarter coming from that just with the impact of the forgiveness of those loans. But generally, again, fairly consistent with what we would have expected coming into the year as far as the trajectory and the and our outlook for those balances.
spk11: Okay, thank you. That's very helpful. And then separately, on the healthcare banking effort, one question I've been getting about this is, you know, the expected longer-term impact that you may forecast from this whole effort, not just the digital effort with Borough Road for Doctors, but I guess also when you look at the combined effort that you flagged before by involving your Kane Brothers business, as well as the emerging relationship, you know, in your backyard there with the Cleveland Clinic. You know, when you look at this long term, how do you size up the expected overall impact, maybe as a percentage of revenue or earnings or returns or even percentage of loans on the loan side or deposits? Just want to help people think about how big this thing can be. Thanks.
spk12: So, John, it's Chris. We have not yet framed that for the investors. Obviously, we just launched the National Digital Affinity Bank just at the end of March. Obviously, healthcare is rapidly approaching 20% of the GDP, so there is a huge opportunity. And as you look throughout Key, we do a lot of business in healthcare throughout our franchise. For example... While not part of Laurel Road, doctors and dentists are a significant driver of our mortgage business, for example. And if you think about serving these large hospitals and what we can do for the CEO in terms of provide him strategic advice, raise capital, dealing with the CFO, a lot we can do around payments. And then with the Chief Human Resources Officer, the ability to refinance student loans, the ability for docs to manage their money. We have $45 billion of AUM. So it is a huge opportunity. We haven't yet laid it out for the public yet what our targets are. As it relates specifically to Laurel Road, last year we generated $2.3 billion in loan refinancing. This year, in spite of, frankly, some of the noise around student lending in general, we will continue to grow that business. So that's just a data point for you.
spk11: Got it. That's helpful. Thanks, Chris.
spk13: Thank you. Our next question will come from the line of Erica Nazarian with Bank of America. And your line is open.
spk02: Hi. Good morning.
spk13: Good morning.
spk02: Michael. My first question is for you, Chris, I just want to tap into your experience. No keys uniquely positioned to benefit from, um, you know, CapEx coming back online, you know, and, and as we think about the excess liquidity in the system, you know, our, our deposits going to be a leading indicator for line utilization, or are your clients telling you that they're going to keep, um, excess levels of cash for the time being? And additionally, this curve steepening from the long end rising, how does that play into historically the decision between capital markets and revolvers?
spk12: Sure. So first, as it relates to deposits, I think it's probably somewhere in between your two scenarios. I think based on what we've all been through over the last 12 to 18 months, I think you'll see people carry a little higher levels of cash. But clearly, I think they will definitely burn down some of those excessive deposits before they start borrowing. And I think as you think about going forward, the use of revolvers or going to various markets, I think to the extent that people have a defined use of proceeds, I think you'll see people try to lock in longer-term money because at current rates, I just think that makes a lot of sense for some of these long-term projects.
spk02: Got it. And just to follow up on the question whether or not a steeper curve from a higher long end, if that could impact the decision between capital markets and revolvers in terms of funding preference.
spk12: I don't think the steepness of the curve, while it matters a lot to us, I think what our clients really think about from a strategic perspective, is this a long-term asset? And if I go out, if I term it out as opposed to use my revolver, is that an advantageous financing for the long term? I don't think they're driven by the steepness of the curve.
spk02: Got it. And just for Don, the outlook for non-interest expense being relatively stable is Does that contemplate another record year in investment banking and debt placement fees?
spk01: That does contemplate that, as Chris highlighted, that we expect that to show growth on a year-over-year basis and also to show the stronger residential mortgage production as well. And so both of those are part of the reasons why the fee income is up and also the expenses are up on a corresponding basis.
spk13: Great. Thank you.
spk01: Thank you.
spk13: Thank you. Next, we'll go to the line of Chris Uzzin with Jefferies. And your line is open.
spk08: Hey, good morning. Thanks. I was wondering if you could talk a little bit about the reinvestments that you said you made this quarter, $6.5 billion ending balance increase. Can you just help us understand just where that front book, back book math is at this point on both securities and also if you just have any comments on loan pricing and spreads too? Thanks.
spk01: Sure can. As far as our securities portfolio, we did add to both the core book as well as a short-term treasury book. We've got, as of the end of the period, about a $5 billion over the last two quarters increase in the core bond portfolio. That was really done in some of the core type of products and investments we would normally invest in, which would include CMOs and 15-year pass-throughs. We also did some commercial mortgage agency securities as well and attached swaps to those so that basically it locks in that fixed rate for the first, say, four to six years and then converts it to a nice loading rate for us. And so the average yield on those purchases was around a 140%. the roll-off of our existing portfolio is around a 235 to 240 range. And so we do see continued pressure there based on where the current rates are, but is just consistent with what we're seeing in the markets overall. As far as that short-term treasury portion of the portfolio, we added, again, about $5 billion also over the last two quarters. The average yield on that is about 40 basis points. And the Well, that's fairly low. It's a fairly short duration of the portfolio and really is just representing a safe substitute for the cash position as we're continuing to maintain cash levels of about $15 billion, which is up from our target level of about $1 billion and no more than $2 billion. And so just something we'll continue to evaluate as far as the overall outlook as far as putting some of those additional dollars to work, and hopefully we start to see some of that additional commercial growth and utilization rates pick up which would be a much better option for us as far as using some of that excess liquidity. On the loan side, we are seeing some tightening from the competitive perspective on the commercial side. As you might imagine, there's stronger demand coming from banks to provide those loans, and so we are seeing a little bit of tightening there compared to where we were a year ago. On the consumer side, spreads on a curve-adjusted basis continue to be pretty good for us. Both Laurel Road and residential mortgage are wider spreads than where they would typically be, even though the yields are still low compared to where we might want to see that overall portfolio, but generally holding up pretty well.
spk08: Okay. And then, Don, just one more follow-up on PPP. Do you have the first quarter contribution from just the NII contribution of PPP in total?
spk01: Well, the interest income, or excuse me, the interest income, so this wouldn't include any funding costs associated with it, it was $65 million, and that was down from $70 million last quarter. And we would expect just some very slight reductions in that $65 million level over the next few quarters. And the essentially with the forgiveness triggering some acceleration of the fee income, offsetting some of the reduction of future balances as that forgiveness goes through. Yep, understood. Thank you, Don. Thank you.
spk13: Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo, and your line is open.
spk04: Hi. Chris, I know you've I know you built the investment banking business and you expect another record year, but it seems a little bold this early in the year. So what gives you confidence? I guess, what are your backlogs? Are they record and how far above are they versus the prior record backlogs, if that's the case? And maybe just a little bit about how you see the size of the pie and your wallet share and You know, what percentage of your middle market customers have investment banking or just a little bit more color that gives you confidence?
spk12: Sure. So as we look at the pipelines, as I mentioned, Mike, our pipelines are strong. And they're strong in the areas that have long lead times. but they're also strong in the areas that have a fair amount of velocity. Think about the debt markets, for example. So the pipelines are there. Also, as we look at the mix, and I've mentioned this before, the level of M&A activity tends to have a multiplier effect. And so as we're advising on a lot of significant transactions, it gives us the opportunity to do what we do for our clients, provide capital after providing advice, also provide enterprise payments, help them hedge. So those are the things that give me confidence that we're going to be able to grow the business again this year. We also have a lot of repeat customers. We're really proud of the fact that a lot of our customers go to the markets relatively regularly, and we do a good job for them, and so they hire us regularly. in a repetitive fashion. Those are some of the reasons that I feel confident about the business. We also continue to hire quality people to bring onto our platform. We have what we think is a unique platform. Candidly, I still think it's under leveraged and there's an opportunity for us to, in a very targeted way, go out and hire people that we think can advance the business.
spk04: And then a follow-up, your CEO letter says that you guys are the number one provider, sorry, number one provider of renewable energy financing. So what does that include? Is that bank lending and capital markets? Yeah, so that would be... And what's the total addressable market and where are you in that market?
spk12: Sure, sure. So we have been a leader in, we always talk about targeted scale. And renewables is a great example that way back in 2004, as we saw the utilities pivot to renewable energy, we built a business around both wind and solar. On our books today, Mike, we have about $5 billion of exposure. Obviously, over the years, we've raised tens of billions of dollars for the benefit of our clients. I think our pipelines in that business probably have visibility on $2 billion or so. What's really interesting is I think as the whole plan comes together for the American Jobs Plan, I think there'll be a big focus on renewable energy, and we feel like we're really well positioned. And so we'll continue to lean in. We'll continue to invest. We have good relationships with the whole ecosystem. And so That would be an example of targeted scale. It wasn't that big of a business when we started it, but it will continue to grow. All right. Thank you. Thank you.
spk13: Thank you. Next, we will go to the line of Gerard Cassidy with RBC, and your line is open.
spk06: Thank you. Hi, Chris. Hi, Don. Good morning. Good morning. Can you guys share with us, we all know what has happened with quantitative easing and the increase in the industry's deposits as evidenced by the over $3 trillion growth we saw last year. in the banking industry's deposits. You guys have certainly seen it on your balance sheet, and it shows up. And you mentioned that the stimulus programs have contributed to your deposit growth. Can you share with us, how do you see your customers using these deposits, and is there any evidence yet from the earlier stimulus plans that we saw in the spring of last year, you know, the initial checks that individuals received, as well as the initial PPP programs, that they're actually drawing down the deposits? Or do you think that your deposits could remain elevated for an extended period of time because of the continuation of QE and the government deficit spending we expect over the next 12 to 18 months?
spk12: So I think the consumers are spending part of it. So you're right, the industry... has about $3 trillion of excess deposits. We at Key have about $3 billion. And if you looked on our consumer balances, our consumer balances are up year over year. Gerard, about 17%. Importantly, on the deposits that are non-rate sensitive, they're up 42%. But I think you will see those, particularly if there's not additional stimulus. We've had three waves now. I think you'll start to see those burn down. We're certainly seeing it in card spend, for example. Don, what would you add to that?
spk01: No, I think you're right. I mean, the first quarter, I think we saw card spend up about 7% across our customer base, and maybe that's a leading indicator there. But, Gerard, those deposit balances have been amazingly sticky, and I think it reflects the impact of the ongoing stimulus programs that have come through and the checks that have been cut to the consumer. And so... those have been very resilient as far as the overall balances. I think we will see balances remain strong for a period of time, even as the economy starts to pick up. But I would expect probably, as we are also expecting to see partial lending pick up in the second half of the year, I would expect some of those commercial deposits to start coming under a little bit of pressure to, as Chris highlighted, maybe do a little bit of both, where you pull back a little bit on that liquidity on the balance sheet, but also... start to borrow against some of the lines to help fund some of the needed investments in inventory and just other growth. Very good.
spk06: And then, Chris, in terms of using excess capital for acquisitions, Key over the years has been successful in acquiring, you know, not necessarily depositories, but the complementary businesses, particularly in investment banking and then Laurel Road, of course. Can you share with us your thoughts, and not so much, I'm not too interested in if you're looking at a depository, but more just the add-on businesses. Are there opportunities or needs for you that you can buy another broker-dealer or advisor or something like that to enhance the investment banking business as you go forward?
spk12: I think there's always niche businesses. And what we found, Gerard, is when we bring on these niche businesses, I'm really proud of the way we've been able to integrate them because most of these businesses, by definition, are entrepreneurial businesses. The most recent one, obviously, was just last quarter when we purchased AQN, which is an analytics business. But there are clearly opportunities with our targeted scale for us to go out and acquire these entrepreneurial companies that, by the way, are good companies that we're able to integrate, but they really bring a skill set to key as well. You know, with Laurel Road, I think we acquired 40 full-stack software engineers, for example, and that clearly will be helpful as we advance our our digital strategy throughout Key. So, yes, there are opportunities, and we'll keep our eyes open for those.
spk06: Very good. Thank you.
spk12: Thank you.
spk13: Thank you. Next, we'll go to the line of Terry McEvoy with Stevens, and your line is open.
spk07: Thanks. Good morning. Good morning, Terry. Actually, just one question for you, Don. The cards and payments income up 60% and over $100 million in the first quarter. I was hoping you could just talk about how the stimulus plan kind of impacted prepaid card activity and maybe a better way to think about the run rate in a more normal operating environment.
spk01: Sure. If you look at the increase year over year, there was about $39 million. I would say 32-ish of that is really related to the prepaid cards. business that we've talked about before that's used to support various state government programs in this environment, that at the same time we saw that increase, we also saw a corresponding increase in our expenses of $32 million. And so near term, the benefit really is from those deposits that are being maintained there. And so we would expect those programs to continue to wind down throughout the year. And so we will see that increase. Cards and payments-related revenue line item coming down for that, but also see a corresponding impact on the expense side as well. As we mentioned earlier, we were starting to see in the first quarter some nice trends as far as the year-over-year growth rates in all of our card programs, whether it was consumer credit card or debit card, or whether it was the commercial card products that we have. We're excited about that core momentum and probably would expect to see growth there on a core basis, but it might be a little cloudy to see that as we would expect to see some of that prepaid balance or activity slow throughout the year.
spk07: Great. And then just as a quick follow-up, the revised outlook for expenses up since January, is any of that connected to the announcement last month and the build-out of Laurel Road for doctors?
spk01: Well, I would say that we will have increased costs associated with that, but the run rate and the build-out was reflected in our January outlook, and so none of that really came through there. As you think about what the change in our outlook was, and just using the midpoint of those guidance ranges, that total revenues are up $160 million from what we would have shown before. Defenses are up $80 million. efficiency ratio of about 50% on that revenue growth, and that really relates to the growth coming from higher expected capital markets-related revenues and higher consumer mortgage revenues, which both have a strong variable expense component to it. Appreciate that. Thanks, Don. Thank you.
spk13: Thank you. Our next question comes from the line of Steve Alexopoulos with JP Morgan, and your line is open.
spk03: Good morning. This is Janet Lee for Steve Alexopoulos. Good morning, Janet. Good morning. Digging deeper into your NII guidance of up low single digit and your NIM outlook for stable to slightly up for 2021, can you provide more details around what you're assuming in terms of the level and deployment of excess liquidity on your balance sheet. So how much of $15 billion of short-term investments in the first quarter is assumed to go into securities as we look out?
spk01: Yeah, we would expect very incremental changes as far as deploying some of those. Initially, the liquidity will be absorbed through additional loan balances. And so, as we mentioned before, we expect the first quarter to be the low point for us for average loan balances for the year, and that's really led by the consumer growth initially, and then we would expect to see line utilization rates pick up in the second half of the year for commercial, and so that will be helpful. And then as far as the investment portfolio, over the last couple of quarters, we've put to work a net, say, $2 billion to $3 billion of additional capital investments outside of the Treasury portfolio. And so I would think that that would be an expected pace of maybe deploying $1 billion to $2 billion per quarter as far as shifting out of cash and putting that into the investment portfolio in addition to the loan growth.
spk03: All right, that's helpful. And shifting to fee income, can you talk through why service charges on deposits declines sequentially in the first quarter back to sort of the pre-pandemic levels? Is this more of a function of customers having elevated deposit balances and not incurring overdraft fees, or is there something else going on?
spk01: You nailed it. That's essentially what's happened here is on the service charge on deposits, the primary reason for the decline is related to just that very fact that the consumers have stronger balances, and so they have lower NSF OD fees. And also the commercial customers have stronger balances, which results in fewer service charges for those accounts as well. And so that excess liquidity is providing relief for the customers as far as fee income.
spk03: All right. Thanks for taking my questions.
spk01: Thank you.
spk13: Thank you. And with that, we have no further questions. I'll turn it back over to the speakers for any closing comments.
spk12: Well, thank you. And again, I want to thank all of you for participating in our call today. If you have any follow-up questions, you can direct them to our investor relations team, 216-689-4221. This concludes our remarks. Thank you.
spk13: Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation. And for using AT&T Executive Teleconference Service, you may now disconnect.
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