Apr 21, 2010
Executives
Henry Meyer – Chairman, Chief Executive Officer Jeffrey Weeden – Chief Financial Officer Chris Gorman – Chief Credit Officer Beth Mooney – Vice Chairman Joe Vayda – Treasurer Chuck Hyle – Chief Risk Officer
Analysts
Brian Foran – Goldman Sachs Gerard Cassidy – RBC Capital Markets Terry McEvoy – Oppenheimer Craig Siegenthaler – Credit Suisse Kenneth Usdin – Bank of America Jessica for Paul Miller – FBR Capital Markets
Operator
Welcome to KeyCorp’s 2010 first quarter earnings results conference call. Today’s call is being recorded.
At this time, I’d like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer.
Henry Meyer
Good morning and welcome to KeyCorp’s first quarter 2010 earnings conference call. Joining me for today’s presentation is our CFO Jeff Weeden and available for the Q&A portion of our call, are our leaders of Community Banking and National Banking, Beth Mooney and Chris Gorman, our Chief Credit Officer Chuck Hyle and our Treasurer Joe Vayda.
Now if you turn to the next slide. Slide 2 is our forward-looking disclosure statement.
It covers presentation materials and comments as well as the question and answer segment of our call today. Turning to Slide 3, this morning we announced a net loss from continuing operations of $98 million or $0.11 per common share.
A stronger net interest margin, lower loan loss provision and continued expense control resulted in a narrowing of KeyCorp’s first quarter loss when compared to both the fourth quarter and the year ago period. Our net interest margin increased 15 basis points from the prior quarter, primarily due to lower funding costs and improved yields on loans.
Expenses declined as a result of lower personnel expense, our efficiency initiative and a decrease in the provision for losses on lending related commitments. We also saw improvements in our key credit metrics, including net charge offs, which declined $186 million and non-performing loans, which were down $122 million from the prior quarter.
Both benefited from continued stabilization in the commercial loan portfolio. This was the second consecutive quarterly decrease in non-performing loans.
Our balance sheet continues to reflect strong capital with liquidity and reserve levels. At March 31, our tier one common equity ratio was a strong 7.53% and our tier one risk based capital ratio was 12.96%.
Both measures are up significantly from the year ago period. At the end of the first quarter, our loan loss allowance was $2.4 billion and represented 4.34% of total loss and 117% of non-performing loans.
Both of these ratios should maintain our position at or near the top quartile of our peer group. As Jeff will discuss shortly, we have continued to maintain a strong liquidity and funding profile.
Also, good progress was made on several other strategic fronts during the quarter. First, we filled a key role in our management team.
Chris Gorman was promoted to head our National Banking business. Chris has been with the company for 19 years and was previously President of KeyBank Capital Markets where he was instrumental in innovating Key’s corporate and investment banking businesses.
His breadth of experience, business acumen and leadership ability make him ideally suited for this role. And we continue to invest in our core relationship businesses including our 14 state branch network.
We opened eight new branches in the quarter and expect to open an additional 32 branches during the remainder of 2010. We also have plans to renovate approximately 85 existing branches this year, which is in addition to the 160 completed over the past two years.
The new and modernized branches support Key’s relationship strategy by leveraging the branch network to offer the full breadth of solutions, expertise, products and services that Key has to offer. We’ve also been transforming our operations for programs and technology designed to enhance the client experience and operate more effectively.
One measure of success that we’ve seen in our customer satisfaction scores including being named customer service champ by Business Week last year, and the recent results from the American Customer Service Index, a customer satisfaction survey conducted by the University of Michigan. Key also received recognition from Corporate Insight’s 2009 Bank Monitor, which highlights firms that excel in online banking.
During the past year, we also created 157 business intensive branches, which are staffed to serve our small business clients. Key’s focus on the small business segment has resulted in our moving to number 15 in 2009 from 21 the previous year among the country’s major lenders in the SBA 7A Small Business Financing program.
This means that we have contributed to job creation in our communities and are well positioned to serve our small business clients as the economy improves. In National Banking, we have continued to concentrate on reducing risk and sharpening our focus on specific segments and clients where we can be relevant.
In our Institutional business, we’ve aligned around four specific planned segments and continue to invest in the people that can leverage our capabilities. We reduced our exposure to commercial real estate and continue to look for opportunities to leverage our commercial real estate servicing capabilities.
And, we are emphasizing areas that have synergy with the clients segments in the Community Bank such as equipment leasing, and certain products offered through KeyBank Capital Markets. In our equipment leasing business, we are leveraging our scale and expertise to meet the needs of our clients across the organization from small business all the way up to our large corporate clients.
And finally, in both business groups, as well as our support areas, we have continued to make progress on improving the efficiency and effectiveness of our organization. Our staffing levels are down by over 2,600 FTE’s over the past two years, and we continue to implement initiatives that will better align our cost structure with our relationship focused business strategies.
On Slide 4, we show our 2010 strategic priorities. The first is returning the company to profitability and setting the stage for long-term growth and stability.
Maintaining a strong balance sheet also remains one of our top priorities including have strong capital reserves and liquidity. This give us the flexibility to invest in our businesses and make new loans as the economy improves.
We will also continue to strengthen our risk culture by fine-tuning our risk tolerances and increasing risk awareness throughout the organization. And finally, we’re positioning the company for growth by investing in our franchise and our people.
Our first quarter results were encouraging and reflect the work that has been done to strengthen and reposition our company. I remain confident that we are emerging from this extraordinary period as a strong, competitive company.
Now, I’ll turn the call over to Jeff for a review of our financial results.
Jeffrey Weeden
Slide 5 provides a summary of the company’s first quarter 2010 results from continuing operations. Unless otherwise noted, our comments today will be with regard to our continuing operations.
As Henry mentioned in his comments, for the first quarter the company incurred a net loss of $0.11 per common share. This loss is significantly lower than the loss of $1.03 per common share for the same period one year ago, and the $0.30 loss per common share for the fourth quarter of last year.
The improvement in our results was driven by a lower provision for loan losses, an improvement in our net interest margin and lower expenses. Turning to Slide 6, for the first quarter of 2010, the company’s taxable equivalent net interest income was $632 million compared to $637 million for the fourth quarter of 2009 and $595 million for the same period one year ago.
The net interest margin expanded 15 basis points to 3.19% for the first quarter compared to the fourth quarter of 2009, and is up 40 basis points from the same period one year ago. The company continues to benefit from an improved funding mix as the maturing CD’s continue to re-price to current market rates or move to lower cost deposit products such as Now and Money Market accounts.
We expect this trend to continue during the balance of 2010 as we experience additional maturities of CD’s booked in 2008 or earlier. This re-pricing opportunity, along with improved spreads on loan renewals will continue to benefit the net interest margin.
For the second quarter of 2010, we anticipate approximately five basis points of improvement in the net interest margin with additional improvement anticipated in the third and fourth quarters of this year. Keeping some pressure on the margin is the higher level of short-term liquidity and the general lack of loan demand.
Turning to Slide 7, during the first quarter the company experienced an additional $2.9 billion decrease in average total loan balances compared to the fourth quarter of 2009. The decline in average balances continues to reflect soft loan demand for consumers and business as they continue to de-leverage.
Also impacting average loan balances is the impact of our exit portfolio’s as we continue to reduce risk in the company. In addition, larger clients have had access to the Public Debt and Equity Capital markets in the past several months and are using this access an opportunity to issue debt and/or equity, thus reducing bank lending demand.
As a result of this and other items noted before, we expect average loan balances to continue to decline until business lending demand picks up. Turning to Slide 8, average deposits were down approximately $2.3 billion from the fourth quarter and up $.6 billion from the same period one year ago.
The first quarter of the year is typically the softest period of time for deposit growth due to seasonal factors. Further impacting us in the first quarter of 2010 is our re-pricing of Certificates of Deposits where we experienced a decline in balances of $2.4 billion.
With loan demand remaining soft and our liquidity remaining strong, we have adjusted our pricing on many of our deposit offerings during this low rate period environment, the net effect of which has led to an improvement in the net interest margin. As I discussed when reviewing the net interest margin earlier, we expect to see further changes in the mix of our deposits over the balance of 2010 with a significant portion of the money from maturing CD’s either moving back into Now and Money Market deposit accounts or moving to other forms of investments such as annuities.
Slide 9 shows the much improved liquidity position of the company. Over the time period shown on this slide, we have increased the size of the investment portfolio and the percentage of the balance sheet that is funded with deposits.
For the first quarter of 2010, the loan to deposit ratio stood at 93%, a significant decrease from one year ago when it was 115%. In this loan to deposit ratio, we have also included our discontinued operations balances not funded with the securitization trust which were placed on the balance sheet as of January 1, 2010.
These securitizations trusts grossed up the balance sheet but did not have an impact on the liquidity of the company. Turning to Slide 10, net charge offs in the first quarter were $522 million and represented 3.67% of average total loans compared to $708 million or 4.64% of average total loans in the fourth quarter of 2009.
Net charge offs declined in the CNI and commercial real estate portfolios in the first quarter compared to the fourth quarter of 2009. Fourth quarter net charge offs included two large credits representing $131 million of the total for that period.
As we have stated before, while we see net charge offs remaining elevated in 2010, we do expect that they will trend downward as we progress throughout the year. In the first quarter, represented the first time since the second quarter of 2007 we have not increased the reserve for loan losses.
During the first quarter, the reserve for loan losses declined by $109 million to a little over $2.4 billion. Even with this reduction, the reserve as a percentage of total loans increased to 4.34% at March 31, 2010, up from 4.31% at December 31, 2009.
In addition, our reserve for unfunded commitments decreased by $2 million during the first quarter to $119 million, and when combined with our loan loss reserve, total reserve for credit losses represented 4.55% of total loans at March 31, 2010. Given our current reserve levels and our outlook for lower trending levels of net charge offs, we see the potential for our reserve for credit losses to continue to trend downward.
However, we would also caution that if the economic recovery should falter, which we are not currently forecasting, then this could change our outlook with respect to future reserve levels. Turning to Slide 11, our non performing loans stood at $2.1 billion at March 31, 2010 and our non performing assets were $2.4 billion.
These totals represent a decrease of $122 million and $82 million in non performing loans and non performing assets respectively from December 31, 2009. As shown in the summary of changes in non performing loans on Page 25 of the earnings release today, we experienced another decrease in net in-flows of non performing loans during the first quarter, which represented our third consecutive quarterly decline in new in-flows and the lowest level of new in-flows since the fourth quarter of 2008.
Also shown on Page 24 of the earnings release, are our 90 day or more past due and our 30 to 89 day past due loans. While the 90 day or more past due loans increased $103 million from December 31, 2009, the 30 to 89 days past due loans decreased by $294 million to its lowest level since the second quarter of 2007.
Our coverage ratio of our loan loss reserve to non performing loans increased to 117% at March 31, 2010 and when we combine our reserve for unfunded commitments to our loan loss reserve, our total allowance for credit losses represented 123% coverage of non performing at March 31, 2010. In addition, non performing loans are carried at approximately 73% of their original face values and other real estate owned and other non performing assets are carried at approximately 54% of their original face values.
Turning to Slide 12, our capital ratios remain strong at March 31, 2010. Our tangible common equity to tangible asset ratio was 7.37%.
Our tier one common equity ratio was 7.53% and our tier one risk based capital ratio was 12.96%. On Page 16 of our earnings release, we provided a reconciliation of our GAAP equity to our regulatory equity and the respective ratios.
For regulatory capital purposes, $651 million of deferred tax assets are disallowed as of March 31, 2010, the effect of which reduced our regulatory capital ratios by approximately 78 basis points. Before we go to our Q&A segment of our call, I want to review a new slide with respect to how we are thinking about Key’s business model and the targets we are setting for success at Key.
On Slide 13, you will see the long term targets we have set. We are already achieving some of these targets.
Others will take additional time and work. For example, we have established that we will be a core funded institution and target a loan to deposit ratio of 90% to 100%.
At March 31, 2010, we were within this range. Another objective is to return to a more moderate risk profile.
The metric we are using here is targeting a net charge off ratio of 40 to 50 basis points. Clearly, we are high on this measure and it will take some time before we achieve this objective.
On growing a high quality diverse revenue stream, we have established two objectives here. First, achieve a net interest margin greater than 3.50% and the other is maintaining non interest income to total revenue to greater than 40%.
While we are above the 40% level today of non interest income to total revenue, we are below with respect to the net interest margin. Our trend with respect to the margin is positive and we expect to make further progress throughout 2010 on this front.
A potential headwind on the non interest income side is the changes to Reg E slated for the second half of the year. We estimate this could further reduce deposit service charges once fully in effect by the end of the year in the range of $50 million on an annualized basis.
We are working on solutions to help offset part of this revenue loss. Creating positive operating leverage will take our continued focus on achieving our Key savings as well as growing our revenue streams.
As of March 31, 2010, we have implemented $191 million of the targeted run rate savings towards our goal of achieving $300 million to $375 million in 20112. The end result of those should be a targeted return on average assets in the range of 1.0% to 1.25% for Key.
That concludes our remarks, and now I will turn the call back over to the operator to provide instructions for the Q&A segment of our call.
Operator
(Operator Instructions) Your first question comes from Brian Foran – Goldman Sachs.
Brian Foran – Goldman Sachs
A question on Slide 13, the 1 to 125 ROA target, what are reasonable bounds to put on the ultimate size of the balance sheet to apply that target to?
Jeffrey Weeden
I think in terms of our overall balance sheet what we’re looking at probably something in that $90 billion range, so not materially different from where we are today, and I’m looking at it kind of X the securitized assets. We have a little bit more in there with the securitization trust that came on, $90 billion to $95 billion.
So not materially different from where we are today, and it’s going to be driven by the funding side until we see loan demand start to come back.
Brian Foran – Goldman Sachs
On the CD book re-pricing, the 3.3% give or take cost between the two CD buckets you reported is still very high relative to the industry. Is there anything structurally that prevents that coming down, i.e.
do you have a slug of three to five year money in there that doesn’t re-price for a long time or I guess how should we balance where that ultimate cost of CD’s could go in the current environment?
Jeffrey Weeden
I think what you’re going to see is the balances are going to come down over time as we’ve talked about. The rate will come down slightly during that time period, but once you’re coming down you’re coming down $2 billion.
We came down $2.4 billion. That is coming out at that rate that you’re looking at and it’s going into much lower cost of funds for the organization.
So there are buckets out there. There’s a bigger bucket in the third quarter; there’s second quarter, third quarter has a bigger bucket and there are longer terms.
But the biggest buckets are going to come in the second and third quarter and the fourth quarter of this year, then it starts to taper off and it becomes longer term in nature. But you’ll see that overall rate will be relatively sticky just because the higher rate CD’s as they mature are going into other deposit categories.
Brian Foran – Goldman Sachs
Again, on this Slide 13, Keyvolution continues to come in. Does the overall reported non interest expense continue to fall from this quarter’s level or is it more about saying in this $750 million to $800 million range even as maybe revenues recover a little bit?
Jeffrey Weeden
I think for the time being, stay in that $750 million to $800 million range is probably the appropriate range we’ll be in as we continue to implement the Keyvolution items. Again, it’s going to not be fully implements until we get into 2012.
We’re still working on a number of initiatives.
Operator
You're next question comes from Gerard Cassidy – RBC Capital Markets.
Gerard Cassidy – RBC Capital Markets
In terms of, you mentioned the balance sheet; you think it will be around the $90 billion range. What about the composition of the mix of the balance sheet at that time period when you see ROA possibly getting to 120 basis points.
Do you still think that the securities portfolio would be as large as it is today relative to loans?
Jeffrey Weeden
I think what we said, we are going to be core funded so I you look at it from the 90% to 100% loan to deposit ratio, I think that looking out into the future we will have a higher investment portfolio for the organization, so I think that’s just a structural change that’s taken place as a result of as we look at the new liquidity requirements that may be coming down the pike at us.
Gerard Cassidy – RBC Capital Markets
In terms of the loan portfolio, it’s obviously declined materially over the last 18 months, particularly in the commercial lending side – the corporate lending, not commercial real estate. What do you see once normalization comes back to KeyCorp?
Where do you see the growth coming from on the loan side since I’m assuming commercial real estate and construction lending will not be the focus of growth after we get through, back to normalization.
Jeffrey Weeden
I think in terms of how we would look at it, you’re right. The commercial real estate book is going to continue to trend down and we have our exit portfolio’s that are identified that we’re reporting on too.
Those will continue to come down. I think the growth and the initiatives we’re looking at are going to be on the commercial side.
There’s not going to be a lot on the consumer side. So it is going to come from the commercial side and the segments that Chris has targeted as well as the segments that Beth have targeted.
So Chris you want to -
Chris Gorman
There will be a couple areas where I think we’ll get some growth. What we’re doing throughout K&B is refocusing the business.
It will be albeit a smaller business, but where we can get growth going forward from a loan perspective is a common set of clients that we think we can serve with all the different products and advice and balance sheet that we have. The other thing that we’re going to do is, we’re going to take that business and migrate it even more to a middle market mid cap kind of business that will then interface really well with what Beth is doing in the Community Bank.
Beth Mooney
I would just that it’s no surprise there has been a significant de-leveraging of our client base. Traditional borrowers and companies and middle sized corporations that will have borrowing needs as the economy to expand, but as part of this economic cycle we’ve seen de-leveraging, a building up of liquidity and cash and are borrowing in our compliant base.
So as the economy improves and as those cash reserves get drawn down, I would see, although none of us now when to call that inflection point, as our economy expands I think borrowing will expand within our existing client base because we’ve had pretty significant pay downs. And then we obviously will work with Chris and our market to continue to acquire and expand our client relationships.
Chris Gorman
As there begins to get a lot of demand in market demand, I think what you’ll see is it will be some combination of deposits that people will start to run down a bit. Some combination as Jeff mentioned of going outside for capital and then of course, people starting to tap their lines.
What we like about our business model is, we’re sort of positioned for each of those three as we serve these targeted middle market companies.
Gerard Cassidy – RBC Capital Markets
Can you comment on TARP repayment? Is that something you would like to try to accomplish this year?
Do you think as the economy continues to expand and your profitability improves and the industry’s profitability improves that the regulatory requirements of being, having to raise common equity as a condition of paying back TARP could be relieved where if you paid it back next year, maybe you don’t have to raise common equity to pay it back?
Henry Meyer
I find it difficult to comment on where the regulators are going to be. Our number one priority that we think will ensure that smooth transition to the right time to pay the TARP money back is to be really focused on sustainable profitability.
And obviously our improvement from the fourth quarter to the first quarter is setting up a trend line that if things continue will get us there sooner rather than later. But we still lost money in the first quarter.
I’m very encouraged by the trend line, but we’ve stayed away from predicting when we would pay TARP back. To some degree, the better the company does, and if that is reflected in our stock price, whatever the requirements are, we’ll be less dilutive as the company performs better.
So we’re focusing on trying to put all of things together as we look forward.
Gerard Cassidy – RBC Capital Markets
On the securities portfolio, what is the duration of that portfolio and should the Federal Reserve start raising rates later this year, and we’re possibly seeing a Fed Funds raise a year from now, let’s say 1.5%, the long end of the curve is up at 4.5% to 5%, how would the securities portfolio behave and would the duration change in that kind of scenario from where it is today to a year from now?
Jeffrey Weeden
The duration is around 3.1 years today, and certainly if we’ve modeled it out to rate up 100, up 200, up 300 and so it does extend the duration on out. It would add basically going out to what you had talked about, up to about 150 basis points level, would add probably another year to the duration of the portfolio.
At some point in time, because these are primarily seamable packs, they do max out on the duration, but it does extend the duration on out with the pricing rates.
Operator
You're next question comes from Terry McEvoy – Oppenheimer.
Terry McEvoy – Oppenheimer
About 10% of your earning assets were in this exit portfolio, which I understand you’ve been running off for quite some time to improve the risk profit of the company, but it was still down $3 billion. Could you talk about the pace at which you expect that portfolio to run off and is it the ultimate goal to bring those asset levels down to zero?
Jeffrey Weeden
The goal is to get those non strategic assets out of the bank, so I think that is our goal, and I think if you look at those particular assets, some of which are longer term in duration, so if you look at the Marine book, and there are some in the leasing book which will be the leverage lease that the [Lilo Silo’s] those are longer duration assets. Those will be there for some time.
I think in the first quarter we came down approximately $600 million. I would expect that we would be somewhere in the range of half a billion dollars going forward at this particular point in time so we factor that in $2 billion over the course of this year.
If the economy improves, better liquidity within the Marine book, people want to buy new boats etc. that can also accelerate the amortization on that particular book.
Terry McEvoy – Oppenheimer
You’ve invested heavily in the Community Banking line of business and you continue to invest there. Could you talk about certain goals in that business and a year from now we’ll know whether that investment was appropriate and you’re getting the returns?
Is it the retention of core deposits? Just something for us to gauge those investments by.
Beth Mooney
Part of what we are doing is strategically investing in our franchise in markets where we have low share but we see them as attractive demographic markets with high growth potential, and we are looking to mainly our franchise, Colorado, Seattle, Portland where through the addition of branches to our network, we can get a broader market share, broader branch share, increase our density, and it really is a vehicle to augment our presence in those markets and largely to help acquire new relationships, new deposits and new attractive clients to the Community Bank. Part of the synergy also is the Community Banking model and the ultimate success of not just the new retail clients, it’s what we’re able to do to service business in the area, expand our private client offerings as well as meet the needs of our middle market clients.
So it has a broader market impact in addition to increasing our retail share.
Terry McEvoy – Oppenheimer
The implications for Reg E, about a $50 million annualized hit. Should I look at the full year revenue at $333 million take out $50 million so are we talking about a 15% decline as kind of a normalized run rate based off what was reported in ’09?
Jeffrey Weeden
In terms of total deposit service charges, that’s correct, so it would be off the total.
Operator
You're next question comes from Craig Siegenthaler – Credit Suisse.
Craig Siegenthaler – Credit Suisse
In the expense initiatives here, when we think about normalized expenses kind of what’s embedded on your ROA guidance, on the other side of this credit cycle, how much additional core expense – not the cyclical credit related expense, but core expense can you reduce here and also there’s probably one negative head wind coming up here and that’s when you repay back TARP bonuses for the upper echelon of senior management come back. How much would be the rate of change there?
Henry Meyer
First of all, the bonuses are not going to be that material of an impact on the company so I think as we look at it, part of it, what we announced last fall, part is paid in the form of stock right now, so the increase of the differential may be small additional amounts, but it will be based on the performance of the company, so it’s not one of those things that’s fixed in nature. I think the other areas that we continue to look at, just like we outlined on Slide 13, is how do we make more of our cost variablized within the company.
So we’re really looking at those particular initiatives. I think some of the other things we’re looking at is, we have fewer people today, so there are other costs that we’re very focused on.
We’re making investments in the Community Bank and the branch network that we have there, corporate space is being reduced. So there are specific goals over the next three years to bring down corporate space fairly significantly.
Those are other initiatives that are taking place. Also deploying technology more efficiently and effectively, so how do we leverage technology within the organization.
I guess an example I would point to there is what we were able to do with Teller 21 in the organization, bringing down a lot of our courier costs and improving our service quality to our customers. So those are things that we are continuing to focus on.
Environmental costs, I think you can look at what our costs are associated with, other real estate expense is still elevated within the organization. Typically it used to run say in the $5 million range on other real estate in any given quarter.
That’s been as high as $50 million and this last quarter it was $32 million. So those particular costs will be out there.
Professional fees, collection related costs, etc. so we’ll continue to look at all those particular areas.
Craig Siegenthaler – Credit Suisse
When you think about the timing of the rate provided this morning, the 1 to 1.2, how can we think about that? Can you give us a range of how many years out we should expect that?
Henry Meyer
We haven’t given a specific time period on the timing here. I think as we look at some of those goals, credit is still going to be a very significant component of that and so with an improving economy, credit will improve over time.
It’s not a quick cycle type of an expense item that the corporations have, the banking institutions have. So that’s going to take a period of time.
The expense initiatives that we continue to work on here, we’ll have implemented by 2012. That will help us in that regard to it’s not something that you should factor in for 2011.
It’s beyond that time period before I think we get to that particular level.
Operator
You're next question comes from Kenneth Usdin – Bank of America.
Kenneth Usdin – Bank of America
My question relates to the fee income. Connected to with the balance sheet shrinking in a lot of the commercial areas, there’s obviously a lot of fee income that’s connected to it.
Would you start to expect to see, when would you expect to see also the kind of bottoming in other fee categories separate and aside from the consumer issues with Reg E?
Jeffrey Weeden
Some of the items that we still have that are hitting the fee income related areas are reserves that are still going through, so in the first quarter we had approximately $24 million of building reserves in our customer derivative book. $21 million of that was in the National Bank and you can see that in the description for the National Bank results of operations.
Part of the growth that we get in the fee income line items is just the lack of more negative marks. Negative marks went down substantially here in the first quarter because a lot of what we had in the funds management group within the real estate capital area, those particular investments have been written down substantially at this particular point in time, so there’s just less to go though.
But we still have other areas that are pressured, and I think, perhaps Chris can comment on this, but I think it’s just activities that we would expect to see from the capital markets area or customer activities.
Chris Gorman
The debt market as everyone knows continues to be very vibrant. Those are basically on pace to where they were last year which were record years, at least for issuance this is.
And then the equity business, while it was back end loaded last year, this year it’s been very strong in the front end. So we are in fact seeing that.
But the biggest driver as you point it is just not having some of the marks frankly that were running through those lines in previous years.
Jeffrey Weeden
The core business is still intact here, so we have a number of things that are still taking place and I think in the case of the Community Bank, obviously just growing what we have in our key investment specialist area continues to show growth, etc. Beth, any comments you can make on that?
Beth Mooney
I would say that other than service charges which I think there a behavioral change within the consumer base, many of our fee income categories are showing double digit year over year growth which show a return of key investment services for example, which is our platform based annuity sales product, is up 20% year over year. We’re seeing ATM debit start to recover.
Obviously our investment management fees, our trust fees, so we see trends where the business has bottomed, stabilized and is starting to grow from where we were a year ago.
Kenneth Usdin – Bank of America
As you let some of these non core deposits and long term debt roll off and with having the loan book shrinkage, and you mentioned that you probably will have a bigger securities portfolio versus history, how are you positioning the securities portfolio now especially with rates eventually on the rise in terms of just preparing for the eventual rise and also just compositionally as far as what you’re investing in.
Joe Vayda
The portfolio as Jeff mentioned earlier has a relatively short duration and new purchases recently have been in the two and a half to three year duration range. However, in answering the question in positioning for rate risk, it’s a bigger question beyond the investment portfolio.
The portfolio is only one component of the balance sheet, and overall our rate risk position has continued to be moderately asset sensitive so we would expect a benefit to the margin and net interest income and interest rates rise.
Operator
You're next question comes from Jessica for Paul Miller – FBR Capital Markets.
Jessica for Paul Miller – FBR Capital Markets
Can you talk a little bit about asset sales and I guess in OREO it looks like asset sales are a little more, almost half the size as they were last quarter. Would that be seasonality and how does the pricing trends that you’re seeing on these asset sales compare to recent quarters and to where you have the marks on your OREO?
Chuck Hyle
I’m not sure that I would necessarily call it seasonality but clearly the quarter started more slowly in January and early February, and there was a real crescendo through March in terms of sales activity, so whether that’s, I would say there’s probably a little bit of seasonality in that. But I think more importantly, we started seeing some material liquidity coming back into the market in the second half of the first quarter and that’s not seasonal.
That is real and it is I think reflective of a recognition that number one, there’s a lot of money out there that’s been looking for somewhat better trends in commercial real estate in particular and are beginning to see it. So we’ve seen a great improvement.
Not all of that has been reflected in the first quarter. I think the carry over into the second quarter and the momentum that we saw in March is very much carrying over into the second quarter and therefore I think we’re considerably more encouraged by that trend.
So I think the first quarter is not necessarily reflective of what’s happening in the market.
Operator
You're next question comes from Brian Foran – Goldman Sachs.
Brian Foran – Goldman Sachs
On the credit improvement, historically the first quarter is the good one for the industry just in terms of the quarter over quarter improvement in charge offs. Is there any seasonality we should take into account in this quarter’s results or the 30 to 90 day delinquency trends and stuff like that give you confidence that this is more than – it’s obviously more than seasonality, but is there any seasonal adjustment that we need to make?
Chuck Hyle
I think that the seasonality aspect of it is pretty minimal. We saw a little bit of an improvement in the Marine portfolio but that’s pretty tiny in the great scheme of things.
Again, I think this is much more of a secular trend and certainly almost all of our credit statistics have shown good improvement and good momentum, particularly our early stage delinquencies have come down quite dramatically. The one that Jeff mentioned earlier, looks like it might be moving slightly in the other direction, not 90 plus delinquency.
That was almost fully accounted for by maturity delinquency not underlying performance delinquency. In other words, we have several assets that continue to perform but the maturity came and we’re in the process of either restructuring or in a couple of cases, have the take outs that happened to fall a little bit after the end of the quarter.
So I think even that statistic is moving in the right direction. I would call it considerably more than seasonality.
Brian Foran – Goldman Sachs
The principal investing line item, can you remind us what the underlying portfolio looks like and I guess if driven by the middle market private equity or commercial real estate recoveries or what’s the outlook here?
Jeffrey Weeden
The portfolio is basically half the portfolio are in funds and half are direct investments. The total portfolio is approximately $1 billion.
So if you look at it, you’ve got about $.5 billion in direct investments and half in fund investments. The fund investments would be another venture type related activities.
I think we look at it, the direct investments are in a wide variety of various different companies and I think the prospects or the outlook for that is as the economy continues to improve, and as the market conditions continue to improve, and as we heard today there are more IPO’s in the second half of the quarter in that time period, was said on Bloomberg this morning. So if we see those particular type of activities show improvement, I think it bodes very well for additional liquidity in that and the prospects of future profitability from that particular book.
Operator
You're next question comes from Gerard Cassidy – RBC Capital Markets.
Gerard Cassidy – RBC Capital Markets
I wanted to come back to your Slide 13 that you pointed out that you think you can get to a target ROA of 100 basis points, 125 basis points. What type of efficiency ratio are you thinking that you’ll have at that time?
Jeffrey Weeden
Efficiency ratios are the result of two items; one income and one expense control. I think as we start to look at, we have not given a specific target for that, but I think it is fair to say that it would be approximately in the 60 basis point range.
Gerard Cassidy – RBC Capital Markets
Is there any way you can give us comfort when we look at what’s gone on in KeyCorp over the last three years, like many banks the credit problems were pretty severe and you look like you have your arms around them which of course is positive. Have we traded off, and not just KeyCorp, but a lot of banks, have we traded off credit risk for interest rate risk, because you look at your securities portfolio now from a year ago it’s doubled in size.
It seems likely that if this economy remains healthy and strong, rates will go higher. No one knows for sure how high, but what if we had a 5% loan rate next spring or Timco was looking for something I think even more dramatic.
Do we run the risk of having to deal with interest rate problems to the bond portfolio a year from now so we’ve traded off credit risk for interest rate risk? Can you alleave our fears of that somehow?
Jeffrey Weeden
I think as we look at it, if rates end up moving on up as you’ve outlined the 5%, it should be a much stronger overall economy which also bode well for then improved loan demand and pricing. So we look at that in totality as being not a negative but actually a positive for us.
We are asset sensitive. We’ve had a number of AL swaps that have matured.
We’ve got more that will mature, that receive fixed pay variable. So those are things that just continue to make us more asset sensitive as we look out into the future.
Again, we stayed on our bond portfolio to Fanny, Freddie and Jennie in the CMO area, so we stay with high quality. We try to target as Joe was talking about at two and a half to three year duration, is what we’re quoting on, and yes those will all extend out if the rates go up dramatically.
They will go on out to four to four and a half years. I think they cap out at up another 300 basis points at around five years in total.
So we take all of that into account. We model it on out.
We do not believe that we are in fact making that ‘trade off’ that you’re talking about. And yet, all of us in financial services have to look at how we’re going to deploy liquidity that we have at this particular point in time without doing anything ridiculous.
Joe Vayda
I would just add that you can’t look at the investment portfolio in isolation. Yes we’ve seen growth there, but if you look at our full balance sheet rate risk position, recognize our interest rate swap book, and this is a received fixed rate which is another tool in managing the company’s overall rate risk, has declined by about $7 billion over the same time period.
Net, net, if you look at the duration of the balance sheet holistically, it is shorter today than it was a year ago.
Operator
We have no other questions remaining at this time. I’ll turn the conference back for any additional or closing remarks.
Henry Meyer
Again, we thank all of you for taking the time from your schedule to participate in our call today. If you have any follow up questions, you can direct them to our investor relations team, Vern Patterson and Christa Sikora at 216.689-4221.
That concludes our remarks and again, thank you all.