Apr 18, 2011
Executives
Henry Meyer - Chairman, Chief Executive Officer, Member of Executive Council, Chairman of Executive Committee, Chairman of KeyBank National Association and Chief Executive Officer of KeyBank National Association Charles Hyle - Chief Risk Officer, Executive Vice President and Member of Executive Council Joseph Vayda - Executive Vice President, Treasurer and Member of Executive Council Beth Mooney - Vice Chairman, President, Chief Operating Officer, Director and Member of Executive Council Christopher Gorman - President of Key Corporate Bank and Vice Chairman of Keybank National Association Jeffrey Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council
Analysts
Robert Placet - Deutsche Bank AG Todd Hagerman - Sterne Agee & Leach Inc. Craig Siegenthaler - Crédit Suisse AG David George - Robert W.
Baird & Co. Incorporated Brian Foran - Nomura Securities Co.
Ltd. Betsy Graseck - Morgan Stanley Erika Penala - Merrill Lynch Nancy Bush - NAB Research Kenneth Usdin - Bank of America Securities Steven Alexopoulos - JP Morgan Chase & Co
Operator
. Good morning and welcome to KeyCorp's 2011 First Quarter Earnings Results Conference Call.
This call is being recorded. I would now like to turn the call over to the Chairman and Chief Executive Officer, Mr.
Henry Meyer. Mr.
Meyer, please go ahead.
Henry Meyer
Thank you, operator. Good morning and welcome to KeyCorp's First Quarter 2011 Earnings Conference Call.
Joining me for today's presentation is Key's President and Chief Operating Officer and CEO-elect, Beth Mooney; and Jeff Weeden, our CFO. Available for the Q&A portion of the call are the leaders of Key Corporate Bank and Key Community Bank, Chris Gorman and Bill Koehler.
Also joining us for the Q&A discussion are our Chief Risk 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 our presentation materials and comments, as well as the question-and-answer segment of our call today.
Slide 3 highlights the specific capital actions that were part of our comprehensive capital plan that was submitted to the Federal Reserve earlier this year. We were informed on March 18 that the Fed had no objections to our plan.
This allowed us to move forward in repurchasing the $2.5 billion in preferred shares held by the U.S. Treasury under the TARP Capital Purchase Program.
This was completed on March 30. That transaction followed the successful completion of about $625 million common equity offering and a $1 billion senior debt offering.
A common equity issuance represented 25% of the TARP Capital, which is one of the lowest capital replacement percentages among the 19 SCAP [Supervisory Capital Assessment Program] institutions. This was accomplished by improving our financial performance, including returning the company to sustained profitability, improving credit quality and continuing to build our strong capital position.
That put us in a position to repurchase the TARP shares in a less dilutive manner than would have been the case if we had proceeded earlier. After repurchase of the TARP preferred shares, the U.S.
Treasury continues to hold a warrant to purchase 35.2 million shares of common stock at an initial exercise price of $10.64 per share. Key has notified the U.S.
Treasury of its intent to repurchase the outstanding warrant. Our capital plan also included an increase in our quarterly common stock dividend from $0.01 to $0.03 in the second quarter of 2011, subject to the approval of Key's Board of Directors when they meet in May.
Future increases will be evaluated by the Board based on profitability, financial condition and other factors. Slide 4 shows the significant progress we've made on Keyvolution initiative.
To date, we've realized approximately $317 million in annual run rate savings, which puts us in our targeted range of $300 million to $375 million. We have leveraged our technology and implemented dozens of individual efficiency initiatives to lower expenses and to change our cost base to be more variable in relation to business activity.
As we have discussed in previous calls, a portion of the savings have been reinvested back in our businesses, including new branches, technology and people. And we don't view Keyvolution as an endpoint.
In a slower growth environment, expense management is a critical factor in remaining competitive and producing value for our shareholders. Now let me turn the call over to Beth Mooney to provide some overview comments on the quarter and her thoughts on the way we position Key for the future.
Beth?
Beth Mooney
Thank you, Henry. And starting on Slide 5.
This morning, we announced first quarter net income from continuing operations of $184 million or $0.21 per common share. Our first quarter results showed continued improvement in credit quality and disciplined expense control.
Key's favorable credit quality trends have benefited from the ongoing modest economic recovery and the aggressive actions that we began over four years ago to exit higher risk lending activity. The result has been continued improvement across the majority of our loan portfolio, in both Key Community Bank and Key Corporate Bank.
Key's net charge-offs are now at the lowest level since the first quarter of 2008, and nonperforming assets have declined for six consecutive quarters. We expect to continue to see decreasing levels of net charge-offs and nonperforming assets during 2011.
In terms of our balance sheet, Key remains in a strong position in terms of capital, liquidity and reserve. Our Tier 1 common equity ratio at March 31 was 10.7% and our Tier 1 risk-based capital ratio was 13.44%.
These capital levels position us well for a successful transition to Basel III, and we remain among the highest in our peer group. Our strength as a company and the foundation that has been laid is a reflection of the leadership that Henry has provided us through some very difficult times.
Now, as we look forward, our focus turns to leveraging our strong balance sheet and delivering on our growth strategies and the momentum we have in our businesses. As a management team, we are committed to maintaining our strong position, but our focus is shifting from one of reducing risk to looking for lending opportunities and growing our fee-based revenue streams in areas such as investment banking, capital markets and private banking.
Our KeyBank Capital Markets group bring in $46 million for our clients in the first quarter through the successful execution of 82 capital market transactions. And in our Commercial Banking group, which serves clients with revenues of $10 million to $250 million, we experienced a 4% annualized growth rate in average loans in the quarter.
As our clients continue to gain more confidence and begin to finance inventory and equipment purchases, we also saw an 11% year-over-year increase in SBA loan originations, and our national ranking in the small business administration, 7(a) small business financing program, has moved from number 15 in 2009 to number 12 at the end of last year. 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.
And we have continued to invest in our businesses, which includes facilities, people, technology and product lines. We expect to build 40 new branches in 2011, having opened 8 of those new branches in the first quarter and 77 others in the previous two calendar years.
In addition, Key originated approximately $6.9 billion in new or renewed lending commitments to consumers and businesses during the first quarter, which is up from $5.3 billion for the same period last year. In the Corporate bank, we have hired more than 300 people, including over 100 senior professionals across industry verticals and product groups since January of 2010.
With the investments that we've made, along with the benefits of Keyvolution, we are in a strong competitive position in the marketplace, and we can compete with anyone in our targeted industries and clients segment. We are all excited about our future.
Our strong capital, balance sheet and liquidity positions us for a range of opportunities. Strong capital provides us the flexibility to make investments in our relationship businesses, look for opportunities to build market share and target markets and meet our clients' needs for credit and financial services as demand increases with an ever-improving economy.
Now I'll turn the call over to Jeff for a review of our financial results. Jeff?
Jeffrey Weeden
Thank you, Beth. Slide 6 provides a summary of the company's first quarter 2011 results from continuing operations.
As Beth mentioned, for the first quarter, the company earned a net profit of $0.21 per common share. This was after the $49 million or $0.06 charge related to the accelerated accretion of the discount on the TARP-preferred shares repurchased on March 30.
Our first quarter results benefited from an improved credit quality and lower expenses. Our provision for loan losses was a credit of $40 million as net charge-offs and criticized assets continued to decline in the current quarter.
The first quarter profit compares to a profit of $0.33 per common share for the fourth quarter of 2010 and an $0.11 loss per common share for the first quarter of last year. On Slide 7 are Key's long-term targets for success we have established against which we will measure our results.
You can also see how we have performed against these financial metrics through the first quarter. We remain confident that we are taking the appropriate steps that will continue to move us towards our long-term goals for each of these measures.
Turning to Slide 8. One of our objectives is to be a core-funded institution with a targeted loan-to-deposit ratio of 90% to 100%.
As of March 31, 2011, and for each of the quarters shown on this slide, our loan-to-deposit ratio was within this targeted range. Looking at our average total loans, during the first quarter we experienced a $1.5 billion decrease in balances compared to the fourth quarter of 2010.
The majority of this decrease occurred in our commercial real estate and exit portfolios. While we have additional work remaining in our exit portfolio, we have currently turned our attention to new lending opportunities.
And, as Beth mentioned, we are seeing an improvement in our lending pipeline and stability in our commercial and industrial book and experienced growth in our small-business and middle-market areas within Key Community Banks during this quarter compared to the fourth quarter of 2010. The runoff in the exit portfolio slowed in the current quarter to $340 million, and we expect to see it remain in the $300 million to $400 million range for the next several quarters.
Our expectation remains that we will experience growth in our commercial loan book in the second half of this year as the economy improves. On the deposit side of the balance sheet, we continue to experience an improvement in the mix of our average deposit balances during the first quarter as compared to both the fourth quarter and the first quarter of last year, as higher-costing CDs matured and were repriced to current market rates or moved to other deposit categories or other investment alternatives.
As we reported in our Form 10-K for last year, as a result of a Moody's removing the one-notch lift it KeyBank's credit rating in November of 2010 due to the enactment of Dodd-Frank, we moved approximately $1.5 billion of escrow balances on deposit at KeyBank during the first quarter to another financial institution. This had an impact on both average and ending deposit balances for the first quarter of 2011.
We funded this movement of the escrow deposits by selling a similar amount of securities available for sale at the time of the trade. Turning to Slide 9.
The company has experienced a substantial reduction in net charge-offs during the past several quarters, with net charge-offs as an annualized percent of average total loans declining from 3.67% in the first quarter of 2010 to 1.59% for the first quarter of 2011. As you can see on this slide, the majority of the improvement has come from the commercial portfolios.
We anticipate additional improvement in the total amount of quarterly net charge-offs during 2011. Turning to Slide 10.
We want to highlight here the continued improvement in all of our asset quality statistics over the past five quarters. During this time period, net charge-offs have declined 63%; nonperforming assets are down 55% to 2.23% of total loans, other real estate owned and other nonperforming assets; and our coverage ratio of reserves to nonperforming loans has increased to 155% as of March 31, 2011.
We would also point to Page 23 of today's earnings release when we review the nonperforming asset flows for the quarter. And note that new inflows of nonperforming loans are less than one half of what they were for the first three quarters of 2010 and are down over $200 million from the fourth quarter of last year.
We believe this quarter was another confirmation of the continued progress we have made on asset quality and believe we are benefiting from the early aggressive actions we took. We also anticipate lower levels of nonperforming loans and net charge-offs as the economy continues to rebound and for the provision for loan losses to remain lower than the level of net charge-offs for at least the next couple of quarters.
Turning to Slide 11. For the first quarter of 2011, the company's taxable equivalent net interest income was $604 million compared to $635 million for the fourth quarter.
The net interest margin contracted six basis points to 3.25% for the first quarter compared to the fourth quarter of 2010. The overall level of average earning assets declined $2.2 billion during the first quarter compared to the fourth quarter of last year, with average loan balances declining $1.5 billion.
Also, as previously noted, during the first quarter, we have moved approximately $1.5 billion of escrow deposits associated with our commercial real estate servicing to another depository and sold investment securities from our available-for-sale portfolio to fund this transfer. Looking at the second quarter of 2011, we expect to see average earning assets and the net interest margin decline as a result of the movement of the escrow balances and the repurchase of the TARP preferred securities from the U.S.
Treasury during March. While net interest income will decline, the company will also avoid approximately $35 million per quarter in preferred dividends and amortization related to the TARP-preferred shares.
Until we see a more significant pickup in lending activities, given the current rate environment, we expect that net interest margin for the remainder of 2011 in the range of 3.15% to 3.25%. Turning to Slide 12.
Noninterest income is a large contributor to the overall revenue stream of the company, representing approximately 43% of total revenues for the first quarter of 2011. We are remaining focused on using our balance sheet strategically and targeting specific client opportunities across the company.
In the Corporate bank, noninterest income was down from the seasonally high level we experienced in the fourth quarter, but showed good improvement over the first quarter of last year as a result of increased activity in investment banking and capital markets revenue, along with the positive impact of improvement in credit, which resulted in a decrease in customer derivative reserves compared to an increase during the same period one year ago. In the Community bank, compared to the first quarter of last year, we experienced growth in trust and investment management fees, net gains on loan sales, electronic banking fees and a reduction in the provision for losses for client derivatives, which more than offset the decrease in deposit service charge income, resulting from the implementation of Regulation E in the third quarter of last year.
In total, noninterest income for the first quarter of 2011 was $457 million, down from $526 million in the fourth quarter of 2010 and up from $450 million in the same period one year ago. Included in the fourth quarter results was a gain of $28 million from the sale of Tuition Management Systems and net gains on sale of investments of $12 million.
The fourth quarter also had very strong investment banking and capital markets revenue as clients took advantage of favorable market conditions for debt and equity transactions. Turning to Slide 13.
As Henry mentioned in his comments, through the first quarter of 2011, we have implemented $317 million of annualized expense savings towards our goal of $300 million to $375 million by the end of 2012. This is a significant improvement from our previously reported progress on Keyvolution.
For the first quarter, our noninterest expense was $701 million, down from $744 million for the fourth quarter of 2010 and down from $785 million from the same period one year ago. During the first quarter, personnel expense increased $6 million compared to the fourth quarter of 2010 as a result of seasonally higher employee benefits expense, including employment taxes, along with severance-related costs.
Other noninterest expense, in total, declined $49 million compared to the fourth quarter and decreased $93 million from the same period one year ago. Included in our first quarter cost was a credit for the provision for [indiscernible] commitments of $4 million compared to a credit of $26 million in the fourth quarter and a credit of $2 million in the same period one year ago.
Based on the progress we have made on our expense base and our continued focus on controlling our costs, we anticipate expenses remaining in the range of $700 million to $725 million per quarter. This focus will help offset some of the pressure we expect on net interest income, due to the contraction and the balance sheet resulting from the repayment of the TARP preferred share and the movement of the escrow balances in the first quarter.
Slide 14 shows our pre-provision net revenue and return on average assets. Pre-provision net revenue is up from the same period one year ago and down from the strong results reported in the fourth quarter, which included the gains on the sale of Tuition Management System and certain seasonally strong revenue items such as corporate-owned life insurance income, higher levels of capital markets-related income and net gains from the sale of investment securities.
As stated earlier, we expect net interest income to decline in the next quarter as a result of repaying TARP and a smaller balance sheet. We also expect to maintain effective expense controls in the coming quarters and focusing on increasing our lending activities as the economy continues to improve.
However, the net effect of the above will still result in a lower level of pretax pre-provision net revenue. An offset to this is the elimination of the preferred dividend and accretion on the TARP shares of approximately $35 million per quarter.
Another positive is we expect to see credit costs remain well contained as net charge-offs and non-performing loans continue to trend lower. As shown on this slide, the return on average assets for the first quarter of 2011 and the fourth quarter of 2010 were above our targeted range of 1% to 1.25%.
We continue to believe as provision expense normalizes and we execute on our client insight relationship strategy, our results will be within the targeted range of return on average assets. And finally, turning to Slide 15, we think it's safe to say our capital ratios are strong.
Having raised additional common equity in the first quarter to repurchase the TARP-preferred shares, our tangible common ratio and our estimated Tier 1 common ratio both increased during the first quarter to 9.16% and 10.70%, respectively, at March 31, 2011. Our work now going forward will be to seek opportunities to profitably deploy this capital.
That concludes our remarks. And now we will return the call to the operator to provide instructions for the Q&A segment of our call.
Operator?
Operator
[Operator Instructions] Let's begin with Ken Usdin with Jefferies.
Kenneth Usdin - Bank of America Securities
My question is just on the balance sheet size, and you talked about you're still having the run off expectation and some of the other core portfolio still shrinking. So I'm just wondering, first of all, the $1.5 billion of escrow deposits and securities, was that completed -- could you tell us what part of the quarter that was completed?
Jeffrey Weeden
Ken, that was completed in March of this year.
Kenneth Usdin - Bank of America Securities
Okay. So I'm just trying to understand, then, we should probably see a little bit more effect of that in the second quarter.
Can you maybe try to size for us where you kind of expect the average earning assets to move over the next few quarters? And if you have, at this point -- do you have an understanding of when you think you'll actually achieve that bottoming point before the core growth that you're starting to expect can exceed some of that runoff?
Jeffrey Weeden
Yes. Ken, this is Jeff Weeden again.
I think in terms of the overall average earning assets, the first quarter around $75.2 billion, on average. And with the repayment of the TARP and the movement of the escrow balances, plus we had sub-debt that matured at the bank level in the first quarter also, our expectation would be that average earning assets for the second quarter would probably decline approximately $3 billion.
As we think about it, though, then that's getting fairly close to the bottoming out. There may be a little bit of additional movement but there's not a lot of debt maturities for the balance of the year.
And I think the other thing is that we've talked about is we are more of a liability-driven balance sheet at this particular point in time. And so I think that's where we'll kind of bottom out.
As far as loan growth, we talked about, basically, the second half of this year. I think in the C&I book, we have seen relative stability in ending balances.
So ending balances for the last quarter here are fairly close within the straight C&I book. In terms of when that overall decline of stops on the total book, I think, again, we'd see the exit portfolios are slowing down at this particular point to the $300 million to $400 million range.
And I guess I'd ask both Bill and Chris could maybe comment on what they're seeing on the lending side.
Christopher Gorman
Sure. Ken, this is Chris Gorman here.
Just to follow up with Jeff's comments. So we too see stabilization overall in the second quarter and then growth in the back half of the year.
One of the things, though, that we always focus on is the real estate book, because that clearly has been the biggest driver. Real estate, you'll notice on Page 19 is down about $900 million throughout the quarter.
Interestingly here, we're starting to see, frankly, a fair amount of traction. In that portfolio, we still think it will be down in the second quarter.
We think it will stabilize in the third quarter and we think it will grow in the fourth quarter. And our confidence in the growth is based on the pipeline.
We see the pipeline is up say, 8.5x, believe it or not, from where it was in April of 2010. And not everything the pipeline is going to matriculate.
But the fact of the matter is when you have that kind of a pipeline, we feel pretty good about it. As you look at the C&I book, which is basically stabilized, we have about 71 deals in the pipeline in the Syndications business where we had basically the second best quarter that we've ever had.
And of those 71 deals, we think that will generate outstandings for KeyCorp throughout the balance of the year, somewhere in the neighborhood of $600 million to $700 million. So Ken, our view of it is exactly as Jeff described.
Real estate's a little bit of an outlier in that it grows later as we implement our strategy, but we see stabilization to second quarter growth and the third and fourth.
Jeffrey Weeden
Ken, this is Jeff. In the Community bank, the story is very similar.
Commercial loans did grow this quarter and we've seen loan approvals up dramatically this quarter versus past quarter and even to the highest level they had before the downturn in 2008. So some good activity there.
Business banking, we saw a little bit of growth this year and that's the first time we've had in a number of quarters. So we feel good about the trends that are developing.
Operator
And we'll take our next question from Steven Alexopoulos with JPMorgan.
Steven Alexopoulos - JP Morgan Chase & Co
Maybe first, to follow up on that comment to seek this commercial loan growth in the second half. Are you guys seeing any change in borrower confidence to draw on commercial lines at this point?
I guess we've heard from quite a few banks, they expect the growth in the second half. I'm just wondering what you're seeing in terms of borrowers really being able to draw down on lines to get that moving up, number one?
Christopher Gorman
Steven, it's Chris Gorman here. We have not seen an expansion in utilization.
As you look at the C&I book, it's up a tick from the third quarter of last year and consistent with the fourth quarter. Our growth is really coming from people buying equipment in our leasing business, frankly, some transactional lending that we're doing, but we are not seeing, yet, an increase in the utilization.
Jeffrey Weeden
And I would say, Steven, the Community bank, we've been relatively flat although our utilization has been up slightly more than the Corporate bank's book, but not enough to say it's dramatically different.
Steven Alexopoulos - JP Morgan Chase & Co
So where you are seeing the commercial loan growth, do you think that will be enough to offset the run-off to the non-exit portfolio in the second half of the year? We'll see more stable balances there?
Jeffrey Weeden
In the non-exit books?
Steven Alexopoulos - JP Morgan Chase & Co
Yes.
Jeffrey Weeden
Yes, I think in terms of the non-exit books, yes. I think even in terms of how we get later into the year, our expectation is that the exit books have slowed at this particular point in time and that we're expecting to see stability and potential improvement, obviously, growth in the overall loan look by the end of the year.
Steven Alexopoulos - JP Morgan Chase & Co
And maybe just one, following up on Henry's comments about cost savings being a process, not an endpoint. Maybe a question for Beth.
How do you balance spending on new branches and renovations now, with the need to improve efficiency? Why not wait until the top line starts improving?
Beth Mooney
Steven, that's a good question because we balance that decision every year and are in a wave of expansion in some of our core targeted market, specifically Seattle, Portland and Colorado where we see our branch share growth outpacing with our density increases. So as we look at each year, we validate that we do have enough market share growth and are in attractive demographic markets to support those new branches.
We've also changed the mix of where we placed them to be more small-business and middle-market as well as private-banking-centric, and we monitor the profitability of that portfolio in the business cases monthly. And we are continuing to look at that program to deploy new branches only where we feel like we can generate a return consistent with our business case.
But we evaluate it constantly and are looking at the mix of branches and doing more relocations this year where we'll take an existing branch that is slightly off the trade area and move it to a more attractive area. So some piece of those 40 branches include relocations to help the overall fleet.
Henry Meyer
This is Henry, Steven. One of the things that I just want to highlight in Beth's comments is that we don't justify, in this environment, branches for retail deposits.
Beth said, in Bill's comments about loan growth, but when we're looking at branches today, we're really looking at stores that are going to take in retail deposits but also make small-business and middle-market loans be attractive to private banking and a more, a different clientele there. So it's really a more holistic approach to the Community bank than it is just a retail deposit play.
Operator
And we'll take our next question from Todd Hagerman with Sterne Agee.
Todd Hagerman - Sterne Agee & Leach Inc.
Just a couple of questions. First, just in terms of the loan loss reserve, and Jeff maybe Chuck, a question to you.
But I'm just wondering with the positive outlook for the year in terms of nonperformers and charge-offs, Jeff, as you mentioned, the inflow this quarter was down again substantially, reserve coverage is strong. How do we start thinking about, just in terms of with -- starting to see a little bit more slow down now in some of the legacy portfolio, C&I, commercial real estate, and the expectation now that for more loan growth in the second half, how do we start to think about kind of that return to a more normalized provision level, if you will, after a couple of quarters now of the negative provision?
Charles Hyle
Yes, Todd, this is Chuck. We spend a lot of time thinking about the allowance, doing a lot of quantitative work on the allowance.
And clearly, I think, that some of the reduction in it is coming from the reduction in volume. So as volume changes over time, there'll be some impact.
But the expectation clearly is that those will be high-quality assets. So I wouldn't want to overplay the impact of a growing loan book.
But as you said, the fundamentals, which is clearly what we look and spend a lot of time on, have continued to improve. But a lot of the improvement that we've seen over the last three or four quarters has been our manic [ph] reduction in our real estate book.
And as you pointed out, that's beginning to slow because it's a much smaller portfolio than it used to be. And the growth that was referenced in the commercial real estate by Chris, those real estate assets will have quite different characteristics from the ones that were in there in the exit book.
They tend to be REIT-related, much larger obligors, higher credit quality, et cetera, et cetera. So this is a quarterly process for us.
There's a lot of quantitative and modeling work that goes into it. And I think, really, the only thing I can say at the moment is that the general direction, as we guided previously, has been to lower charge-offs, lower NPLs and lower provision.
Todd Hagerman - Sterne Agee & Leach Inc.
Okay, that's helpful. Again, it sounds pretty positive at the end of the day.
But just switching gears, just another question, just on the expenses. Jeff, again, you guys kind of came in, expenses were a positive surprise in the quarter for sure.
You're now kind of at the low end of what you're suggesting in terms of a run rate for the year. What I'm thinking about, could you give us a little bit more thought process in terms of where you are now, balancing out the ongoing efficiency improvements versus additional leverage that you may have in terms of some of the environmental cost as it relates to credit?
I noticed that the OREO costs were pretty flattish this quarter. Again, with some of the slowing in the portfolios, how do we think about ongoing efficiency improvements versus potential leverage on in terms of legacy environmental costs tied to credit?
Henry Meyer
Well, I think there is still some additional room on the legacy environmental cost that you're referring to. So we're running at about $10 million a quarter on OREO expense for the last two quarters.
And I think if we get to a more of a normalized environment time, that number will probably drop to closer to a $5 million. There's always going to be some degree of costs associated with it.
So there's a little bit more that's left there. I think in terms of, overall, our expenses, we saw a nice improvement across a number of different areas in the company.
And I think there's just an intense focus on it within the company now, with what we set up in our sourcing area that we have and going through and really managing and working with across the company to control those costs. So we're trying to be very judicial about what we spend but then also looking at making investments.
So I think as Beth talked about your previous question was on new branches and where those are located and people, I believe in the comments Beth also made in her prepared remarks, that within the Corporate bank, we've added a number of people in the last year and we'll continue to add people as we see additional business opportunities out there. So we expect to have positive operating leverage from that as business activity improves on the part of our clients.
Operator
[Operator Instructions] We'll take our next question from David George with Baird.
David George - Robert W. Baird & Co. Incorporated
Henry, you mentioned in your comments, this is, first, with respect to capital, you mentioned the dividend and the Board is going to meet in May. But can you further clarify kind of your plans on capital?
Obviously, you're in pretty good shape from a capital perspective and the balance sheet probably isn't going to be growing a whole lot, at least in the near-term, and you've got a pretty big reserve. So if you could maybe clarify your thoughts on deploying capital as you move through the year?
Henry Meyer
David, I'm going to turn that over to Beth because I have two weeks left. So I don't think we're going to do much on capital in two weeks, and Beth will be the CEO so I'm going to let her answer that question.
Beth Mooney
With that, thank you, Henry and David. That's a good question because, obviously, the whole notion of capital management will be a big issue for, not only Key, but the industry going forward.
Jeff, in his prepared remarks, mentioned that we do have among peer-leading capital level and that we will be focusing on opportunities to profitably deploy this capital. As you mentioned, part of our capital assessment that we submitted to the Federal Reserve included a request to increase our dividend on our stock to $0.03 a share, which the Board will consider in its next meeting.
So obviously, dividend policy as we go forward in the coming years will be something that we will evaluate based on financial performance, earnings levels and so forth. And then we've often talked that we continue to support and invest in our franchise through the downturn, but we are very much focused on what can we do to support the organic growth of our business, as well as support loan demand that we've indicated, we believe, will be returning as we go through the year.
And then at the end of the day, another thing that we could look to is how do we opportunistically expand our franchise. We have many markets that we deem to be attractive, where we have opportunities that we could grow market share through some tactical fill-in acquisitions.
And we think the geographic diversity of our footprint actually translates into a number of opportunities we could consider over time. So if we stay disciplined about our investments, about our de novos, about our acquisitions, as well as thinking about what appropriate amount gets returned to shareholders, we feel like our level of capital creates an opportunity for us to support organic growth acquisition opportunities and gives us a lot of flexibility as we start thinking about how to strengthen the value of Key in the future.
David George - Robert W. Baird & Co. Incorporated
Okay, great, that's helpful. And then one question for maybe Jeff or Chris.
Commercial loan yields were down about 18 basis points from Q4 to Q1. Can you talk about what the driver of that is?
Is it kind of a mix issue? Kind of explain what's going on there if you could?
Jeffrey Weeden
Well, this is Jeff. There are a couple of things.
One, we do have certain other things that are in the swap book that have benefited, provided benefit, and those swaps have been rolling off. And I think from the competitive side, perhaps Chuck can talk about what he's seeing on the spread in the overall market as for loans coming in.
Charles Hyle
Yes. And David, this is Chuck.
I would say that you have to pick your sector and your market. But generally speaking, margins are off where they were in the peak last year.
Big run-off during the crisis and they've certainly settled down from there. Our belief is that they are still well above where they were pre-crisis, but my guess is they'd come off somewhere, on average, 25 basis points so thereabouts, maybe a little bit more into the markets.
Operator
And we'll take our next question from Crane Siegenhalter (sic) [Craig Siegenthaler] with Credit Suisse.
Craig Siegenthaler - Crédit Suisse AG
It's Craig Siegenthaler, Credit Suisse. The first question I have is on the liability side of the balance sheet.
Maybe, probably, a better one here for Jeff. But it looks like many of Key's deposit segments declined sequentially and deposits overall would have declined except for the large pickup in foreign-based deposits.
Can you maybe discuss some of the seasonal factors here and the impact from the escrow and what kind of drove all this?
Jeffrey Weeden
Well, the escrow balances, obviously, were $1.5 billion going out in March. So that did have an impact on it.
That will be in several different categories. So some of those are DDA balances, some of them are money market account balances.
So that does have an impact. I think if we look at personal checking accounts and some of the other things, we did see growth in those overall accounts.
So I guess we feel confident about as we look forward, at this particular in time, on overall deposits. But also bear in mind that we continue to have CDs that are coming up for renewal and repricing and if you've got a CD that's coming up and it's a 3% or a 2% or a 5% yield on it and it's repricing at 25 basis points, that's somewhat of a shock for people.
So they've been moving some of that money to other deposit categories too or looking for other yield elsewhere in the marketplace. So overall, I said I think we feel relatively good about where we are in deposits.
In terms of the foreign branch deposits, you'll see also that short-term investments were up at the end of the quarter. So we have probably about $2.4 billion in total that, that account was higher at the end of the quarter and it was just offset in short-term investments and those went out.
In other words, they've left the Fed account after the end of the quarter. And if you look on the average-balance basis, average balances are pretty consistent from quarter-to-quarter on those two categories.
Craig Siegenthaler - Crédit Suisse AG
Got it. And what was the yield that you pay on average for that deposit in foreign office?
Henry Meyer
Joe, do you know what that yield is? This is going to be, if you look here on average, it's 31 basis points.
Joseph Vayda
Yes. But on the particular transaction that we're referring to, it's related to cash management activities on the part of one of our customers that was sitting on a large amount, actually related to one of the capital markets transactions that Chris Gorman referred to earlier.
And given the short-term nature, you're talking less than 25 basis points as far as the amount paid on that transaction.
Craig Siegenthaler - Crédit Suisse AG
Got it. And you think with that transaction, that money could leave next quarter?
Do you think that's fairly sticky?
Jeffrey Weeden
That particular one? That's already gone.
That was a transaction, as Joe was talking about, it was one of the capital markets transaction. So the client raised some capital from the end of the quarter that was in deposit short-term and then it moved out of the bank shortly after the end of the quarter.
Craig Siegenthaler - Crédit Suisse AG
Okay, got it. And what I've been trying to get these questions is do you think we're nearing the end of significant growth in noninterest bearing and low interest-bearing deposit cost?
Are we near the end or do you think we have a couple of more quarters here?
Jeffrey Weeden
Well, in terms of our cost on our deposits overall, we're still going to see a reduction in terms of the overall level of deposit costs. We have CDs that are higher rate that continue to mature.
So whatever they're going into, whether it's into a money market account, a NOW [Negotiable Order of Withdrawal] account, a checking account or even back into a CD, it's at less cost than what it was maturing against. So that will have an impact on the overall cost of deposits.
Operator
And we'll take our next question from Matt O'Connor of Deutsche Bank.
Robert Placet - Deutsche Bank AG
This is actually Rob Placet from Matt's Group. First, just to follow up on your net interest income outlook comments.
You mentioned you expect net interest income to decline this quarter and you expect the NIM to be between 3.15% and 3.2% for the rest of the year. That said, can you provide any color on how we should be thinking about the trajectory of the NIM throughout the year?
Jeffrey Weeden
Rob, this is Jeff. What we talked about was the net interest margin between 3.15% and 3.25%.
And that the expectation was that average earning assets would decline approximately $3 billion here in the second quarter as a result of a lot of the movement of the bonds repayment of the TARP shares in the first quarter along with the escrow balances. So I think in terms of where we see the margin, we see it coming down in the second quarter and then we see the overall level of earning assets coming down.
But as I also said in our previous question, the level of earning assets going forward is going to be driven a lot by the liability side of the equation. So not expecting a lot of movement after this particular quarter.
And as we think about the overall margin, what is it going to take to have an improvement in the margin? We need to have overall interest rates come up.
We are asset-sensitive. We took risk off of the balance sheet in the first quarter, also.
So when the escrow deposits were removed, we also reduced the size of the investment portfolio. So we used that to fund that.
So there's less "interest rate risk" associated with that, and we became a little bit more asset sensitive as a result of those activities.
Robert Placet - Deutsche Bank AG
Okay, thanks. That's helpful.
And then secondly, just to follow up on the topic of capital deployment. Key has about $1.5 billion of trust preferreds outstanding, I believe.
So how are you guys thinking about these? Does it make sense to start calling some of these?
Henry Meyer
Well, I think we have $1.8 billion in trust preferreds outstanding, and we did not have anything incorporated into our 2011 capital plan that was acted upon earlier this year, this last quarter. And so any activities that would be related to the trust preferreds would require us to resubmit a capital plan or submit a capital plan.
And what our plans are along those lines, obviously, as we continue to get our capital, to have discussions with our Board and we will be thinking about a number of different things over the course of the next several months.
Operator
And we'll take our next question from Nancy Bush with NAB Research.
Nancy Bush - NAB Research
Just a quick question on the subject of mortgage. You guys have largely benefited, I would say over the past few years, for not being a huge player in the mortgage industry.
I just wanted to get your thoughts back on that business in the future, whether it is your that thoughts have been impacted by QRM [Quantitative Risk Management] and the various other initiatives that are swirling around the mortgage business right now?
Beth Mooney
Yes, Nancy, that's a good question because we clearly have been the beneficiary, have very little repurchase risk, don't have MSRs on the balance sheet. So in many ways, have weathered some piece of the storm well as a result of that positioning.
We have built up a mortgage platform within the Community bank of some 200 mortgage loan originators. And we are originating but we originate to sell.
So we have been under a contract where we get a fixed revenue spread for that very important product to our clients and it is done on a white-label basis where our client does not realize that it is not Key. So that has been a very good solution for us.
And we actually have seen our mortgage volumes increasing significantly year-over-year. And over the last several years, we're up some 30% or 40% versus the same time last year and view the market uncertainties as an opportunity for us to continue to provide that product.
But we chose to make it a fixed spread versus riding the wave of the volume variable production and cost curve of mortgage. I'm not going to say in the future, we wouldn't reconsider whether our mortgage platform of a different nature made sense for our company, but for right now, we're very pleased with the ability to offer the product, attract good sales people because the disruption in the market has created a lot of good people who are seeking a different mortgage platform and being able to robustly offer that product to our clients.
And we do have a small book where we will balance sheet for our private clients and our private banking clients.
Nancy Bush - NAB Research
; Do you think there would be an opportunity to keep more on the balance sheet going forward? Since, apparently, what is being originated out there right now is it pretty good quality, is that an asset that you might want to keep?
Beth Mooney
Nancy, we talk about that in our asset liability committee meetings, and we do have a bucket that we are willing to put on the balance sheet for the right client profile. Like I said, heavily into our private bank client group and that is something where we have continued capacity and appetite and review it regularly to make sure we like the credit statistics, the yield and the mix with our assets.
Operator
And we'll take our next question from Erika Penala with Bank of America.
Erika Penala - Merrill Lynch
My first question is for Beth as a follow up to David's question. Assuming that, clearly, your first priority for capital deployment is to support organic growth.
Could you help us think about how you're prioritizing your other opportunities, and the other opportunities being, clearly, depository acquisitions, non- depository acquisitions, raising the dividend again this year and ramping up a share repurchase program?
Beth Mooney
Yes, Erika. We are in the process of doing our three-year strategic plan as we speak.
The opportunity to repurchase the TARP capital and put that behind us and get more clarity on what our capital base index was going to be. And as we've all noted, we are also now in the position of where we are generating capital on a quarterly basis.
Supporting dividends would be a priority. And for our 2011 capital plan, we have indicated that our Board will consider that increase.
But going forward, we will always consider, on a quarterly basis, what is the appropriate level of dividend relative to our income. And then first priority is the strategic execution of our business plans.
We have said that we are not in any way dependent on mergers and acquisitions in order to organically grow our business and support our growth plans. We view that as an opportunity in addition to investing in our businesses and continuing to grow on our balance sheet.
And then share repurchase was not part of our 2011 capital plan. Obviously, over the years, you would always look at whether or not you return excess capital to the shareholder or you can effectively deploy it with discipline for shareholder return.
But that is not currently on our radar screen of how we're thinking about capital opportunities.
Erika Penala - Merrill Lynch
As you're going through your strategic plan, could you give us a sense on if you do consider depository acquisitions where you would be A, where you you'd be more focused on and B, as you look out through your footprint, whether or not you believe you're in the right markets or perhaps there are markets that you're considering may be exiting or not paying as much attention to?
Beth Mooney
Erika, that's a good question because one of our thoughts is our geographic diversity does provide us lots of opportunities. Because of our relative market share and distribution in many different markets, we view the M&A landscape as high a highly opportunistic for Key.
And there's that old saying, "Banks get sold, they don't get bought." So you can't necessarily articulate where some of these depository opportunities would fall.
But demographically, when we look West, we felt like there is a good fit with our franchise for some potential acquisitions in the Western markets, and we have been strategically building de novos in anticipation of the ability to continue to ramp up our performance in the West. So look at it that way.
And then as it relates to markets where we currently do not do business, we would consider that a low priority. I think it's a slow way to go into a market where you don't have existing presence and name recognition so would not target anything that took us into a new geography in and of itself.
But we might get an expansion of our footprint as you look at M&A, but we wouldn't target to just try and go into a market without name recognition that didn't also complement what we already have.
Operator
And we'll take our next question from Brian Foran with Nomura.
Brian Foran - Nomura Securities Co. Ltd.
Can you talk about the core fee run rate outlook over the next couple of quarters?
Henry Meyer
Well, I think in terms of looking at the Key revenue side of the equation, we've pretty much come to the bottom, I believe, on the deposit service charge side of the equation. Trust and investment management service fees, as we continue to make investments into our private banking operations as well as overall market activity in that particular area, has a tendency to usually build the course as we go through, through the course of the year.
Other related items, I'm not certain in the aggregate. If you look at the total that we have that there's going to be a lot of difference in terms of the overall total picture, but mostly individual line items move during the course of the year based upon business-related activities.
Brian Foran - Nomura Securities Co. Ltd.
Is it fair to say just working down the list of guidance points you gave then, that average earning assets down $3 billion, NIM $315 million to $325 million. It sounds like fees in the ballpark of the $450 million reported this quarter and then $700 million to $725 million of expenses.
So the preprovision kind of $300 million to $340 million as a range of potential near-term outcomes? $300 million to $340 million?
Jeffrey Weeden
That would be a potential range for near-term outcome.
Brian Foran - Nomura Securities Co. Ltd.
And then just to follow up, there've been a lot of questions on excess capital. But I guess the way I think about it, if you were towards a 9% Tier 1 common, which would still seem to be a pretty high number, the excess capital is going to be roughly 20% of your market cap, basically, now.
So I guess recognizing that there's some organic growth opportunities, recognizing that there's some tuck-in deals you can do, with that kind of excess capital base, why wouldn't you be more focused on share repurchases?
Henry Meyer
I think in terms of, Brian, what we have to do, really review this with the Board. We have our plans that we're developing and putting together as Jeff was talking about.
Strategic plans are underway. [indiscernible] But as we all know, everything requires us, once you're part of the 19 SCAP banks, you have to go back with your capital plan and resubmit it to the regulators for any changes to it.
So I can't represent any differences than what have already been approved. I think share repurchases are something that will be incorporated into the future capital plans that will be presented.
Our primary focus on this last capital plan was to repay TARP, we've paid it in as friendly a manner as possible, seek a dividend increase, which we incorporated into it and retire the warrants. And that was a plan that the regulators did not object to and we are implementing that particular plan.
Operator
And we have time for one more question from Betsy Graseck with Morgan Stanley.
Betsy Graseck - Morgan Stanley
One is on the capital that you're going to be deploying into the business. Can I just get a sense as to what kind of hurdle rates you have for the various buckets of your business?
Jeffrey Weeden
Well, I think in terms of hurdle rates, what we look at and thinking in terms of branches, for example, and that's a longer-lived asset that we look at, which currently has approximately about a three-year, breakeven type of on the cash flow basis, so revenue versus expense. In terms of the IRRs that we strive for, it is something in the 15% to 16% range on branch deployment.
As we look at some of the other areas, when we're investing in people, obviously, it's different we have, it's much more much more of a positive operating leverage, and we're trying to cover the costs associated with the current infrastructure that we have. And that's going to be based a lot on what we see for business opportunities that are out there.
So there's not a lot of other capital "deployment initiatives" that are currently underway. We are looking and still working on technology across the company to make us, again, as efficient as possible in and across all of the businesses and being able to respond to client questions quickly and timely.
Yes, Beth?
Beth Mooney
And Betsy, I would just add that when it comes to the deployment of human capital, we have been very opportunistic at adding people in client-facing roles against markets or verticals where we see an opportunity to gain share or garner new and additional clients and have put kind of a hurdle out there that we expect people to produce enough revenue within 12 months to justify their hiring. And then as it relates to technology, that has been a significant enabler to our business strategies to promote client insights, to have better active information on how to predict client needs, as well as resolve problems.
So as we look at our portfolio between plant and equipment as it were our branch network as well as people and technology, we have been investing across the board to support our business plans.
Christopher Gorman
And Betsy, it's Chris. Just to add to that, we've been very pleased in the Corporate bank with the amount of talent we've been able to bring in, kind of what our hit rate is and the ability of these new senior-level relationship people to leverage what we think is a unique business model.
Betsy Graseck - Morgan Stanley
Okay. So we should expect that the ROA for the organization will be trending up as you execute on all of this?
Jeffrey Weeden
Well, Betsy, I think in terms of looking at the amount of capital that we have and going back to our ROA. So as we deploy capital over time, in other words, how we return capital or we look at potential M&A opportunities in the future, all of those things will be taken into account.
But our targeted ROA, what we've put out there, is 1% to 1.25%, and you'll have to apply them against the leverage we ultimately end up with.
Operator
And that concludes today's question-and-answer session. At this time, I'll turn the conference back over to Mr.
Henry Meyer for any closing remarks.
Henry Meyer
Thank you, operator. This will be my last opportunity to thank all of you for taking time from your schedule to participate in one of our earnings calls.
As you know, a lot of changes in the industry and here over my 39 years at Key, and I remain confident that under Beth and her leadership team, the company will perform very well, serving our clients, communities, employees and shareholders going forward. So thank you for your time and interest.
If you have any follow-up questions regarding today's earnings material, you can direct them to our Investor Relations team, Vernon Patterson and/or Chris Sikora at (216) 689-4221. That concludes our remarks.
Operator
That concludes today's conference call. We appreciate your participation.