KeyCorp's CEO Discusses Q1 2012 Results - Earnings Call Transcript

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 |  About: KeyCorp (KEY)
by: SA Transcripts

Operator

Good morning, and welcome to KeyCorp's 2012 First Quarter Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to Chairman and Chief Executive Officer, Ms. Beth Mooney. Ms. Mooney, please go ahead.

Beth E. Mooney

Thank you, operator. And good morning, and welcome to KeyCorp's First Quarter 2012 Earnings Conference Call. Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer. And 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 would turn to Slide 3. This morning, we announced first quarter net income from continuing operations attributable to common shareholders of $199 million, or $0.21 per common share. Our first quarter results demonstrate continued momentum as we execute on our relationship strategy, strengthen our balance sheet and maintain disciplined expense control. Credit quality also improved in the first quarter, which is a continuation of the trend that we have seen over the past 2 years. Net charge-offs declined to 82 basis points, continuing its migration toward our long-term target of 40 to 50 basis points. Nonperforming assets and criticized loans also showed improvement in the quarter.

We were encouraged to see continued growth in our commercial, financial and agricultural loans as we continue to acquire and deepen relationships and meet customer needs for credit. Average CF&A loans were up 7.2% compared with the prior quarter, making the fourth consecutive quarter of growth for this portfolio. The growth in our CF&A loan balances continues to be broad-based across our franchise, as well as in targeted client segments in our Corporate Bank, such as industrial and manufacturing, energy and utilities and health care.

Also contributing to loan growth has been our progress on the commitment we made last year to lend $5 billion to small businesses. Since this program was launched in September of 2011, Key has made over $2.4 billion in lending commitments to small business owners, who remain critical to our economic recovery and job creation. Importantly, in both the Community and Corporate Banks, we continue to add new clients and increase the level of engagement with our existing relationships.

Our success in executing on our relationship strategy was affirmed through several industry honors and recognitions in the first quarter. They included a top 5 ranking for overall customer satisfaction in J.D. Power's 2011 Small Business Satisfaction survey, excellence award from Greenwich Associates for small business and middle-market banking, awards for our online banking capability from Corporate Insights Bank Monitor and top scores for treasury management services from Phoenix-Hecht. We have also continued to make investments that enhance our ability to serve our clients and grow our business. These include modernizing our branch network, enhancing our online and mobile capabilities and adding more client-facing positions. And we remain on track for an early third quarter closing of our branch acquisition in Western New York. This acquisition will strengthen our franchise and benefit our local communities, clients and our shareholders.

The final item on this slide focuses on maintaining a strong balance sheet and remaining disciplined in our approach to capital management as previously announced, we received no objection from the Federal Reserve to our 2012 capital plan and subsequently authorized a common stock repurchase program of up to $344 million. The program is expected to begin in the second quarter of this year and will run through the first quarter of 2013. Our capital plan also included an increase in our common stock dividend from $0.03 a share to $0.05 per share. The board will consider the potential dividend increase when it meets next month. These actions represent opportunities for Key to return capital to our shareholders while still maintaining our peer-leading capital position.

On Slide 4, you can see that we have made significant progress on our long-term goals and our return on average assets for the first quarter continues to be within our targeted range. We believe that we can continue to build on our momentum by leveraging our strong balance sheet and executing our relationship model. Our clients continue to tell us that Key's business model and strategy is distinctive and this is allowing us to win in the marketplace and grow.

We're also focused on managing expenses and improving our operating leverage, which remain critical in the current operating environment. And finally, we will remain disciplined in the way we manage our capital, consistent with the priorities that we have previously outlined: maintaining strong capital for organic growth; increasing our common stock dividend; using the authority we have from the board to return capital to our shareholders through share repurchases over the next 4 quarters; and to be disciplined around opportunities to invest in our business model and our franchise.

Now I'll turn the call over to Jeff for a review of our financial results. Jeff?

Jeffrey B. Weeden

Thank you, Beth. Slide 6 provides a summary of the company's first quarter 2012 results from continuing operations. As we reported this morning, the company earned a net profit from continuing operations of $0.21 per common share for the first quarter. This compares to $0.21 for both the fourth quarter and the first quarters of 2011. I'll cover the other information on this page in more detail on the following slide.

Turning to Slide 7. Average total loans increased $766 million or 1.6% unannualized during the first quarter compared to the fourth quarter of 2011. As can be seen on this slide, average balances of commercial, financial and agricultural loans increased from $18.3 billion to $19.5 billion, or approximately 7.2% unannualized. And our utilization rate of CF&A loans improved from 46.3% in the fourth quarter to 46.9% in the first quarter of 2012.

Continuing to Slide 8. On the deposit side of the balance sheet, our trend of improving mix of deposits continued into the first quarter, where we experienced an increase in average balances of nontime deposits of approximately $600 million or 1.3% unannualized. During March of this year, certain funds previously invested in our Victory Money Market Mutual Funds were either moved to a Key deposit account or to a new arrangement that we have with another fund provider. This resulted in approximately $600 million of low-cost transaction deposits moving onto our balance sheet. These funds did not have a material impact on our first quarter average deposit balances. The additional liquidity from these deposits will help fund second quarter debt maturities and potential loan growth. As noted on this slide, average balances of time deposits declined approximately $700 million during the first quarter. We have identified, under the highlight section of this slide, the scheduled maturities of our CD book and the rates that apply to the $9.9 billion of CDs maturing at March 31, 2012.

As we have previously discussed, we have significant maturities of higher-costing CDs in the second, third and fourth quarters of this year. Specifically, approximately $690 million at an average cost of 4.59% mature in the second quarter, followed by $1,030,000,000 in the third quarter at a cost of 5.06%. And then tapering down to approximately $530 million at a 4.88% average cost during the fourth quarter. This compares to approximately $240 million in maturities in the first quarter of this year. These CD maturities, along with debt maturities in the second quarter, will help offset pressure from maturities of investment securities in this extended low-rate environment.

Turning to Slide 9. Consistent with our comments last quarter regarding our outlook for credit quality, we continue to experience an improvement in our asset quality statistics again this quarter. Net charge-offs declined to $101 million or 82 basis points of average loan balances for the first quarter of 2012. In addition, our nonperforming loans declined to 1.35% of period-end loans at March 31, 2012. Our reserve for loan losses stood at $944 million or 1.92% of period-end loans and represented 141.7% coverage of nonperforming loans at March 31, 2012. As we have identified on Page 19 in the appendix of today's materials, criticized loans outstanding continued to improve, declining for the 11th consecutive quarter at March 31.

Looking to the balance of the 2012. We anticipate continued modest improvement in asset quality and net charge-offs. Regarding provision and reserves, we anticipate the amount to be provided to be less than charge-offs for 2012. And consistent with our comments last quarter, we would anticipate as loan growth continues, we would migrate during the course of the year for provision to be closer to the level of net charge-offs. For the first quarter, our provision expense represented approximately 34 basis points of average loan balances and net charge-offs were 82 basis points of average loan balances. As Beth mentioned in her comments, our long-term target for net charge-offs is 40 to 50 basis points.

Turning to Slide 10. For the first quarter of 2012, the company's net interest margin was 3.16% compared to 3.13% for the fourth quarter of 2011. Taxable equivalent net interest income was $559 million for the first quarter, down from $563 million in the fourth quarter of 2011 as a result of the early termination of a leverage lease, which resulted in the write-off of $6 million of capitalized loan origination costs. Average earning assets were down approximately $1 billion to $71.4 billion for the first quarter compared to the fourth quarter of 2011. However, all of this decline can be attributable to lower short-term investment balances. Our expectation for 2012 continues to be for the net interest margin to show modest improvement and for average earning assets to remain in the range of $71 billion to $73 billion.

With respect to the second quarter, we do not expect much change in the net interest margin from the first quarter level as most of the benefit we expect from our debt and deposit repricing opportunities during the second quarter will benefit the third and fourth quarters of this year. Another item which could impact the margin, but not necessarily net interest income, is simply higher levels of short-term liquidity from deposit flows. As Beth commented on, we remain on track for an early third quarter closing of our branch acquisition in Western New York. This will add approximately $2.4 billion in deposits and $400 million in loans during the third quarter.

Our noninterest income was $472 million in the first quarter of 2012 compared to $414 million in the fourth quarter of 2011. The $58 million increase was primarily the result of a $20 million gain we realized on the early termination of a leverage lease, a $43 million improvement in net gains from principal investing and a $19 million improvement in investment banking and capital markets income. These improvements were partially offset by decreases in corporate-owned life insurance, lower levels of gains on loan sales and various other items. Of note, net of the $6 million charged against net interest income for the write-off of the capitalized loan origination costs, the early termination of the leverage lease benefited our total revenue by $14 million during the first quarter.

Turning to Slide 11. Noninterest expense for the first quarter of 2012 remained well controlled at $703 million, down $14 million from the fourth quarter of 2011. Personnel expense was down $2 million as lower incentive compensation accruals offset seasonal increases in employment taxes. Nonpersonnel expense decreased $12 million primarily from lower cost for professional fees and marketing, partially offset by not having a credit to the provision for losses on lending-related commitments in the first quarter, as well as higher other expenses.

Slide 12 shows our pretax pre-provision net revenue and return on average assets. Pre-provision net revenue for the first quarter was $328 million and benefited from stronger fee revenue, as well as lower expense levels compared to the fourth quarter. As we look at pre-provision net revenue for the balance of 2012, we anticipate PPNR to be in the range of around $290 million to $330 million per quarter.

And finally, turning to Slide 13. Our tangible common equity ratio and estimated Tier 1 common equity ratio both remained strong at March 31, 2012, at 10.3% and 11.5%, respectively, placing us in the top quartile of our peer group on these ratios. As Beth commented on with respect to capital management, our priorities remain maintaining strong capital for organic growth, increasing the dividend and using the authority we have from the board included in our capital plan to return capital to our shareholders through share repurchases over the next 4 quarters.

That concludes our formal remarks. And I will return the call back over to the operator to provide instructions for the Q&A segment of our call. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll begin with Matt O'Connor from Deutsche Bank.

Robert Placet - Deutsche Bank AG, Research Division

This is Rob Placet for Matt's team. The first question, just in terms of share buybacks from here, any color on how you're approaching buybacks and how we should think about the timing of buybacks through the year?

Jeffrey B. Weeden

Yes, Rob, this is Jeff Weeden. You should think about timing of the buybacks really are going to be over the next 4 quarters. So that's how we're viewing it. It's not something that we're going to have an accelerated share repurchase program on. It should be kind of evenly over the next 4 quarters. I think in terms of people always wanting to know about price, in terms of where we trade it on a book value basis or a tangible book value, with a tangible book value in the $9.26 range and stated book value at about $10.26. Certainly, where we're trading today, it's accretive in terms of book value, tangible book value and earnings per share.

Robert Placet - Deutsche Bank AG, Research Division

Okay, great. And just separately, given your outlook for average earning assets between $71 billion and $73 billion, any sense of how we should be thinking about mix of loans versus securities as we think about that average earning assets for the rest of the year?

Jeffrey B. Weeden

Well, we've been doing some remixing. So as we've had loan growth that's been coming on, the investment portfolio has been coming down. So our guidance for an improving margin includes a number of different moving parts here. One, we have the repricing of our debt and CDs that are coming up. The second part is just the cash flows coming off of investment securities and reinvesting that either in loans or in lower-yielding investments, to some extent. But that's how we're remixing that overall balance sheet.

Operator

And we will take our next question from Ken Usdin from Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

I just want to ask you to go into a little bit more color on your expectations for loans to grow. Obviously, they were a little bit stepped-back this quarter because of exit and CRE. So can you just talk to also about like where you expect the majority of loan growth to come from? And also, at what point do we actually see that stabilization in CRE and leasing lines?

Jeffrey B. Weeden

Ken, this is Jeff Weeden. The business guys are going to talk here in just a second. But one of the things that we went back and we talked about in the fourth quarter was we said we had a number of loans, the balances came up in the fourth quarter, and we expected actually some of those to be paid down in the first quarter. There's some bridge loan activity that was in there, and so that's part and parcel of it. We also had the leverage lease that paid off in the first quarter, which was around $70 million. So that had some impact on it. On that leasing line that you're referring to, the part that's in the exit portfolio, there may be some lumpiness in that, depending on if we have other opportunities for early termination of these leverage leases. But the rest of the business, I think, is growing fine. And I'd ask Chris Gorman to talk first.

Christopher Marrott Gorman

Let me just give you kind of a quick overview. In short, we see balances growing from here. You asked where they're going to grow. They're going to grow principally in the Corporate Bank in 3 areas. One is our energy area, and I'm going to come back to that in a moment. The next is industrial. And also we're seeing a lot of growth in health care. Kind of big picture, if you look over the last year, in the Corporate Bank, our loans have grown by 5.1%. But that included a strategic runoff that we were doing in real estate of, call it, 10%. And on the other side of the equation, in our corporate and investment bank, year-over-year on an average basis, we actually grew them 36%, 37%. So we are through that in the real estate book, which means we're well positioned to grow from here. We actually look at our backlogs and feel very good about them. I'll give you a kind of one example of kind of finding these niches, and that is in the area of both wind and solar. We were left lead on 10 deals that raised well over $1 billion in the first quarter. So again, Ken, our growth is going to come from picking these niches and continuing to be able to garner new clients. So that's how we're going to grow.

William R. Koehler

And in the Community Bank, Ken, we're seeing continued strength in our pipelines. We also see some strong activity in health care for a lot of the same reasons. Chris sees it on the upper end of the market. And if you look at it regionally, the Northeast continues to be pretty strong and consistently so. The Great Lakes continues to see a lot of activity. Probably our strongest region over the past 4, 5 quarters, I would say, has been at the Great Lakes. And activity in general, in many of the manufacturing sectors, where we are strong as an organization, continues to be pretty good.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Great. And my follow-up question, just on expenses, you guys have done a really nice job of really holding the line on expenses. And I'm just wondering what opportunities do you still see to even take cost out of the business. I know you talked about not necessarily doing Keyvolution too, but with a still high efficiency ratio, what can we see kind of still coming out as you continue to work on that?

Beth E. Mooney

Yes, Ken, this is Beth. And that's a good question. And we made reference to it in our remarks, that clearly in this operating and economic environment, continued focus on expenses is one of the levers we all have to work with to enhance our performance. So while Keyvolution is complete and you're seeing the benefit of that in our disciplined expense ratio that has been coming through in our guidance $700 million to $725 million in noninterest expense, quarterly, we do have continuing programs, a focus on continuous improvement and are continuing to look at opportunities for sourcing, procurement. As we invest in client-facing positions, we're also looking at how we can align our backroom operations and other things that we are doing that are not core to our client experience. So we continue to do a variety of things, it is a culture of continuous improvement, and have a number of initiatives underway that we will think will continue to enhance our efficiency ratio as it relates to the expense side. And Jeff, do you have any other comment?

Jeffrey B. Weeden

No, I think that summarized it well.

Operator

Our next question comes from Gerard Cassidy from RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Can we go back to the Corporate and Community Bank reference that you guys both had year-over-year loan growth, but it looks like your net interest revenue was flat to slightly down in both of the subs there. Can you give us some color on what's going on with pricing?

Christopher Marrott Gorman

Gerard, it's Chris. Well, I mean, the first thing is just generally low interest and the squeeze in terms of margins. What we're seeing in the marketplace, though, is that structure is generally holding. We're seeing just a little bit of pressure around the edges on pricing, but not to a degree that it's concerning us at all. I think what you're seeing is the impact of deposits, candidly, as you look at those numbers.

William R. Koehler

And Gerard, this is Bill Koehler. And in the Community Bank, we're seeing similar trends on loan spreads that Chris mentioned. But the bigger driver for us in this area is the value of our deposits, in this environment, we continue to get pressure there. And it's the same story we've been talking about for a number of quarters now.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Jeff, you mentioned your outlook for net charge-offs. I think you and Beth said, I think, normalized. It's in the 50 basis point level of average loans. And currently, your charge-offs are around 80 basis points. The provision will eventually match the charge-offs, if I heard it correctly. When do you think you can get to a normalized net charge-off level?

Charles S. Hyle

Gerard, this is Chuck. It's hard to predict the timing of this. But I think if you look at our core business and the kinds of business that we're putting on today and if you look at the chart on Page 16, you can see where we are today. And then the CF&A category, we're at 31 basis points. That's a big part of our portfolio. If you look on our leasing portfolio, you'll see actually nothing there. So I think that's a pretty good indicator of the kind of commercial business that we're writing and where we will get to over time. I think some of the noncore business, which we still have, although it's shrinking all the time, is still where the higher charge-off numbers are. So how you project that trajectory is a little hard to do, clearly dependent upon the economy and various other things. But I think it is still a range that is very achievable for this organization.

Beth E. Mooney

And Gerard, this is Beth. I would add that we made a comment in our last quarterly call that to the extent that we do see growth in CF&A, our new business volumes and our new originations, which are heavily candid towards new client acquisitions are coming in at a higher quality and a higher credit quality than our existing books. So if you remix and grow the balance sheet, that will have a positive impact on the level of net charge-offs as well.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Absolutely. If the net charge-offs stays stubbornly around 75 basis points into the middle of next year and with your guys comments about provision and eventually reaching the charge-offs, should we expect the provision to get that high? Or is it more of a provision to the normalized levels that we should be focused on?

Jeffrey B. Weeden

Well, Gerard, I guess -- this is Jeff Weeden. I think in terms of the nonperformers also continuing to migrate on down. And clearly, as Chuck talked about it, some of these exit books that are still out there, they'll run a little bit higher on the charge-offs level. So if we're still at the 75 basis points next year, I think you have to look at what's the forward look at that particular point in time. So it's all about the existing book you have a provision or reserve for and it's your forward look that you are trying to anticipate, business volume, et cetera. So I would think in terms of the provision expense normalizing in that 40 to 50 basis point range first, and then seeing the charge-offs kind of work their way down, so...

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Good to know. Okay. And finally, Jeff, on the buyback, you mentioned you think it will be spread out over the 12-month period. Is there anything that would prevent you guys from completing the buyback this year? And then tying into that, with your return on equity around 8.25%, which I assume is less than your cost of capital based on your internal models, when do you think the return on equity number would exceed your cost of capital?

Jeffrey B. Weeden

Okay. Well, Gerard, we're not giving a specific guidance on the return on equity at this particular point in time. I think with respect to the buyback provisions, the capital plan that was submitted had the buybacks over the 4-quarter time period. And that's you should view the overall plan, is lasting over that 4 quarters.

Operator

Our next question comes from Josh Levin from Citi.

Josh Levin - Citigroup Inc, Research Division

Yesterday, one of your competitors sounded very bullish on the economic and lending environment in the Midwest. They talked about a recovery, and they specifically talked about the impact of the energy shales. How would you characterize the Midwest economic and lending environment relative to maybe what it was 6 to 9 months ago?

Christopher Marrott Gorman

Josh, it's Chris Gorman. It remain -- I mean, here's what's going on, our -- the companies in the Midwest continue to do well. They continue to recover. They're obviously not recovering at a pace that all of us would like them to recover. Having said that, there are some real bright spots that happened to play very well with the kind of things that we do here at Key. First is the industrial companies that are here are major exporters, that's one driver. You mentioned the shale play. We're participating in that in a significant way in that we have an oil and gas business. But in addition to that, for example, in our M&A business right now, in our backlog, a very significant percentage of a backlog that's elevated are people that supply into the frac-ing process, which is driven by the shale plays. So there's no question we're benefiting from it. I'll let Bill Koehler cover what's going on. And also, the shale plays, by the way, benefit our retail customers as well because they, in many cases, when you look at places like the Utica Shale field, are the owners of the land that's being leased for the shale play. Bill?

William R. Koehler

And I would say, as well, that as we talk to our clients there, confidence is growing in the smaller end of the market, which to me says that the economy is overall has strengthened. They are serving some of the same industries Chris talked about. They are getting more clarity in their business about -- in their order book. And as a result, they are seeing a lot more opportunity to continue to drive growth in the business.

Christopher Marrott Gorman

Josh, the one thing we're not seeing yet and we're watching very carefully, we're not seeing our customers and clients growing employment. So that's one area that I would say continues to lag. The other area that lags is we don't see huge capital outlays for big, new plants. We do see around the edges people starting to invest in technology, equipment, people investing in working capital, people investing on the margin.

William R. Koehler

And in health care, where in Ohio, obviously, the demographics would suggest that we need continue to support the needs there over time. We are seeing a lot of new construction and consolidation of services across the full value chain within the health care industry. And as a result, we think we're very well positioned from a Community Bank and the Corporate Bank perspective to serve the needs of the industry overall with some very integrated capabilities.

Josh Levin - Citigroup Inc, Research Division

Okay. Just on a separate note, you have assets outside of the Midwest, you have those assets in Colorado, Alaska, Florida. Would you ever consider selling them and redeploying the capital for other uses?

Beth E. Mooney

Josh, this is Beth. We obviously constantly evaluate our franchise and our opportunities to strengthen, invest, grow our business, as well as rationalize our business. And we have always said never say never. Everything over time is always needing to be revalidated. At this point in time, relative to our footprint, all our markets are accretive to Key's performance and we don't see any particular ability to appropriately redeploy what could be any potential gain or funds from such a repositioning. As always, the way the character of the franchise was built, there would always be tax consequences. So as we look at it now, our goal is to optimize our performance. We have market-by-market growth strategies and continue to improve the performance. But the mix of our businesses right now, for the foreseeable future, are where we're positioned.

Operator

Our next question comes from Steve Scinicariello from UBS.

Stephen Scinicariello - UBS Investment Bank, Research Division

I just want to follow up on the -- this building on the success that you've had with the HSBC acquisition. Just kind of curious as you look out and talking about capital deployment, do you see more types of opportunities to continue to round out some parts of the franchise, like the HSBC deal, as you kind of look forward? And if so, would you like to do more of them?

Beth E. Mooney

Steve, this is Beth. We do think that the HSBC transaction is indicative of an opportunity with actually minimal capital to strengthen our presence in 2 key markets. It would be what I would call a small fill-in, where we enhance our presence in Buffalo and in an attractive market such as Rochester to us. So in the right circumstances, we would absolutely be disciplined and opportunistic about what we could do to augment our franchise, where we can leverage our business model, where we can garner new clients and really put to use the alignment between our Corporate and our Community Bank. So as time progresses and opportunities present themselves, we would look to have a point of view to be -- underscore a theme I have also said in the past. But we would be very disciplined about the amount of capital, about what is an appropriate price and that it really does strengthen not only our franchise but strengthens and has a proper return for our shareholders.

Stephen Scinicariello - UBS Investment Bank, Research Division

Got you. And then just kind of following with the expense management team and going along with kind of further optimization of the network. I assume you would also kind of look to maybe not you're going to exit any markets but just kind of further optimize your positioning within those. So could there be some kind of pruning along some parts of the franchise, just in keeping with what we're talking about in terms of optimization?

William R. Koehler

This is Bill Koehler. There absolutely is. We are constantly looking at our branch footprint in the context of our overall cost structure, returns in each of the branches, as well as overall channel strategy and our de novo strategy. What you will see this year is we are likely to open roughly half of what we've opened last year in the form of branches, and the lion's share of those will be relocations or consolidations, not strictly de novos. So on a net basis, you won't see a lot of branch growth year-over-year. But we'll reposition our businesses to parts of our markets where -- frankly where our customers are, so we can provide a continued focus on convenience that they demand.

Stephen Scinicariello - UBS Investment Bank, Research Division

Great. And then just one last quick one. I know, as part of the CCAR capital plan approval, you had sought to repurchase some trust preferreds. And I know you didn't quantify the amount, but I was just curious if there is a certain kind of target amount that you like to redeem. I know you've got the request out there for approval to -- but I was just curious if you could quantify just how much you're looking to buy back?

Joseph M. Vayda

Sure. This is Joe Vayda. I'll take that question. We have about $1 billion remaining in outstanding trust preferreds. And each has its own unique economics to the issuer. But we're evaluating particularly those that have regulatory capital treatment call provisions. And that includes primarily the Series 10s, which is about $560 million outstanding. They cannot be called without a capital treatment change, and it's subject to further evaluation.

Operator

[Operator Instructions] We'll move on to Adam Hurwich from Ulysses.

Adam G. Hurwich - Ulysses Management LLC

A question as a follow-up to the first question actually, where you discussed the impact on NIM on the shift between loans and securities. One of the reasons for the size of the securities portfolio, I assume, has to do with the macro environment we've just been through. Given that things are improving for the bank, to what extent do you have an opportunity to reduce the liquidity in the securities portfolio in general regardless of that shift? And what would the impact potentially be on the NIM?

Jeffrey B. Weeden

This is Jeff Weeden. As we look at the investment portfolio, the investment portfolio has been stored liquidity for us. So if you think about it, we've been more liability-driven. So we have the liabilities. We've parked some of the excess liquidity in the investment portfolio. The investment portfolio, itself, is turning about $500 million of cash flow each and every month at this point in time with these particular rates. So we have reinvestment opportunities that happen all the time. So I think as we look at it and we say that we have loan growth, we'll put it into loans at that particular point in time. And that's why you've seen the overall portfolio come down. The other part is on the liability management side of the equation. So to the extent we have debt maturities, which we have $1 billion that matures in June of some TLGP debt, we will look at where the overall flow of deposits are. Deposits have still been positive for us. So to the extent we have positive deposits flows and we have a loan demand that's out there that continues at basically what our expectations are, we will have some degree of need to reinvest in our securities portfolio each and every quarter. But that's factored into our overall guidance. So we've taken all of that into account as we've looked at our net interest margin guidance that we've provided for 2012.

Adam G. Hurwich - Ulysses Management LLC

So Jeff, if I understand you correctly, what it sounds like is given these flows, you don't see a material drop in the total assets of the bank this year.

Jeffrey B. Weeden

That is correct. We actually provided our guidance was for $71 billion to $73 billion of average earning assets. And that's predicated, too, on the fact that we know we have these debt maturities, we have CDs that are repricing. But we also have positive deposit flows in other areas in the transactions and regulated accounts.

Operator

And I'll take our next question from Mike Turner from Compass Point.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Just one asset question regarding the Fed's new guidance in first quarter or regarding NPL accounting for HELOCs or for second liens. I know over 50% of your home equity portfolio is first lien. Maybe -- there didn't seem to be any impact in the quarter on your NPL accounting. Maybe you can just speak to that reserve accounting and why there was no commensurate increase at all in NPLs.

Charles S. Hyle

Yes, Mike, this is Chuck Hyle. We have been, I think, quite fortunate in our HELOC portfolio over the years in terms of how we've underwritten it. You mentioned the fact that well over 50% are first liens. We've been tracking that information. We've been tracking the firsts that we do have, that others have that we don't on our seconds. We think we have very strong methodologies in terms of understanding the quality of that book. It has performed, we think, on a relative basis, very well through the cycle. We do very aggressive work on looking at credit bureau scores every 2 months. We have a quarterly appraisal mechanism. And all that has been factored into our provisioning effort. We have a lot of quantitative analysis around that. And as a result, with the new guidance that has come out really, we view it as having virtually no impact on our portfolio. And I think our performance has underscored our approach to that.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay, great. And so what percentage for those HELOCs, where you don't own the first but there is one, what percentage of those do you actually have data on the first lien?

Charles S. Hyle

I can't give you the exact number, but we worked through various vendors to track that information. And we have, I think, a pretty good fix on what is out there.

Operator

[Operator Instructions] And it appears we have no further questions at this time. I would like to turn the call back over to our speakers for any closing remarks.

Beth E. Mooney

Thank you, operator. And again, we thank you for taking 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 or Kelly Lammers, at (216) 689-3133. That concludes our remarks. Thank you.

Operator

Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.

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