KeyCorp (NYSE:KEY) Q1 2017 Results Earnings Conference Call April 20, 2017 9:00 AM ET
Beth Mooney - Chairman and CEO
Don Kimble - CFO
Bill Hartmann - Chief Risk Officer
Matt O'Connor - Deutsche Bank
Samuel Ross - Evercore
Scott Siefers - Sandler O’Neill
Bob Ramsey - FBR
Steven Alexopoulos - JPMorgan
Ken Zerbe - Morgan Stanley
Gerard Cassidy - RBC
Lana Chan - BMO Capital Markets
Marty Mosby - Vining Sparks
Saul Martinez - UBS
Geoffrey Elliott - Autonomous Research
Kevin Reevey - DA Davidson
Peter Winter - Wedbush Securities
Good morning, and welcome to KeyCorp's First Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded.
I would now like to turn the conference over to the Chairman and CEO, Beth Mooney. Please go ahead, ma'am.
Thank you, Operator. Good morning and welcome to KeyCorp's first quarter 2017 earnings conference call. Joining me for today’s presentation is Don Kimble, our Chief Financial Officer. And available for our Q&A portion of the call is Bill Hartmann, our Chief Risk Officer.
Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call.
I am now turning to Slide 3. Key reported strong results for the first quarter which reflects continued business momentum throughout our company and our success in realizing value from our First Niagara acquisition. My comments this morning will exclude merger-related charges which were $81 million or $0.05 per share in the quarter.
We generated positive operating leverage in both the year ago period and prior quarter and our pre-provision net revenue was up 58% from last year and 6% from the fourth quarter. Revenue trends reflect strong net interest income and another quarter of solid performance from our fee-based businesses including our capital market area.
Both revenue and expenses reflect our acquisition of First Niagara last August and the addition of over 1 million new consumer and commercial clients. Our result this quarter also reflects significant progress on our cost savings targets and efficiency goals. This has been accomplished by continuing to focus on legacy key expense levels, as well as executing our integration plans for First Niagara.
At the end of the first quarter, we had achieved 85% of our targeted cost savings of $400 million from our acquisition. The remaining 15% will be realized by the end of next quarter and we expect to exceed our initial savings target and deliver $450 million of cost savings by early 2018.
Our cash efficiency ratio this quarter moved to 60.4% and we're on a past to move that below 60%. Credit quality remains strong this quarter but lower net charge-offs and a reduction in non-performing assets and loans relative to the prior quarter.
We also maintained our strong capital position with the common equity Tier 1 ratio of 9.9%. During the quarter, we repurchased $160 million of common shares and subject to Board approval we expect to increase our common stock dividend in May.
Moving now to Slide 4. During the quarter we made significant progress with our First Niagara acquisition and as I mentioned earlier, we expect to exceed our initial cost savings target but the conversion of branches, systems and clients completed in the fourth quarter our teams continue to execute our detailed merger plans as we moved into 2017.
In addition to the completion of our branch consolidations plans, we have now exited approximately half of the corporate real estate space that was identified along with our work to decommission nearly all of the targeted application and servers.
From a strategic perspective, our confirmation with First Niagara has truly transformed our market presence particularly in Upstate New York where our history days back nearly 200 years. We now have leading market share in a number of important markets and have improved our scale but deposits per branch are approximately 70%.
We have also made broad-based progress in strengthening the relationships with our 1 million new clients. Retail deposits have grown from the conversion dates in every First Niagara market. We are also seeing strength in areas like commercial mortgage banking, payments and residential mortgage as we continue to build out that platform.
Critical to our success with First Niagara is our ability to deliver on our financial targets and the commitments we have made. As I said, we remain on track to achieve our initial $400 million in cost savings by the second quarter and we expect to reach $450 million by early 2018. This would represent 46% of First Niagara’s full year 2015 expense base.
With our first quarter results, we are operating at a level consistent with or better than the financial targets we announced with the acquisition. And while not included in our financial targets, revenue synergies from our acquisition provide significant upside. We have been very pleased with our early wins and remain confident in our ability to deliver a broad range of products and services to our new client.
I will close my portion of the call by restating, that it was a strong quarter for Key and also the third consecutive quarter that we have shown value creation from our First Niagara acquisition. During each of these quarters, we have grown our business by expanding client relationships and delivered on our cost saving commitments and this is translating into enhanced operating results.
As evidenced by our 60% cash efficiency ratio, and 13% return on tangible common equity both of which improved by 400 basis points from the year ago period. While we are reporting results that reflect the value of the acquisition, we believe they have not yet been fully recognized in our stock valuation.
With that, I will turn the call over to Don for more detailed look at the quarter. Don?
Thanks Beth. I'm on Slide 6.
First quarter net income from continuing operations was $0.32 per common share after excluding $0.05 of merger-related charges as compared to $0.24 per share in the year ago period and $0.31 in the fourth quarter which excludes $0.11 of merger-related charges.
As Beth mentioned, we generated positive operating leverage for the quarter. Excluding merger-related charges, our cash efficiency ratio was 60.4% and we had a return on tangible common equity of 12.9%. I’ll cover many of these items on this slide in the rest of my presentation so I’m now turning to Slide 7.
Total average loan balances of $86 billion were up $26 billion or 43% compared to the year ago quarter and up $773 million or 1% unannualized from the fourth quarter. Compared to a year ago period average loan growth primarily reflects the impact of the acquisition, as well as ongoing business activity with commercial and industrial loans continuing to be a driver.
Sequential quarter growth and average balances was driven by commercial loans which were up 2% and reflecting ongoing business activity and lower payoffs in our real estate capital line of business. Consumer loans primarily reflected the continued decline in home equity loan portfolio in line with market trends. As we previously communicated, we plan to finalize purchase accounting including the fair value of acquired loan portfolio in the second quarter.
Continuing to Slide 8, average total deposits totaled $102 billion for the first quarter of 2017, an increase of $30 million compared to a year ago period and down $3 million compared to the fourth quarter. The cost of our total deposits was relatively stable in the first quarter with a beta of less than 10% for total interest bearing deposits we remained - we maintained our deposit pricing discipline despite the increased interest rates.
Our guidance assumes the beta will remain low throughout this year. Compared to the prior-year, first quarter average deposit growth was driven by First Niagara, as well as continued momentum in our retail banking franchise. It is important to note that retention of the First Niagara deposit base is exceeded expectations. As Beth mentioned, retail deposits have grown in every First Niagara markets since the conversion date adding approximately $600 million in total balances.
Consumer deposits which include our retail franchise, as well as small business and private banking now account for approximately 60% of total deposit mix. On a linked-quarter basis, the change in deposit balances was primarily driven by escrow deposits along with a target reduction and certain short-term commercial deposits.
In the corporate bank as expected we saw a decline in deposits as we exited low value rate relationships and collateralized deposits. On a period in basis, deposit balances were stable with growth from our retail franchise offsetting lower escrow deposits.
Turning to Slide 9, taxable equivalent net interest income was $929 million for the first quarter of 2017 and the net interest margin was 3.13%. These results compare to taxable equivalent net interest income of $612 million and a net interest margin of 2.89% for the first quarter of 2016 and $948 million and a net interest margin of 3.12% in the fourth quarter of 2016.
Keep in mind fourth quarter results included $34 million related to the third quarter refinement of purchase accounting. Included in the first quarter net interest income is $53 million from purchase accounting accretion which added 18 basis points to our net interest margin for the quarter. This compares with $58 million in the fourth quarter which excluded the prior period refinement.
Our outlook would assume that the impact of purchase accounting accretion will continue to decline at the same pace. Excluding purchase accounting accretion, net interest income increased $264 million in the prior-year largely driven by the impact of First Niagara and higher earning asset yields and balances. Growth of $20 million in the prior quarter resulted from higher earning asset yields which partially offset by two fewer days in the quarter.
On our slide we had a detail to show the trend in our net interest margin excluding the impact of purchase accounting accretion which is 2.95% for the first quarter to benefit from higher interest rates and lower levels of liquidity.
I’m going to Slide 10, non-interest income in the first quarter was $577 million, up $146 million from the prior year and down $32 million from the prior quarter excluding the fourth quarter benefit from merger-related charges. Growth in the prior year was driven by higher investment banking and debt placement fees, a result of improved capital markets conditions and activity. It was a record first quarter for this business.
We also saw growth in the prior year and a number of our other businesses like Trust and investment services, service charges on deposit accounts, and cards and payments income which benefited from the acquisition and ongoing business activity.
Compared to the fourth quarter, lower non-interest income largely reflects lower investment banking and debt placement fees which had a very strong fourth quarter along with corporate owned life insurance which is seasonally lower in the first quarter.
Turning to Slide 11, reported non-interest expense for the first quarter was $1 billion which includes $81 million of merger-related charges. A detailed breakout of merger-related charges is included in the appendix of our materials.
As Beth mentioned, our expense levels this quarter reflects our commitments to reduce expenses and improve efficiency. 85% of our targeted cost savings have been achieved and are reflected in our first quarter results.
On the bottom line on the slide you can see that our quarterly run rate after adjusting for merger-related charges, pension settlement and intangible amortization refinement was $58 million lower compared to the fourth quarter. We expect to achieve the remainder of the $400 million initial cost savings target in the second quarter and as we look out to the remainder of 2017 and enter early 2018, we will be executing on our revised target of $450 million, an incremental $50 million from our initial target.
Moving back to reported expenses compared to the first quarter of last year and after adjusting for merger-related charges, non-interest expense was up $253 million. Growth primarily reflects the acquisition of First Niagara, as well as higher incentive stock based compensation.
Linked-quarter expenses adjusted for merger-related charges were down $81 million. Lower incentive levels reflect the merger cost savings achieved, as well as the lower pension expense due to the fourth quarter settlement charge. Additionally, lower incentive and stock-based compensation for the first quarter was offset by seasonally higher benefit expense.
Turning to Slide 12, our net charge-offs were $58 million and 27 basis points of average total loans in the first quarter which continues to be below our targeted range. First quarter provision for credit losses was $63 million which slightly exceeded the level of net charge-offs.
Non-performing loans decreased $52 million or 8% from the prior quarter. At March 31, 2017 our total reserves for loan losses represented 1% of period end loans and 152% coverage of our non-performing loans.
Turning on to Slide 13, common equity Tier 1 ratio at the end of the first quarter was 9.9%. In accordance with our 2016 capital plan, we repurchased $160 million of common shares during the first quarter. Also we both redeemed and converted some of our preferred stock in the quarter. In February, we redeemed our preferred series fee which totaled $350 million and in March we converted our 7.75% Preferred Stock Series A in the common shares which added approximately $21 million in common shares outstanding.
For the first quarter, our preferred stock dividend totaled $28 million with the Series C redemption and the Series A conversion, we would expect our quarterly run rate to move down to $14 million.
Slide 14 provides you with our outlook and expectations for our recorded results in 2017. Merger-related charges are excluded. We remain committed to generating positive operating leverage and have updated our guidance to reflect our first quarter results.
We continue to expect average loans increased in mid single-digit percentage range which translates the full year average balances of $87 billion to $88 billion. We expect loan growth to exceed deposit growth with full year average deposit balances in the range of $104 billion to $105 billion.
Net interest income is expected to be in the range of $3.7 billion to $3.8 billion. The $100 million increase from our previous guidance with our outlook assuming one additional rate increase late in the year and the data will remain low for the remainder of the year.
We continue to expect the quarterly impact from purchase accounting accretion to trend down over time with the 2017 full-year amount in the range of $180 million to $190 million, approximately 20% below the fourth quarter run rate. The quarterly impact will decline consistent with the phase that we experienced in the first quarter. We anticipate that non-interest income will be in the range of $2.3 billion $2.4 billion as we continue to drive growth from ongoing business activity and the acquisition.
Non-interest expense is expected to be in the range of $3.65 billion to $3.75 billion and once again does not include merger-related charges. With the incremental cost savings we expect to achieve from the acquisition, we're also anticipating higher levels of merger-related charges. We expect charges to increase proportionally from the regional $550 million estimate.
In 2017, net charge-offs should include - should continue to be below our targeted range of 40 to 60 basis points and provision should slightly exceed our level of charge-offs to provide for loan growth. To wrap up, this quarter was important to us. We've been committed to realizing the value of the acquisition to achieve the improvement in our operating performance and to continue to drive core growth.
And while we are not there yet, we are on the cost of delivering our performance within our long-term target range. We remain committed to our long-term financial targets as have shown at the bottom of this slide which include continuing to generate positive operating leverage, reducing our cash efficiency ratio to less than 60%, maintaining our moderate risk profile, and producing a return on tangible common equity of 13% or 15%.
I’ll now turn the call back over to the operator for instructions in the Q&A portion of the call. Operator?
[Operator Instructions] First from the line of Matt O'Connor with Deutsche Bank. Please go ahead.
Good morning. I was wondering if you could just elaborate on the trust line actually, that was quite positive and just any more color in terms of what was driving that?
We are continuing to invest in this area and reflected the growth in our investment services business along with the benefit of certain trading activity that occurred during the quarter as well and so we view that as a area of ongoing focus for us.
Okay. And then - sorry it's been a very long and early days here, just in terms of progression on the purchase accounting accretion, I know you commented on that earlier but how should we think about that kind of invest this year and then looking ahead in terms of how quickly it burns off?
Sure, what we've talked about is that from fourth quarter to first quarter we saw a decline from $58 million to $53 million. We would expect that same type of decline to occur on a quarterly basis going forward. We are down about $5 million a quarter and we always said for the full year, we expected the accretion to be in the $180 million to $190 million range and just to give you a perspective.
We would expect that same type of decline occur prospectively in quarters after that the remainder of 2017 as well.
Okay. That's helpful. Thank you.
Next we'll go to John Pancari with Evercore. Please go ahead.
This is actually Sam Ross on for John. Thanks for taking the question, just had a couple of quick ones. The first is, I know you guys gave some color on your commercial portfolio based on the outstandings, and I'm just wondering if you can size it to your exposure to the retail industry specifically to the mall factor.
One, it's a fairly small portfolio for the overall we referred questions about regional malls and also direct exposure to retail businesses. And I would say that our outstanding balances are less than $1 billion on that combined portfolio to fairly small ports overall and we've been very pleased with the performance so far.
Great, thanks. And then maybe just as a follow-up, just want to hear your general sense of both line utilization and maybe just borrower appetite, I know that some of your competitors talked about still borrowers being on the sidelines, I just wanted to get your updated thoughts on what you guys are seeing in the market?
Sam, this is Beth Mooney. We have seen line utilization remain relatively consistent now for several quarters and I would tell you that borrowers - what I would tell you the sentiment that we're hearing is canteen towards optimism but not yet translating into different behaviors or activities as it relates to their borrowing and banking activities but there is level of emerging confidence that I think if it is not with some level of fiscal stimulus, as well as other legislative and tax reform out of Washington that could translate into increased and heightened activity.
Good. Thank you for taking the questions.
And next go to Scott Siefers with Sandler O’Neill. Please go ahead.
Good morning, guys. Don I was just wondering if you can expand a little on your commentary on the margin, I mean you gave the lock in the presentation which I appreciate but even within that backdrop, the core margin improvement was just a lot more substantial than I might have anticipated.
So I wonder if you could spend a second or so on how things came in relative to what you might have anticipated and whether it was simply deposit betas being effectively zero or just capturing so much of the asset side. How did things relative to what you would've thought. And then if you can just sort of expand on your outlook for the core margin more specifically as well.
I would say that the core margin did come in stronger than what we would have expected back in January. I think it was driven by a number of different items. One, you mentioned the betas, and there were lower than what we had modeled, I would say that the impact of the December rate increase added about six basis points in margin to us just because of the betas were lower than expected.
We also had picked up about three basis points in margin related to lower levels of liquidity. We talked about some of the temporary or short-term deposits that left in the first quarter on average basis and we saw a corresponding reduction to our fed cash account and so that added about three basis points.
And so that really represents the 9 of the 13 basis point improvement. So that really was the other core activity and growth we saw on the balance sheet. We benefitted a little bit from higher yields on some the portfolio purchases that we made throughout the quarter and so those were helpful as well.
Going forward as we look at the margin, I would say that we will continue to see pressure as those purchase accounting accretion benefits amortized down so by declining about 5 million a quarter that caused about two basis points a quarter for us and so going forward we did say that we expect to see betas remain low for us and so we would expect in general that the margin to be relatively stable for the year reflecting the impact of both those items.
Okay. That’s perfect. Thank you. And then separately now you've officially put out the quantification of the higher cost savings number, can you just spend second talking about where those - where you see the incremental potential for that additional $50 million.
Sure, and as far as the additional part of the $50 million and Beth commentary she talked about the progress we made on certain systems conversions and space related occupancy with that cost and many of those are near completion and so we would expect to see those realized throughout the end of this year and first part of next year and so you will see ongoing reductions and computer processing/vendor related expenses associated with the technology and then also lower occupancy costs from reducing some of our non-branch related expense.
All right, great. Thank you, guys very much.
And we'll go to Bob Ramsey with FBR. Please go ahead.
Hi, good morning guys. Maybe just circle of the conversation on the core margin piece and we kind of exclude the purchase accounting. Is it fair to think that given the March fed increase you guys could see something of a similar magnitude in terms of benefit from the higher yield on assets, something maybe 8 to 10 basis points on lift?
By overstating a little bit as you look at our core margin we talked earlier that about three basis points that came from the benefit of lower liquidity. We don't expect to see that continue to drive that kind of incremental benefit.
The other thing is that we talked about some of the lift on the investment portfolio and while we do believe that our new purchases will be at a higher rate than the roll-off of the cash flows from our existing portfolio, we're seeing rates per day about 20 to 30 basis points below where they would've been before for new purchases and so that lift would not be as significant but we do expect to get additional benefit from that March rate increase and we do believe the base will remain low for this next rate increase as well.
Okay. I appreciate your guidance is predicated on only one more rate increase at the end of the year. If that rate increase came sooner or if there was an incremental increase, how much of a benefit do you estimate that could provide to the margin?
At some point in time we are going to start to see beta start to pickup in and so I don't know when that is but as we talked about before this last rate increase that was about 6 basis points of margin. I think that subsequent rate increase I would expect to be slightly below what we are realizing from the past rate increases and so we will start to see that benefit get smaller in perspective rate moves.
Okay. Fair enough. Shifting to I guess certainly clean up a question. Could you give me what the preferred dividend expense was at this quarter and then what you expected to be in the second quarter given the retirement of couple of classes of preferreds.
Good question. It's $28 million for the first quarter and we would expect the second quarter to be $14 million and so each of those two preferred issuances is at about $7 million quarterly dividend.
Perfect. And do you also have handy the number of share and price for share repurchases quarter and a get a dollar amount in total but a significant break out.
We’ve talked about $160 million and that was including net and growth shares and the total shares that were bought back I don't see that handy. Vern, do you have that in the table someplace? Okay, repurchase were 8,673,000 shares in the open market.
Okay. That’s perfect. And last question, just sort of thinking about the expense run rate is we head into the second quarter. I know you said you expect the remainder of the initial First Niagara cost savings to commence. I guess that takes us maybe about 15 million lower and seasonality should be I guess another tailwind theoretically in the second quarter. Any sense of kind of putting all together where we should be thinking about expenses next quarter?
We really haven't provided second quarter guidance but I would say that we do expect to realize that remaining 50 million incremental per quarter. One thing to keep in mind is that we also have targeted $300 million in revenue synergies related to the acquisition we talked about incremental costs associated with that of about $100 million a year. And so you will start to see some investments being made to achieve this kind of revenue synergies as well.
Okay. All right. Thank you.
Next question is from Steven Alexopoulos with JPMorgan. Please go ahead.
Good morning, everybody. I'm going to start on the expense saves, it's great to see already raising the expected cost phase in the First Niagara. And Beth on prior calls you had indicated that, the cost save commitment to the board or internally was above the 400 million level with cost saves in an estimated 450 million. Is that the level that you committed internally or could there be upside to the 450?
That is consistent with what we had committed internally into our board as we undertook the acquisition.
Okay, that's helpful. And Beth I want to follow-up on your comments that business customers are more optimistic but cautious right waiting to see what comes out of Washington. I don’t know if you heard Huntington's call yesterday, but they were very bullish on loan growth really pointing to the Midwest, seeing an economic revival sold by American fee income in Washington. Are you seeing more activity today in your Midwest markets compared to the rest of the footprint?
We are seeing relatively well distributed activity. We do not see a pocket set of either underperforming or over performing, it has been a consistent level of activity across our franchise and markets. And will tell you as we look at our first quarter investment banking and debt placement fees. Clearly the debt capital market piece of our business is incredibly strong and so we do see some of our manufacturing base which would be included in the Midwest as else being an auto related - still being very strong.
But with our model we see dispersion of activity and obviously with our acquisition we have more bankers on the street than we've ever had in our eastern markets as well.
Maybe if I could squeeze one more for Don. Relative to the 53 million of accretion reported, how much of that was scheduled and we think about the guidance you're giving us 180 million to 190 million, has it split out between scheduled accretion and what you think will be accelerated?
We really haven't broken that out I would say that estimated in our projections a level of prepayment to be consistent with what we’re experiencing so far. So we can see if we can dig out a little more detailed then just what the actual breakout of both stated and expected.
Okay. I mean, well I’m try gin to get a sense Don is, if there's a big cliff affect coming as we move into 2018 and 2019 on the schedule.
What we would expect to see a continued trend as far as essentially about 20% reduction per year and so we're not forecasting any big drop off in 2018 compared to the 2017 level of decline.
Okay. Got you. Thanks for all the color.
And we’ll go to Ken Zerbe with Morgan Stanley. Please go ahead.
Just a question on the investment banking business. Obviously good quarter this quarter, when you think about going into second quarter, have industry conditions changed in terms of the outlook, obviously your fee guidance in total didn’t really change that much but just wondering if things were unique in first quarter and different in second quarter - versus seasonality. Thanks.
No Ken, typically our first quarter on investment banking and debt placement fees is always a seasonally like quarter historically it tends to end strong in the fourth quarter. So the fact that this was a record quarter for this business is a good indication of core momentum in that business and as we go into the second quarter again assuming markets are constructive as they have been, our pipelines are definitely strong if we go into the second quarter.
I guess does that imply the - of your 2.3 billion to 2.4 billion of fee guidance that you may end up – that's easier to hit the higher end of that range or there are other offsets?
Well I would say Ken if you take a look at our first quarter level of non-interest income it's $577 million, so you annualize that and that's the very low end of that to $2.3 billion to $2.4 billion numbers. So we would expect growth in that line item along with other fee categories but I don't want to get too prescriptive as to where we would reside in that range at this point.
Understood. And then just a question on capital, when you think buybacks and when we think about going into the end of '17 and '18. What's the right level of CE Tier 1 that you're comfortable holding? In any way you would like to target at least?
We talked before about post the acquisition our CET 1 was 9.5% and for banks this still will go through the quantity a portion of the CE Tier process. Don't see a lot of this pass the quantitative portion without leasing 9% to Common Equity Tier 1.
And then so I think that kind of gives a range of where you would expect we were very pleased with the 9.5% level and can see that still been in a strong level of capital but we'll provide more color after the '17 CE Tier results are announced.
All right, great. Thank you.
Our next question is from Gerard Cassidy, RBC. Please go ahead.
Good morning, Beth. Good morning, Don. Beth, you talked about the loan growth being kind of spread out across your different franchises around the country. Can you share with us what you're seeing from the acquired? And you've done a very good job in describing the cost savings from the First Niagara transaction. Can you give us some detail on what the loan growth has been in that new - I know it's an existing market but from those new customers that you've acquired?
Yes Gerard. At this point in time we also did note that the deposit growth has been very strong and the attrition of clients has been less than we would have expected. So we felt like we are off to a very good start and I would tell you pipelines are building across loans, as well as payments opportunities and specifically with the mix of the balance sheet with First Niagara with a relatively large commercial real estate book, we are also seeing a variety of activities that can lead into our commercial mortgage banking which goes into our investment banking and debt placement fees.
So as we look across the board on those new million consumer and commercial clients, we do see momentum building and in the first quarter you’re still not even fully six months passed the conversion date, and as you can well imagine going into the beginning of the year we were declaring ourselves back to [BAU] and we see those pipelines in that momentum building.
Thank you. And then Don, I think you talked about the revenue synergies from this transaction, can total about $300 million, and the cost to get that will be about $100 million. Again, the expenses are very clear, you shouldn't spent very easily in the press release and stuff. Where would you say are you on these revenue synergies? Are you 25% into them? 10%? What do you stand there?
I would say we are still at very early stages at this point in time in some of the areas we have talked about our cash management and treasure management activities for our commercial customers and while the pipelines are very strong, we really haven't seen the full benefit kick-in from those yet.
Another area we talked about it is residential mortgage and we're starting to build out the commercial - the mortgage loan officers and other support areas for that business that we really haven't seen the revenues kick in for that yet either and we're early stages for that.
And so I would say that with a few exceptions, we are just really starting off that process and starting to see some of the early seats as far as the those opportunities.
Great. And then on that number, have you guys done any analysis to say that - to achieve the $300 million, what percentage of it would be coming from your new customers that use some of those services from competitors of yours? So you'll have to steal that business versus new growth because you are into - deeper into markets that are in Upstate New York.
For the most part these are new product or services and so what we're picking up is a greater market share of that existing customer relationship. Keep in mind as for some of the commercial products and services, first we didn't have those capabilities to sell into their customers and they were hiring people from other banks that we were able to bring over the commercial loan relationships but not necessarily the treasury management capabilities. And so we believe that we can have success in driving that additional account acquisition.
On the residential mortgage side, that we really didn't have this is a true product offering throughout the key footprint and each one of those key customers probably have a mortgage loan, but we want to be a top of mind for when they look out to buy next house or when they want to refinance.
And so this is really getting to a point where we're successful in getting our share of the market as opposed to creating a new product or offering.
Great. Thank you.
Our next question is from Lana Chan with BMO Capital Markets. Please go ahead.
Good morning. Just one to two follow up question done on the incremental 50 million of cost savings just thinking about how that flows through should we think about that being invested for force abilities revenue synergies initiatives?
We look at them separate and independently and we might drive those cost savings from the bottom line and at the same time we do make investments to get additional revenues. And so they're not dependent on one another there are mutual exclusive but we’re continuing to hold our team accountable in driving that $450 million cost savings target. Our board is fully accountable to drive that and we’re also holding each other accountable to make sure we can drive that $300 million in revenue growth and recognize that there are some incremental cost associated with it.
Okay. And just one quick follow-up also on the decline in sort of the excess and liquidity this quarter some of that was you said deliberate decline and some of the commercial deposits. How should we think about that going forward in terms of some of the detail growth is obviously going to come back so net-net for the margin going forward?
I would say that are assumption is these levels remain consistent with where they're at today.
And you wouldn’t see a lot of the other changes in the deposit balances or the cash position prospectively.
Okay, great. Thank you.
Next we'll go to Marty Mosby with Vining Sparks. Please go ahead.
Thanks Don I want to ask you little bit about $3 paying building allowance and the purchase account accretion. When you’re starting to convert these loans over you have to kind of take the accounting and it just the way that they forces will do this is crazy but you’ve to take it from netting against the loan so actually building the allowance.
It was a pretty nice $40 million difference between the PAA and the building allowance this particular quarter. So just wanted to kind of get your thoughts on how those two things should be balancing out.
Good question I would say that the kind have some new answers to it essentially what we do on a quarterly basis is look at our level of reserves it would be required on that purchase portfolio and see how that compares to the discomfort that remains. And so at some point in time we’ll have to start building reserves in connection with that. I would say that as those loans mature and are originated in a new form that were required to book reserves on that.
What we've talked about externally is that we think that the average loan life is about four years and so over that four years that allowance will be growing from the 1% to say about 120, 125. And so you will see a build in the reserve prospectively but we don't expected to be lumpy at this point in time.
And then to a degree that there was a net positive I kind of just think of that as accelerating the benefits and as that kind of roles off with that $5 million dollars per quarter you’re going to generate more synergies, more incremental revenues. And actually the offset is it, because this upfront benefit but then you're really generating the core business to replace that and more as you move forward.
It’s a good way to look at it.
Our next question is from Saul Martinez with UBS. Please go ahead.
Hi good morning thanks for taking my question. Just I guess follow up on net interest income net interest margins and thinking through the guidance so you up the guidance at 37, 38 given what you did and once you kind of imply the run rate of at the low end $925 million I think at the high end $960 million this quarter obviously we’re 929 on the NIIE even considering the incremental purchase accounting accretion of 5 million per year it seems like there's maybe a bit of conservatism built into that number. I guess question is it fair to say that and is it fair to think that you’ll likely be closer to the higher end of that range?
I would say that if you take a look at our 929 this quarter and multiple times four you’re still at the low end of that 37 or 38 range as far as our full year guidance. We do say and expect that that purchase accounting accretion will decrease by $5 million a quarter. And so that 180 to 190 level for the entire year is below that first quarter level of $53 million.
And so it does create a hurdle for us to grow through. The question will be is what kind of betas will exist going forward for the market rate increase and for the rate increase that we assumed at the end of the year and then beyond that it’s just making sure we continue to grow the asset base and we would expect to have net interest income grow from that.
So again the variables on margin tend to be more than the impact of the betas and overall liquidity position of the variable on net interest income tend to process more on what we will see from changes in deposit rates with future rate increases.
Okay. No, that’s helpful. And then I guess more specific questions that project if you address this say gone on late but did you have any benefit at all from any tax benefit this quarter at all from restricted stock units or options?
Yes, tax benefit was there so if look and see tax rate absent the merger related charges I think it was 24.8% we do guide for a range of 25% to 27% for the full year. And so there was back in the current quarter from that.
Okay. So we can just take 24.8 to a more normalize rate and that’s kind of the benefit you got from it this quarter?
That's correct, yes.
Okay. Thanks a lot.
Next we’ll go to Ken Usdin with Jeffries. Please go ahead. And we will move on to Geoffrey Elliott with Autonomous Research. Please go ahead
Good morning, thank you for taking the question. It seems like on the first Niagara deal it sounds that you’re pretty happy with how things are going you increased the expenses target to the 450 million given that you now quite the way through integration that's one how do you think about future M&A?
This is Beth and I would say that our work is not yet done and I think our priorities are clear there is additional work to realize and deliver all the cost savings we’ve always said while not in our initial projections that we shared with the street we announced the transaction that the revenue synergies were significant and a real opportunity for us and so I would tell you that we do not yet believe our shareholders have realized the full value and benefit of this acquisition and our priorities and our focus are very, very clear.
And so as opportunities come up now does that mean you have to kind of turn away from them and focus on this or how long does it take until you can start to locate something else?
No, as we have said we have everything we need to be successful between our business model our geographies our capabilities and so as we look at the prospects for TNR our commitment on our long-term financial targets and our operating performance we have what we need to be successful and meet the goals and objectives that we have outlined to the street First Niagara has been instrumental as we said in our ability to achieve some of the financial metrics and performance particularly in return on tangible common equity and efficiency ratio so it’s been very beneficial but as a company Key is well positioned in the market to succeed.
Our next question is from Kevin Reevey with DA Davidson. Please go ahead.
Good morning. I know of your loan book as a small percentage of your loan portfolio can you talk about the credit trends you've seen in that book and the most recent quarter?
I am sorry which book did you say.
The auto loan book.
I am sorry, yes, I would say our loan book has continued to perform well and delinquency levels have maintained very well and keep in mind that our auto loan book is what I refer to a super prime and FICO scores is north of 750 on average and we’re focused on making sure that we extend credit to the borrowers that aren’t reliant on the value of the collateral to get our money back and are more focused on their capability that to repay and that has continued to do well for us.
Great. Thank you.
And we have a question from Peter Winter with Wedbush Securities. Please go ahead.
Good morning I was just curious you talked about how borrower sentiment was very positive not translating into loan growth. But can you talk about what you're seeing in terms of the loan pipelines?
Yes Peter, this is Beth I would tell you that we've always talked over the last couple years about borrowers being cautiously optimistic and I would say they have definitely chanted towards to optimism I do see our pipelines are up year-over-year and they are very strong going into the second quarter you add to that that we have also increased our sales force and our client base with First Niagara.
So as we go into the balance of the year, we have not only improving sentiment that likely is going to translate into increased activity but we also have another level for growth in terms of the acquisition of First Niagara, those relationship managers and that client base. So prospectively we feel good about loan growth.
Peter, this is Don. One other thing to add and Beth had highlighted this earlier as well, that keep in mind too for the first quarter for us but we had our record first quarter as far as investment banking debt placement fees. And the strength is really coming from our commercial real estate and loan syndication areas and we are actually retaining a little bit less on our balance sheet than what we normally would based on the availability of the markets reporting those areas.
And so that results in a little bit slower loan growth for us but still represents the strength as far as our ability to generate capital for our customers.
Just a quick follow-up, just going back to the expense guidance with the additional 50 million expenses. Would you think that it would come in more towards the lower end of the range or is it a function of what happens on the revenue front that maybe makes you come in more towards the middle higher rent just given the additional cost saves now?
Peter you guys are just trying to pin me down to the actual number you're putting in your models here, but…
Take the low end or high end of the range.
What I would offer up for that is if you look at the incremental $50 million. We talked about those synergies really been achieved later in 2017 and early 2018 and so the impact on the full-year 2017 won't be that significant for that incremental $50 million and so while we do believe it's real, we are able to hold ourselves accountable to achieving that but that really doesn't impact the outlook as much you might expect.
Okay, thanks very much and very good quarter.
And with no further questions, I'll turn it back to you Ms. Mooney for any closing remarks.
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 at 216-689-4221. And that concludes our remarks for today. Thank you very much.
And ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.
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