Keycorp (KEY) — Q1 2021 Earnings Call Transcript

Thank you for joining us for KeyCorp's First Quarter 2021 Earnings Conference Call. Joining me on the call today are Don Kimble, our Chief Financial Officer; and Mark Midkiff, our Chief Risk Officer. On Slide 2, you will find our statement on forward-looking disclosures and non-GAAP financial measures. It covers our presentation materials and comments as well as the question-and-answer segment of our call. I'm now turning to Slide 3. Our first quarter was a strong start to the year as we executed our strategy and delivered positive operating leverage relative to the year-ago period. We continued to grow the number of clients across our franchise. In the first quarter, we experienced the strongest growth in consumer households in 5 years. Additionally, we continue to add commercial clients and deepen existing relationships. We leverage the strength of our business model by raising over $13 billion for our commercial clients, of which we retained approximately 19% on our balance sheet. And let me just say that's exactly how our model is designed to work, taking advantage of attractive markets for the benefit of our clients while maintaining our credit discipline with that which we place on our balance sheet. We also launched our National Digital Bank, Laurel Road for doctors at the end of March. I will comment more on that shortly. In addition, we announced the acquisition of AQN Strategies, a client-focused analytics firm with deep expertise in the financial services industry. The acquisition aligns with Key's relationship strategy and underscores our commitment to a data-driven approach to grow our business. We also identified 70 branches for consolidation representing approximately 7% of our network. We continue to lean into digital. Most of these closures will take place in the second quarter. Moving to our financial results for the quarter. We reported net income of $591 million or $0.61 per share for the first quarter. On a per share basis, this is an increase of 9% from the fourth quarter results and up significantly from the year-ago period. We generated record first-quarter revenue, reflecting broad-based growth across our company, driven by our fee-based businesses. Our Investment Banking business achieved record first-quarter revenues with growth across the platform. This is an area where we have invested in our teammates and made targeted acquisitions to enhance our capabilities, including such areas as health care and technology. We have grown this business in 8 of the last 9 years, including having a record year in 2020, and we expect to grow this business again in 2021. We reached a new milestone in our consumer mortgage business with record loan originations of $3 billion for the quarter. In addition to adding high-quality loans to our balance sheet, consumer mortgage fees were up 135% from the year-ago period. Our outlook for this business remains positive as we continue to grow and take market share. We reported a record $8.3 billion of originations in 2020, and we expect to eclipse that level this year. Other contributors to fee income this quarter were trust and investment services and cards and payments income. Credit quality remains strong. Nonperforming loans, net charge-offs, and criticized loans were all down from the prior quarter. We continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through the business cycle. Finally, we have maintained our strong capital position while continuing to return capital to our shareholders. Our common equity Tier 1 ratio ended the quarter at 9.8%, which is above our targeted range of 9% to 9.5%. Our strong capital position enables us to execute against our capital priorities: organic growth, dividends, and share repurchases. This quarter, we repurchased $135 million of common shares. Our Board of Directors also approved our first-quarter common stock dividend of $0.185 a share. Now turning to Slide 4. Before I turn the call over to Don, I wanted to make a few comments regarding Laurel Road. We acquired Laurel Road, a born digital company in April of 2019. The acquisition has exceeded all of our expectations. It has accelerated our digital transformation and has been a great complement to our existing health care platform. Since our acquisition, Laurel Road has generated over $4.6 billion in high-quality loan originations, adding high-value digital relationships with health care professionals. We also have the opportunity to continue to scale this business. At the end of March, we took the next step on this journey with the launch of our Digital Bank, Laurel Road for Doctors, serving the health care segment and expanding our consumer franchise nationally. Importantly, our approach to our Digital Bank is differentiated. Historically, many offerings have been product-centric or focused on deposit gathering. Ours is fully aligned with our relationship strategy. The launch broadened our offering for Laurel Road clients to include deposits, additional lending products, and other value-added services created to meet the unique financial needs of health care professionals. The launch was an important milestone in our digital journey, which brings together critical elements of our strategy: targeted scale, digital, health care, and primacy. Right now, we are focused on physicians and dentists, but soon, we will expand to other medical professionals. Importantly, this launch is not the end goal, but rather just the beginning. I will close my remarks by restating that I am pleased with our results for the quarter and our strong start for 2021. I am proud of what we have achieved as a team and remain optimistic about the future as we emerge from the pandemic and the economy continues to recover. Key is well positioned to grow and deliver on our commitments for all of our stakeholders. With that, I'd like to now turn it over to Don to walk through the quarter. Don?

Thanks, Chris. I'm now on Slide 6. As Chris said, it was a strong start to the year with net income from continuing operations of $0.61 per common share, up 9% from the prior quarter and over 4x from the year-ago period. The quarter reflected a net benefit from our provision for credit losses. The reserve release was largely driven by expected improvement in the economic environment. Importantly, we generated a record first-quarter revenue, driven by the strength in our fee-based businesses. I'll cover the other items on this slide later in my presentation. Turning to Slide 7. Total average loans were $101 billion, up 5% from the first quarter of last year, driven by growth in both commercial and consumer loans. Commercial loans reflected Key's participation in PPP, partially offset by decreased utilization. PPP loans had an impact of $7 billion in the first quarter of 2021 average balances. Consumer loans benefited from the continued growth from Laurel Road and, as Chris mentioned, record performance from our consumer mortgage business with $3 billion of consumer mortgage loans this quarter. The investments we have made in these areas continue to drive results and importantly, add high-quality loans and relationships. Linked quarter average loan balances were down 1%, reflecting lower commercial utilization rates and a reduction in average PPP balances. We had just under $1 billion of PPP forgiveness in the current quarter. Consumer loans were up 1% from the prior quarter, again related to continued production from consumer mortgage and Laurel Road. Continuing on to Slide 8. Average deposits totaled $138 billion for the first quarter of 2021, up $28 billion or 25% compared to the year-ago period and up 1.5% from the prior quarter. The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus. The growth was offset by continued and expected decline in time deposits. The interest-bearing deposit costs came down another 3 basis points from the fourth quarter of 2020, following an 8 basis point decline last quarter. We continue to have a strong, stable core deposit base with consumer deposits accounting for over 60% of our total deposit mix. Turning to Slide 9. Taxable equivalent net interest income was $1.012 billion for the first quarter of 2021 compared to $989 million a year ago and $1.043 billion for the prior quarter. Our net interest margin was 2.61% for the first quarter of 2021 compared to 3.01% for the same period last year and 2.7% from the prior quarter. Both net interest income and net interest margin were meaningfully impacted by significant growth in our balance sheet compared to the year-ago period. The larger balance sheet benefited net interest income but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows. Compared to the prior quarter, net interest income decreased $31 million and the margin declined 9 basis points. The decrease in net interest income was caused by the day count of approximately $14 million, lower loan fees of $8 million and lower loan balances resulting in an additional $8 million reduction to NII. Net interest margin also reflected a 4 basis point reduction due to the increases in our liquidity position. Moving on to Slide 10. We have continued to see growth in our fee-based businesses. Noninterest income was $738 million for the first quarter of 2021 compared to $477 million for the year-ago period and $802 million in the fourth quarter. Compared to the year-ago period, noninterest income increased 55%. We had a record first quarter for investment banking and debt placement fees, which reached $162 million driven by broad-based strength across the platform. This quarter, both debt and equity markets were especially strong. Record mortgage originations drove consumer mortgage fees this quarter, which were up $27 million or 135% from the first quarter of '20. Cards and payments income also increased $39 million related to higher prepaid card activity from state government support programs as well as the growth in the core platform. Other income in the year-ago period included $92 million of market-related valuation adjustments. Compared to the fourth quarter, noninterest income decreased by $64 million. The largest driver of the quarterly decrease was seasonality in our investment banking line coming off an all-time high record quarter. This was partially offset by the strength in trust and investment services income and cards and payments income. I'm now on Slide 11. Total noninterest expense for the quarter was $1.071 billion compared to $931 million last year and $1.1 billion in the prior quarter. The increase from the prior year is primarily in personnel expenses related to higher production-related incentive compensation, which increased $58 million and the increase in our stock price resulting in a $36 million increase compared to last year. Employee benefit costs also increased $15 million. Year-over-year, payments-related costs reported in other expenses were $32 million higher, driven by higher prepaid activity. Computer processing expenses this quarter were elevated related to software investments across the platform, accounting changes, and timing differences. Compared to the prior quarter, noninterest expenses decreased $57 million. The decline was largely due to lower production-related incentives and severance costs. Moving now to Slide 12. Overall, credit quality continues to outperform expectations. For the first quarter, net charge-offs were $114 million or 46 basis points of average loans. Our provision for credit losses was a net benefit of $93 million. This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production. Nonperforming loans were $728 million this quarter or 72 basis points of period-end loans, a decline of almost $60 million from the prior quarter. Additionally, criticized loans declined and the 30- to 90-day delinquencies also improved again quarter-over-quarter with a 5 basis point decrease, while the 90-day plus category remained relatively flat. Now on to Slide 13. Key's capital position remains an area of strength. We ended the first quarter with a common equity Tier 1 ratio of 9.8%, which places us above our targeted range of 9% to 9.5%. This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders. Importantly, we continue to return capital to our shareholders in accordance with our capital priorities. Our Board of Directors approved a first-quarter dividend of $0.185 per common share. We also repurchased $135 million of common shares under the share repurchase authorization we announced in January of up to $900 million. This leaves us with a capacity of up to $765 million for the next 2 quarters. On Slide 14, we provide our full year 2021 outlook, which we've adjusted to reflect our strong start to the year, positive momentum in our business and more favorable revenue outlook. Consistent with our prior guidance, we expect to deliver positive operating leverage for the year. Average loans are expected to be relatively stable, reflecting continued momentum in our consumer areas, the impact of PPP, and stronger commercial growth in the second half of the year. The first quarter should be the low point of the year with expected growth from here. We expect deposits to be up mid-single digits and that we will continue to benefit from our low-cost deposit base. Net interest income should be up low single digits. Our net interest income will benefit from higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity, offset by the ongoing impact of low rates. Noninterest income should be up mid-single digits, reflecting the growth in most of our core fee-based businesses. Noninterest expense should be relatively stable, reflecting higher production-based incentives related to our improved revenue outlook. Our continuous improvement efforts and branch consolidation plans remain on track and will help support our ongoing investments in talent and to stay at the forefront of our digital offerings. Moving on to credit quality. We have reduced our net charge-off guidance, which is now expected to be in the 35 to 45 basis point range for the year. This reflects the quality of our portfolio and our current outlook. And our guidance for our GAAP tax rate remains unchanged at around 19% for the year. Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns. Overall, it was a good start to the year, and we remain confident in our ability to deliver on our commitments to all of our stakeholders.

Sorry, I think I was on mute. Good to talk to you this morning. I appreciate you taking the question. My first question is about whether you are seeing any preference from your corporate clients for traditional banking products compared to capital markets products, especially given your broader product mix due to your capital markets exposure. Has there been any shift in preference there?

So Scott, it's Chris. We have seen a preference to kind of take our clients to where the most advantageous financing is. And one of the areas that I would point you to would be our real estate book. And you'll notice, if you look at the H8 data, we underperform some of our competitors in terms of what we're putting on our balance sheet. But yet we're only putting about 19% or 20% of the capital we raise. So if you think about really attractive nonrecourse, 10-year money, Fannie, Freddie, FHA, the life companies, the CMBS market. That would be an example of where these middle market companies are consistently opting to go to other sources of funding other than the banks. And obviously, for us, that ties in really well with our business model. So that would be an example.

Okay. Perfect. And then, I guess, actually, just sort of a ticky-tack one for Don. I saw the $7 billion of average balances of PPP loans. Do you happen to have the end of period just for modeling purposes? I'm guessing somewhere in the $6.5 billion range given what you said about forgiveness in the first quarter, but I was curious if you had a more pinpointing number?

Sure. The ending balance was $7.7 billion because we actually originated $2 billion of new loans under the current program. And we also have a pipeline of approved through the SBA of an additional $700 million that will be expected to close in the second quarter.

In terms of the Laurel Road for Doctors, can you just help us understand, is that a, I guess, a marketing decision of how you're positioning Laurel Road? Or does it actually require you guys to build out capabilities to talent people to be able to offer services specific to doctors where it's not just a marketing sort of gimmick?

No. It certainly is a lot broader than just marketing. And kind of a couple of proof points. Just since we launched Laurel Road for Doctors on March 30, our website traffic, Ken, is up 100%. We've had 50,000 discrete sessions with doctors and dentists on the website. We also have garnered 300 new doctor, dentist households. And obviously, we'll start building this out in concentric circles. So what this is, it is a complete digital offering focused on doctors and dentists. And so it's much broader than a single product. It is to meet the needs of doctors and dentists, which are both unique and to some degree homogeneous. So it isn't just marketing for sure, it's very focused.

Got it. Understood. Okay. And then just a different follow-up question. How do you guys see seasonality playing out in the investment banking and debt placement fees? Because if I'm not mistaken, I believe first quarter tends to be a seasonally weak quarter, but it was obviously a very strong this quarter.

It was a record first quarter for our investment banking business. Seasonality typically sees a stronger performance in the later part of the year as there is often a significant effort to complete transactions before the year ends. We are pleased with the direction of the business and are encouraged that, as we finalize current opportunities, our pipeline is being replenished and remains robust. We feel optimistic and anticipate another record year in our investment banking segment. Interestingly, there is considerable M&A activity. While borrowing levels are low, the leaders of mid-market and midsized companies are looking to engage in strategic initiatives, which presents us with the opportunity to offer a wide range of services.

I wanted to ask about your loan pipeline. We're hearing varying degrees of optimism around growth in the second half of 2021 post reopening. Can you give a little bit of color on the tailwind that you're anticipating based on the discussions you're having with clients and the extent to which the liquidity on their balance sheets is impacting their appetite to borrow?

That's a great question. Let me break it down into consumer and commercial segments. On the consumer side, we had a record quarter in terms of the number of new households and mortgage originations, reaching $3 billion. There is significant growth potential in the consumer sector. Consumers are spending, even though this isn't reflected in credit card balances since our average consumer has a FICO score of around 770 at origination. However, we do see increased activity in both debit and credit transactions. Last year, our consumer-originated loans, including Laurel Road and mortgages, totaled about $10 billion, and we expect to exceed that figure this year. Now, regarding the commercial sector, it is currently facing delays. We are experiencing unusually low utilization rates, which suggests there is room for growth. As businesses navigate supply chain challenges and inflation, I anticipate that they will start to build their inventory, leading to an improvement in utilization from its current low. Additionally, there are many strategic discussions underway that should foster loan growth.

That's very helpful. Chris. Don, as a follow-up, sorry if I missed this, but what's driving the improved NII outlook? Do you still expect relatively stable loan growth? So is the improvement coming from PPP? And on PPP, can you tell us what the anticipated total revenue benefit is after factoring in forgiveness, will most of that come in 2021? Just trying to get a sense if you could clarify for us within the outlook, what kind of NII growth you guys expect ex PPP?

Sure. If you look at the full year outlook that we have provided in January compared to what we have today. And just using the midpoint, net interest income is up about $80 million. And roughly $45 million to $50 million of that is coming from the improved rate outlook that we've seen with the rate curve moving up and just the impact of that in the overall portfolio. If you take a look at the loan balances overall, I would say that they're up very modestly, but it really shows a little bit more of a mix improvement there as far as the yield impact. As Chris highlighted, we had record mortgage originations of $3 billion this past quarter. We've increased our outlook as far as the overall mortgage balances going onto the balance sheet and pulled back a little bit on the commercial given the lower utilization rates we saw in the first quarter. And so that mix shift also helped a little bit. As far as PPP, we talked on the call in January about we thought that with the new loans that we'd be seeing coming through with the current wave of PPP, if you take a look at the net interest income, which includes both the 1% interest plus the fee income, we thought that'd be up about $80 million year-over-year. And that's about the same as what we're seeing this year as far as our outlook in April, and so we're still seeing that kind of an incremental benefit. And then as far as the forgiveness, we would expect of last year's production of the $8 billion about 85% of that to be forgiven throughout the remainder of this year. And so we will see that acceleration occur as far as some of the fee income in future quarters compared to what we experienced in the first quarter. But generally fairly consistent with what we would have expected back in January.

On the margin side, I just want to see, Don, if you can kind of walk us through your expectations of how you expect the margin to traject here over the remainder of the year? And what's assumed in your NII of up low single-digit outlook? I guess if you can give it perhaps with the PPP impact and without, that would help.

Sure. As far as the margin outlook, we would expect it to be stable to slightly up from here. So maybe up a couple of basis points throughout the rest of the year, really reflecting some of the improvement in the loan fees. And as we mentioned earlier, from the fourth quarter to the first quarter, one of the drivers of why our NII was down was about $8 million lower loan fees, and some of that was related to the PPP because we had higher levels of forgiveness in the fourth quarter than what we actually did in the first quarter of this year. And so as far as the PPP impact, we would expect that the total NII level contributed for first quarter versus the rest of the year to continue to trend down a little bit, very modestly at first, and thinking of $1 million or $2 million a quarter coming from that just with the impact of the forgiveness of those loans. But generally, again, fairly consistent with what we would have expected coming into the year as far as the trajectory and our outlook for those balances.

Okay. That's very helpful. And then separately, on the health care banking effort, one question I've been getting about this is, the expected longer-term impact that you may forecast from this whole effort, not just the digital effort with Laurel Road for Doctors, but I guess, also when you look at the combined effort that you flagged before by involving your Cain Brothers business as well as the emerging relationship in your backyard there with the Cleveland Clinic. When you look at this long term, how do you size up the expected overall impact and maybe as a percentage of revenue or earnings or returns or even percentage of loans on the loan side or deposits. Just want to help people think about how big this thing can be.

John, it's Chris. We haven't presented that to the investors yet. We just launched the national digital affinity bank at the end of March. Health care is nearing 20% of GDP, which presents a significant opportunity. Throughout our operations, we are deeply involved in health care. For instance, while not directly linked to Laurel Road, physicians and dentists play a major role in our mortgage business. Additionally, we can offer strategic advice and assist CEOs of large hospitals with capital raising and payments, while also helping Chief Human Resources Officers refinance student loans and manage finances. We have $45 billion in assets under management, highlighting the potential here. We have not yet disclosed our specific targets to the public. Regarding Laurel Road, last year we achieved $2.3 billion in loan refinancing. Despite the challenges surrounding student lending this year, we expect to continue growing that sector. That's just a data point for you.

My first question is for you, Chris. I just want to tap into your experience. Key is uniquely positioned to benefit from CapEx coming back online. And as we think about the excess liquidity in the system, are deposits going to be a leading indicator for line utilization? Or are your clients telling you that they're going to keep excess levels of cash for the time being? And additionally, this curve steepening from the long end rising, how does that play into historically the decision between capital markets and revolvers?

Sure. So first, as it relates to deposits, I think it's probably somewhere in between your 2 scenarios. I think based on what we've all been through over the last 12 to 18 months. I think you'll see people carry a little higher levels of cash. But clearly, I think they will definitely burn down some of those excessive deposits before they start borrowing. And I think as you think about going forward, the use of revolvers or going to various markets, I think to the extent that people have a defined use of proceeds, I think you'll see people try to lock in longer-term money because at current rates, I just think that makes a lot of sense for some of these long-term projects.

Got it. And just as a follow-up on the question whether or not a steeper curve from a higher long end could affect or impact the decision between capital markets and revolvers in terms of funding preference.

I believe that while the steepness of the curve is significant to us, our clients are primarily focused on the long-term nature of their assets. They are considering whether locking in financing for the long term is more advantageous than using their revolvers. The steepness of the curve does not seem to be a major factor in their decision-making process.

Got it. And just for Don, the outlook for noninterest expenses being relatively stable. Does that contemplate another record year in investment banking and debt placement fees?

That does contemplate that. As Chris highlighted, that we expect that to show growth on a year-over-year basis and also to show the stronger residential mortgage production as well. And so both of those are part of the reasons why the fee income is up and also the expenses are up on a corresponding basis.

I was wondering if you could talk a little bit about the reinvestments that you said you made this quarter, $6.5 billion ending balance increase. Can you just help us understand just where that front book, back book math is at this point on both securities and also if you just have any comments on loan pricing and spreads, too.

Sure, Ken. As far as our securities portfolio that we did add to both the core book as well as a short-term treasury book. We've got as of the end of the period about a $5 billion over the last 2 quarters increase in the core bond portfolio. That was really done in some of the core type of products and investments we would normally invest in, which would include CMOs and 15-year pass-throughs. We also did some commercial mortgage agency securities as well and attached swaps to those, so that basically it locks in that fixed rate for the first, say, 4 to 6 years and then converts it to a nice loading rate for us. And so the average yield on those purchases was around $140 million. The roll-off of our existing portfolio is around a $2.35 to $2.40 range. And so we do see continued pressure there based on where the current rates are, but is just consistent with what we're seeing in the markets overall.

Okay. And then, Don, can you provide the total NII contribution from PPP for the first quarter?

The interest income was $65 million, down from $70 million last quarter. We anticipate only slight reductions from the $65 million level in the upcoming quarters, as the forgiveness process is expected to trigger some acceleration in fee income, which will help offset some of the decrease in future balances as forgiveness takes place.

Chris, I know you built the investment banking business and you expect another record year, but that seems a little bold this early in the year. So what gives you confidence? I guess what are your backlogs? Are they record and how far above are they versus the prior record backlog, if that's the case? And maybe just a little bit about how you see the size of the pie in your wallet share and what percentage of your middle market customers have investment banking? Or just a little bit more color that gives you confidence.

Sure. So as we look at the pipelines, as I mentioned, Mike, our pipelines are strong. And they're strong in the areas that have long lead times. But they're also strong in the areas that have a fair amount of velocity. Think about the debt markets, for example. So the pipelines are there. Also as we look at the mix, and I've mentioned this before, the level of M&A activity tends to have a multiplier effect. And so as we're advising on a lot of significant transactions, it gives us the opportunity to do what we do for our clients, provide capital after providing advice, also provide enterprise payments, help them hedge. So those are the things that give me confidence that we're going to be able to grow the business again this year. We also have a lot of repeat customers. We're really proud of the fact that a lot of our customers go to the markets relatively regularly, and we do a good job for them, and so they hire us in a repetitive fashion. Those are some of the reasons that I feel confident about the business. We also continue to hire quality people to bring onto our platform. We have what we think is a unique platform. Candidly, I still think it's underleveraged. And there's an opportunity for us in a very targeted way, to go out and hire people that we think can advance the business. And then a follow-up, your CEO letter says that you guys are the #1 provider of renewable energy financing. So what does that include? Is that bank lending and capital markets? And what's the total addressable market? And where are you in that market? We have been a leader in targeted scale, and renewables is a perfect example. Back in 2004, as we noticed utilities shifting towards renewable energy, we established a business focused on both wind and solar. Currently, we have about $5 billion in exposure in this area. Over the years, we've raised tens of billions of dollars for our clients. I believe our pipelines in this sector have visibility on approximately $2 billion. As the American Jobs plan starts to take shape, I anticipate a significant emphasis on renewable energy, and we are well positioned to take advantage of that. We will continue to invest and deepen our relationships within the entire ecosystem, which illustrates our approach to targeted scale. While this business was relatively small when we began, it is poised for continued growth.

Can you share with us what has happened with quantitative easing and the increase in the industry's deposits, which grew by over $3 trillion last year? You've certainly seen this on your balance sheet. You mentioned that the stimulus programs contributed to your deposit growth. How do you see your customers using these deposits? Is there any evidence from the earlier stimulus plans, such as the initial checks and the initial PPP programs, showing that they are drawing down the deposits? Or do you believe that your deposits could remain elevated for an extended period due to the continuation of quantitative easing and expected government deficit spending over the next 12 to 18 months?

I believe consumers are using some of their funds. The industry holds approximately $3 trillion in excess deposits, while we at Key have around $3 billion. Our consumer balances have increased by about 17% year-over-year. Notably, non-rate sensitive deposits are up 42%. However, if there is no further stimulus, we might see these deposits decrease, especially considering we've experienced three waves of stimulus already. We're definitely noticing this impact in card spending. Don, do you have anything to add?

No, I think you're right. I mean in the first quarter, I think we saw card spend up about 7% across our customer base, and maybe that's a leading indicator there. But Gerard, those deposit balances have been amazingly sticky. And I think it reflects the impact of the ongoing stimulus programs that come through and the checks that have been cut to the consumer. And so those have been very resilient as far as the overall balances. I think we will see balances remain strong for a period of time, even as the economy starts to pick up. But would expect probably as we are also expecting to see commercial lending picking up in the second half of the year. I would expect some of those commercial deposits to start coming under a little bit of pressure too, as Chris highlighted, maybe do a little bit of both where you pull back a little bit on that liquidity on the balance sheet but also start to borrow against some of the lines to help fund some of the needed investments in inventory and just other growth.

Very good. And then, Chris, in terms of using excess capital for acquisitions, Key, over the years has been successful in acquiring not necessarily depositories, but the complementary businesses, particularly in the investment banking and then Laurel Road, of course. Can you share with us your thoughts and not so much, I'm not too interested in if you're looking at a depository, but more just the add-on businesses. Are there opportunities or needs for you that you can buy another broker-dealer or adviser or something like that to enhance the investment banking business as you go forward?

I think there's always niche businesses. And what we found, Gerard, is when we bring on these niche businesses, I'm really proud of the way we've been able to integrate them because most of these businesses, by definition, are entrepreneurial businesses. The most recent one, obviously, was just last quarter when we purchased AQN, which is an analytics business. But there are clearly opportunities with our targeted scale for us to go out and acquire these entrepreneurial companies that, by the way, are good companies that we're able to integrate, but they really bring a skill set to Key as well. With Laurel Road, I think we acquired 40 full-stack software engineers, for example. And that clearly will be helpful as we advance our digital strategy throughout Key. So yes, there are opportunities, and we'll keep our eyes open for those.

Actually, just one question for you, Don. The cards and payments income was up 60% and over $100 million in the first quarter. I was hoping if you could just talk about how the stimulus plan kind of impacted prepaid card activity and maybe a better way to think about the run rate in a more normal operating environment.

Sure, if you look at the increase year-over-year, there was about $39 million. I would say $32 million of that is really related to the prepaid card business that we've talked about before that's used to support various state government programs in this environment that at the same time, we saw that increase. We also saw a corresponding increase in our expenses of $32 million. And so near term, the benefit really is from those deposits that are being maintained there. And so we would expect those programs to continue to wind down throughout the year. And so we will see that cards and payments-related revenue line item coming down for that, but also see a corresponding impact on the expense side as well. As we mentioned earlier, we were starting to see in the first quarter some nice trends as far as the year-over-year growth rates in all of our card programs, whether it was consumer credit cards or debit cards or whether it was the commercial card products that we have. And so we're excited about that core momentum and probably would expect to see growth there on a core basis, but might be a little cloudy to see that as we would expect to see some of that prepaid balance or activity flow throughout the year.

Great. And then just as a quick follow-up. The revised outlook for expenses being up since January. Is any of that connected to the announcement last month and the build-out of Laurel Road for Doctors?

Well, I would say that we will have increased costs associated with that. But the run rate and the build-out was reflected in our January outlook. And so none of that really came through there that as you think about what the change in our outlook was and just using the midpoint of those guidance ranges that total revenues are up $160 million from what we would have shown before. Expenses are up $80 million. And so efficiency ratio of about 50% on that revenue growth, and that really relates to the growth coming from higher expected capital markets-related revenues and higher consumer mortgage revenues, which both have a strong variable expense component to it.

Well, thank you. And again, I want to thank all of you for participating in our call today. If you have any follow-up questions, you can direct them to our Investor Relations team (216) 689-4221. This concludes our remarks. Thank you.