KeyCorp (KEY) 2012 Q1 法說會逐字稿

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.

Thank you, Operator.

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 two years.

Net charge-off declined to 82 basis points, continuing its migration toward our long-term target of 40 to 50 basis points.

Non-performing 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 continued 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.

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 manufacturing, energy and utilities, and healthcare.

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-five ranking for overall customer satisfaction in JD Power's 2011 small business satisfaction survey, excellence awards from Greenwich Associates for small business and middle market managing, awards for our online banking capabilities from Corporate Insight's 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.

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 are 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 four 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?

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 non-time 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 on to 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 highlights 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 billion 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 continued 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 non-performing 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 non-performing 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 eleventh consecutive quarter at March 31.

Looking to the balance of 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 load 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 a 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 this 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 non-interest 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 principle investing, and a $19 million improvement in investment banking and capital markets income.

These improvements were partially offset by increases 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, non-interest 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.

Non-personnel expense decreased $12 million, primarily from lower costs for professional fees in 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 pre-tax, 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.

Finally, turning to slide 13, our tangible common equity ratio and estimated tier one common equity ration 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 four quarters.

That concludes our formal remarks, and now we'll turn the call back over to the operator to provide instructions for the Q&A segment of our call.

Thank you.

(Operator Instructions)

We appreciate your patience, and we'll begin with Matt O'Connor from Deutsche Bank.

Good morning, guys.

This is Rob [Placid] from Matt's team.

First question, just in terms of share buy-backs from here, any color on how you are approaching buy-backs, and how we should think about the timing of buy-backs through the year?

Yes, Rob.

This is Jeff Weeden.

You should think about timing of the buy-backs, really, are going to be over the next four quarters.

So that is how we're viewing it.

It is not something that we are going to have an accelerated share repurchase program on.

It should be kind of evenly over the next four quarters.

I think in terms of people always want to know about price.

In terms of where we trade at on a book value basis, or a tangible book value, with tangible book value in the $9.26 range, and stated book value at $10.26.

Certainly, where we are trading today, it is accretive in terms of book value, tangible book value, and earnings per share.

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 verses securities, as we think about that average earning assets for the rest of the year?

Well, we have been doing some re-mixing, so as we have had loan growth that has 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 flow that is coming off of investment securities, and reinvesting that either in loans or in lower-yielding investments to some extent.

But that is how we are re-mixing that overall balance sheet.

Okay, thanks very much.

We will take our next question from Ken Usdin from Jefferies.

Hi, good morning.

I just wanted to ask you to go into a little bit more color on your expectation for loans to grow.

Obviously, they were a little bit stepped back this quarter, just because of exit and CRE, so can you just talk to us also about where you expect the majority of loan growth to come from, and also, at what point do we actually see that stabilization in the CRE and leasing lines?

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 in the fourth quarter, and we expected, actually, some of those to be paid down in the first quarter.

There was some bridge loan activity that was in there.

And so that is 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 are referring to, the part that is 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.

I'd ask Chris Gorman to talk first.

Good morning, Ken.

How are you?

Let me just give you a quick overview.

In short, we see balances growing from here.

You ask where they're going to grow.

They're going to grow principally in the corporate bank in three areas.

One is our energy area.

I'm going to come back to that in a moment.

The next is industrial, and also we are seeing a lot of growth in healthcare.

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 run-off 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 average basis, we actually grow them 36%, 37%.

So we are through that in the real estate book, which means we are well-positioned to grow from here.

We actually look at our backlogs and feel pretty good about them.

I'll give you one example of finding these niches, and that is in the area of both wind and solar.

We were left lead on ten 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.

That is how we're going to grow it.

In the Community Bank, Ken, we are seeing continued strength in our pipelines.

We also see some strong activity in healthcare 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 four or five 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.

Great.

And my follow-up question, just on expenses.

You guys have done a really nice job of really holding the line on expenses.

I'm just wondering what opportunities do you still see to even take cost out of the business?

I know you have talked about not necessarily doing Keyvolution too, but with a still-high efficiency ratio, what can we see kind of coming out, as you continue to work on that?

Ken, this is Beth, and that is 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 are seeing the benefit of that in our disciplined expense rate that has been coming through, and in our guidance of $700 million to $725 million in non-interest expense quarterly, we do have continuing programs, a focus on continuous improvement, and are continuing to look at opportunities for sourcing procurement.

As we investment client-facing positions, we are also looking at how we can align our back-room 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 think will continue to enhance our efficiency ratio as it relates to the expense side.

And Jeff, do you have any other comments?

No, I think that summarized it well.

Thanks very much.

Our next question comes from Gerard Cassidy from RBC.

Thank you.

Good morning, everyone.

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 is going on with pricing?

Gerard, it's Chris.

The first thing is just, generally, low interest and the squeeze in terms of margins.

What we are 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 is concerning us at all.

I think what you are really seeing is the impact of deposits, candidly, as you look at those numbers.

Gerard, this is Bill Koehler.

In the community bank, we are 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 have been talking about for a number of quarters now.

Thank you.

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?

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 are putting on today, and if you look at the chart on page 16, you can see where we are today.

And in the CF&A category, we are at 31 basis points.

That is a big part of portfolio.

If you look at our leasing portfolio, you'll see, actually, nothing there.

So I think that is 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 non-core business, which we still have, although it is 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.

Gerard, this is Beth.

I would add that we made the 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 canted towards new client acquisitions, are coming in at a higher quality and a higher credit quality than our existing book.

So as you re-mix and grow the balance sheet, that will have a positive impact on the level of net charge-offs, as well.

Absolutely.

If the net charge-offs stay stubbornly around 75 basis points into the middle of next year, and with your guys' comments about provision 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?

Well, Gerard, I guess this is Jeff Weeden.

I think, in terms of the non-performers 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 net charge-off levels.

So if we're still at the 75 basis points next year, I think you have to look at what is the forward look at that particular point in time.

So it's all about the existing book, you have a provision in reserve for, and then it's your forward look that you are trying to anticipate, whether it's 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.

Good to know.

Okay.

And finally, Jeff, on the buy-back, you mentioned you think it will be spread out over the twelve-month period.

Is there anything that would prevent you from completing the buy-back this year?

And 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?

Thank you.

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 buy-back provisions, the capital plan that was submitted had the buy-backs over the four quarter time period, and that is how you should view the overall plan, is lasting over that four quarters.

Thank you.

Our next question comes from Josh Levin from Citi.

Good morning.

Good morning.

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's economic and lending environment, relative to maybe what it was six to nine months ago?

Josh, it's Chris Gorman.

It remains -- here is what's going on.

The companies in the Midwest continue to do well.

They continue to recover.

They are 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 happen to play very well with the kind of things we do here at Key.

First is, the industrial companies that are here are major exporters.

That is 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 is elevated are people that supply into the fracking process, which is driven by these shale plays.

There's no question, we are benefiting from it.

I'll let bill Koehler cover what was going on.

Also, those 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 is being leased for the shale play.

And I would say, as well, that we as we talk to our clients, their confidence is growing in the smaller end of the market, which to me says that the economy, 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.

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 is 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 in on the margins.

And in healthcare, where in Ohio, obviously, the demographics would suggest that we need to 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 healthcare industry, and as a result, we think we're very well-positioned from the community bank and the corporate bank perspective to serve the needs of the industry overall with some very innovative capabilities.

Okay.

On a separate note, you know 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?

Josh, this is Beth.

You know, we obviously constantly evaluate our franchise and our opportunities to strengthen, invest, grow our business, as well as rationalize our business.

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 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 are positioned.

Thank you.

Our next question comes from Steven Scinicariello from UBS.

Good morning, everyone.

Good morning.

Good morning.

I just want to follow up on this building on the success that you have had with the HSBC acquisition.

I'm 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 hike to do more of them?

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 two key markets.

It would be what I would call a small fill-in, where we enhance our presence in Buffalo, and 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 like to have a point of view to underscore a theme.

I have also said in the past that 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.

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 are talking about in terms of optimization?

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 [denobo] strategy.

What you will see this year is we are likely to open roughly half of what we have opened last year in the form branches, and the lion's share of those will be relocations or consolidations, not strictly [denobos].

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 market to, frankly, where our customers are, so we can provide a continued focus and convenience that they demand.

Great.

And then just one last quick one.

I know as part of the CCAR capital plan approval, you had thought to repurchase some trust preferreds.

I know you didn't quantify the amount, but I'm just curious if there is a certain kind of target amount that you would like to redeem.

I know you've got the requests out there for approval.

But I was just curious if you quantify just how much you're looking to buy back.

Good morning.

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.

We're evaluating, particularly, those that have regulatory capital treatment call provisions, and that includes, primarily, the series tens, which is about $560 million outstanding.

They cannot be called without a capital treatment change, and it is subject to further evaluation.

Great.

Thank you so much.

(Operator Instructions)

We'll move on to Adam Hurwitz from Ulysses.

Hi, good morning.

A question that's 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 have 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?

This is Jeff Weeden.

As we look at the investment portfolio, the investment portfolio has been stored liquidity for us.

If you think about it, we have been more liability-driven.

So if you think about it, we have been more liability driven.

So we have the liabilities.

We have 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 at these particular rates.

So we have reinvestment opportunities that happen all the time.

So I think if we look at it, and we say that we have loan growth, we'll put it into loans at that particular point in time.

That is why you have seen the overall portfolio come down.

The other part is on the liability management side of the equation.

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 deposit flows, and we have a loan demand that is 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 is factored in to our overall guidance.

So we have taken all that into account, as we have looked at our net interest margin guidance that we provided for to 2012.

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.

That is correct.

We actually provided our guidance was for $71 billion to $73 billion of average earnings assets, and that is predicated, too, on the fact that we know we have these debt maturities.

We have CDs that are re-pricing, but we also have positive deposit flows and other areas in the transaction related accounts.

Thank you very much.

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

Good morning.

I just wanted to ask a question regarding the Fed's new guidance in first quarter regarding MPL accounting for HELOC, or for second liens.

I know over 50% of your home equity portfolio is first lien.

Maybe that didn't seem to be any impact in the quarter on your MPL accounting.

Maybe you can just speak to that reserve accounting, and why there was no commensurate increase at all in MPLs.

Mike, this is Chuck Hyle.

We have been quite fortunate in our HELOC portfolio over the years, in terms of how we have underwritten it.

You mentioned the fact that well over 50% are first liens.

We have been tracking that information.

We have 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 two months.

We have a quarterly appraisal mechanism, and all that has been factored in to our provisioning effort.

We have a lot of quantitative analysis around that.

And as a result, the new guidance has come out, really, we view it as having virtually no impact on our portfolio.

I think our performance has underscored our approach to that.

Okay, great.

So what percentage for those HELOCs where you don't own the first that there is one, what percentage of those do you actually have data on the first lien?

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

Terrific, thanks.

(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.

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, Vernon Patterson or Kelly Lammers, at 216-689-3133.

That concludes our remarks.

Thank you.

Once again, ladies and gentlemen, that concludes today's conference.

We appreciate your participation today.