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KeyCorp (KEY) Q2 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
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KeyCorp (NYSE: KEY)
Q2 2019 Earnings Call
Jul 23, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the KeyCorp second-quarter 2019 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.

Beth Mooney -- Chairman and Chief Executive Officer

Thank you, operator. Good morning, and welcome to KeyCorp's second-quarter 2019 earnings conference call. Joining me for the call is Don Kimble, our chief financial officer; Chris Gorman, president of banking; and Mark Midkiff, 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 moving to Slide 3. This morning, we reported earnings per common share of $0.40, which included $0.04 of notable items, consisting primarily of efficiency-related expenses. Adjusting for notable items, our results were $0.44 per share, the same as the year-ago period and up 10% from our first-quarter results.

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To provide a consistent view of our financial trends and prior-period comparisons, my remarks this morning will focus on the adjusted numbers, which exclude notable items in all periods. Our results this quarter highlight the momentum we continue to see across our company and highlights for the quarter included: solid revenue trends, reflecting balance sheet growth, and momentum in our fee-based businesses; focused expense management, including the realization of substantially all of our $200 million in cost savings by the end of the quarter; continued strong credit quality, with net charge-offs well below our over-the-cycle range; and disciplined capital management, which includes retaining a significant -- returning a significant amount of our net income to our shareholders through dividends and share repurchases. Turning to the balance sheet. We saw a continued growth in both loans and deposits.

Loan growth continues to be driven by commercial and industrial loans with average balances up 5% from the year-ago period and 3% from the first quarter. Both is broad-based and focused on high-quality credits. Our outlook remains positive as client sentiment remains constructive, and our pipelines continue to be strong. We also benefited from growth on the consumer side, including our residential mortgage business, which generated $1 billion of loan originations in the second quarter, 60% of which we held on our balance sheet.

This is double the volume from the prior quarter and last year and resulted in a 6% year over year increase in residential mortgage loans. Also adding to our consumer loan growth was Laurel Road, with over $400 million in loan originations in the second quarter. We remain very excited about our Laurel Road acquisition, which bolsters our digital capabilities, and the production from Laurel Road has exceeded our initial expectations. In total, our direct consumer loans were up 33% year over year.

Average deposits from both commercial and consumer clients grew 5% from the year-ago period. Our growth reflects the success of our business model and focus on relationship clients. Noninterest income this quarter, adjusted for notable items, reflected broad-based momentum. In our first-quarter call, we guided to a linked quarter double-digit increase in fees, driven by stronger investment banking and debt placement.

And adjusted for notable items, noninterest income was up $86 million or 16% compared with the first quarter. And we reached a record second-quarter level of investment banking and debt placement fees, which were up $53 million or 48% from the prior quarter. Our pipelines remain strong and client engagement is high, which should position us well for the remainder of the year. We also saw linked quarter double-digit increases in areas where we have been investing, including cards and payments and our residential mortgage business.

Expenses were also a positive story this quarter, reflecting our success and achieving our cost-saving target and positioning the company to reach its targeted cash efficiency ratio of 54% to 56% in the second half of the year, and strong expense management will continue to be a priority. Moving to credit quality. We had another very strong quarter with stable credit metrics and a net charge-off ratio of 29 basis points, well below our over-the-cycle range. We remain committed to disciplined underwriting and maintaining our moderate risk profile.The final item on the slide is capital, where we have remained focused on maintaining our strong position, while returning a large portion of our earnings to our shareholders through dividends and share repurchases.

And just last week, our board of directors approved a 9% increase in our common share dividend to $0.185 beginning in the third quarter of this year. Before I turn the call over to Don, let me comment on the disclosure that we made last week concerning fraudulent activity by one of our long-standing business clients. Since this is part of an ongoing investigation, we are limited in what we can say, but we are pursuing all available sources to mitigate the potential loss that could be up to $90 million net of taxes. The potential loss will be recognized as a the third-quarter event.

Importantly, I want to underscore that we believe this is an isolated occurrence. This was a fraud perpetrated by a single, long-standing business customer, and we will provide appropriate updates in our public filings. Now I will shift back to today's news and conclude my remarks by restating that it was a good quarter with broad-based growth across our franchise. We added and grew relationships, driving growth in both our consumer and commercial businesses.

We grew loans including 5% year-over-year growth in C&I and experienced growth in consumer loans from residential mortgage and Laurel Road. We grew fees with a record second quarter for investment banking and debt placement fees. We managed expenses, reaching our 200 million-dollar cost savings target, which keeps us on a path to reach our targeted cash efficiency ratio in the second half of this year. We maintain credit quality underpinned by our disciplined loan underwriting, and we continue to return capital to our shareholders, including a 9% increase in our common share dividend approved last week by our board of directors.

And finally, we remain committed to achieving our long-term targets and to continue delivering value for our shareholders. With that, I will close and turn the call over to Don.

Don Kimble -- Chief Financial Officer

Thanks, Beth. I'm now on Slide 5. As mentioned earlier, we reported second-quarter net income from continuing operations of $0.40 per common share. Adjusting for notable items, earnings per share was $0.44.

Our adjusted results compared to $0.44 per share in the year ago period and $0.40 in the first quarter of 2019. Notable items for the quarter totaled $52 million, including $32 million of personnel, largely severance, as well as $17 million of real estate expenses, both related to our efficiency initiatives. Notable items also included $2 million of onetime charges related to the closing of our Laurel Road acquisition in April. As Beth mentioned, we achieved our 200 million-dollar cost savings target with the full amount expected to be in the run rate next quarter.

Importantly, we also remain committed to reaching our 54% to 56% cash efficiency ratio target in the second half of this year. I will cover many of the remaining items on this slide and the rest of my presentation, so now I'm turning to Slide 6. Our business model continues to position us well to grow relationships and loan balances. Total average loans were $91 billion, up 2% from the second quarter of last year, driven by growth in commercial and industrial loans, which were up 5%.

Linked quarter growth and average balances was also driven primarily by commercial and industrial loans up 3%. Our growth continues to be broad-based across our footprint, as well as through our targeted industry verticals. C&I growth was partially offset by a decline in commercial real estate balances due to elevated paydowns. Importantly, this quarter, we saw strong growth on our consumer side, as well.

Laurel Road and investments in our residential mortgage business contributed to our growth this quarter, and we expect to continue to benefit from both, moving forward. For Laurel Road, we originated over $400 million of loans this quarter. For the residential mortgage production, we originated over $1 billion of loans in the second quarter, double the volume from a year ago and from last quarter. For this production, approximately 60% was related -- was retained on balance sheet.

We expect to continue to grow loan balances consistent with the top end of our 2019 full-year guidance as we support our relationship clients. The tone and sentiment with our clients remains positive, and our pipelines are solid. That said, we remain committed to our moderate risk profile, and we will continue to walk away from business that does not meet our risk parameters. Continuing on to Slide 7, average deposits totaled $110 billion for the second quarter of 2019, up $5.6 billion or 5% compared to the year-ago period and up 2% from the prior quarter.

Growth from the prior year was driven by both consumer and commercial clients. On a linked quarter basis, the increase in deposit balances was also driven by both consumer and commercial clients, as well as elevated levels of short-term deposits from certain commercial customers. The cost of our total deposits was up 6 basis points from the first quarter, reflecting the continued migration of our portfolio into higher-yielding products. As expected, our deposit beta increased from the first quarter, bringing our cumulative beta to 38%.

We continue to have a strong, stable core deposit base with consumer deposits accounting for 66% of our total deposit mix. Turning to Slide 8. Taxable equivalent net interest income was $989 million for the second quarter of 2019, and net interest margin was 3.06%. These results compare to taxable equivalent net interest income of $987 million and a net interest margin of 3.19% for the second quarter of 2018 and $985 million or -- and 3.13% in the first quarter.

The increase in net interest income from the second quarter of 2018 was driven by earning asset growth and the benefit from higher interest rates. Partially offsetting this was a lower net interest margin, driven by higher interest-bearing deposit costs, lower loan fees, and 11 million-dollar decline in purchase accounting accretion. Net interest income increased $4 million or 0.4% from the prior quarter, driven by higher earning asset balances and one additional day in the quarter. These benefits were partially offset by a decline in net interest margin, driven by higher interest-bearing deposit cost, elevated levels of liquidity, as well as a decline in purchase accounting accretion.

Going forward, we expect our net interest margin to remain relatively stable and net interest income to grow consistent with the guidance we have provided. In the appendix of our slide deck, you can find additional information on our asset liability positioning, which continued to actively reduce our exposure to declining rates, executing approximately $3 billion in interest rate swaps and floors in the second quarter. This was a move that we began back in the third quarter of last year, entered into a total swaps and floors of $15 billion during this time. Today, our net interest income impact for 100 basis points parallel increase or decrease from current levels is less than 1%.

Moving on to Slide 9. Key's noninterest income was $622 million for the second quarter of 2019, compared to $660 million for the year-ago quarter. The year-ago quarter included notable items with a net impact of $36 million, including a gain from the sale of key insurance and benefits services and a lease residual loss. Excluding these item, total fee income was down $2 million year over year.

The change from the year-ago period reflects continued momentum in core fee-based businesses resulting from ongoing investments, including growth in our investment banking and debt placement fees, as well as positive trends in our mortgage business. Offsetting this growth was a year-over-year reduction in trust and investment services income, related to the sale of key insurance and benefits services and a 6 million-dollar impact from the revenue classification changes mid-2018 on deposit service charges. Compared to the prior quarter, noninterest income was up $86 million or 16%. This change was largely related to a rebound in investment banking and debt placement fee, which increased $53 million to a record second-quarter level.

We continue to see momentum in other fee-based businesses, as well as including a 7 million-dollar increase in both cards and payments-related income and trust and investment services income from the first quarter. Turning to Slide 10. Expense management has remained an area of focus for us. As we mentioned, at the end of the second quarter, we have implemented substantially all of our expense initiatives tied to our 200 million-dollar continuous improvement target, which we expect to be fully reflected in our run rate next quarter.

Second-quarter noninterest expense was just over a $1 billion or $967 million, excluding the $52 million of efficiency-related expenses. This compares to $966 million in the second quarter of 2018 and $937 million in the prior quarter, both excluding notable items. The table on the bottom left side of the slide breaks out our detail of the notable items. Expenses are relatively flat compared to the year-ago period, again, excluding notable items.

The year-over-year comparison reflects our Laurel Road acquisition in April 2019, as well as the successful implementation of the company's expense initiatives. Compared to the prior quarter, noninterest expense increased $30 million, excluding notable items. The increase reflects the impact of the Laurel Road acquisition, as well as our higher variable costs related to increase in the capital markets activity. Marketing expense is also seasonally higher in the second quarter, while employee benefits costs were seasonally lower.

Moving to Slide 11. Our credit quality remains strong, and we continue to be consistent and disciplined in our underwriting. Net charge-offs were $65 million or 29 basis points of average total loans in the second quarter, which continues to be below our over-the-cycle range of 40 basis points to 60 basis points. The provision for credit losses was $74 million for the quarter, reflecting ongoing loan growth.

Nonperforming loans were $561 million this quarter and represent 61 basis points of period-end loans consistent with the prior quarter. Turning to Slide 12. Capital also remains a strength of our company, with an estimated Common Equity Tier 1 ratio at the end of the second quarter of 9.6%. As Beth mentioned earlier, we have remained true to our capital priorities, including returning a significant amount to our shareholders.

In the second quarter, we declared a common dividend of $0.17 per share. We also continue to repurchase common shares with $180 million repurchased this quarter. We also announced our 2019 Capital Plan in April. This was for the third quarter of 2019 through the second quarter of 2020.

The plan includes a 9% increase in our common stock dividend to $0.185 per share in the third quarter, which was approved last week by our board of directors. We also plan to repurchase up to $1 billion in common shares over the four-quarter period. Our strong capital position supports our organic growth along with our planned capital actions. On Slide 13, we've provided our outlook for 2019.

Our guidance excludes the impact of the fraud loss that was disclosed in an 8-K filing on July 16. Excluding this singular occurrence, our outlook has not changed from what we provided earlier this year. This reflects our performance through the first six months and expectations for the remainder of the year. We continue to expect another year of strong positive operating leverage with improved efficiency.

Average loans should be in the range of $90 billion to $91 billion, once again, driven by our commercial businesses, but also benefiting from growth in our consumer lines, including Laurel Road and residential mortgage. With the contribution from mortgage origination and Laurel Road, we would expect to be toward the higher end of our guidance range. Average deposits should remain relatively stable as our continued account growth were offset by declines in the temporary deposit balances, reaching the 108 billion-dollar to 109 billion-dollar range. Despite a more challenging interest rate environment and assuming one more 25 basis points rate cut, we still expect net interest income to be in the range of $4 billion to $4.1 billion.

As a result of the projected rate decrease and the shape of the yield curve, we would expect to be at the lower end of this range. The lift we saw this quarter in noninterest income keeps us on a path to reach our full-year range of $2.5 billion to $2.6 billion. We expect growth in most of our fee-based businesses, including investment banking and debt placement fees. Our current outlook would place us toward the lower side of our guidance range.

Although, we may operate at the lower end of our revenue range, we also believe that we are likely to outperform on expenses. We have achieved our 200 million-dollar cost savings target, and we continue to identify opportunities for further expense reduction. At this point, we have not changed our expense outlook of $3.85 billion to $3.95 billion, but based on the first-half results, the completion of our expense initiatives and our focus on continuous improvement, we believe that we can come in at or slightly below the lower end of the range. And we also expect to reach our targeted cash efficiency ratio of 54% to 56% in the second half of the year.

Our credit quality -- on credit quality, we see nothing on the horizon that changes our outlook, with net charge-offs and provision expense remaining below or over-the-cycle range of 40 basis points to 60 basis points. Our loan loss provision should slightly exceed net charge-offs to provide for loan growth. And our guidance for our GAAP tax rate remaining in the range of 18% to 19%, with some opportunity to come in at or slightly below our range. Overall, we expect 2019 to be another good year for Key, building on the momentum across our businesses with disciplined expense management, a clear focus on risk, and strong returns.

On the bottom of the slide are our long-term targets and remain confident in our ability to achieve these targets, continue to move toward the top tier of our peer group. And over time, I believe our market valuation will reflect our progress and improved results. I will now turn the call back over to the operator with instructions for the Q&A portion of the call. Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Scott Siefers from Sandler O'Neill. Please go ahead.

Scott Siefers -- Sandler O'Neill + Partners, L.P. -- Analyst

Good morning, everyone. Thanks for taking the questions.

Beth Mooney -- Chairman and Chief Executive Officer

Good morning.

Scott Siefers -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey. Don, I was hoping you could walk through, and with a little finer points, the thoughts on the margin. I think you said in your prepared remarks that the margin overall should hold stable. I know you had a little liquidity built in the 2Q, and I think that tends to be a seasonal issue that comes out in the 3Q, so presumably that helps.

But guess I'm just curious regarding the puts and takes as you see them. And then if -- when you made those comments, are you talking of the core margin or the reported? Maybe if you can sort of bisect that, as well, please.

Don Kimble -- Chief Financial Officer

Sure. And Scott, as you highlight, we did have some seasonal trends into the deposits, especially that caused some of the pressure on liquidity. And so in the second quarter, our margin came down by 3 basis points from liquidity, not any impact on net interest income, but did have an impact on the overall margin. We also saw a reduction that wasn't expected as far as purchase accounting accretion.

Last quarter, first quarter, we're at $22 million, second quarter we came in at $17 million. We would expect that to be relatively stable with maybe slight declines from here, but not having the kind of pressure that we saw this past quarter. Going forward, we expect to margin on a reported basis to be relatively stable. And so to your point, we should see some of that liquidity come back in over time.

And that could help offset some of the pressure associated with the most recent -- our expected 25 basis points rate decline. And so we think that positions us to have more stability in that margin prospectively.

Scott Siefers -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. That's perfect. I appreciate that. And then just one, sort of, ticky-tack question, just on the accounting for the fraud.

Just -- what is the reason that, that becomes a 3Q event? Is that just because of the difficulty in estimating that potential loss now? Or were the books from an accounting standpoint closed at the time of disclosure? Just curious about that dynamic.

Don Kimble -- Chief Financial Officer

On that point, the events that resulted in the fraud actually took place here in the third quarter. And that's why the timing of the loss is recognized in the third quarter as opposed in the second quarter.

Scott Siefers -- Sandler O'Neill + Partners, L.P. -- Analyst

Yeah. OK. So I got nothing more than that. All right.

That's perfect. Thank you, guys, very much. I appreciate it.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Ken Zerbe from Morgan Stanley. Please go ahead.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Ken Zerbe -- Morgan Stanley -- Analyst

I guess first is -- just have a silly or simple question. In -- you're building in one rate cut into your guidance, how does your NII guidance change if we actually get a cut both in July and in September?

Don Kimble -- Chief Financial Officer

Yes. If we would get an additional rate decrease of additional 25 basis points, we think, near term, that would have a negative impact of about 2 basis points to 3 basis points. And essentially, what causes that is that the -- our deposit pricing lags a little bit as far as the current market. And so we would see a little bit of a near-term negative impact from that.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. And are you building into July cut or September cut?

Don Kimble -- Chief Financial Officer

We're building into July cut.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Understood. And then just as a follow-up question. In terms of Laurel Road, obviously, good growth from them this quarter, how -- I guess when you think about the longer-term growth or maybe the next year or two years, like, what kind of pace of growth are you comfortable putting on to your balance sheet from Laurel Road?

Don Kimble -- Chief Financial Officer

We're very pleased with the credit quality of the originations. We love the customer base that we're approaching with Laurel Road. And as far as the -- just this product I don't know that we're going to see tremendous growth from that, but we think there's a lot of additional opportunities for expanding the relationships with these customers, whether it's residential mortgage or savings products, or other potential relationship building services that we can provide for that customer base. So we do expect to see nice growth there, but maybe not at the same pace on the student loan consolidation product.

Ken Zerbe -- Morgan Stanley -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of Steven Alexopoulos from J. P. Morgan. Please go ahead.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Hey, good morning, everybody.

Don Kimble -- Chief Financial Officer

Good, morning, Steven.

Beth Mooney -- Chairman and Chief Executive Officer

Good morning.

Steven Alexopoulos -- J.P. Morgan -- Analyst

If I could start on the fee income -- So year-to-date, you reported $1.2 billion. And if we just look to get to the low end of the guided range, I think you need to do somewhere around $670 million per quarter, and I don't think you've ever done that in a single quarter. Could you walk us through what gives you confidence to -- I know you said it would be at the low end of the range, but even to maintain the range?

Don Kimble -- Chief Financial Officer

Sure. I think your math is right there, Steve. So what I would offer up is that, first of all, if we take a look at our investment banking and debt placement fees, and we compare what we have reported in the second quarter of last year to the run rate for the second half of last year, it's an increase of $42 million. And we believe that our pipelines are strong and activity level support seeing that same type of continued growth from here.

In addition to that 42 million-dollar increase, we would see seasonal increases in a number of fee categories, including Coley, which we believe adds about $20 million to the second half of the year compared to what we saw in the second quarter. And then we also have about $30 million of other growth. And I would say that growth is coming from areas where -- might not have seen much in the past. But we've talked about our mortgage production this quarter.

And that's the first time we'll really see that come through, and we originated over $1 billion in the second quarter. Our application volumes and our pipelines were even stronger going into the third quarter than they were in the second quarter. And so we think we're positioned there. We also think that there's other categories where we're seeing a lot of growth.

And so if you would assume about $30 million for additional growth to $20 million for seasonal increases and roughly the 40-plus million dollars for the IB&D revenues, we believe that we'll be at that 95-kind-of million range that you're talking about as far as needed to achieve that kind of growth for the second half.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful, Don. And then as a follow-up in your response to Ken's response about the NIM going down 2 basis points to 3 basis points, if you get that additional cut. Is that about the math of what you would expect per 25 basis points cut, two to three?

Don Kimble -- Chief Financial Officer

Well, initially we would. And so, for example, on our average rates paid on deposits, the first quarter after that rate decrease, we think that deposit rates will go down by about 5 basis points in that second quarter, that cumulative reduction would be about 10 basis points. And so that's how that 2 basis points to 3 basis points initial hit will go away over time.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Thank you. Then just finally for Beth. Once we get into the 54% to 56% cash efficiency ratio, where do you go from there? Stay in the range? Do we improve further? How do you think about that?

Beth Mooney -- Chairman and Chief Executive Officer

You know, obviously, with our fourth-quarter call in January, we will update our thoughts for the coming year, and so I think some piece of that will be predicated on the expectation for the macro environment. But I do know that we -- you hear us talk with a degree of relative confidence about our targeted business strategies and our commitment to continuous improvement, and we have a diversified business model. So we continue to see the ability to drive our performance in the future. But what that looks like is with sum and substance of our fourth-quarter call.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. Fair enough. Thanks for taking my questions.

Operator

Your next question comes from the line of John Pancari from Evercore. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Beth Mooney -- Chairman and Chief Executive Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

Related to Steve's question there on efficiency, I guess another way I'd like to ask is -- just is, if you could talk about the leverage you would have on the expense side, if the revenue outlook gets more challenging? If we are looking at, for example, another cut in addition to the one cut that you modeled, if we get another cut this year. Can you talk about the impact on your efficiency ratio expectation? And then what the levers are to dig deeper on expenses? Thanks.

Don Kimble -- Chief Financial Officer

Great. And in our comments, we did allude to that we've already achieved the $200 million, but we still have other efforts and steps identified, and we're executing against for further, continuous improvement. And so we are very committed to delivering that 54% to 56% range. And so we believe that, that will help provide some support for that.

So it's critical that we continue to manage that. We're always going to be focused on further, continuous improvement efforts to manage that efficiency ratio down and generate the positive operating leverage. I think one else that's unique for us compared to many of our peers too is the steps we did take as far as managing our overall asset liability position. And as we noted in our comments, that we've added a $15 billion worth of swaps and floors to help protect against that downward rate pressure.

And that did cost us some margin over the last few quarters, but we think it was prudent for us to be able to manage to that level, especially given the current outlook that we see for interest rates.

John Pancari -- Evercore ISI -- Analyst

OK. Got it. All right. And then separately, I know you can't speak much about the fraud specifically.

But as the investigation continues and even though it's an isolated thing, is there any risk that there is an increased focus around your risk controls and the expenses related to that as a result of this? Thanks.

Don Kimble -- Chief Financial Officer

Well, sure. And maybe I'll take more of a comprehensive look at this issue because I'm sure the people have lots of questions about this. But as we did note in our Form 8-K, that we are limited as to what we can disclose given our current investigation and litigation that's in process. So just let me share a few things that we are able to say at this point.

And so earlier this month, we discovered fraudulent activity by a long-standing business client. We believe that this was an isolated incident involving a single business relationship. We are pursuing all available sources of recovery and means of mitigating the potential loss, which could be as high as $90 million net of taxes. We're conducting a comprehensive assessment of all procedures and related controls.

And we've reported the incident to law enforcement. The potential loss will be recognized as a third-quarter event. And importantly, this is not a cyber event or a data breach. And we do not believe this to impact our capital plans, which will include both dividends and share repurchases.

We also do not believe that this will materially impact core expenses going forward, and we remain on track to achieve our cash efficiency ratio target in the second half of this year. And due to the ongoing nature of the investigation and litigation, we'll not be able to further comment at this point, and we'll provide appropriate updates in public filings in the future.

John Pancari -- Evercore ISI -- Analyst

Got it. All right, thanks, Don.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Peter Winter from Wedbush Securities. Please go ahead.

Peter Winter -- Wedbush Securities -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Peter Winter -- Wedbush Securities -- Analyst

You guys had very good momentum on the loan side, and I'm just wondering, if that continues, it does seem like you could come in above the high end of your range for average loan growth.

Don Kimble -- Chief Financial Officer

Yeah. Peter, we were very pleased with our production, especially on the consumer side this quarter that -- commercial has always been a core strength for us, and we're seeing that momentum maintain. But we've been talking for the last couple of years about what we're doing from a residential mortgage perspective, and this is the first quarter I can really say that we're starting to achieve that. And that $1 billion of production and 60% of that going on balance sheet will clearly help our loan growth from that side.

Laurel Road, over $400 million this month -- or this quarter, excuse me, as far as originations, and that's also another strength for us. And so if we just continue to grow loans like we did in the second quarter, and I think that our ending balance and our pipelines would suggest that we'd be growing average loans each quarter by about $1 billion, which will put us slightly above that 91 billion-dollar top end of our guidance range. And so I think that you're on track there are as far as what we're seeing for potential dynamics in that category.

Peter Winter -- Wedbush Securities -- Analyst

OK. And if I could ask just one -- just housekeeping item. Within the fee income, operating lease income in gains was a little bit elevated relative to the run rate, I think the last four quarters. Just wondering if there was anything unusual or if this is a new run rate for you guys?

Don Kimble -- Chief Financial Officer

We had a small gain in the quarter. And interestingly enough that we actually had some losses on residual value -- declines actually go through provision expense in the current quarter. And so the two of those, they essentially net each other out, and they could be just a little high as far as the operating lease income.

Peter Winter -- Wedbush Securities -- Analyst

OK. Thanks very much.

Operator

Your next question comes from the line of Matt O'Connor from Deutsche Bank. Please go ahead.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Matt O'Connor -- Deutsche Bank -- Analyst

How much of the $200 million of savings was in the second quarter run rate?

Don Kimble -- Chief Financial Officer

What we've said is we were there at the end of the quarter. I would say that a number of the expense programs really had a launch date of around June 30th. And so we still have upwards of about $20 million in run rate going into the third quarter for future savings.

Matt O'Connor -- Deutsche Bank -- Analyst

OK. And then, I guess, what else is driving the cost down as we think about going from 2Q to 3Q, that's $20 million. Are there some other things, like, I know seasonality tends to be kind of some puts and takes there?

Don Kimble -- Chief Financial Officer

The biggest variable, Matt, for expenses beyond that really is the capital markets-related revenue. And as we've shown before that there's a direct connection between the incentives associated with that and the revenues. But we also highlighted that we have other efforts in play as far as continuous improvements. So even though we've achieved our $200 million, we're not done yet.

Matt O'Connor -- Deutsche Bank -- Analyst

OK. And then any additional repositioning or efficiency charges that you expect in the second half and beyond?

Don Kimble -- Chief Financial Officer

Our guidance would incorporate those charges. We don't think they would be material going forward.

Matt O'Connor -- Deutsche Bank -- Analyst

OK. All right, perfect. Thank you.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Saul Martinez from UBS. Please go ahead.

Saul Martinez -- UBS -- Analyst

Hey, good morning. Just -- I don't know if you mentioned this, maybe I missed it, but how much of -- how much did Laurel Road contribute to your expense base? And not the one-off items, but just the overall level of expenses this quarter?

Don Kimble -- Chief Financial Officer

Yeah. This quarter, we had reported Laurel Road expenses of $22 million. And as we noted, there's a -- some in that notable items as far as the deal-related expenses.

Saul Martinez -- UBS -- Analyst

Right. But in terms of the core expenses, it was -- I think the onetime item was $2 million, if I'm not mistaken?

Don Kimble -- Chief Financial Officer

That's correct. So the core was a little less than $20 million, but in that range.

Saul Martinez -- UBS -- Analyst

OK. And any material revenue contribution yet from Laurel Road?

Don Kimble -- Chief Financial Officer

Well, the revenue or the contribution really, so far, has been in that loan growth, and so we originated over $400 million. So it will be building over time. And so that's -- really didn't have a dramatic impact the second quarter, but we'll be building that annuity stream over time.

Saul Martinez -- UBS -- Analyst

Got it. And that $400 million, how -- I think you mentioned that you retained 60%, if I'm not mistaken. That plus your residential mortgages, but how much of you -- that, the $400 million, did you retain?

Don Kimble -- Chief Financial Officer

We retained 100% of the Laurel Road originations, but 60% was for the residential real estate originations we had. Now what we do have in the second quarter though is that we have transferred about $250 million of the Laurel Road production into a held for sale. And that we're in the process of working through a securitization transaction on those assets. It's just to make sure that we stay current on the markets and see potential liquidity avenues for us going forward.

Saul Martinez -- UBS -- Analyst

Right. But your intention going forward is to retain the vast majority of that?

Don Kimble -- Chief Financial Officer

That's correct.

Saul Martinez -- UBS -- Analyst

And what are the terms on those? Can you just give us a sense of what kind of yield -- just to get a sense of what kind of interest income pickup we could expect if you've maintained something close to this level of origination?

Don Kimble -- Chief Financial Officer

Yes. As we ended up the second quarter, we were talking about yields of around 5%, that the long end of the curve has moved down by about 50 basis points. So we're probably in the 4.50% to 4.60% range as far current yields. And so it's more of that spread.

Average life on those loans tend to be around four years and again, very strong FICO scores and very low loss content based on the consumers that we're working with.

Saul Martinez -- UBS -- Analyst

Got it. That's helpful. Thanks a lot.

Operator

Your next question comes from the line of Marty Mosby from Vining Sparks. Please go ahead.

Marty Mosby -- Vining Sparks -- Analyst

Thanks.

Don Kimble -- Chief Financial Officer

Good morning.

Beth Mooney -- Chairman and Chief Executive Officer

Good morning.

Marty Mosby -- Vining Sparks -- Analyst

Good morning. I wanted to drill into this NII because if you look at your margin, the core margin actually peaked out around 3.10%, if we exclude PAA. It started around 2.85% and now we're down to almost 3%. So how much -- because you mentioned earlier the cost of the hedges that actually limits your downside, how much of the cost is related to what's going on from the 3.10% to the 3% to lock in as close to 3% as you can as you move forward? So in this particular quarter, is there close to 10 basis points of cost related to these hedges?

Don Kimble -- Chief Financial Officer

A couple of things on there, Marty. One is that, that loan fees are down significantly. In this quarter, we're expecting to see a slight recovery there, and we actually saw loan fees come down. And so compared to that peak period, our loan fees are costing -- it's about 3 basis points on the margin.

If you look at the net cost from our swaps in the second quarter, it was around 8 basis points or 9 basis points, that's down from 11 basis points from the first quarter. But there clearly has been a cost there, and that's about 5 basis points or 6 basis points of additional cost compared to that peak period that you would've talked about, as well. And so those -- both have had a negative impact on margin, and we're continuing to hopefully see the benefits from positioning for more of a neutral asset position prospectively, but there was a cost for us to initially establish that. On the loan fee front, what we're seeing there is just the refinance activity has been much slower and especially in some of the syndicated loan products.

We're seeing that across the board as far as being down year over year. And we would expect to see that start to pick up again once we see the refinancing start to pick up again on that category.

Marty Mosby -- Vining Sparks -- Analyst

So what I wanted to emphasize for -- folks are almost seeing some of this compression in margin this quarter. A significant amount of that is also just related to putting on insurance that then limits the downside. So if we're looking at the 3% and then the low of the cycle last time was 2.85%, that restructuring gives you how much confidence in the sense of where do you land in the worst case scenario that we get back to zero interest rates, like we did before, somewhere between 3% and 2.85%. But are we to the upper end of that range or the lower end of the range, once it's all said and done?

Don Kimble -- Chief Financial Officer

I wish I could predict that accurately. I think one of the things that we've continued to be surprised that we position our asset liability in a way that we think is neutral, but the yield curve can take funny changes in movement. If you look at the longer end of the curve, we're probably down 75 basis points to 80 basis points over the last 90 days where as the short end of the curve is now just coming down 25 basis points, we expect later this month. So -- but we think that we're better positioned than our peers, and we've been very deliberate in that approach in looking to make sure that we can maintain as much stability in that margin prospectively as we can.

Marty Mosby -- Vining Sparks -- Analyst

And then just lastly, what's the timing of the share repurchase activity? Is it even over the next four quarters or any front loading to get more into this year?

Don Kimble -- Chief Financial Officer

I would say that there's a couple of quarters where that might be a little outside, but I would generally assume fairly consistent throughout the time period that -- there are some quarters where we have employee issuance for different compensation programs where we're able to buy back more, but generally pretty consistent throughout the four quarters.

Marty Mosby -- Vining Sparks -- Analyst

Thanks.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Ken Usdin from Jefferies. Please go ahead.

Ken Usdin -- Jefferies -- Analyst

Thanks. Good morning, guys. Don, a couple just about yield follow-ups. Can you talk about -- this quarter you mentioned in the deck that you had 50 basis point still positive rollover on the securities portfolio.

Where do you see that heading given the rate environment going forward?

Don Kimble -- Chief Financial Officer

Yeah. That -- you're right. In the first quarter, we had 105 basis points, so in this last quarter was 50, and then it went over probably closer to the 20 basis points to 30 basis points range today. So we still have a fairly low yield on our investment portfolio.

So there's still less pickup there. But it's less than today's market than what we would have seen last quarter.

Ken Usdin -- Jefferies -- Analyst

OK. And then what are the yields that you're putting on Laurel Road loans at? And how does that compare to the average yield of the loan book?

Don Kimble -- Chief Financial Officer

That -- when we started this at the end of the first quarter, we were seeing a yield of about 5%. I would say today, we're down closer to the 4.50% to 4.60% range because the yield curve has moved down by that much, and so really it's focused on that kind of spread. And so compared to that category, I think it's fairly neutral, but compared to the overall loan yields, I think it should be additive to us going forward.

Ken Usdin -- Jefferies -- Analyst

OK. And lastly, one of the things I think you mentioned last quarter was that part of the -- you had a lower burden from the terminated swaps in the first half of the year. How much of a helper does that continue to be incrementally from here?

Don Kimble -- Chief Financial Officer

It was about $7 million of hit in the second quarter, it's about $5 million in the third quarter, and about $2 million in the fourth quarter. So there is some slight pickup on an incremental basis each quarter.

Ken Usdin -- Jefferies -- Analyst

OK. Got it. And one last one just on the deposit cost. Any -- you mentioned the pace of which the deposit cost should rollover.

Is that mostly due to the index part? And if so, then what do you see happening with the nonindex part, just the customer behavior?

Don Kimble -- Chief Financial Officer

As far as the rates coming down, the index parts move very quickly with the overall rate changes. And so it's more the administered rates that take some time to phase in. And so that's why we only see about 5 basis points of benefit in our deposit rates in the first quarter. And then we'd expect that to be up to 10 basis points in the second quarter.

And so it really is more managing through those administered rates.

Ken Usdin -- Jefferies -- Analyst

Thanks a lot, Don.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Brian Foran from Autonomous Research. Please go ahead.

Brian Foran -- Autonomous Research -- Analyst

Hi, good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Brian Foran -- Autonomous Research -- Analyst

Maybe one, just housekeeping. The fraud, do we put it through the expense or charge-off line? And can I just confirm that it's excluded from the full-year guide?

Don Kimble -- Chief Financial Officer

Yes, it is excluded from the full-year guidance. And we do believe it will be going through as an expense as a fraud loss as opposed to through charge-offs.

Brian Foran -- Autonomous Research -- Analyst

OK. And then on the core expenses or the full-year guide on expenses, when you were talking about being at the low end or maybe even below the range, is that linked with the revenue outlook or independent? Or may said in other ways, is there a scenario in your mind where you hit the low end of the revenue guide, but beat on expenses? Or would it more be like you'd only beat on expenses if the revenue came up a little short?

Don Kimble -- Chief Financial Officer

I would say that our expenses being at or slightly below is consistent with our revenue outlook. What would cause that expense number to be higher is if the revenues come in stronger and the corresponding expenses associated with that would come through. And if for -- going forward, if you would miss our revenue guidance, I think that there is even further opportunity on the expense side to come down.

Brian Foran -- Autonomous Research -- Analyst

Got it. And then very quickly, and I apologize if I missed this. The hedges are obviously improving to be a big differentiator. So well done, whoever put them in.

Did you say what the term or the duration and how long that will last -- is?

Don Kimble -- Chief Financial Officer

Yeah, on average they're a little over two years as far as the interest rate swaps. The floors have an average life of about two and a half years, and we've been entering into some longer-dated swaps here recently. And going into the full year for some of the new ones we've been putting in place to more match with some of the more recent balance sheet improvements that we've had. And making sure that we keep that consistent.

So it's something that we watch very closely, and we try to be barely conservative as far as how we manage that overall position.

Brian Foran -- Autonomous Research -- Analyst

Great. Thank you.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Gerard Cassidy from RBC. Please go ahead.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Beth. Good morning, Don.

Beth Mooney -- Chairman and Chief Executive Officer

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Can you guys share with us what your customers are saying from the standpoint that the forward curve is expecting three Fed fund rate cuts this year? And it seems rather dramatic, considering our macroeconomic environment doesn't appear to be that week. Does that -- is there a disconnect you think between the forward curve and what your customers -- commercial customers, in particular, are seeing on the ground?

Chris Gorman -- President of Banking

Gerard, it's Chris. I would say, to some degree, there is. Here's kind of what we're hearing from our clients. The tone and sentiment with our clients continues to remain positive.

We're having a lot of strategic discussions with them. I would say it's been about flat kind of quarter over quarter if I could give you a read of the sentiment. Some of the areas of concern continue to be labor -- very hard to staff up their operations, both knowledge workers and also nonskilled workers. And also there's a bid to hire employees away.

I'd say the trade tension certainly doesn't help because of its uncertainty, but on balance it doesn't feel -- out talking to our clients, which we're doing very regularly. It doesn't feel the same as you would think it would feel as you look at the forward curve.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then your credit obviously, is quite strong this quarter, but some of your smaller regional peers have had so-called one-off credit announcements. And they seem to be concentrated in the private equity area of leverage loans and also some restaurant credits. Can you guys give any color on your leverage loan portfolio? I know it's been stable for a number of years.

It's not, as a percentage of total loans, a giant number. But curious to see what you're -- if you're seeing any trends in there that show some weakening or know it's fairly stable.

Chris Gorman -- President of Banking

Gerard, it's Chris. That's obviously a portfolio that we look at very, very closely at this point in the cycle. There is nothing in our portfolio that we believe is a sign of deterioration in that portfolio. It's a $2 billion portfolio, which by the way is what it was before we even acquired First Niagara.

So we have been very, very consistent at staying at that 2 billion-dollar level. It has a lot of velocity, as you can well imagine. And these are middle-market companies that are in our areas of focus. So we feel good about the portfolio, but it is a portfolio we watch very closely.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then just finally, maybe for Don. You mentioned about, if I heard it correctly, you're selling off some of the Laurel Road mortgage loans, I assume. I assume you're keeping the servicing so that you could cross-sell into that customer base.

And speaking of that cross-selling, when do you folks think you can actually start to gain some traction where you're able to get other business from these customers?

Don Kimble -- Chief Financial Officer

Yeah. Gerard, we're actually securitizing off some of the consolidation student loans.

Gerard Cassidy -- RBC Capital Markets -- Analyst

OK.

Don Kimble -- Chief Financial Officer

And this is something that Laurel Road had done before. And we just want to make sure we kept those avenues open. And so we're doing a small securitization transaction. And to your point as far as additional products, Laurel Road has already launched a mortgage product where we're continuing to refine some of those capabilities they've offered and hopefully be in a position to offer that to our existing retail customers, as well.

And so we'll start to see some traction there, and we're continuing to work on plans to further increase the types of products and services we can offer to that customer base. So we're really excited about the digital capabilities that they bring, and I think it has a bright future for us.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you.

Operator

[Operator instructions] And at this time, there are no further questions.

Beth Mooney -- Chairman and Chief Executive Officer

All right. Well, thank you, operator, and we 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 at (216) 689-4221. And with that, that concludes our remarks and our call today.

And have a great day. Thank you.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Beth Mooney -- Chairman and Chief Executive Officer

Don Kimble -- Chief Financial Officer

Scott Siefers -- Sandler O'Neill + Partners, L.P. -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

John Pancari -- Evercore ISI -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Matt Oonnor -- Deutsche Bank -- Analyst

Saul Martinez -- UBS -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Ken Usdin -- Jefferies -- Analyst

Brian Foran -- Autonomous Research -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Chris Gorman -- President of Banking

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