KeyCorp (KEY) 2021 Q4 法說會逐字稿

Good morning, and welcome to KeyCorp's Fourth Quarter 2021 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, Chris Gorman. Please go ahead.

Thank you for joining us for KeyCorp's Fourth 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 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 a strong finish to a record year. For the fourth quarter, our earnings per share were $0.64 or $2.63 for the year. Before we discuss our quarterly results, I would like to provide some perspective on our performance for the year.

Importantly, we continue to deliver on our commitments and make progress toward each of our long-term targets. I'll start with positive operating leverage. In 2021, we generated positive operating leverage for the eighth time in the past 9 years.

Importantly, we expect to generate positive operating leverage again in 2022. We delivered record revenue, which was up 9% year-over-year with growth in both net interest income and noninterest income. Preprovision net revenue also achieved record levels last year, up 10% from the prior year.

We raised a record level of capital for our clients this year, over $100 billion, resulting in a record level of investment banking fees.

Our investment banking business has been a consistent, sustainable growth engine for Key, growing at 15% compound annual growth rate over the last decade. We expect another year of growth in 2022. Our pipelines remain strong and are higher than at this time last year. We continue to take share in our 7 industry verticals.

We also have leading positions in some very targeted sub-verticals, including renewables financing and affordable housing. In order to enhance our strong competitive position, we have continued to add bankers. In 2021, we increased our population of senior bankers by 10%, and we expect further growth in 2022.

We also saw strong momentum in our consumer business. We grew net new households at a record pace, and we continue to expand our existing client relationships. Our strongest growth in 2021 came from the western part of our franchise, which grew households at over 2x the rate of the rest of our footprint.

Consumer loans in our Western franchise were up 17% last year. We are also seeing very strong growth with younger clients; 25% of our new households are under 30. We continue to benefit from 2 consumer growth engines, Laurel Road and consumer mortgage. Combined, these businesses generated a record $16 billion in originations for the year ending 12/31/21. We also continue to invest in order to support future growth. In addition to growing the number of bankers, we have continued to make meaningful investments in digital and analytics.

These investments have accelerated our growth, improved our efficiency and enhanced the client experience. In 2021, we launched our national digital affinity bank, Laurel Road for Doctors, which expanded our consumer footprint nationally for a very targeted high-quality client segment.

75% of our new business is coming from outside of our traditional 15-state footprint. We also acquired AQN Strategies, a leading consumer-focused analytics firm. And most recently, we acquired XUP, a B2B-focused digital payments platform that provides an integrated and seamless onboarding experience.

Foundational to our model is a relentless focus on maintaining our risk discipline. Credit quality remains strong throughout the year, as net charge-offs as a percentage of average loans remained at historically low levels.

We will continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through all business cycles.

Finally, we have maintained our strong capital position, while continuing to return capital to our shareholders. In 2021, we returned 75% of our net income to shareholders in the form of dividends and share repurchases. We are committed to delivering value for all of our stakeholders. I am very proud of our accomplishments in 2021.

I want to thank our teammates for their dedication and commitment to serving our clients and growing our business. I am confident in our future. We are positioned to deliver on our commitments.

Now I'll turn it over to Don to provide more details on the results for the quarter and our outlook for 2022. Don?

Thanks, Chris. I'm now on Slide 5. For the fourth quarter, net income from continuing operations was $0.64 per common share, up 14% from last year. Our results reflect record performance from many of our businesses as well as continued strong credit metrics.

Importantly, we delivered positive operating leverage for both the fourth quarter and the full year. We also achieved record revenue for both the fourth quarter and full year. We had year-over-year growth in both net interest income and noninterest income. Our return on tangible common equity for the quarter was 18.7%. I will cover the other items on this slide later in my presentation.

Turning to Slide 6. Average loans for the quarter were $99.4 billion, down 2% from the year ago period and down less than 1% in the prior quarter. The driver of the decline from both periods was a decrease in average PPP balances, as we helped clients take advantage of loan forgiveness. Forgiveness this quarter was $1.5 billion.

Importantly, we saw core growth in both our commercial and industrial books as well as commercial real estate portfolios versus the prior year and prior quarter. If we adjust for the sale of the indirect auto portfolio last quarter as well as the impact of PPP, our core loans were up approximately $4 billion on average or 4% and up over $4.8 billion or 5% on an ending basis from the prior quarter.

On the consumer side, we continue to see strong momentum driven by Laurel Road and consumer mortgage. Combined, these businesses originated $4 billion of high-quality loans this quarter.

Continuing on to Slide 7. Average deposits totaled $151 billion for the fourth quarter of 2021, up $15 billion or 11% compared to the year ago period and up $4 billion or 3% from the prior quarter.

The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances. The growth was partially offset by continued and expected decline in time deposits. Our cost of interest-bearing deposits remained unchanged at 6 basis points.

We continue to have a strong, stable core deposit base with consumer deposits accounting for approximately 60% of the total deposit mix.

Turning to Slide 8. Taxable equivalent net interest income was $1.038 billion for the fourth quarter of 2021 compared to $1.043 billion a year ago and $1.025 billion for the prior quarter.

Our net interest margin was 2.44% for the fourth quarter of 2021 compared to 2.7% for the same period last year and 2.47% for the prior quarter. Year-over-year and quarter-over-quarter, both net interest income and net interest margin reflect the impact of lower investment yields as well as the exit of the indirect auto loan portfolio last quarter, which impacted our net interest margin by 3 basis points.

These were largely offset by a favorable earning asset mix. The net interest margin was also impacted by elevated levels of liquidity, as we continued to experience higher levels of deposit inflows in 2021.

Couple of areas of interest in the past have been the impact of the repricing of our interest rate swap portfolio and the potential benefit from investing our excess liquidity position. Today, the current market rates actually exceed the average received fixed rate of our current swap portfolio. Also, if we reinvested the $20 billion of liquidity, our benefit to net interest income would be about $350 million a year. We've also included in the appendix additional detail on our investment portfolio and asset liability position.

Moving on to Slide 9. We reported record noninterest income for both the quarter and full year. Noninterest income was $909 million for the fourth quarter of 2021 compared to $802 million for the year ago period and $797 million in the third quarter.

Compared to the year ago period, noninterest income increased 13%. The increase was largely driven by an all-time high quarter for investment banking and debt placement fees, which reached $323 million. Additionally, commercial mortgage servicing fees increased $16 million year-over-year.

Offsetting this growth was lower consumer mortgage fees reflecting higher balance sheet retention and lower gain on sale margins. Compared to the third quarter, noninterest income increased by $112 million, again primarily driven by the record fourth quarter investment banking and debt placement fees.

Other notable drivers were other income and commercial mortgage servicing fees, which increased $33 million and $14 million, respectively. Partially offsetting this was a $25 million decrease in cards and payments income, driven by lower prepaid card revenues.

I'm now on Slide 10. Noninterest expense for the quarter was $1.17 billion compared to $1.128 billion last year and $1.112 billion in the prior quarter. Our expense levels reflect higher production-related incentives related to our record revenue generation as well as the investments we've made to drive future growth.

Our expense levels in 2021 reflect a number of direct investments. As Chris mentioned, we invested in our team, including adding 10% new senior bankers. We invested in Laurel Road in the rollout of our National Digital Bank, in the team and in increased marketing. And we strengthened our digital and analytics capability, including the acquisitions of AQN and XUP.

These investments are correlated to higher levels of personnel costs from increasing hiring as well as the production-related incentives. On the nonpersonnel side, we saw an increase in business services and professional fees, computer processing expense and marketing.

Now moving to Slide 11. Overall credit quality continues to outperform expectations. For the fourth quarter, net charge-offs remained at historic lows and were $19 million or 8 basis points of average loans. Our provision for credit losses was $4 million. This reflects our continued strong credit measures as well as our outlook for the overall economy and loan production.

Nonperforming loans were $454 million this quarter or 45 basis points of period-end loans, a decline of $100 million or 22% from the prior quarter.

Now on to Slide 12. We ended the fourth quarter with Common Equity Tier 1 ratio of 9.4%, with 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. The final settlement of our accelerated share repurchase program disclosed last quarter was reflected in our share count this quarter. No additional open market repurchases were executed.

Additionally, our Board of Directors approved a fourth quarter dividend increase of 5%, which now places our dividend at $0.195 per common share.

On Slide 13 is our full year 2022 outlook. The guidance is relative to our full year 2021 results and ranges are shown on the slide. Importantly, using the midpoints of our guidance ranges, which support Chris' comments by delivering another year of positive operating leverage in 2022.

Average loans will be up low single digits on a reported basis. Excluding PPP and the impact of the sale of our indirect auto business, average loans will be up low double digits. We expect continued growth in average deposits, which should be up low single digits.

Net interest income is expected to be relatively stable, reflecting lower fees from PPP forgiveness, offset by growth in average earning assets, primarily loan balances.

Our guidance assumes 3 rate increases in 2022, with the last one in December, which would not have a meaningful impact on our results for the year. On a reported basis, noninterest income would be down low single digits, reflecting lower prepaid card revenue related to the support of government programs.

Excluding prepaid card, our noninterest income would be relatively stable. We expect noninterest expense to be down low single digits. Once again, adjusting for the expected reduction in expenses related to prepaid cards, expenses would be relatively stable.

For the year, we expect net charge-offs to be in the range of 20 to 30 basis points. Given our strong credit trends, we would expect lower loss rates to remain below our range early in the year and to move modestly higher later in the year. And our guidance for the GAAP tax rate is approximately 20%.

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 a moderate risk profile and improving our productivity and efficiency, which will drive returns.

Overall, it was a strong quarter and a good finish to the year, and we remain confident in our ability to grow and deliver on our commitments to all of our stakeholders.

With that, I'll now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator?

(Operator Instructions) Our first question will come from the line of John Pancari with Evercore ISI.

I wanted to see if you could elaborate a little bit more in terms of the main drivers of loan growth that you expect in your most single-digit average loan growth outlook for 2022. Where do you think you're going to see the biggest upside? Where are you seeing some of the momentum building?

And then related to that, I know the end-of-period balances pointed to -- or came in above the average balances on the loan side, is that a good jumping-off point as we model loan growth for next year?

Sure, John. So as you look at it, in the last couple of years, we've had the benefit of a lot of strength in the consumer loan engines that we've built around both mortgage, which is up basically 7x since 2016. And of course, Laurel Road, which has exceeded our expectations.

As we look forward, I think you're going to see the commercial side leading the growth. And if you look back from the second quarter to the third quarter and the third quarter to the fourth quarter, we had total loan growth of 4% in each of those quarters adjusted for both PPP and indirect auto.

And where I think you're going to see the growth continue is, first of all, let's talk a little bit about just what the utilization rates are. Our historic utilization rates have been mid-30s. Right now, we're at 27%. Every percent that we go up is $1 billion. So that's one source of growth. We called the bottom of that at the end of the second quarter. And this quarter, for example, we're up 75 basis points.

On utilization, it's my view that once people can get product, they will probably build inventory to a degree even greater than they had prior. And that's because I think people have learned a lesson on just in time. And also in an inflationary environment, there's just not a lot of cost to going long on inventory, so to speak.

Other than that, we also have -- in our targeted scale approach, we have some areas that really generate outsized loan growth. And you think about our focus on health care, there's certainly a lot of consolidation going on there, our focus on technology. Then we have a couple of real drivers that I mentioned in my remarks.

One is renewable energy, which obviously, there's a tremendous amount of capital flowing into. And the other is this notion of affordable housing, which is really -- a real unmet need in our country. So if you think about our backlogs and you think about our current trajectory, I think our guidance is pretty logical.

Yes, Chris, the only 2 things I would add to that really are, again, we're seeing a lot of benefit from adding senior bankers. We talked about adding 10% senior bankers this year, and they're helping to drive that commercial growth for us going forward. And so continue to be excited about the benefit from that.

And then if you look at the period-end balances, the only thing that I would caution there is that it still includes about $1.6 billion worth of PPP balances. We saw $1.5 billion of forgiveness this past quarter. And so that will become a smaller and smaller part of the overall pie. But still excited and optimistic about the growth going forward.

Okay. Great. And then separately, a common question that we get for you guys, just given how solid your capital markets and IB business has been, is the question around the potential -- or if there is a cliff coming in that revenue. So can you just give us a little bit of color on how you're thinking about capital markets revenues? As you look at 2022, I know you indicated in your prepared remarks that you expect another solid year, but just if you can give us a little bit more in terms of how we should think about the run rate.

Sure. So this is a business that for the last decade, we've had a compound annual growth rate of 15%. And so it's a business that has a good track record of growing. I think it's important to note that in this line, our investment banking line, we don't have any trading revenue. So some of the extreme volatility that one might expect to see from trading, one, we don't have it as part of our business. We trade just to provide liquidity for our customers.

But certainly, within our investment banking line, we don't have any of those revenues. The other thing that gives me comfort are, obviously, our backlogs. Our backlogs are stronger today than they were a year ago. We have more bankers on the street, as Don just mentioned, out talking to more customers.

In addition to that, we've made other investments. We've bought boutiques that we've successfully integrated. We also have hired groups of bankers that are on the platform. I've said for a long time that I thought that it was a platform that was underleveraged. The other thing that gives us a lot of opportunity to do businesses, when you're a middle market bank, obviously, the number of targets as you kind of go down the pyramid, expand geometrically. And so there's really a lot of potential customers out there for us to be calling on.

And the customers that we do have, because we've picked areas like I just mentioned, whether it's renewables or affordable housing, there's a lot of repeat issuers as a normal part of their business. So we have a lot of repeat business.

Okay. And any way to help us think about the -- how we should think about the level of growth in that line? I know you mentioned you expect growth this year, but any way to help us think about the magnitude?

No. I think what we're really focused on is making sure we continue to maintain growth in that business in spite of coming off of a year where we grew it by 49%.

Our next question comes from the line of Scott Siefers with Piper Sandler.

Don, I was just hoping you can maybe sort of unpack the expense guidance a little. I guess, personally, I would have thought maybe a little more pressure on the cost side in 2022 than what you're guiding to, particularly in light of the expectation for such ongoing strength in the investment banking line. So maybe just sort of the puts and takes that you see and sort of how you're keeping a lid on overall costs.

I'd be happy to that, as we mentioned a little bit on the comments that we do expect expenses and also fee income to come down from the expected decline in the prepaid card activity. We did see a nice reduction in that in the fourth quarter. And the year-over-year change from that activity should be about $90 million for both fee income and expenses coming down.

In addition to that, we have a similar issue going on with our operating lease area that we're going to reclassify certain leases into capital leases from operating leases. And so you can see a smaller than that, but a reclassification out-of-fee income and expenses. And so it will have a reduction of both of those.

And then other categories where we would expect to have declines in 2022 compared to 2021 would include professional fees, which we had some programs that finished up here in the fourth quarter and had an artificially high level in the quarter and parts of 2021 that we wouldn't expect going into 2022.

And then incentives that many of our incentives are based on how our performance is compared to our plan. And we clearly exceeded our plan levels in 2021. And so we would expect incentives to be down year-over-year compared to what we had in 2021.

Now hopefully, we'll have performance that exceeds expectations again next year or this year, I should say, and drive that back, but we'll see some outsized performance and revenue there as well.

And the last piece I'd like to highlight there as far as expenses is that both in the third and fourth quarter, we made additional $15 million contributions to our charitable foundation as a result of some additional fee income that was realized. And so we should see a little lower other expense coming through there. Now you mentioned investments that we will see salaries go up year-over-year. And part of that is just the expectation that merit increases will be higher.

Historically, we would see merit increases in the 2% range. And because of the market pressures and others, we will probably see 3% to 4% merit increases. And on top of that, continuing to invest in our senior bankers, and we grew those at 10% this year. Our expectations will have another nice year of growth again in 2022.

And the last piece of growth in expenses will be computer processing that we did see that one-line item increase year-over-year and linked quarter, and we would expect to see that continue to go up a little bit overall. And so if you mesh all that together and swirled around a little bit is how you get to our guidance of being kind of low down single -- down low single digits. And so I know it's a little messy, but hopefully, that helps provide a little bit more color there.

Next, we will go to the line of Gerard Cassidy with RBC.

Chris, can you share with us on the investment banking area? I think you guys talked about retaining about 18% of the loans that you put out for these clients. Can you give us some color on what types of loans are? Are they leveraged transactions or are they those low-income housing mortgages that you referenced? Can you give us some color about that part of the investment banking business?

Yes. It's a wide range, Gerard. And it ranges from investment-grade debt that we would be distributing to on the other end of the spectrum. We would be distributing to Fannie, Freddie, FHA/HUD, 10-year nonrecourse debt. And in those instances, obviously, we wouldn't be retaining any for our balance sheet. So it's really our kind of criteria for what we hold on our balance sheet and what we distribute.

First and foremost, we start with what is in the client's best interest. And when markets are as open as they are now, there's -- and we have a moderate risk appetite, there are certainly other places where we can better serve our clients than on our balance sheet. And then the other thing we think about, again, keeping our moderate risk profile is just not having a lot of risk in any one name. So that's kind of how we think about it.

And you said something in your comments earlier to a question about the repeatable business. How much is -- can you give us an estimate of how much of your investment banking business are in those industries that constantly need funding?

In any given year, it's not unusual for 1/3 to 1/2 of our issuers to be repeat customers of ours. And so in certain -- to your question, in certain businesses, for example, if you're a real estate developer in low income housing, low income, which is the same as affordable, your business is built around putting these projects in, and we're in the business of helping them do that and then providing the permanent financing by placing it.

And then as a follow-up question, Don, you guys have done a very good job in changing the image of Key on credit from what it was like in the financial crisis and other recessions. The consensus, and you referenced this as well in your camp about credit remains real strong first half of the year and maybe we start to see normalization trends in the second half of the year. Is it just more intuitive that you feel that way or is there some modeling that you guys can really see and say, "Yes, okay, this cannot be sustained much longer because it's been so unusually strong?"

To me, it's more intuitive. I'll ask Mark to provide a little bit more color there as well. But if you think about it, the consumer has benefited so much from all the stimulus that's been provided. And we're starting to see some of those stimulus programs actually wind down. And so we would expect to see some of the consumer performance start to return to more normal levels. Delinquency and charge-off levels for the consumer portfolio are all-time record lows and don't see that as being sustainable long term.

Commercial, I would say, it's similar that if you look at what's happened on criticized, classified, nonperforming loans, the trends have just been so, so positive. And I don't see anything on the horizon, which would suggest that it's going to turn anytime soon. But gut would just tell you that sometimes you're going to have to start to see something start to revert back closer to normal. Mark, any thought you would add to that?

Yes. No, I think you summed it up well, Don. Just the general criticized, classified, NPL, all those improvements, they'll begin to moderate, and you get to more of a level bottom as the stimulus programs are pulled back.

What's interesting, even though the stimulus programs clearly are waning, as we look at our book, there's about $5 billion of deposits for our consumers that are greater than prepandemic. So there's still a lot of cash in the system, for sure.

Our next question comes from the line of Peter Winter with Wedbush Securities.

I wanted to ask about net interest income. And I was just wondering, Don, if maybe you could quantify the impact in 2022 versus '21 on both the PPP income and the swap income.

Sure, can. As far as the PPP loans that we've talked to each quarter about what the fee income is that we've realized, and the fourth quarter was $48 million. And so combined throughout the year, the fee income was $191 million in 2021. And then on top of that, we had normal interest income on the PPP loans of a little over $50 million.

And so we think that $244 million of income actually gets cut by about $200 million between 2021 and 2022. And so that clearly is a headwind for us. And so if that would have been consistent year-over-year, we would be showing mid-single-digit kind of growth rates in net interest income as opposed to what we're reporting of being relatively stable.

As far as the swaps, I don't have that off the top of my head as far as the impact for 2022. I think the important thing that -- and we've hit this on the call a little bit, is that what we're seeing from market rates today actually are at or higher than what the total portfolio of swap received fixed rates are. And so in other words, we're seeing a 125 as far as our received fixed rate that we have for our swap book, and that is at or below what the current market rates would be for 3- or 4-year swap to replace it.

And the only reason I hesitate as far as the swap impact beyond that, Peter, is that, that all depends on the rate assumptions and because we would expect swaps to come down as rates go up because essentially what the swaps do is help convert some of those variable rate loans to flow -- or to fixed rate loans.

Okay. And just regarding rates, Don, you mentioned in the prepared remarks, 3 rate hikes and one of them being in December, so not much of an impact. Could you just quantify the impact to net interest income for every 25 basis point rate hike and what you're assuming for deposit betas?

Sure, can. Each 25 basis points for the full year impact would be about $50 million to $60 million of additional net interest income. Our assumption right now that's in our asset liability management model would show about a 30% deposit beta.

But we're assuming a much lower deposit beta on the first couple of rate moves in our outlook. And some of our commercial deposits are tied to the changes in LIBOR, now SOFR and others on the consumer side are more administrative rates. So we'll have a little bit of flexibility there as far as how quickly those rates move up, but we would expect it to show a lower beta in the first couple of moves and then move to 30% beta over time.

Our next question comes from the line of Erika Najarian with UBS.

I wanted to follow up on Peter's question, Don, on net interest income sensitivity. I just wanted to clarify that $50 million to $60 million for each 25 basis points does include a 30% beta, and therefore, what you're telling us is in reality, there's going to be -- the first few rate hikes should be, in theory, higher than this $50 million to $60 million?

I would agree that there will be some negative impact initially, Erika, for a few commercial loans that have floors that are above 0 but would expect the early rate increases that have more of a lift than that $50 million to $60 million range. That's correct.

Got it. And what -- can you remind us of the $25 billion you have in A/LM swaps? What the maturity profile looks like? And given expectations for a tightening cycle that goes through 2023, what are your plans to replace maturing swaps the debate in terms of capturing more of the rate sensitivity versus replacing the swaps for -- to protect your NII in the future?

Sure. As far as the swaps, they have a duration of 2.4 years. And so if we look at the 2022 maturities, there's about $4 billion of the $25 billion that mature in that first year. We take a look at how we're positioned from an asset sensitivity perspective all the time to see where we want to target that right now, we're showing about a 5% asset-sensitive position.

To the earlier point, that was with the assumption of a 30% deposit beta. In our appendix, we show that for every 5-percentage point decline in that beta, our asset sensitivity actually increases by 1.25 points. And so there is a real impact from that. We are getting to the point where the rates are getting more attractive and more consistent with where our outlook would be.

And so as we look at the loan growth that we would be expecting for this year, we'll have to continue to reassess how much of the swap book we roll over and how much we might add to if we're more and more comfortable with that forward curve and able to realize that with the swaps that we've been booking. But right now, we're not assuming any additional swaps beyond just replacing the maturities at this point in time in our outlook.

Got it. And if I could sneak one last one for Chris. So Chris, I feel like during this earnings season, CEOs are in 2 camps: those that are letting the rate hikes fall to the bottom line and those that are investing the rate hikes. The way Don explained your expense outlook, clearly, there are Key-specific idiosyncrasies. Your strategy is loud and clear that you invest back in the franchise and you pay for increased client activity.

But as we think about a year without PPP noise and good loan growth and rate hikes, how should we think about positive operating leverage at Key? In other words, are you going to allow more of those rate hikes to drop to the bottom line and therefore, positive operating leverage actually widens as we get further into the rate cycle? Or do you feel like you can keep positive operating leverage stable and take that opportunity to invest?

It's really the latter, Erika. We said today that we will generate positive operating leverage in 2022, but that assumes that we are out there and we're investing. And we're investing in our existing people. We're out successfully hiring people. As you know, we've made a lot of niche acquisitions.

We continue to see a lot of flow there. So it's really -- we will achieve positive operating leverage, but we will clearly invest in our team. We think we have a unique platform. We think it's underleveraged, and we'll continue to invest in it.

Just to reemphasize that point that Chris made that think about the headwinds we have in 2022 for the PPP program of $200 million and our PPNR numbers there are at $2.8 billion. So that's a meaningful increase to our adjusted or core PPNR without that impact of the PPP forgiveness. And so we would have had an extremely strong positive operating leverage in 2022. And I think we're continuing to invest for growth and would expect that to continue to have a nice trajectory in the 2023 and beyond.

Our next question will come from the line of Matt O'Connor with Deutsche Bank.

You guys are less reliant on overdraft or nonsufficient fund's fees than some of your peers. But maybe you could give us an update on what your strategy is there going forward, given some of the changes in the industry and what the impact would be on your revenues this year and maybe looking out a couple of years?

Sure, Matt. So you're right. For us, it's a -- on a relative basis, it's not as important. But kind of starting at what is most important is we're a relationship bank. And so it is very, very important to us that we have a value proposition that is attractive to our existing customers and to our clients.

Currently, 22% of all our checking accounts are what we call hassle-free. And by definition, you can't overdraft with that account. And also there are absolutely no fees on a monthly basis. Having said that, obviously, in the last couple of weeks, there's been a series of changes in sort of where the market is, and we will continue to reassess where we are making sure that it's a, as I say, great value proposition for both our customers and our prospects.

Okay. And then just remind us what those fees totaled in '21? And are you assuming any changes in the guidance?

So those -- if you look at overdraft fees for us in 2021, I think they were just over 1.5%, and we haven't made any formal changes in our model yet as we're assessing where we're going to come out.

Okay. And then just separately, a quick clarification question. Don, you mentioned about the change in accounting on the leasing impacting the fees and costs. And maybe I missed it, but do we just essentially take out both of those fees and costs and then it migrates -- it nets out? Or is there a net interest income impact?

Well, for that, those 2-line items, you would see them decline by a little bit. That wouldn't be completely removed, but there are certain leases that we have currently included in our operating lease accounts that will be considered as capital leases going forward.

And so you would see that operating lease income and operating lease expense both decline by $20 million to $30 million year-over-year from that. And you would see the net difference going through the net interest income. That's correct.

Next, we'll go to the line of Mike Mayo with Wells Fargo Securities.

I guess I have a positive and a negative question. Let me do the negative question first. Wage pressure. You're hiring a lot of bankers. You're seeing wages go up in technology and outside. What are you seeing and what are you assuming as part of your expense guidance?

Sure. Mike, so a couple of things. We, like everybody else, are seeing wage pressure. And if you go back 5 years and you look at our entry-level teammates, depending on what they do, what their background was, what geography they're in, their starting wages are up over 40%. So that's over 5 years.

That's real, and we've been seeing that. Also, there's wage -- there's certain areas where there's even more wage pressure. One would be certain areas around analytics and technology. Those employees and teammates are obviously very valuable, and we're recruiting in those areas. So you see inflation there.

And then it's pretty well documented, we and others gave junior bankers in our investment banking business increases sort of mid-cycle. So that's kind of where we've seen it. And from an overall planning perspective, we typically would think that we would have 2% merit increases every year. We're budgeting for 3% to 4% this coming year, Mike.

Okay. And then the positive question. No good deed goes unpunished. Record investment banking markets last year, record this year. I know you grew and ran that business and you're the only capital markets player that I've heard so far to guide for higher 2022 results. People have said -- CEOs have said impossible comps, normalizing lower, yet you're saying it should still go higher. Now you don't need to put yourself out there with that specific forecast. What gives you that extra confidence?

Yes. So it's a few things. It's -- first of all, the fact that -- and I mentioned this earlier, the line item that you're looking at doesn't have any trading in it. We trade just for the benefit of our customers' liquidity. We have a lot of repeat customers. We, as you know, Mike, have built the business on this notion of targeted scale around certain sectors of the economy that are growing and that need capital, places like health care technology and I mentioned a couple of the subsectors as well.

And we continue to add to our platform. I mean as I mentioned, we have a unique and underleveraged platform that we continue to hire teammates. We grew our number of senior bankers by 10% last year. I'm looking at our backlogs. Obviously, there's no guarantees in the deal business, but I feel really good about our team, and I feel good about the momentum of the business in spite of the fact that, as you point out, we're up 49% year-over-year.

Next, we'll go to the line of Ebrahim Poonawala with Bank of America.

I guess just, Don, one question on follow-up around rate sensitivity on Slide 18. You outlined $20 billion of cash and short-term securities. In the numbers you provided earlier, the $50 million to $60 million, what are you assuming in terms of remixing some of that cash into longer-dated assets and loans? Just give us some color on that.

And also, I think, Chris, in the past, you've talked about maybe $2 billion or $3 billion in deposits that could leave as things normalize, consumers are back out and about. Give us a perspective on what you're assuming in terms of deposit outflows?

Okay. As far as the redeployment of that $20 billion of liquidity that we were thinking that for 2022, the biggest use of that excess liquidity will really come from loan demand that we expect from this point forward that our loan balances will outpace deposit balances as far as growth.

And so that will use up some of that excess liquidity in 2022, still be in a strong position after that. Our assumptions would have us reinvesting the runoff, which is about $2.5 billion a quarter, plus another $1 billion to $3 billion a quarter of additional growth. And so it doesn't have any significant redeployment of that excess liquidity into the bond market at all. So -- but that's something we'll continue to evaluate and fine-tune as we go throughout the year.

On the deposit assumption that we are still guiding to growth year-over-year in deposits, but at a slower pace than what we've seen. I will be honest and tell you that over the last few years, we've always been wrong as far as our deposit growth, and it's come in stronger than what we would have expected, and the balances have retained longer than what we would have expected.

But at some point in time, we do think some of that cash will be put to work as our commercial company -- our customers start to have opportunities to invest in inventory and other things like that to support their growth, and we do believe the consumer at some point in time will start to use some of the cash buildup they've achieved as well.

That's helpful. And I guess just a separate question on loan growth. You talked about some of the C&I utilization rates informing your guidance. You also talked about the West Coast franchise and the household acquisition has been 2x, what you're seeing in the rest of the footprint. How big is that household acquisition in terms of actually translating into revenue loan growth? Any color you can provide on that?

Sure. Well, the one data point that I mentioned was in the West, we grew our loans on the consumer side by 17% in 2021. And a lot of that -- this goes back to targeted scale, a lot of that growth was frankly around mortgages for doctors and dentists.

Got it. And is that where we should see growth is tied to consumer within that medical sort of vertical going forward?

That's one of the areas. But I just think the demographics -- the point I was making on the West is just the demographics are much stronger than other parts of our franchise and it's really important for us, we're focused on growing in the West, growing in growth markets. And so the opportunity there is about 2x. And in terms of households, we grew households 2x in 2021 in the West.

All right. And just one, if I could sneak in, how many more of like XUP, AQN kind of opportunities are out there? And are there any particular areas where you're really focused on when it comes to these acquisitions?

So there are a lot of opportunities. Because we've been involved in the fintech space as an investor, as a partner for well over a decade, we're pretty tied into the ecosystem. It's not unusual for us to see 10 or 15 deals a month. So there are a lot of opportunities.

Our first screen is always how does this help us distinguish ourselves with our customers? And a lot of fintechs are very good at taking out one particular pain point for a certain client set. And so that's kind of how we look at it. So I think there'll be a lot of opportunities. The interesting thing for us is XUP is one of the first fintechs that we've acquired that's exclusively focused on our commercial franchise.

In the past, we've really made investments on the consumer side. So I think going forward, not at the expense of the consumer side, but you'll see us continue to invest on the commercial side.

Our next question comes from the line of Terry McEvoy with Stephens.

Maybe, Don, just a question for you. I was wondering if you could maybe help us think about first quarter expenses based on some of the comments earlier on this call in the fourth quarter and maybe some of the step-up or seasonality that you typically can see.

Sure. We would expect to see some normal seasonality there. The first quarter tends to be kind of a low spot on revenues for many of the areas, but the day count is fewer, and so that drives a lot of the revenue components.

Capital markets-related revenues tend to be lower in the first quarter as well. And so with that, you would expect to see incentives coming down nicely compared to the fourth quarter as well because we have a high correlation for the incentive calculations to total revenues.

Some of the other expense categories, we would expect to see some declines in some of the areas that I've mentioned before, including professional fees, the op lease expense will start to phase in and some of the other expense categories should also show some declines there because of the nonrecurring type of items that hit us in the fourth quarter also.

And then as a follow-up, is $4 billion a good quarterly run rate for 2022, as I think about consumer loan originations and can Laurel Road continue to grow if the consumer mortgage channel comes down a bit?

So there's a couple of things going on there. As you think about our consumer business, let's start with Laurel Road. They had obviously about $2 billion of originations in spite of what was a federal student loan payment holiday all year. So I think actually, there's a little pent-up demand there. As you think about our mortgage business, that will come down in terms of volume. We had originations of $14 billion this year.

We're about half purchase half refi. We will exceed the MBA numbers and take share in both of those, but I would expect purchase to continue to rise. And obviously, based on our forecast for interest rates, we would expect refi to drop off rather significantly.

Our next question comes from the line of Ken Usdin with Jefferies.

A couple of quick ones. You mentioned that the full year retention of that commercial investment bank originations was 18%. You had been doing a little bit more than 20%. So I'm just checking that while the number was good in the fourth quarter, did you actually keep a lower percentage? And is that a potential driver presuming that the organic origination growth still looks good in your outlook for '22?

Yes. It's a good question. It really goes back to what's in the client's best interest. And there will be some times where a financing, we will actually -- we won't hold any of it, sometimes we'll hold a piece of it. So any fluctuation you'll see there is really just a function of us taking our clients to the market that we think suits them best.

Okay. Got it. So that can move. Okay. Don, can you talk a little bit about what you're buying securities at today versus what's still running off and how that front book/back book looks going forward?

Sure. Last quarter, we had a runoff yield of 2.1% on roughly $2.7 billion. But in the fourth quarter, we bought securities of 1.82% -- or excuse me, 1.62% and around the end of the year, that had moved up to about 1.80% to 1.90%. It's actually north of 2% today. So we're getting to that point of breakeven as far as the rollover of the investment portfolio as well.

Okay. Great. And last one, just on capital, you're at 9.4%, that's right around your zone where you want to live. So can you talk to us about RWA growth versus buyback and how you think about capital return after the dividend?

Sure. And I think you hit on our priorities there. The first is to continue to support organic growth. We have seen the strong loan growth and forecasting for continuation of strong loan growth. And so that will require additional capital to support that.

Second is to support a very strong dividend, and we did increase the fourth quarter to $0.195 a share and still continue to target somewhere in that 40% to 50% kind of payout range.

And then after that, you share buybacks to manage our overall capital position. If you're growing loans at double-digit rates, you're probably not going to be buying back as many shares as when you're growing loans at, say, 4% to 5% range. And so that will probably be slower than what it might have been over the previous years, but still view that as an appropriate use of the excess capital generation that we have throughout the year.

And with that, we have no further questions. I'd like to turn it back over to the speakers for any closing comments.

Again, thank 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.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.