Q4 2021 KeyCorp Earnings Call
Can make progress towards 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 nine years importantly, we expect to generate positive operating leverage again in 2022, we.
We delivered record revenue, which was up 9% year over year with growth in both net interest income and noninterest income prepay.
Pre provision 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 Qi <unk>.
A 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 and our seven 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 and 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 two times the rate of the <unk>.
Rest of our footprint.
Consumer loans in our western franchise were up 17% last year.
We're also seeing very strong growth with younger clients, 25% of our new households are under 30.
We continue to benefit from two 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 enhance the client experience.
In 2021, we launched our national digital affinity Bank lower 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.
We also acquired <unk> strategies, a leading consumer focused analytics firm and most recently, we acquired <unk> a b.
<unk> 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 remained 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.
<unk>.
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.
All of our stakeholders.
I am very proud of our accomplishments in 2021.
Want to thank our teammates for their dedication and commitment to serving our clients and.
And growing our business.
I am confident in our future.
We are positioned to deliver on our commitments now.
Now I'll turn it over to Don to provide more details on the results for the quarter and our outlook for 2020 to dawn.
Thanks, Chris I'm now on slide five for the fourth quarter net income from continuing operations was <unk> 64 per common share up 14% from last year.
Our results reflect record performance for 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.
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 six.
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 with a decrease in average PPP balances as we help clients take advantage of loan forgiveness.
Forgiveness this quarter was $1 5 billion.
Importantly, we saw core growth in both our commercial and industrial book as well as commercial real estate portfolios versus the prior year and prior quarter.
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 of 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 seven.
Average deposits totaled $151 billion for the fourth quarter of 2021 up $15 billion or 11% compared to the year ago period, and a 4 billion or 3% from the prior quarter.
Linked quarter in Europe , <unk> comparisons reflect growth in both commercial and consumer balances.
Growth was partially offset by continued and expected decline in time deposits.
Our cost of interest bearing deposits remained unchanged at six 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 eight.
Taxable equivalent net interest income was $1 <unk> three 8 billion for the fourth quarter of 2021 compared to $1 <unk>.
$3 billion, a year ago, and $1 <unk> 5 billion for the prior quarter.
Our net interest margin was 244% for the fourth quarter of 2021 compared to two 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.
Well as the exit of the indirect auto loan portfolio last quarter, which impacted our net interest margin by three 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 continue to experience higher levels of deposit inflows in 2021.
Couple of areas of interest in the past has 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 receive fixed rate of our current swap portfolio.
Also if we are if we reinvested the $20 billion of liquidity are benefit to net interest income would be about $350 million a year.
We have also included in the appendix additional detail on our investment portfolio and our asset liability position.
Moving on to slide nine 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, a year ago period and $797 million in the third quarter.
Compared to the year ago period, noninterest income increased 13% to.
The increase was largely driven by an all time high quarter for investment banking 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 debt placement fees.
Other notable drivers where other income in 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 $107 million compared to $1 128 billion last year, and 111 2 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 reflects a number of direct investments.
As Chris mentioned, we invested in our team, including adding 10% new senior bankers.
We invested in Laurel Road.
Rollout of our National Digital bank in the team and an increased marketing.
And we've strengthened our digital and analytics capability, including the acquisitions of EQM and stuff.
These investments and correlated to higher levels of personnel costs from increasing hiring as well as the production related incentives.
On the non personnel 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 80 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 one ratio of nine 4% with our targeted range of nine to nine 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 <unk> 19, five per common share.
On slide 13 is our full year 2022 outlook.
Our guidance is relative to our full year 2021 results in ranges are shown on the slide.
Importantly, using the midpoint of our guidance ranges with support Christmas 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 three 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 will 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 rate 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 slide 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.
So 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 for the Q&A portion of the call operator.
Sure.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press with one and then zero on your Touchtone phone.
He had tone, indicating that <unk> been placed in Q you may remove yourself from queue by pressing the same one seal command.
Once again, one and then <unk> for any questions or comments.
Our first question will come from the line of John Carney with Evercore ISI. Your line is open.
Good morning.
John .
Wanted to see if you could elaborate.
Elaborate a little bit more in terms of the.
The main drivers of loan growth that you're expecting your most single digit average loan growth outlook for 2022.
Where do you think youre going to see that.
The biggest upside where do you see in some of the momentum building and then related to that I know the end of period balances.
Pointed to.
Above the average balances on the loan side is that a good jumping off point as we model loan growth for next year. Thanks.
Sure John So as you look at it.
The last couple of years, we've had the benefit of a lot of strength in the consumer loan engines that we built around both mortgage which was up basically seven X since 2016 and of course Laurel Road, which has exceeded our expectations. As we look forward I think youre going to see the commercial side.
Leading the growth and.
If you look back from the second quarter to the third quarter in 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.
I think youre going to see the growth continue is first of all let's talk a little bit about.
What the utilization rates are historic utilization rates have been mid <unk> right now we're at 27.
<unk> percent that we go up as a $1 billion. So thats one source of growth we called the bottom of that at the end of the second quarter and this quarter. For example were up 75 basis points on.
On utilization, it's my view that once people can get product, Dave will probably build inventory to a degree even greater than they had prior and thats because I think people have learned a lesson on just in time and also in an inflationary environment.
Just not a lot of cost to going long on inventory so to speak.
Other than that we also have our targeted scale approach, we have some areas that really generate outsized loan growth and you think about our focus on health care. There is certainly a lot of consolidation going on there our focus on technology and then we have a couple of real drivers that I mentioned in my remarks, one is renewable energy, which obviously there is a tremendous.
The 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 I think our guidance is.
It's pretty logical.
The only two things I would add to that really are.
We're seeing a lot of benefit from adding senior bankers, we've talked about adding 10% senior bankers. This year and they are 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 it still includes about $1 six worth of PPP balances. We saw a 1 billion fibre forgiveness. This past quarter, and so that will become a smaller and smaller part of the overall pie, but still.
Still excited and optimistic about the growth going forward.
Okay, great. Thanks for that and then separately common question that we get for you guys just given how solid year.
Our capital markets business has been is the question around the <unk>.
Potential of Bacon.
If there is a cliff coming in that in that revenue. So can you just give us a little bit of color on how you are thinking about.
Capital markets revenues as you look at 2022, I know you indicated in your prepared remarks.
Another solid year, but just give us a little bit more in terms of how we should think about the.
The run rate thanks.
Sure. So this is a business that for the last decade, we've had a compound annual growth rate of 15% and so it is 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.
Other thing that gives me comfort our 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 bought.
Peaks 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 under leveraged the other thing that gives us a lot of opportunity to do business is 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 is a lot of repeat issuers as a normal part of their business. So we have a lot of repeat.
Miss.
Okay. Thank you and any any way to help us think about 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 <unk>.
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%.
Got it okay. Thanks, Chris.
Thank you.
Our next question comes from the line of Scott <unk> with Piper Sandler.
And your line is open.
Good morning, guys. Thanks for taking the question Hey, Scott.
Hey, Don I was just hoping you can maybe.
Sort of unpack the expense guidance, a little I guess personally I would've thought maybe a little more pressure on the cost side in 2022 than what youre 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.
As you see them sort of how youre, keeping a lid on overall costs.
Be happy too 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 from that activity should be about $90 million for both fee income.
<unk> expenses coming down in.
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 are 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 in 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 as compared to our plan and we clearly exceeded our planned levels and.
2021, and so we would expect incentives to be down year over year.
Compared to what we had in 2021 now hopefully we will have performance that exceeds expectations again next year or this year I should say and drive that back, but we will see some outsized performance in revenue there as well.
And the last piece I would like to highlight there as far as expenses as it 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.
You mentioned investments that we will see salaries go up year over year and part of Thats, just the expectation that merit increases will be higher than historically, we would see merit increases in the 2% range and because of the market pressures in others, we will probably see 3% to 4% merit increases and on top of that continuing to.
And our senior bankers and we grew those at 10% this year our expectations, we'll have another nice year of growth again in 2022.
And the last piece of growth and expenses will be computer processing that we did see that one line item increase year over year and linked quarter in.
We would expect to see that continue to go up a little bit overall, and so if you mix all that together and it's world around a little bit is how you get to our guidance of being kind of low down single Dow.
Low single digits and so on.
No, it's a little messy, but but hopefully that helps provide a little bit more color there.
Yeah. It does that's perfect and I appreciate the thoughts.
Yeah.
Thank you.
Next we will go to the line of Gerard Cassidy with RBC.
And your line is open.
Good morning, Chris Marine done good morning Gerard.
Chris can you share with us on the investment banking 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.
Leveraged transactions or the low.
Low income housing mortgages that you referenced can you give us some color about that part of the investment banking business.
Yes. It is.
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 Slash HUD.
10 year non recourse.
That and then those instance, obviously, we wouldnt be retaining any for our balance sheet. So it is 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 clients' best interest and when markets are as open as they are now and we have a moderate risk appetite there are certain other.
Places, where we can better serve our clients and on our balance sheet and then the other thing we think about again, keeping our moderate risk profile.
As 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 it.
Can you give us some minimum how much of your investment banking business are in those industries.
Instantly need funding.
In any given year, it's not unusual for a third to a half of our issuers to be repeat customers of ours and so in certain to your question in certain businesses for example.
<unk> a real estate developer in low income housing low income, which is the same as affordable your business is built around putting these projects and it we're in the business.
Of helping them do that and then providing the permanent financing by placing it.
Thank you 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 when it was like in the financial crisis and other recessions.
The consensus and you referenced this as well.
Our camp about credit remains a 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 seen say, yes. Okay.
Not be sustain much longer and because it's been so unusually strong.
To me, it's more intuitive I'll ask mark to provide a little more color there as well, but you would 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.
So to more normal levels.
<unk> and charge off levels for the consumer portfolio, our 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 positive in <unk>.
Don't see anything on the horizon, which would suggest that it's good turn anytime soon.
Got it would just tell you that some time ago to start to see some things start to revert back closer to normal marketing thought you would add to that.
Well done.
The general.
<unk> is classified.
All of those improvements.
They will begin to moderate.
Is it more of a level bottoms.
As the stimulus programs have pulled back.
What's interesting even though the stimulus programs clearly are waning as we look at our book there was about $5 billion of deposits for our consumers that are greater than pre pandemic.
So theres still a lot of cash in the system for sure.
Got it thank you gentlemen, thanks Gerard.
Thank you.
Our next question comes from the line of Peter Winter with Wedbush Securities.
Your line is open.
Good morning, I wanted to ask about net interest income and I was just wondering Don.
If you could quantify the impact.
In 2022 versus 21 on both the PPP.
Income in the swap income.
Sure Ken as far as the PPP loans that we.
We've talked each quarter about what the fee income is that we've realized in 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 are 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 as 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 have been relatively stable.
Far as the swaps I don't have that.
My head as far as the impact for 2022, I think the important thing thats the.
And we've hit this on the call a little bit as to what we're seeing for market rates today actually are at or higher than what the.
Total portfolio of swaps receive fixed rates are and so in other words, we're seeing a $1 25 as far as our receive fixed rate that we have for our swap book in.
That.
Is at or below what the current market rates would be for three years or four years swap to replace it.
And the only reason I hesitate as far as the swap impact beyond that Peter is that all depends on the rate assumptions and because we would expect swaps come down as rates go up because essentially what the swaps do is help convert some of those variable rate loans to float to fixed rate loans.
Okay.
Just just regarding rates.
Don you mentioned in the prepared remarks, three 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 youre assuming for deposit betas.
Sure can.
Each 25 basis points.
For the full year impact will be about $50 million to $60 million of additional net interest income.
Our assumption right now thats in our asset liability management model would show about a 30% deposit beta.
We're assuming a much lower deposit beta on the first couple of rate moves and our outlook in.
Some of our commercial deposits are tied to changes in LIBOR now sofa.
And others on the consumer side or more administer right. So we'll have a little bit of flexibility there as far as how quickly those rates move up but we would expect to show a lower beta in the first couple of moves and then move to.
<unk> 30 basis, a 30% beta over time.
Great. Thanks, Don appreciate it.
Thank you. Our next question comes from the line of Erika Najarian with UBS your.
Your line is open.
Hi, good morning, good morning.
I wanted to follow up on Peters question Don on net.
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.
Okay.
The first few 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.
<unk> for a few commercial loans that have floors that are above zero.
But would expect the early rate increases that have more of a lift in that $50 million to $60 million range. That's correct.
Got it and.
Can you remind us of the 25 billion you have an alum swaps with the maturity profile looks like and given expectations for a tightening cycle that goes through 2023, what are your plans to.
Place maturing swaps.
The debate for in terms of capturing more of the rate sensitivity versus.
Replacing the swaps to protect your NII in the future.
Sure that.
As far as the swaps they have a duration of two four years and so if we look at the 2022 maturities that.
There is about.
$4 billion of the 25% 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 the 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 five percentage point decline in that data.
Our asset sensitivity actually increases by a point in the quarter 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 will have to continue to reassess.
How much of the swap book, we rollover and how much we might add to if we're more and more comfortable with that forward curve and enable to realize that with the swaps that we booked.
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 Chris I feel like during this earning season and Ceos.
Two counts.
Those that are letting the rate hikes fall to the bottom line and those that.
Our.
Investing the rate hikes.
Don explained your expense outlook clearly there are key specific idiosyncrasies.
Your.
Strategies loud and clear that you invest back in the franchise and you pay for increase client activity, but as we think about.
Yes.
Year without PPP noise, and good loan growth and rate hikes.
How should we think about positive operating leverage 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 widened as we can.
Further into the rate cycle or do you feel like you can keep positive operating leverage stable and.
I'll take that opportunity to invest.
It's really the latter Erica.
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 were 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 but.
We will clearly invest.
And our team we think we have a unique platform and we think it is under leveraged and will continue to invest in it.
Just to emphasize that point that Chris made that think about the headwinds we have in 2022 for the PPP program of $200 million in.
Sure.
<unk> in our numbers there.
At $2 8 billion, that's a meaningful increase to our adjusted our core <unk> 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 into 2023 and beyond.
Thank you.
Thank you.
Our next question will come from the line of Matt O'connor with Deutsche Bank and your line is open.
You guys are less reliant on overdraft or nonprofessional funds.
Yes.
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.
This year and maybe looking out a couple of years.
Sure Matt. So you are right for us I'd say on a relative basis, it's not as important but kind of starting 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 or what we call hassle free and by definition you can't overdraft.
With that 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 has been.
A series of changes and sort of where the market is and we will continue to reassess where we are making sure that it's a as I say a great value proposition for both our customers and our prospects.
Okay, and then just remind us what does the total in 'twenty, one and are you assuming any changes in the guidance.
So.
If you look at overdraft fees for us in 2021, I think they were just over one 5% and we haven't made any formal changes in our model yet as we're assessing where we are going to come out.
Okay, and then just separately a quick clarification question, Don you mentioned about trying to the accounting on the leasing impact on the fees and costs.
And maybe I missed it but do we just.
Take out both of those fees and costs.
Mike.
Its out or is there a noninterest income impact.
<unk>.
For that those two line items, you would see them declined by a little bit that wouldn't be completely removed a bit but there are certain leases that we have currently included in our operating lease accounts that will be considered capital leases going forward.
And so you would see that operating lease income and operating lease expense, both declined 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.
Okay. Thank you.
Thank you next we'll go to the line of Mike Mayo with Wells Fargo Securities and your line is open.
Hey.
I guess I have a positive or negative question, let me do the negative question first.
Wage pressure youre hiring a lot of bankers.
Youre seeing.
Wages go up and technology and outside.
What are you seeing and what are you assuming as part of your expense guidance.
Sure well first of all good morning, Mike.
So a couple of things we like everybody else are seeing wage pressure and if you go back.
If you go back five years and you look at our entry level teammates depending on what they do what their background was what geography, they're in they're starting wages are up over 40%. So thats over five years, that's that's real and we've been seeing that.
Also there is wage there's certain areas, where theres, 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'll 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 from an overall planning perspective, we typically would think that we would have 2% merit increases every year, we're budgeting for three to four.
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.
<unk> grew and ran that business and.
You are the only <unk>.
<unk> market player that I've heard so far.
The guide for higher 2022 results.
People have said Ceos, who said impossible comps.
Normalizing lower yet you are 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.
It's a few things first of all the fact that and I mentioned this earlier.
The line item that you are looking at doesn't have any trading in it.
Trey just for the benefit of our customers liquidity.
We have a lot of repeat customers.
You know Mike had built the business on this notion of targeted scale around certain sectors of the economy.
<unk> are growing and that need capital places like health care technology, and I've mentioned, a couple of the Subsectors as well and we continue to.
To add to our platform and then as I mentioned, we have a unique and under leverage 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 theres 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.
Alright. Thank you thank.
Thank you thank.
Thank you.
Next we'll go to the line of Ebrahim <unk> with Bank of America and your line is open.
Good morning.
Morning.
I guess just Don one question on follow up on the sensitivity on slide 18.
You outlined $20 billion of cash and short term securities.
And the numbers you provided earlier, the $50 million to $60 million.
Are you assuming in terms of any mixing some of that cash into longer dated assets and loans just give us some color on that.
And also I think this in the past you've talked about maybe two or $3 billion in deposits that could leave.
Normalized consumers.
And out and about give us a pushback given what you're assuming in terms of deposit outflows.
As far as the redeployment of that $20 million at $20 billion of liquidity.
We were thinking that for 2022, that's 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 2020 to 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 that 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 has come in stronger than what we would've expected in the balance of the retained longer than what we would've expected, but at some point in time, we do think some of that cash will be put to work as a commercial company our customers start to have opportunities to invest in inventory and other.
Things like that to support their growth and we.
We do believe that consumer at some point in time, we'll start to use some of the cash buildup.
Cheap as well.
That's helpful. And then 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 divesting those franchise.
The household acquisitions being two X what are you seeing and Dennis 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.
A lot of that just 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 and within that medical sort of political.
Going forward.
It's one of the areas, but I just think the demographics.
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 <unk> in terms of households, we grew households, <unk> in 2021 and the <unk>.
Yes.
Alright, and just one if I could just.
Sneak in.
More of like Zapped, EQM kind of opportunities at all that in.
Are there any particular areas, where you really focus 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 are.
First screen is always how does this help us distinguish ourselves with our customers and a lot of Fintech are very good at taking out one particular pain point or 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.
<unk> is one of the first Fintech 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.
Expense of the consumer side, but.
But youll see us continue to invest on the on the commercial side.
That's helpful. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jay Mcevilly with Stephens. Your line is open.
Hi, Good morning, good morning territory.
Don just a question for you I was wondering if you could maybe help us think about the first quarter expenses based on some of the comments earlier on this call and in the fourth quarter and and maybe some of the step up or seasonality that you typically can see.
Sure, we would expect to see some normal seasonality there.
First quarter tends to be kind of a low spot on revenues for many of the areas.
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.
A nicely.
Paired with the <unk>.
<unk> fourth quarter as well because we have a high correlation for the incentive company.
Calculations to the.
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 some declines there because of the.
Nonrecurring type of items that hit us in the fourth quarter also.
Thank you and then as a follow up is $4 billion a good quarterly run rate for 2022 as I think about consumer loan originations can Laurel road continue to grow if the consumer mortgage channel it comes down a bit.
So theres 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 is 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.
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.
Great. Thank you both thank you.
<unk>.
Thank you. Our next question comes from the line of Ken <unk> with Jefferies and your line is open.
Thanks, Good morning, guys 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 im 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 so it looks good and your outlook for 'twenty two.
Yes, it's a good question really goes back to <unk>.
Whats in the clients' best interest and there'll be some times, where a financing we will actually we wont hold any of it sometimes we will hold a piece of it so any fluctuation youll 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 youre buying securities today versus what's still running off and how that front book back book looks going forward sure that last quarter, we had a runoff yield of two 1% on roughly $2 7 billion.
In the fourth quarter, we bought securities 182, or excuse me $1 62 and <unk>.
Around the end of the year that had moved up to about a 180 to 190, it's actually north of 2% to 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 94 Thats right around your zone, where you want to live. So can you talk to us about our <unk> growth versus buyback and how you think about capital return after the dividend. Thanks.
And then I think you've hit on our priorities. There. The first is to continue to support organic growth. We have seen the strong loan growth and forecasting for continued 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 it.
The fourth quarter to $19.05, a share and still continue to target somewhere in that 40% to 50% kind of payout range and.
And then after that use share buybacks to manage our overall capital position.
If youre growing loans at double digit rates that youre, probably not going to be buying back as many shares as when youre growing loans.
Say, a 4% to 5% range and so that will probably be slower than what it might have been over the previous year.
We still view that as a.
And appropriate use of the excess capital generation that we have throughout the year.
Okay. Thanks, very much thank you.
Thank you.
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 to $166 $8 94 to one this concludes our remarks. Thank you.
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