Keycorp (KEY) — Q4 2021 Earnings Call Transcript

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 nine 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 non-interest income. 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 Key, growing at 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 in 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. 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 2 times 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 two consumer growth engines, Laurel Road and consumer mortgage. Combined, these businesses generated a record $16 billion in originations for the year ending December 31, 2021. 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 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 non-interest 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 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 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 declines 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 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 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. A 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 non-interest income for both the quarter and full year. Non-interest 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, non-interest 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, non-interest 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. Non-interest 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 and the team and 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 production-related incentives. On the non-personnel side, we saw an increase in business services and professional fees, computer processing expenses, 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 eight 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. Non-performing 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 a Common Equity Tier 1 ratio of 9.4%, within 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, 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 about 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, non-interest income would be down low single digits, reflecting lower prepaid card revenue related to the support of government programs. Excluding prepaid card, our non-interest income would be relatively stable. We expect non-interest 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. 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.

Good morning.

Good morning, John.

Can you provide more details on the key factors driving your expected low single-digit average loan growth for 2022? Where do you anticipate the most potential for growth, and where do you see momentum developing? Additionally, considering that the end-of-period balances were above the average balances for loans, can we use this as a starting point for forecasting loan growth next year?

Sure, John. In the past couple of years, we've benefited from significant strength in our consumer loan segments, particularly in mortgages, which have increased nearly sevenfold since 2016, and Laurel Road, which has surpassed our expectations. Looking ahead, I believe the commercial sector will drive our growth. If you compare the second quarter to the third and the third to the fourth, we experienced total loan growth of 4% in each quarter when adjusted for PPP and indirect auto loans. The growth will continue primarily due to the utilization rates. Historically, our rates have been in the mid-30s, but currently, we're at 27%. For every percentage point increase, that's an additional $1 billion in growth. We identified the bottom of this trend at the end of the second quarter, and this quarter, for instance, utilization increased by 75 basis points. I believe once customers have access to products, they are likely to build inventory beyond previous levels because they have learned from just-in-time strategies. In an inflationary environment, the cost of holding inventory is relatively low. Additionally, through our targeted scale approach, we are focusing on areas that yield significant loan growth. We're emphasizing healthcare, which is seeing considerable consolidation, and technology. We also have strong drivers in renewable energy, which is attracting substantial investment, and affordable housing, which represents a significant unmet need in our country. Considering our backlogs and current trajectory, I think our guidance is quite reasonable.

Yes, Chris, the only two 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. A common question we receive is about the stability of your capital markets and investment banking revenue. Can you provide some insights into how you perceive capital markets revenues? You mentioned in your remarks that you anticipate another strong year in 2022, but could you share more details on how we should view the revenue 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 is, obviously, 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 under-leveraged. The other thing that gives us a lot of opportunity to do business when you're a middle-market bank, obviously, the number of targets as you kind of go down the pyramid expands 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. Can you provide some insight on how we should view the growth potential in that area? I know you mentioned that you anticipate growth this year, but can you elaborate on the expected scale of that growth?

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%.

Got it. Okay. Thanks, Chris.

Good morning, guys. Thanks for taking the questions.

Thanks, Scott.

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 provide that clarification. As mentioned earlier, we anticipate a decline in both expenses and fee income due to a decrease in prepaid card activity, which we already observed in the fourth quarter. The year-over-year change from this activity should amount to approximately $90 million in reduced fee income and expenses. Additionally, we will be reclassifying some leases from operating to capital leases, leading to a smaller but notable reclassification affecting these categories as well. We also expect declines in 2022 compared to 2021 in areas like professional fees, as some programs wrapped up in the fourth quarter and resulted in an unusually high level of expenses during that time, which we don't anticipate repeating this year. Furthermore, many of our incentives are tied to performance relative to our plans, and since we exceeded our targets in 2021, we expect those incentives to decrease year-over-year. However, if we outperform expectations again this year, it may result in improved performance and revenue. Lastly, in terms of expenses, we made additional $15 million contributions to our charitable foundation in the third and fourth quarters due to extra fee income, so we should see lower other expenses as a result. Regarding salaries, we do expect year-over-year increases, primarily because merit increases are likely to be higher than the historical 2% range; we forecast they will fall between 3% and 4% this year. We are also continuing to invest in our senior bankers, who saw a 10% growth this year, and we expect another strong growth year in 2022. Moreover, computer processing expenses have increased year-over-year and quarter-over-quarter, and we anticipate that rising trend to continue. All of these factors combined lead to our guidance of low single-digit expense growth. I understand it might come across as complicated, but I hope this provides additional clarity.

Yes, it does. That's perfect, and I appreciate the thoughts.

Good morning, Chris. Good morning, Don.

Good morning, Gerard.

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?

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 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. When markets are as open as they are now, 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.

Can you estimate how much of your Investment Banking business comes from industries that consistently require funding?

In any given year, it's not unusual for one-third to half of our issuers to be repeat customers. For certain businesses, such as real estate developers in low-income housing, which is the same as affordable housing, their operations focus on implementing these projects. We assist them in this process and then provide permanent financing through placement.

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 comments about credit, remains really strong for the 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, or do you think 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. We're starting to see some of those stimulus programs actually wind down. 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 I 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, non-performing loans, the trends have just been so, so positive. 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 some things 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 pre-pandemic. So there's still a lot of cash in the system, for sure.

Got it. Thank you, gentlemen.

Thanks, Gerard.

Good morning. 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?

Certainly. The fee income from PPP loans in the fourth quarter was $48 million, totaling $191 million for the year 2021. Additionally, we earned over $50 million in normal interest income from PPP loans. We expect that the overall income of $244 million will decrease by about $200 million from 2021 to 2022, which represents a headwind for us. If this income had remained consistent year-over-year, we would have experienced mid-single-digit growth rates in net interest income, instead of the relatively stable figures we are reporting. Regarding the swaps, I don’t recall the specific impact for 2022 at the moment, but it's important to note that the market rates we observe today are at or above the fixed rates we receive from our swap portfolio. Specifically, our received fixed rate is at 125, which is at or lower than current market rates for replacing three or four-year swaps.

Okay. And 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 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. 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.

Great. Thanks, Don. I appreciate it.

Hi, good morning. I wanted to follow up on Peter's question about net interest income sensitivity. Just to clarify, the $50 million to $60 million for each 25 basis points does include a 30% beta. So, what you're saying is that the initial rate hikes should, in theory, exceed this $50 million to $60 million?

I would agree that there will be some negative impact initially, Erika, for a few commercial loans to have floors that are above zero 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. Can you remind us of the $25 billion you have in A/LM swaps? What does the maturity profile look like? Given expectations for a tightening cycle throughout 2023, what are your plans to replace maturing swaps in terms of capturing more rate sensitivity versus replacing the swaps to protect your net interest income in the future?

Sure. As far as the swaps, they have a duration of 2.4 years. 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 and our appendix, we show that for every 5-percentage point decline in that beta, our asset sensitivity actually increases by 1.25 points. 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. 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 two 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 mentioned today that we will achieve positive operating leverage in 2022, but that is contingent upon our investment efforts. We are focusing on our existing workforce and successfully bringing in new talent. As you know, we have made several targeted acquisitions and continue to see significant activity there. So, we will achieve positive operating leverage, but we will also invest in our team. We believe we have a unique platform that is currently under-leveraged and we will keep investing in it.

Just to reemphasize that point that Chris made, think about the headwinds we have in 2022 for the PPP program of $200 million. 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.

Thank you.

You guys are less reliant on overdraft or non-sufficient fund 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. You're correct that it's not as significant for us on a relative basis. However, what's most important is that we are a relationship bank. Therefore, it's crucial for us to have a value proposition that appeals to both our existing customers and clients. Currently, 22% of all our checking accounts are hassle-free, meaning you can't overdraft with that account, and there are no monthly fees. That said, there have been several changes in the market recently, and we will continue to reassess our position to ensure we maintain a compelling value proposition for both our customers and prospects.

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

So if you look at overdraft fees for us in 2021, they were just over 1.5%, and we haven't made any formal changes in our model yet as we are evaluating where we are headed.

Okay. I have a quick clarification question. Don, you mentioned that the change in accounting for leasing is affecting the fees and costs. Did I miss it, or do we essentially remove both fees and costs and have them balance out? Or is there an impact on net interest income?

Well, for that, those two 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. 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.

Okay. Thank you.

Hey, I guess I have a positive and 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. A few points to mention. Like many others, we're experiencing wage pressure. Over the past five years, the starting wages for our entry-level employees have increased by more than 40%, depending on their roles, backgrounds, and locations. That's significant, and we've been noticing it. Additionally, there are specific fields, particularly in analytics and technology, where wage pressure is even greater. Those employees are crucial, and we are actively recruiting in those areas, which is contributing to inflation in those segments. As it's well known, we and others have provided mid-cycle salary increases to junior bankers in our Investment Banking division. In general, we usually plan for about 2% merit increases each year, but we are budgeting for 3% to 4% for the upcoming year, Mike.

Okay. Now for the positive question. No good deed goes unpunished. We had record investment banking and markets last year, and we're seeing record performance this year as well. I know you grew and managed that business, and so far, you're the only capital markets player I've heard of that is projecting higher results for 2022. Other CEOs have mentioned difficult comparisons and expect normalization to lower levels, yet you are still suggesting growth. You don't need to make that specific forecast. What gives you that additional confidence?

Yes. Several factors contribute to this. Firstly, the item you're examining does not include any trading activity. We engage in trading solely to enhance our customers' liquidity. We have a strong base of repeat customers. Our business, as you know, Mike, is built on the concept of targeted scale focused on specific growing sectors of the economy that require capital, such as health care technology, among others. We are continuously expanding our platform. We have a distinctive and under-leveraged platform and are actively hiring new team members. Last year, we increased our number of senior bankers by 10%. Looking at our backlogs, although there are no guarantees in deal-making, I am optimistic about our team and the momentum of our business, especially considering we are up 49% year-over-year.

All right, thank you.

Thank you.

Good morning.

Good morning.

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, 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. It doesn't have any significant redeployment of that excess liquidity into the bond market at all. But that's something we'll continue to evaluate and fine-tune as we go throughout the year. On the deposit assumption, 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. 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 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. The data point I mentioned is that on the consumer side, our loans in the West grew by 17% in 2021. Much of this growth was due to mortgages specifically 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. I believe the demographics in the West are significantly stronger than in other parts of our franchise, which is very important for us. We are focused on expanding in the West and in growth markets. The opportunity there is about twice as much. In 2021, we doubled the number of households 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? A lot of fintechs are very good at taking out one particular pain point for a certain client set. That's kind of how we look at it. 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. I think going forward, not at the expense of the consumer side, but you'll see us continue to invest on the commercial side.

That's helpful. Thank you.

Thank you.

Hi, good morning.

Good morning, Terry.

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. 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.

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. Obviously, based on our forecast for interest rates, we would expect refi to drop off rather significantly.

Great. Thank you, both.

Thank you.

Thanks. Good morning, guys. 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, that's a great question. It really comes down to what's best for the client. There will be times when we don't retain any of the financing, and other times when we will retain a portion. Any changes you see are simply due to our efforts to connect our clients with the market that fits 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 by the end of the fourth quarter, that had moved up to about 180 to 190. 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. 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. 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, 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. 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.

Okay. Thank you very much.

Thank you.

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 at 216-689-4221. This concludes our remarks. Thank you.