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 two, 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 three. 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 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 two 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 12/31/2021. 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 of our traditional 15-state footprint. We also acquired AQN Strategies, a leading consumer-focused analytics firm. 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 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. 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 five. 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 six. Average loans for the quarter were $99.4 billion, down 2% from the year ago period and down less than 1% from 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 book, 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 seven.
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 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 $1.038 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 continued 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 nine. We reported record non-interest income for both the quarter and the full year. Non-interest income was $909 million for the fourth quarter of 2021 compared to $802 million 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 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 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, in the team, and in increased marketing. We strengthened our digital and analytic capability, including the acquisitions of AQN and XUP. These investments 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 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 Common Equity Tier 1 ratio of 9.4%, with our targeted range of 9%-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 would support Chris's 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 the 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 20-30 basis points. Given our strong credit trends, we would expect low 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 for the Q&A portion of the call. Operator?
Thank you. Ladies and gentlemen, if you wish to ask a question, please press one and then zero on your touch-tone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself from queue by pressing the same one-zero command. Once again, it's one and then zero for any questions or comments. Our first question will come from the line of John Pancari with Evercore ISI. Your line is open.
Morning.
Good morning, John.
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 low single digit average loan growth outlook for 2022. You know, where do you think you're gonna see the biggest upside? Where do you see some of the momentum building? Then related to that, I know the end of period balances pointed to, you know, 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? Thanks.
Sure, John. As you look at it, you know, in the last couple 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 gonna see the commercial side leading the growth. 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. Where I think you're gonna 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 1% that we go up is $1 billion. That's one source of growth. We called the bottom of that at the end of the second quarter. 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. That's because I think people have learned a lesson on just in time. Also, in an inflationary environment, there's just not a lot of cost to going along on inventory, so to speak. Other than that, we also have, you know, in our targeted scale approach, we have some areas that really generate outsized loan growth. You think about our focus on healthcare, there's certainly a lot of consolidation going on there, our focus on technology.
And then we have a couple real drivers that I mentioned in my remarks. One is renewable energy, which obviously there's a tremendous amount of capital flowing into. The other is this notion of affordable housing, which is really a real unmet need in our country.
If you think about our backlogs and you think about our current trajectory, I think our guidance is pretty logical.
Yeah, 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. Continue to be excited about the benefit from that. 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 five. Still excited and optimistic about the growth going forward.
Okay, great. Thanks for that. 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 abatement or, you know, if there is a cliff coming in that revenue. 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. Just if you can give us a little bit more in terms of how we should think about the run rate. Thanks.
Sure. This is a business that for the last decade, we've had a compound annual growth rate of 15%. 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 revenues. 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. 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 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. There's really a lot of potential customers out there for us to be calling on. 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. We have a lot of repeat business.
Okay, thank you. 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 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 Siefers with Piper Sandler. Your line is open.
Morning, guys. Thanks for taking the question.
Hey, Scott.
Hey. Don, 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. 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. 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. You're going to see a smaller than that, but a reclassification out of fee income and expenses. It will have a reduction of both of those.
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. Incentives, that many of our incentives are based on how our performance is compared to our plan. 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.
We'll see some outsized performance in revenues there as well. 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. 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. Part of that's just the expectation that merit increases will be higher. Historically, we would see merit increases in the 2% range. Because of the market pressures and others, we will probably see 3%-4% merit increases.
On top of that, continuing to invest in our senior bankers. 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 we would expect to see that continue to go up a little bit overall. If you mesh all that together and swirl it around a little bit, is how you get to our guidance of being kind of low down single, down low single digits. I know it's a little messy, but hopefully that helps provide a little bit more color there.
Yeah, it does. That's perfect, and I appreciate the thoughts.
Thank you. Next, we will go to the line of Gerard Cassidy with RBC. Your line is open.
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, you know, the loans that you put out for these clients. Can you give us some color on what types of loans 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?
Yeah, 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, you know, ten-year non-recourse debt. In those instances, obviously we wouldn't be retaining any for our balance sheet. 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. 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.
The other thing we think about, again, keeping our moderate risk profile, is just not having, you know, a lot of risk in any one name. That's kind of how we think about it.
You said something in your comments earlier to a question about the repeatable business. How much is it? 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 a 1/3 to a 1/2 of our issuers to be repeat customers of ours. To your question, in certain businesses, for example, if you're a real estate developer in low-income housing, which is the same as affordable, your business is built around putting these projects in. We're in the business of helping them do that and then providing the permanent financing by placing it.
Thank you. 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 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, "Yep, okay, you know, 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. 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. So we would expect to see some of the consumer performance start to return to more normal levels. The 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 if you look at what's happened on criticized, classified, non-performing loans, the trends have just been so positive and I don't see anything on the horizon which would suggest that it's going to turn anytime soon. Gut would just tell you that sometime 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?
You know, I think you summed it up well, Don, and just the general, you know, criticized, classified, you know, NPL, all those improvements, you know, they'll begin to moderate and, you know, you get to more of a level bottom as the stimulus programs are pulled back.
You know, it'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. There's 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. I was just wondering, Don, if maybe you could quantify the impact in 2022 versus 2021 on both the PPP income and the swap income.
Sure can. As far as the PPP loans that we've talked each quarter about what the fee income is that we've realized, and the fourth quarter was $48 million. Combined throughout the year, the fee income was $191 million in 2021. On top of that, we had net nominal interest income on the PPP loans of a little over $50 million. We think that $244 million of income actually gets cut by about $200 million between 2021 and 2022. That clearly is a headwind for us.
If that would've been consistent to 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's and we hit this on the call a little bit is that what we're seeing for market rates today actually are at or higher than what the total portfolio of swaps received fixed rates are. In other words, we're seeing 1.25% as far as our received fixed rate that we have for our swap book.
That is at or below what the current market rates would be for a three or four-year swap to replace it. The only reason I hesitate as far as the swap impact beyond that, Peter, is that all depends on the rate assumptions and 'cause 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 float or to fixed-rate loans.
Okay. 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. That each 25 basis points for the full year impact will be about $50 million-$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. 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. Others on the consumer side are more administered rates, so we'll have a little bit of flexibility there as far as how quickly those rates move up.
We would expect to show a lower beta in the first couple of moves and then move to 30% beta over time.
Great. Thanks, Don. Appreciate it.
Thank you.
Thank you. Our next question comes from the line of Erika Najarian with UBS. Your line is open.
Hi. Good morning.
Good morning.
Wanted to follow up on Peter's question, Don, on net interest income sensitivity. I just wanted to clarify that $50 million-$60 million for each 25 basis points does include a 30% beta, and therefore what you're telling us is in reality there, you know, there's going to be, there, you know, the first few rate hikes should be, in theory, higher than this $50 million-$60 million?
I would agree. There will be some negative impact initially, Erika, for a few commercial loans that have floors that are above zero. But would expect the early rate increases to have more of a lift than that $50 million-$60 million range. That's correct.
Got it. What can you remind us of the $25 billion you have in ALM swaps, what the maturity profile looks like? You know, given expectations for a tightening cycle that goes through 2023, you know, what are your plans to, you know, replace maturing swaps? You know, the debate in terms of capturing the rate sensitivity versus, you know, replacing the swaps to protect your NII in the future.
Sure. That 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 bps 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. 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 beta, our asset sensitivity actually increases by a point and a quarter.
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're booking. Right now we're not assuming any additional swaps beyond just replacing the maturities at this point in time in our outlook.
Got it. If I could sneak one last one for Chris. Chris, I feel like during this earnings season, CEOs are in two camps. You know, those that are letting the rate hikes fall to the bottom line and those that, you know, are investing the rate hikes. You know, the way Don explained your expense outlook, clearly there are Key-specific idiosyncrasies. You know, your strategy is loud and clear that you invest back in the franchise, and you pay for increased client activity. As we think about, you know, a year without PPP noise and good loan growth and rate hikes, you know, how should we think about positive operating leverage Key?
You know, 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, you know, 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 in our existing people. We're successfully hiring people. As you know, we've made a lot of niche acquisitions. We continue to see a lot of flow there. 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 re-emphasize 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. That's a meaningful increase to our adjusted or core PPNR without that impact of the PPP forgiveness. We would have had an extremely strong positive operating leverage in 2022. 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. Your line is open.
You guys are less reliant on overdraft or non-sufficient funds fees than some of your peers. 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, you know, maybe looking out a couple of years.
Sure, Matt. You're right. For us, it's on a relative basis, it's not as important. Kind of starting with what is most important is we're a relationship bank, and so it is 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. By definition, you can't overdraft with that account. 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, a great value proposition for both our customers and our prospects.
Just remind us what those fees totaled in 2021, and are you assuming any changes in the guidance?
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. Just separately, quick clarification question. Don, you mentioned about a change in accounting on the leasing impacting the fees and costs. Maybe I missed it, but do we just essentially take out both of those fees and costs and then it nets out or is there a net interest income impact?
Well, for those two line items, you would see them decline by a little bit. They wouldn't be completely removed, but there are certain leases that we have currently included in our operating lease accounts that will be considered capital leases going forward. You would see that operating lease income and operating lease expense both decline by $20 million-$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.
Uh-huh.
Thank you. Next, we'll go to the line of Mike Mayo with Wells Fargo Securities. Your line is open.
Hey. 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. Well, first of all, good morning, Mike. A couple things. We, like everybody else, are seeing wage pressure. 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, their starting wages are up over 40%. That's over five years. That's real, and we've been seeing that. Also, 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. You see inflation there. It's pretty well documented, we and others gave junior bankers in our investment banking business increases sort of mid-cycle.
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 3%-4% this coming year, Mike.
Okay. And then the positive question. No good deed goes unpunished. You know, record investment banking markets last year, record this year. I know you've you know, you grew and ran that business. You know, you're the only capital markets player that I've heard so far to guide for higher 2022 results. You know, 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?
It's a few things. It's first of all the fact that I mentioned this earlier, that 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. As you know, Mike, we 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 healthcare, technology, and I mentioned a couple of the subsectors as well. 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.
All right. Thank you.
Thank you.
Thank you. Next, we'll go to the line of Ebrahim Poonawala with Bank of America. Your line is open.
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-$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. 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.
As far as the redeployment of that $20 billion of liquidity, we were thinking that for 2022, the biggest use of that excess liquidity will really come from loan demand. We expect from this point forward that our loan balances will outpace deposit balances as far as growth. That will use up some of that excess liquidity in 2022. We'll 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-$3 billion a quarter of additional growth. It doesn't have any significant redeployment of that excess liquidity into the bond market at all. 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. At some point in time, we do think some of that cash will be put to work as our customers start to have opportunities to invest in inventory and other things like that to support their growth.
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. 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 acquisitions being 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. 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. 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 just think the point I was making on the West is just the demographics are much stronger than other parts of our franchise. It's really important for us. We're focused on growing in the West, you know, growing in growth markets. The opportunity there is about 2x. In terms of households, we grew households 2x in 2021 in the West.
All right. Just one, if I could sneak in. How many more of like XUP, AQN kind of opportunities are out there? Are there any particular areas where you're really focused on when it comes to these acquisitions?
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. 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.
Thank you. Our next question comes from the line of Terry McEvoy with Stephens, and your line is open.
Hi, good morning.
Morning, Terry.
Morning, Terry.
Maybe 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 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 that 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'd mentioned before, including professional fees.
The operating lease expense will start to phase in, and some of the other expense categories should also show some declines there because of the non-recurring type of items that hit us in the fourth quarter also.
Thank you. 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 comes down a bit?
There's a couple 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. 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.
Thank you. Our next question comes from the line of Ken Usdin with Jefferies, and your line is open.
Thanks. Good morning, guys. Couple 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. Just checking that while the number was good in the fourth quarter, did you actually keep a lower percentage? Is that a potential driver, you know, presuming that the organic origination growth still looks good in your outlook for 2022?
It's a good question. Really goes back to what's in the client's best interest. There'll be some times where a financing, we won't hold any of it. Sometimes we'll hold a piece of it. 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. 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. The last quarter, we had a runoff yield of 2.1% on roughly $2.7 billion. That, in the fourth quarter, we bought securities of 1.82%, or excuse me, 1.62 % . Around the end of the year, that had moved up to about 1.80 % -1.90 % . It's actually north of 2% today. We're getting to that point of breakeven as far as the rollover of the investment portfolio as well.
Okay. Great. Last one, just on capital. You're at 9.4%. That's right around your zone where you wanna live. Can you talk to us about, you know, RWA growth versus buyback and how you think about capital return after the dividend? Thanks.
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. We did increase it the fourth quarter to $19.5 a share and still continue to target somewhere in that 40%-50% kind of payout range. After that, use share buybacks to manage our overall capital position.
If you're growing loans at double-digit rates, you're probably not gonna be buying back as many shares as when you're growing loans at, say, a 4%-5% range. So that will probably be slower than what it might have been over the previous years. We still view that as an 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, 216-689-4221. This concludes our remarks. Thank you.
Thank you. 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.