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KeyCorp (NYSE:KEY)
Q4 2020 Earnings Call
Jan 21, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to KeyCorp's fourth-quarter 2020 earnings conference call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to the chairman and CEO, Chris Gorman. Please go ahead, sir.

Chris Gorman -- Chairman and Chief Executive Officer

Thank you, John, and good morning and welcome to KeyCorp's fourth-quarter 2020 earnings conference call. Joining me for the call today are Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer. Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call.

This morning, Key reported record revenue and earnings. But before we get into the details of the quarter, I want to share a couple of broader and contextual comments. I am very proud of the way our team continues to navigate the pandemic and related economic downturn. Their dedication, combined with our investments in talent and digital capabilities, continue to serve the company, our clients, our communities, and our shareholders well.

Throughout 2020, we successfully executed what I call our dual mandate. By that, I mean responding to the pandemic, which is a real humanitarian and economic crisis, while continuing to position Key for both growth and success. We have taken countless steps to ensure that our teammates and our clients are both safe and well-served. Additionally, we've provided billions of dollars in credit to our clients.

In 2020, we originated more than 43,000 loans amounting to $8 billion through the first round of the Paycheck Protection Program. In fact, we are currently assisting our clients through the second round of the Paycheck Protection Program as we speak. As part of our national community benefits plan, we provided billions of dollars in support to our communities. This included affordable housing, home lending and small business lending in low and moderate-income communities, transformative philanthropy, and renewable energy financing.

Our commitment also includes programs to advance social justice and economic inclusion across all the communities we serve. And finally, I want to thank our teammates for rising to every challenge in 2020 in a way that kept our clients at the center of everything we do. I am now turning to Slide 3. Getting back to our performance in the fourth quarter, we achieved a record level of revenue for both the quarter and the year.

The growth in net interest income and fee income. Net interest income was up almost 4% from the prior quarter with an 8-basis-point increase in our net interest margin. Fee income, also a record, up double -- double digits for both the prior quarter and the year-ago period. We continue to benefit from investments that we have made across our company, which drove both fee income and balance sheet growth.

Let me touch on three specific areas. First, consumer mortgage. We achieved record volume in the fourth quarter with $2.5 billion in funded loans. For the full year, our consumer mortgage originations were $8.3 billion, up 90% from the prior year.

This drove both balance sheet growth, as well as a 179% increase in fee income. Approximately one-half of our originations last year were purchase mortgages. Our pipelines remain strong and we expect to continue to both grow and take share. The second area I will highlight is investment banking.

This is an area where we have invested in talent and made targeted acquisitions to enhance our capabilities, including areas such as healthcare and technology. In the fourth quarter, we generated $243 million in fees, which represents a record quarter. We enjoyed broad-based growth across the platform with particular strength in M&A and loan syndications. 2020 was a record year for investment banking and debt placement fees.

Our investment banking pipelines remain strong. We believe this business will continue to be a growth engine for us in the future. The third area is Laurel Road and, more broadly, the investments we have made in digital across our company. Laurel Road continues to originate high-quality loans that provide us with an opportunity to build broader digital relationships with healthcare professionals.

Last year, Laurel Road originated over $2.3 billion in loans. At the end of March, we will launch our digital bank, serving the healthcare segment, expanding our consumer franchise nationally. This launch will broaden our offering for Laurel Road clients to include deposits, additional lending products, and other value-added services. We believe that both Laurel Road and consumer mortgage will continue to be relationship-based growth engines for our consumer business.

Our expenses this quarter were elevated. They were elevated due to higher production-related incentives, severance, and the funding of our philanthropic foundation. Additionally, COVID-related expenses and costs associated with our prepaid card also remained elevated again this quarter. Don will cover the outlook in his remarks, but we expect expenses to come down in 2021 while concurrently investing in talent and digital capabilities.

This year, we will also be accelerating the pace of branch closures. We expect to consolidate over 70 branches, representing 7% of our network. Most of these closures taking place in the first half of the year. Our decisions are driven by client behavior as more activity continues to move to our digital channels.

It's also informed by our robust analytics. We expect limited client attrition as a high percentage of the impacted branches are located within two miles of another Key facility. Importantly, we expect to continue to grow our retail business while reducing operating expenses and improving overall profitability. Credit quality remained strong this quarter with net charge-offs of 53 basis points within our targeted over the cycle range.

Additionally, nonperforming loans declined by almost $50 million this quarter. We will continue to support our clients while maintaining our moderate risk profile and concurrently positioning the company to perform well through the business cycle. Finally, we have maintained our strong capital position while continuing to return capital to our shareholders. In the fourth quarter, our Common Equity Tier 1 ratio increased 30 basis points to 9.8%, which is above our targeted range of 9% to 9.5%.

The results of our recent stress tests af -- affirm that Key is a different company today with loss rates and loss-absorbing capital among the best in our peer group. Our strategic positioning allows us to continue to execute against each of our capital priorities: supporting organic growth, paying dividends, and, of course, share repurchases. Last week, our board of directors authorized a new share repurchase program of up to $900 million over the next three quarters. We also approved our first-quarter common stock dividend of $18.5 a share.

In closing, despite the challenging environment of the last year, we were able to support our clients, invest in and grow our businesses while maintaining our strong risk practices. Our success was driven by our dedicated team, the strength of our business model, and our relentless focus on executing our strategy. I am confident in Key's future. We are positioned to succeed and continue to deliver on all of our commitments.

I will now turn it over to Don who will provide details on our quarter, in addition to our outlook for the coming year. Don.

Don Kimble -- Chief Financial Officer

Thanks, Chris. I'm now on Slide 5. As Chris said, it was a very strong quarter for us with record net income from continuing operations of $0.56 per common share, up 37% from the prior quarter and 24% from the prior year-ago period. Return on average tangible common equity for the quarter was over 16%, up over 400 basis points from the third quarter.

I will cover the other items on the slide later in my presentation. Turning to Slide 6, total average loans were $102 billion, up 9% from the fourth quarter of last year, driven by growth in both commercial and consumer loans. Commercial loans reflect an increase of over $7.5 billion from the PPP loans. Consumer loans benefited from the continued growth from Laurel Road and, as Chris mentioned, strong performance from our consumer mortgage business.

Laurel Road originated $590 million of loans this quarter and $2.3 billion for the full year, up over 20% from the full-year 2019. We also generated ano -- another record, $2.5 billion of consumer mortgage loans in the quarter, bringing the total for the year to $8.3 billion. The investments we have made in these areas continue to drive results and, importantly, add high-quality loans to our portfolio. Linked-quarter average loan balances were down 3%, reflecting pay downs from a heightened commercial loan draws, as well as a small reduction in PPP balances related to initial forgiveness.

Line utilization rates are at the pre-pandemic levels given the strong liquidity levels in the -- in the environment. Importantly, we have remained disciplined with our credit underwriting and have walked away from business that does not meet our moderate risk profile. We remain committed to performing well through the business cycle and we manage our credit quality with this longer term perspective. Continue on the Slide 7.

Average deposits totaled $136 billion for the fourth quarter of 2020, up $23 billion or, 21%, compared to the year-ago period and up 0.6% from the prior quarter. The linked-quarter increase reflected a broad-based commercial growth, as well as growth from our -- from higher consumer balances. The growth was offset by a continued and expected decline in time deposits. Growth from the prior year was driven by both consumer and commercial clients.

The total interest-bearing deposit costs came down 11 basis points from the third quarter of 2020, exceeding our guidance of a 6 to 9-basis-point decline, continue to have a strong stable core deposit base with consumer deposits accounting for over 60% of the total deposit mix. Turning to Slide 8. Taxable equivalent net interest income was $1.043 billion for the fourth quarter of 2020, compared to $987 million a year ago and just over $1 billion from the prior quarter. Our net interest margin was 2.70% for the fourth quarter of 2020, compared to 2.98% for the same period last year and 2.62% from the prior quarter.

Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to the year-ago period. The larger balance sheet benefited net interest income but reduced the net interest margin due to significant increase in liquidity driven by strong deposit inflows. Compared to the prior quarter, net interest income increased $37 million, and the margin improved by 8 basis points. The increase in both net interest income and net interest margin quarter over quarter are largely due to the lower interest-bearing deposit cost and the higher loan fees from PPP forgiveness.

We saw the average rate paid on interest-bearing deposits declined 11 basis points from the prior quarter. The forgiveness of the PPP loans accelerated about $28 million of additional fee recognition this quarter. These were partially offset by continued elevated liquidity levels, which had a 5-basis-point negative impact on the margin. Moving to Slide 9.

Our fee-based businesses hit all-time highs in the fourth quarter. Noninterest income was $802 million for the fourth quarter of 2020, compared to $651 million for the year-ago period and $681 million for the third quarter. Compared to the year-ago period, noninterest income increased $151 million. The primary driver was a record quarter for investment banking and debt placement fees, which reached $243 million, up $62 million from the year-ago period.

Stronger M&A and loan syndication fees drove most of the increase this quarter. This business also had a record year with $661 million of total fees. Record mortgage originations drove consumer mortgage fees this quarter, which were up $22 million from the fourth quarter of '19. Cards and payments income also increased $30 million related to higher prepaid card activity from the state government support programs.

Compared to the third quarter, noninterest income increased by $121 million. The largest driver of the quarterly increase was once again the record quarter for investment banking, which was up $97 million. Commercial mortgage servicing fees also had a strong quarter, up $14 million. I'm now turning to Slide 11 -- excuse me, Slide 10.

Total noninterest expense for the quarter was $1.128 billion, compared to $980 million last year and $1.037 billion in the prior quarter. The increase from the prior year is primarily in personnel costs, driven by higher production-related incentive from our record fee production, as well as higher severance costs. Year over year, payments-related costs reported and other expense were $40 million higher, driven by higher prepaid activity, and we incurred COVID-19 related expenses to ensure the health and safety of our teammates. Compared to the prior quarter, noninterest expense increased $91 million.

The increase was largely due to $40 million of higher production-related incentives, $22 million of severance, $12 million of higher stock-based compensation related to the share price, and a $15 million additional contribution to our charitable foundation. Marketing expense was also up $8 million from the prior quarter. Turning to Slide 11. Overall, credit quality remains strong.

For the fourth quarter, net charge-offs were $135 million or 53 basis points of average loans. Slightly below our guidance range. Our provision for credit losses was $20 million. This was determined under the CECL methodology and based on our continued strong credit metrics and leading indicators, as well as our outlook for the overall economy, credit migration, and loan production.

Nonperforming loans were $785 million this quarter, or 78 basis points of period in loans, compared to $834 million, or 81 basis points, from the prior quarter. Additionally, 30 to 89 de -- day delinquencies actually improved quarter over quarter with a 9-basis-point decrease while the 90-day plus category remained relatively flat. We've continued to monitor the level of assistance request we receive from our customers. Over the past quarter, the number of requests for loan forbearance has decreased dramatically.

As of December 31, loan subject to forbearance terms were less than $600 million, down from a peak of $5.2 billion, equating to about 0.5% of our outstanding balances. One mo -- one more observation this quarter, and as Chris mentioned earlier, in late December, the results of the most recent stress test results were published. Key results reinforce the commitments we have been making over the past several years that we are a different company with a better risk profile than Key showed through the -- the Great Recession. Our stress credit losses for the -- from the test were peer leading.

We've been managing the company over the last decade to outperform during challenging times and believe we have positioned the company to achieve this. Turning to Slide 12. We updated our disclosure that highlights certain pre -- portfolios that are receiving greater focus in this environment. These areas represent a small percentage of the total loan balances.

Each relationship in these focus areas continues to be subject to active reviews and enhanced monitoring. Importantly, as a group, they continue to perform consistent with our expectations. Now in the Slide 13. Key's capital position remains an area of strength.

We ended the fourth quarter with a Common Equity Tier 1 ratio of 9.8%, up 30 basis points from 9.5% in the third quarter. This places us above our target range of 9% to 9.5%. This provides us with the sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders. Importantly, the results of the recent stress tests support and highlight our strong credit profile and loss absorbing capital.

Last week, our board of directors approved a new share repurchase authorization of up to $900 million for the next three quarters. They also approved our first-quarter 2021 common dividend of $18.5 per share. On Slide 14, we provide our full-year 2021 outlook. This builds on our performance in 2020 and reflects our expectation that we will deliver positive operating leverage for the year.

Guidance range definitions are provided at the bottom of the slide. Average loans are expected to be relatively stable. Although at this point, I would expect a little downward bias to this range. This reflects participation in the next round of PPP and continued growth in our consumer loan portfolio from both Laurel Road and our consumer mortgage business.

We expect deposits to be up low single-digits and we will continue to benefit from our low-cost deposit base. Net interest income should be relatively stable. Our net interest income will benefit from our higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity, offset by the ongoing impact of low rates. Noninterest income should be up low single-digits, reflecting growth in, but most of our core fee-based businesses.

As Chris mentioned, noninterest expense should be down in 2021, somewhere in the low single-digit range. We will continue to benefit from our continuous improvement efforts and accelerated branch closures. We also plan to continue to invest in talent and to stay at the forefront of our digital offerings. Moving on the credit quality.

Net charge-off to average loan should be in the 50 to 60-basis-point range, which is consistent with our through the cycle range of 40 to 60 basis points. And our guidance for our GAAP tax rate should be around 19% for the year. Our guidance also assumes some variability over the course of the year. First quarter will reflect normal seasonality, including a lower day discount and an increase in personnel expense, driven by heightened employee benefit costs.

Finally, shown at the bottom of slide, our long-term targets. As Chris said, we expect to deliver positive operating leverage for 2021. We also maintain our moderate risk profile and over time continue to improve our efficiency and overall returns. I'll close with where Chris started, recognizing the effort of our team to support our clients and to deliver strong results for both the quarter and the year despite the challenging environment.

We are well-positioned as we head into 2021 and plan to deliver on our commitments to all of our stakeholders. With that, I'd like to turn the call back over to the Operator for instructions for the Q&A portion of the call. John.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Thank you for taking the question.

Chris Gorman -- Chairman and Chief Executive Officer

Good morning.

Scott Siefers -- Piper Sandler -- Analyst

Just curious. I -- I guess I can infer it from the up low single-digit guidance on Key's, but was hoping you could provide a little more thoughts on your outlook for investment banking. It ended up being just a terrific end to the year. But maybe thoughts on how you see the -- the year playing out just in terms of the nuance.

I feel like last year, it was kind of less traditional M&A, a sort of other drivers within investment banking or that line item that drove it. Whereas, this year maybe it's more the traditional stuff that we would think of. How do -- how do you see it planning out? And do you think you can sustain that level or grow upon this level of annual revenues in total there?

Chris Gorman -- Chairman and Chief Executive Officer

Sure, Scott. Well, thanks for the question. Just -- just to step back for a second. Our invest -- our integrated corporate and investment bank is a unique and -- and growing franchise.

It's -- it's unique among all of our peers. It's really hard both to coordinate and collaborate and get it done from a cultural perspective. And as you know, Scott, we've been at it for a long time. And we've made a bunch of significant investments.

If you think about the investments we've made in technology and in healthcare. Within any year, there's always variability. But as we step back and look at that business over the past five years, it's had a compound annual growth rate of about 8%. And so -- and if you look at from 2015 to present, I think we've had one year where we were down slightly.

I think, last year, we're down like 3%. So I'm just giving you that as kind of a backdrop as we look forward. There's no question that it's the transaction business and there's a lot of variables that clearly are not within our control. Having said that, for us, it's a relationship business.

We continue to grow it. Our pipelines, today, are strong. Our pipelines are in good shape. What's interesting about our business is whereas a lot of people had a huge lift from investment-grade debt through the pandemic.

That really is not core to our business. Our business was really driven, Scott, by a big surge in M&A and syndications, in some cases, related syndications. So we feel good about the trajectory of the business and we'll continue to invest in it.

Scott Siefers -- Piper Sandler -- Analyst

Terrific. Thank you. And then I guess more of a ticky-tack guidance question in expenses. I know you had $22 million in severance costs in the fourth quarter.

Will there be any further charges or did -- did you sort of take care of all of those in the -- in the fourth quarter? And if -- if there are any, are those included in the -- the full-year '21 guide?

Don Kimble -- Chief Financial Officer

We would typically have some severance throughout the year. We would not expect to have any of that size going forward into the each of the quarters in 2021, so the normal recurring level would be reflected in that guidance, but -- but then not assuming any significant charges on top of that.

Scott Siefers -- Piper Sandler -- Analyst

OK. Perfect. Thank you very much, guys.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Our next question is from line of Bill Carcache with Wolfe Research. Please go ahead.

Bill Carcache -- Wolfe Research -- Analyst

Thank you. Good morning. I wanted to ask about loan yields. Although there were some quarters of relative stability in Key's loan yields during the last [Inaudible] cycle, the overall trajectory of loan yields was lower until we exited [Inaudible].

I believe you guys have about 70% of your loan book is indexed to the short end of the interest rate complex, and so a lot of it's repriced already, but there -- there's still some. And that dynamic happening not just for you guys, but for other banks as well. So can you discuss whether you expect downward pressure in loan yields to persist in this [Inaudible] cycle as well? And are you simply going to work through to offset those headwinds? In general, is there anything I guess different about this cycle that lead you to expect those dynamics to play out any differently this time?

Don Kimble -- Chief Financial Officer

Sure. A couple of things there. One, on the loan book. But keep in mind that a significant portion of the swaps that we enter into from a balance sheet perspective are -- are matched up against the commercial loan book.

And so it does convert some of those over to fixed rates and we've talked over the last couple of quarters about the impact of -- of those swaps going forward. And -- and -- and so you will see some very modest pressure on -- on yields coming from that as -- as -- as those swaps rollover. On the consumer book, we are seeing rates coming down as far as the new originations compared to -- to what was the existing book. But -- but we're also seeing an improved credit quality for those new originations, and we're also seeing margins a little wider on the consumer originations compared to the current rate environment than where we'd been historically, and so that will also help.

And -- and -- and so there -- there will be some pressure going forward. But -- but -- but I -- I would say that we still have other levers to help offset that, including the full-year benefit of the repricing of our deposit book that we realized in the fourth quarter. And -- and -- and then also just this excess liquidity position. We think over time we can start to -- to absorb some of that and -- and -- and maybe reinvest that over time as well.

Bill Carcache -- Wolfe Research -- Analyst

Got it. Thanks, Don. That's super helpful. Maybe along the similar lines.

Can you talk about PPP? How much PPP contributed to loan yields this quarter and how we should expect that contribution to loan yields and NII to trend from here? May -- maybe -- any color on how long the benefits of PPP 1.0 and 2.0 are going to last just largely to the rest of '21 or do they extend to '22? And -- and that's -- that's my last question. Thank you.

Don Kimble -- Chief Financial Officer

That's great. And -- and we'd mentioned just briefly that in the fourth quarter, we had about a billion three of the PPP loans becomes forgiven, and -- and so that accelerate about $28 million of fee income for the -- the quarter. And -- and so that roughly added about 6 basis points or so as far as the -- the overall margin. And -- and so that clearly was additive.

If you look at that first wave of -- of PPP loans, we had about $8 billion of issuance that -- as I mentioned, we had about a billion three of forgiveness this quarter. And so that puts about $6.7 billion. We -- we would expect about 80% of that initial $8 billion to be forgiven. And -- and -- and so you'll see that come throughout the rest of the -- the year.

I would say that, for example, we would expect about $1 billion of forgiveness in the first quarter. And so that's a little less than what we have seen in the fourth quarter, but -- but still continue to show that kind of a pace. The next wave of PPP will be helpful for that and we would expect to see about $2.5 billion of originations in the second quarter. And so some of that decline that we would be expecting from -- from that forgiveness will be directly offset by -- by the new originations, and we will probably start the end of the first quarter with balances of over $8 billion.

And so I think that -- that is helpful as far as just the perspective there. As far as the fee income component to it. That if you look at both the normal accretion of the fee income plus the acceleration coming from the forgiveness, that was about $110 million of fee income for 2020. We would expect for the first wave of -- of those $8 billion of -- of -- of loans.

That number would be up to around $120 billion -- $120 million or so as far as the -- the fee income from both normal accretion and also the impact of forgiveness. And so we have a little bit of a lift on a year-over-year basis from that. And then on top of that, we would have the benefit from the new Wave 2 of the PPP program coming through with -- with the loan yields and -- and fee income a realization from -- from those credits as well so.

Bill Carcache -- Wolfe Research -- Analyst

So -- so the vast majority by the end of '21 should be realized or does it take -- spill over into '22?

Don Kimble -- Chief Financial Officer

I -- I would say that the vast majority of the first wave will clearly be addressed in -- in 2021. We'll probably see some of this next wave continue to -- to hangover into 2022 as well. And -- and so I -- I -- I would say that that incremental lift that we're getting from that will -- will be realized in both 2021 and 2022.

Bill Carcache -- Wolfe Research -- Analyst

Thank you so much, guys. I appreciate it.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Next question is from Ken Usdin with Jefferies. Please go ahead.

Ken Usdin -- Jefferies -- Analyst

Hey, thanks. Good morning. Hey, Don, just -- just to follow up on that last point. So all of that, what you just ran through on PPP is inside your NII guidance for this year?

Don Kimble -- Chief Financial Officer

That's correct, yes.

Ken Usdin -- Jefferies -- Analyst

OK. Got it. And -- and then secondly, just on -- just on the -- on the loans. I heard your point earlier about some of the moving parts, and -- and can you just reconfirm for us just how much you think Laurel Road can do this year and how much more the mortgage business can -- can grow as an -- as an offset to the -- the -- the planned runoff in -- in the auto portfolio on the consumer side?

Don Kimble -- Chief Financial Officer

Sure, Ken. As far as consumer loans, that -- that relatively stable outlook for -- for total loans would assume consumer loans in aggregate grow about $2 billion. And -- and from 2020 to 2021. And -- and -- and that growth really coming from both residential mortgage and -- and from Laurel Road.

Just to put that in perspective. We had almost $600 million of originations in Laurel Road in the fourth quarter. Just continuing with that pace would -- would be in $2.5 billion type of range as far as 2021 originations from that category. On the residential mortgage side, that -- despite what we're seeing and hearing in the industry, that we think that we could actually show stable to maybe even increasing our overall residential mortgage originations in 2021.

Keep in mind that -- that we're at the early stages as far as rolling out that -- that platform throughout our branch network, seeing strong growth there. And in of that $2.5 billion in -- in the fourth quarter and of the $8.3 billion for -- for the full year, about half of that was for purchase money as opposed to refinance. And so we think that there -- there still will be opportunities to continue to show growth there. And that's adding over $1 billion a quarter as far as the new loan originations in the residential mortgage side.

And -- and so that consumer growth in those two areas specifically are -- are -- are at the foundation of how we can get to that kind of relatively stable outlook for -- for total loans.

Ken Usdin -- Jefferies -- Analyst

Got it. And then just a follow-up on expenses. Given that the plan for expense to be overall flat, I'm just wondering, can get -- you have some variability in the investment banking stuff, but just in terms of the cadence of it given the plan to reduce branches and -- and the severance-related benefits that you get overtime, is there any way to understand like the cadence of how expenses traject through the year? Whether or not you're ending or whether you're starting? That type of thing. Thanks.

Don Kimble -- Chief Financial Officer

Great question. And -- and I think you've hit on some of the challenge there, which is that a number of our -- our drivers of our revenue growth really have a variable com -- cost component to it as far as the origination, and -- and so that's a little bit of a challenge. I -- I would say that a -- as we look going into the first quarter, we would tend to have some seasonality in -- in those numbers and we highlighted a little bit as far as the -- the benefit expense being up in -- in the first quarter. We would expect expenses down considerably from -- from where they were in -- in the fourth quarter.

But -- but fairly up from -- from what we were seeing last year. The last year, our -- our revenue outlook was -- was negatively impacted by some market valuation adjustments that also had a corresponding adjustment to our -- our incentive compensation. And -- and so we -- we think that we'll be in a position to generate positive operating leverage for the first quarter and have positive operating leverage for the full year. And I just want to restate that as far as our expense outlook, we are seeing it's down low single-digits, so down 1% to 3% as opposed to stable, and -- and so that's after funding the investments we're making as part of our strategic initiatives as well.

Ken Usdin -- Jefferies -- Analyst

OK. Thanks, Don.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Next, we'll go to Saul Martinez with UBS. Please go ahead.

Saul Martinez -- UBS -- Analyst

Hey, good morning. So just wanted to -- to back up a little just to make sure I understand the -- the -- the mechanics on the PPP dynamics through net interest income. So on the -- on the -- there's an incremental I guess $10 million -- $10 million. So pretty modest on -- on the first waves of -- of PPP.

And then on top of that, you overlay the second round, which I think you said was $2.5 billion. So -- so if we were to add -- adding that second round, and obviously recognizing that these are five years and fee rates might be lower. I mean how much of an incremental lift is -- is that from the second round are we talking? It seem -- it seem like a modest number, but when we're talking to a maybe of something like $10 million a quarter, if you could just kind of help us square away sort of the full year and then connect the dots fully on the full-year '21 versus the full-year '20 tailwind that you get more broadly from PPP?

Don Kimble -- Chief Financial Officer

Sure, Ken. As far as the -- the impact of that second wave, we -- we talked about $2.5 billion in -- in the first quarter. I -- I would say that the -- the full-year average probably will be somewhere around $3 billion related to that next wave of the PPP loans. If you look at the -- both the stated coupon on -- on those loans and -- and the -- the realization of the fee income, it tends to be something a little north of 2% type of yield.

So your -- your pick up over 200 basis points on -- on those balances through the year. So you're probably looking at something for the full year somewhere ar -- around $60 million kind of a lift from -- from -- from that compared to just having it sit in cash.

Saul Martinez -- UBS -- Analyst

So we -- so we should think about the tailwind then just '21 versus '20 from PPP more broadly, it -- it being sort of that $60 million-plus the incremental 10 of 120 versus 110. So something an average of $70 million. Is that a fair way of looking at it?

Don Kimble -- Chief Financial Officer

Well, what -- what I -- I would say is that for the fee income, we had $110 million in 2020. For the first wave, that's about $120 million for that first wave of loans, and then this new origination volume of roughly $3 billion for average would be on top of that. And so we'll actually see a lift year over year of say $70 billion would be a ballpark.

Saul Martinez -- UBS -- Analyst

Yeah, and that -- and that is -- that's em -- embedded in your guidance obviously.

Don Kimble -- Chief Financial Officer

That is embedded in our guidance. That's correct. Yes.

Saul Martinez -- UBS -- Analyst

How much of a headwind or is -- or is the roll off of the hedges in 2021? Do you -- do you have that figure? How much of a -- that goes the other way? And how -- because I presume that those hedge roll loss and the incremental headwind is also embedded in your guidance.

Don Kimble -- Chief Financial Officer

The -- the headwind is embedded in the guidance. I don't have the -- the dollar amount for -- for 2021 as -- as far as the direct impact there. But it is -- it is reflected in that -- that -- that outlook.

Saul Martinez -- UBS -- Analyst

Do you know offhand how much hedge benefit you got this quarter from -- from the swaps?

Don Kimble -- Chief Financial Officer

From the swaps, when you say benefit, I -- I'm reluctant.

Saul Martinez -- UBS -- Analyst

Yeah, right.

Don Kimble -- Chief Financial Officer

To -- to know what that is. Because it -- it is part of our -- our true hedging strategy. And -- and so as far as the -- the cash flow swaps, the -- the net interest income add to us for those cash flows swaps is about $90 million, which is down about 5 mill -- or excuse me, about $4 million from the previous quarter.

Saul Martinez -- UBS -- Analyst

Got it. OK. OK. So $90 million.

OK. Perfect. Thanks so much.

Operator

And next, we'll go to Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Chris. Good morning, Don.

Chris Gorman -- Chairman and Chief Executive Officer

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Don, can you share with us, when you look at the allowance for loan losses currently based on your slides, excluding the PPP loans, it looks like you're at about 193 three basis points. And at the start of the year when all of the -- you and your peers had to convert over to the CECL reserving, I think your reserves are about 122 basis points. As we look further out, maybe end of '22, wh -- what do you think the reserve levels could get to? Do you think they could get back down to where they were in January of this year before the pandemic?

Don Kimble -- Chief Financial Officer

I think we -- we could see trends in that direction. I don't know the absolute timing of that. I -- I don't know how to predict where the e --economic outlook will -- will -- will shift over time. But -- but I would say as we -- we go into 2021 that the three pieces that impact our provision expense under CECL are -- are -- are one, the -- the economic outlook.

And so assuming that's stable with what we would have predicted, won't see any impact there. Credit migration has been a positive for us. And -- and each quarter as we take a look at what our projected credit losses are, that trend continues to get better. And -- and so that's al -- allowing for reductions to the provision compared to normal.

And then the third piece is for loan production. I mentioned on the call a couple of times in the last few quarters is that that provision each quarter would be in the $80 million to $100 million range. And so if -- if the economic outlook doesn't change and -- and if the migration is consistent with expectations, that would imply about a $90 million per quarter provision expense on average and -- and about $360 million for the year in which would be below what that charge-off guidance would imply. And -- and -- and so we would expect to see that allowance ratio come down over time and -- and -- and -- and could have some opportunity to see that come down more quickly if -- if we could do to see that credit migration outperform like we have.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. Thank you for those insights. And -- and, Chris, the bigger question for you or a bigger picture. Obviously, you -- Key and your peers are -- are positioned to really benefit from a recovery in the U.S.

economy coming hopefully this year as the vaccines are more widespread over the summer -- by the summertime. The stocks, yours included, since the Pfizer announcement in November has had a real strong run here. And so everything is shaping up good. And as you pointed out, your fourth quarter investment banking numbers were blockbuster.

When you go home at night and you go down the elevator, what are the risks that you think about since things are shaping up pretty -- pretty good for you and your peers as we look out over the next 12 months?

Chris Gorman -- Chairman and Chief Executive Officer

Hey, Gerard. Well, I think for our entire industry, the number one risk is cyber. I think. We're in the trust business and to the extent there was a significant breach in the industry or of any particular company, I think that is -- I -- I think that's -- that's the number one risk.

The number two risk I think that we all need to focus on are just a whole another [Inaudible] of competitors. If you think about a lot of the Centex and you think about what some of those companies have been able to do in terms of garnering new clients, I think that is a strategic risk, kind of more tactically. We think about sort of the -- the key areas where I think you could see significant degradation in -- in asset values. And fortunately, we're well-positioned here.

But I think the obvious ones are -- are travel and entertainment. I think that's -- as you point out, I think that -- that will come back because I think the -- the vaccine has a lot to do with that. I think hospitality industry is one that you need to focus on. The other couple areas and -- and, as you know, we've been out of them by strategy is both retail and office.

I think those are areas that, as an industry, we need to keep a close eye on. So those are kind of starting with sort of strategic down to tactical what I think about.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. Thank you.

Chris Gorman -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question is from Erika Najarian with Bank of America Merrill Lynch. Please go ahead.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Yes, hi. My first question. I'm sorry for another question on your net interest income outlook. But I'm wondering if you could give us a sense, Don, on what -- what level of cash deployment or what level of investment securities growth you expect for 2021? And maybe this next one is -- is for Chris.

Embedded in that net interest income outlook, how do you see core commercial loans ex-PPP trending throughout the year within your guidance? It seems like a lot of your peers have been quite optimistic, surprising the market on loan growth recovery, particularly in the second half of the year.

Don Kimble -- Chief Financial Officer

Sure. As far as the out -- outlook for -- for net interest income and -- and -- and some of the assumptions we've had there for the reinvestment. In the fourth quarter, we increased our core investment portfolio by about $3 billion. And -- and that was investing at a faster pace than -- than the -- the runoff.

And -- and I would -- and our outlook would have some of that same type of pace continuing throughout the -- the current year, that we're -- we're currently sitting on over $14 billion in cash and about $2 billion in T-Bills that we think would be available for us to continue to -- to redeploy either through loan growth or -- or through reinvestment. And -- and so that would be the -- the core assumption that we have there. Just on that component that -- for that roughly $6 billion that we invested this quarter, the average reinvestment yield was about a 1.28%, so down from what the runoff level would be, but -- but reflected some of the strategy as far as in -- investing in certain securities and then swapping them back so that say five years down the road, those fixed rate securities would convert over to a floating rate. So our expectation would be to continue that kind of a strategy going forward.

Chris, on commercial loan growth.

Chris Gorman -- Chairman and Chief Executive Officer

Sure, Erika. So a couple of things. As Don mentioned, loan growth. First of all, consumers in area that will continue to be an outlier of growth for us and I think we're well-positioned for that.

The next area, if you think about commercial real estate, we have a very, very good franchise. We're actually not growing the on-balance sheet debt there. And that's by strategy. I think, last year, we probably placed $11 billion with our targeted customers in -- in our -- in our real estate book.

As it relates to C&I, we haven't yet seen growth. If we're looking at -- if you're looking at utilization, Erika, it is now at or below even pre-pandemic. We haven't seen people investing in property, plant, equipment, investing in people. But what we have seen, and I think is -- is a very good sign, and you saw it in our investment banking numbers in the fourth quarter, is people are starting to make strategic moves.

And so we're having great strategic discussions with our -- with our clients and our prospects, and I think people are thinking now with the election behind us, with the vaccine rollout of really what are they going to do to grow their business. So I -- I, too, am optimistic that we'll see an increase in line utilization and that we'll see people start to invest in their business. The other thing that would obviously be helpful for line utilization is if we had a bit of inflation, if people actually started investing and going long in inventory. And I don't think that's an unrealistic scenario as you think about the back half of the year.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Got it. And just one follow-up question on expenses, Don. Your guidance is offers the GAAP base of $4.109 billion?

Don Kimble -- Chief Financial Officer

That's correct. Yes.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Our next question is from John Pancari with Evercore. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Chris Gorman -- Chairman and Chief Executive Officer

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

I appreciate the color you gave on the reinvestment and the impact of liquidity, as well as your NII guidance. Just want to see if you can help us in how to think about the trajectory of the net interest margin here in the coming quarters. I know there's also a PPP benefit, but I just want to see if you can give us a little bit of color in terms of how that could trend in the next coming quarters? Thanks.

Don Kimble -- Chief Financial Officer

Good. As far as the -- the margin, it -- it -- it's challenging to predict just because the -- the timing of some of the deposit flows is also creating e -- either pressure or -- or change there. And -- and so with our assumption of having deposits growing low single-digits, that implies that our -- our margin will come down slightly from -- from where it is as of the fourth quarter. So something slightly below the 270.

And -- and I would say that from quarter to quarter, that will be impacted based on, like you said, the PPP forgiveness timing and also the changes in the overall equity position.

John Pancari -- Evercore ISI -- Analyst

OK. All right. Thanks. That -- that helps.

And -- and then separately, Chris, I just want to get your updated thoughts on M&A interest, both bank and nonbank. We've clearly seen some banks there in your backyard move on some deals and I know you've flagged competition as one of the risks that you -- that you think about. And you can certainly see that intensifying in the -- in the coming years. So basically, want to get your thoughts on a whole bank M&A from that perspective, and then also on the nonbank front.

Thanks.

Chris Gorman -- Chairman and Chief Executive Officer

Sure. Thanks for your question. Well, my -- my comment with respect to intensity of competitors was really nonbanks and thinking about some of the Centex. But as it relates specifically to your question, we're not really focused on whole bank consolidation or acquisitions really at all.

We think we have everything we need to be successful. We think the best way for us to generate value is to execute our targeted scale and go out and grow organically. So having said that, obviously, we take the responsibility very seriously of being a public company and we know we have to go out there each and every day and create value. As it relates to -- as it relates to nonbanks.

I'm really proud of the job we've done over many years of being able to buy entrepreneurial firms and successfully integrating them into our business. And I think about Cain brothers. I think about Pacific Crest Securities. And most recently, Laurel Road, that was a born digital company that we've been able to really not only integrate into our business but actually helps Key grow -- helped -- has helped Key and Laurel Road have grown.

So I think you'll see us continue to go out in -- in -- in keeping with our focus around targeted scale, buying these niche businesses that can help us really serve our targeted client bases.

John Pancari -- Evercore ISI -- Analyst

That -- that -- that's helpful. What -- what areas of businesses would you emphasize in terms of the nonbanks?

Chris Gorman -- Chairman and Chief Executive Officer

I think we probably look at the -- at the -- at the verticals that we're in. And I think we also would probably look at -- if you think about -- let's -- let's look at what we've done. We've bought boutiques that are really focused. We've bought digital businesses and slash analytics businesses.

Those are the kind of businesses that I think really turbocharge our existing 3.5 million clients.

John Pancari -- Evercore ISI -- Analyst

Got it. Thanks, Chris.

Operator

Our next question is from Steve Alexopoulos with J.P. Morgan. Please go ahead.

Janet Lee -- J.P. Morgan -- Analyst

Hello. This is Janet Lee on for Steve Alexopoulos. So my first question is on deposits. You're guiding to deposits going up even more from here after 20% growth in 2020.

Is this a function of your customers still holding on to cash in their account or is -- this has taken any assumption about new client acquisitions from your successful PPP?

Don Kimble -- Chief Financial Officer

I -- I would say it's -- it's on all fronts. And -- and -- and so we are assuming a growth on a continued basis. One is that we, in the last three quarters, have shown a lot of strong retail household growth, and -- and with a focus there on primary operating accounts for -- for the retail customers. Throughout our commercial customer base, we have increased efforts around making sure that we have that expanded full depository slash operating account relationship there as well.

And so those will be helpful. It would also reflect the assumptions like we saw last year that as the PPP loans were originated, a good portion of those proceeds were deposited into a deposit accounts with our customers, and -- and so we would expect to see some -- some lift from that. And -- and then just the most recent round of stimulus also adds deposit balances. And each quarter this year, we would try to estimate where our deposit flows will be.

And -- and -- and I think each quarter, we probably underestimated where -- where they actually come through. And -- and so I think the customers continue to have liquidity and continue to build those positions. And -- and that's essentially why we're -- we're assuming that we'll have continued growth there as well.

Chris Gorman -- Chairman and Chief Executive Officer

The only thing I would add to that is we -- we have a very successful third-party commercial loan servicing business where we are named primary servicer on $300 billion worth of commercial real estate. That business has grown very, very well and that generates deposits. And we also, from a strategic perspective, are very focused on primacy with both our consumer clients and our commercial clients and we're getting a lot of lift there.

Janet Lee -- J.P. Morgan -- Analyst

That's helpful. And it's positively surprising to hear that you expect overall residential mortgage originations to remain stable to potentially increase in 2021 versus 2022. So do you -- are you saying that the consumer mortgage income line on your fee incomes, is that going to be stable or is that going to go down like single digits? And how does this fit into the overall fee income guidance of up low single-digits? Like where -- where are the other like offsetting line items that are going to see bigger drop?

Don Kimble -- Chief Financial Officer

Yeah, as far as the outlook for 2021, that we would expect that line item to come down slightly more reflecting the -- the impact of --of the extremely high levels of gain on sale we experienced, especially in the third quarter of this year. So we -- we saw that come down in the fourth quarter and would expect to see ongoing pressure there. So even though the -- the origination volumes would -- would be stable to maybe up, we would expect to see some pressure there. As far as the other categories on fee income, that we would expect good growth in -- in service charge line item, that those categories were under pressure throughout a good portion of -- of say second and third quarter of 2020.

And -- and we would expect to see growth coming from -- from that category, and especially reflecting the impact of the low rates. We would expect to see good growth in trust and investment services line item, between what we're doing from a retail and commercial brokerage slash account activity there and -- and just our overall investment management strategy. We -- we would expect to see some growth there. And then even though we -- we've had a record year for investment banking with that placement fee, we do expect that to grow again for 2021.

And -- and so we've got a good pipeline in that business. We've got a good team and we're expecting to add bankers to that area throughout 2021 as well which will help deliver those results also.

Janet Lee -- J.P. Morgan -- Analyst

Great. Thanks for taking my questions.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

And we'll go to Peter Winter with Wedbush Securities. Please go ahead.

Peter Winter -- Wedbush Securities -- Analyst

Thanks. Good morning.

Chris Gorman -- Chairman and Chief Executive Officer

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Peter Winter -- Wedbush Securities -- Analyst

I just wanted to follow up on line utilization. Where -- where is it today and where do you think it -- it can go? And kind of what's the sensitivity for maybe 1% increase to commercial loans?

Chris Gorman -- Chairman and Chief Executive Officer

So this is Chris. This is an area that frankly through the pandemic we've -- we've been challenged to really pin down on where we think it's going to go. If you think about people drawing on their lines and then paying back those draws. We're about at 50% in our C&I book right now, which, Peter, is a little bit below where we would have been pre-pandemic.

And I think the real -- the real catalyst there is one, our clients are sitting on a lot of cash. So arguably, they'll have to burn down some of their cash before they start to utilize their line. So they have elevated cash positions. That's the first thing.

And the second thing that I mentioned is there's plenty of -- there's plenty of slack now in the global supply chains. And so people aren't really investing and going long per se on inventory. So I think you'd need those two things to happen. The biggest driver of both of those obviously is to get real economic growth.

Don, what would you add to that?

Don Kimble -- Chief Financial Officer

No, I think that -- that's right. I mean as far as the 50%, that implies roughly about $50 billion in outstanding balances on those lines for us. So just to put that in perspective, if that would increase by 1%, then that's -- would -- would show that at 1% growth on -- on the $50 billion.

Peter Winter -- Wedbush Securities -- Analyst

Got it. That's helpful. And then just one question, just on net -- net interest income, the outlook of up low single-digit, that's 2020, it's on the GAAP basis as well? Is that right?

Don Kimble -- Chief Financial Officer

I'm sorry, for -- repeat that, please.

Peter Winter -- Wedbush Securities -- Analyst

Sure. Sorry. Does the income outlook -- the 2020 base, that's a GAAP number?

Don Kimble -- Chief Financial Officer

The 2020 base is the --the GAAP number, and -- and our FTE adjustment isn't assuming much of a change on a year- over-year basis there. But I guess we would have a tax rate change, we would start to see that. But -- but it -- it runs usually about $29 million to $30 million a quarter or a year, excuse me, a year for the FTE adjustment.

Peter Winter -- Wedbush Securities -- Analyst

OK. Got it. Thank you.

Operator

And with no further questions in queue, I'll turn it back to the company for any closing comments.

Chris Gorman -- Chairman and Chief Executive Officer

Thanks, John. Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to our investor relations team. They can be reached at 2166894221.

Thank you for your interest in Key. And this concludes our remarks.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Chris Gorman -- Chairman and Chief Executive Officer

Don Kimble -- Chief Financial Officer

Scott Siefers -- Piper Sandler -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

Ken Usdin -- Jefferies -- Analyst

Saul Martinez -- UBS -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

John Pancari -- Evercore ISI -- Analyst

Janet Lee -- J.P. Morgan -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

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