KeyCorp
Q1 2022 Earnings Call Transcript

Published: 20 Apr 2021

[Operator:]

Good morning, and welcome to KeyCorp’s First Quarter 2021 Earnings Call. As a reminder, this conference call is being recorded. I’d now like to turn the conference over to the Chairman and CEO, Chris Gorman. Please go ahead.

[Chris Gorman:]

Thank you for joining us for KeyCorp’s first 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. Slide 2 you will find our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments as well as the question-and-answer segment of our call.

[Don Kimble:]

Thanks, Chris. I'm now on slide six. As Chris said, it was a strong start to the year with net income from continuing operations of $0.61 per common share, up 9% from the prior quarter and over four times from the year ago period. The quarter reflected a net benefit from our provision for credit losses. The reserve release was largely driven by expected improvement in the economic environment. Importantly, we generated a record first quarter revenue, driven by the strength in our fee-based businesses. I'll cover the other items on this slide later in my presentation. Turning to slide 7. Total average loans were $101 billion, up 5% from the first quarter of last year, driven by growth in both commercial and consumer loans. Commercial loans reflected Key's participation in PPP, partially offset by decreased utilization. PPP loans had an impact of $7 billion in the first quarter of 2021 average balances. Consumer loans benefited from the continued growth from Laurel Road and as Chris mentioned, record performance from our consumer mortgage business with $3 billion of consumer mortgage loans this quarter. The investments we have made in these areas continue to drive results and importantly, add high-quality loans and relationships. Linked quarter average loan balances were down 1%, reflecting lower commercial utilization rates and a reduction in average PPP balances. We had just under $1 billion of PPP forgiveness in the current quarter. Consumer loans were up 1% from the prior quarter, again related to continued production from consumer mortgage and Laurel Road. Continuing on to slide 8. Average deposits totaled $138 billion for the first quarter of 2021, up $28 billion or 25% compared to the year ago period and up 1.5% from the prior quarter. The linked quarter and year ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus. The growth was offset by continued and expected decline in time deposits. The interest-bearing deposit costs came down another 3 basis points from the fourth quarter of 2020, following an 8 basis point decline last quarter. We continue to have a strong, stable core deposit base with consumer deposits accounting for over 60% of our total deposit mix. Turning to slide 9. Taxable equivalent net interest income was $1.012 billion for the first quarter of 2021 and compared to $989 million a year ago and $1.043 billion for the prior quarter. Our net interest margin was 2.61% for the first quarter of 2021 and compared to 3.01% for the same period last year and 2.7% from the prior quarter.

[Operator:]

Thank you. And our first question will come from the line of Scott Siefers with Piper Sandler and your line is open. One moment. Please go ahead.

[Scott Siefers:]

Hi. Sorry, I think it was on mute or something there. Good to talk to you guys this morning. I appreciate you taking the question. First question was just on -- given that you guys sort of have a broader product mix than other traditional regional banks given your capital markets exposure. I guess I'm curious if you guys are seeing any preference from your corporate clients in terms of traditional banking products versus opting for capital markets products that you might have expected to be just sort of more traditional banking. Has there been any preference shift there?

[Chris Gorman:]

So Scott, it's Chris. We have seen a preference to kind of take our clients to where the most advantageous financing is. And one of the areas that I would point you to would be our real estate book. And you'll notice, if you look at the H8 data, we underperformed some of our competitors in terms of what we're putting on our balance sheet. But yet, we're only putting about 19% or 20% of the capital we raise. So if you think about really attractive non-recourse, 10-year money, Fannie, Freddie, FHA, the life companies, the CMBS market. That would be an example of where these middle market companies are consistently opting to go to other sources of funding other than the banks. And obviously, for us, that ties in really well with our business model. So, that would be an example.

[Scott Siefers:]

Okay. Perfect. Thank you. And then, I guess, actually, just sort of a ticky-tack one for Don. I saw the $7 billion of average balances of PPP loans. Do you happen to have the end of period just for modeling purpose, I'm guessing somewhere in the $6.5 billion range given what you said about forgiveness in the first quarter, but I was curious if you had a more pinpointing number?

[Chris Gorman:]

Sure. The ending debt balance was $7.7 billion because we actually originated $2 billion of new loans under the current program. And we also have a pipeline of approved through the SBA of an additional $700 million will be expected to close in the second quarter.

[Scott Siefers:]

Okay. Perfect. What I asked there, so that is helpful clarification. I appreciate you guys taking the questions.

[Operator:]

Thank you. Next question comes from the line of Ken Zerbe with Morgan Stanley. And your line is open

[Ken Zerbe:]

In terms of the Laurel Road for Doctors, can you just help us understand, is that a, I guess, a marketing decision of how you're positioning Laurel Road? Or does it actually require you guys to build out capabilities to talent people to be able to offer services specific to doctors where it's not just a marketing sort of gimmick? Thanks.

[Chris Gorman:]

No. It certainly is a lot broader than just marketing and kind of a couple of proof points. Just since we launched Laurel Road for Doctors on March 30th, our website traffic, Ken, is up 100%. We've had 50,000 discrete sessions with doctors and dentists on the website. We also have garnered 300 new doctor, dentist households. And obviously, we'll start building this out in concentric circles. So what this is, it is a complete digital offering focused on doctors and dentists. And so it's much broader than a single product. It is to meet the needs of doctors and dentists, which are both unique and to some degree homogeneous. So it isn't just marketing for sure, it's very focused.

[Ken Zerbe:]

Got it. Understood. Okay. And then just a different follow-up question. How do you guys see seasonality playing out in the investment banking and debt placement fees? Because if I'm not mistaken, I believe first quarter tends to be a seasonally weak quarter, but it was obviously a very strong quarter.

[Don Kimble:]

Sure. Well, as I mentioned, it was a record first quarter for us in our investment banking business. Seasonality typically is back-end loaded as people -- there's always a big push to get transactions done by year-end. We obviously have been pleased by the trajectory of the business, and we also are pleased that as things come out of the pipeline, the pipeline is being replenished and the pipelines are strong. So we feel good about it, and we think we'll have another record year in our investment banking business. One of the interesting things is there's a lot of M&A activity. So while there's not a lot of borrowing in our strategic discussions with the people that are running these mid-market and midsized companies they are looking to do strategic things, which really opens the door for us to provide a lot of services.

[Operator:]

Thank you. Our next question will come from the line of Bill Carcache with Wolfe Research. And your line is open.

[Bill Carcache:]

Thank you. Good morning, Chris and Don. I wanted to ask about your loan pipeline. We're hearing varying degrees of optimism around growth in the second half of 2021 post reopening. Can you give a little bit of color on the tailwind that you're anticipating based on the discussions you're having with clients and the extent to which the liquidity on their balance sheets is impacting their appetite to borrow?

[Chris Gorman:]

Sure. That's a great question. Let me kind of break it into consumer and commercial. On the consumer side, we had a record year in terms -- a record quarter, I beg your pardon, in terms of number of new households. We also had a record quarter in terms of mortgage originations at $3 billion. So we have a lot of trajectory on the consumer side. The consumer is spending. And while you don't see it in credit card balances because at origination, our average consumer has a FICO score of around 770. What you do see it in is the velocity in both debit and credit. We believe that our growth engines in consumer, last year, we generated about $10 billion of originations between Laurel Road and mortgage. We think we will do more than that this year. And that trajectory is -- they're up and running. Let's talk about commercial a little bit, which is clearly delayed. First of all, commercial right now, we have really unprecedented utilization as in low utilization. So I think one of the areas where we can grow from a commercial perspective is as there are supply chain challenges, as there is clearly some inflation out there. I think you'll see people start to build their inventory. And I would suspect we'll see utilization improve from the low point that it is now. As I mentioned, there's a lot of strategic discussions going on that should generate loan growth. What we're not seeing right now is investment in people and property, plant and equipment. And I would guess on the people front, one of the challenges for our customers is it's hard to hire people. So that's one of the challenges. But on property, plant and equipment, I would expect that to ramp up in the second half. These projects, as you know, take a fair amount of lead time. So consumer, strong throughout the year. I think commercial is going to be relatively flat in the first half and will pick up in the second half.

[Bill Carcache:]

That's very helpful. Chris. Don, as a follow-up, sorry if I missed this, but what's driving the improved NII outlook? Do you still expect relatively stable loan growth. So is the improvement coming from PPP. And on PPP, can you tell us with the anticipated total revenue benefit is after factoring in forgiveness, will most of that come in 2021? Just trying to get a sense if you could clarify for us within the outlook, what kind of NII growth you guys expect ex PPP?

[Don Kimble:]

Sure. If you look at the full year outlook that we would have provided in January compared to what we have today. And just using the midpoint, net interest income is up about $80 million. And roughly $45 million to $50 million of that is coming from the improved rate outlook that we've seen with the rate curve moving up and just the impact of that in the overall portfolio. If you take a look at the loan balances overall that I would say that they're up very modestly, but it really shows a little bit more of a mix improvement there as far as the yield impact. As Chris highlighted, that we had record mortgage originations of $3 billion this past quarter. We've increased our outlook as far as the overall mortgage balances going onto the balance sheet and pull back a little bit on the commercial given the lower utilization rates we saw in the first quarter. And so that mix shift also helped a little bit. As far as PPP. We talked on the call in January about we thought that with the new loans that we'd be seeing coming through with the current wave of PPP, if you take a look at the net interest income, which includes both the 1% interest plus the fee income, we thought that'd be up about $80 million year-over-year. And that's about the same as what we're seeing this year as far as our outlook in April. And so we're still seeing that kind of an incremental benefit. And then as far as the forgiveness, we would expect of last year's production of the $8 billion about 85% of that to be forgiven throughout the remainder of this year. And so we will see that acceleration occur as far as some of the fee income in future quarters compared to what we experienced in the first quarter. But generally fairly consistent with what we would have expected back in January.

[Bill Carcache:]

That's very helpful, Chris. And thank you very much for taking my questions.

[Operator:]

Thank you. Our next question comes from the line of John Pancari with Evercore ISI. And your line is open.

[John Pancari:]

On the margin side, I just want to see, Don, if you can kind of walk us through your expectations of how the -- how you expect the margin to traject here over the remainder of the year? And what's assumed in your NII up, low single-digit outlook? I guess, if you can give it perhaps with the PPP impact and with that would help. Thanks.

[Don Kimble:]

Sure. As far as the margin outlook, we would expect it to be stable to slightly up from here, so, maybe up a couple of basis points throughout the rest of the year, really reflecting some of the improvement in the loan fees. And as we mentioned earlier, from the fourth quarter to the first quarter one of the drivers of why our NII was down was about $8 million lower loan fees and some of that was related to the PPP because we had higher levels of forgiveness in the fourth quarter than what we actually did in the first quarter of this year. And so, as far as the PPP impact, we would expect that the total NII level contributed for first quarter versus the rest of the year to continue to trend down a little bit, very modestly at first and thinking of $1 million or $2 million a quarter coming from that just with the impact of the forgiveness of those loans. But generally, again, fairly consistent with what we would have expected coming into the year as far as the trajectory and our outlook for those balances.

[John Pancari:]

Okay. Thank you. That's very helpful. And then, separately, on the healthcare banking effort, one question I've been getting about this is, the expected longer-term impact that you may forecast from this whole effort, not just the digital effort with borrow road for Doctors. But I guess, also when you look at the combined effort that you flagged before by involving your Cain Brothers business as well as the emerging relationship in your backyard there with the Cleveland Clinic. When you look at this long-term, how do you size up the expected overall impact and maybe as a percentage of revenue or earnings or returns or even percentage of loans on the loan side or deposits. Just want to help people think about, how big this thing can be. Thanks.

[Chris Gorman:]

So, John, its Chris. We have not yet framed that for the investors. Obviously, this is -- we just launched the National Digital Affinity Bank just at the end of March. Obviously, healthcare is rapidly approaching 20% of the GDP. So there is a huge opportunity. And as you look throughout Key, we do a lot of business in health care throughout our franchise. For example, while not part of Laurel Road, doctors and dentists are a significant driver of our mortgage business, for example. And if you think about serving these large hospitals and what we can do for the CEO in terms of provide him strategic advice, raise capital at the -- dealing with the CFO, a lot we can do around payments. And then, with the Chief Human Resources Officer, the ability to refinance student loans, the ability for docs to manage their money. We have $45 billion of AUM. So it is a huge opportunity. We haven't yet laid it out for the public yet what our targets are. As it relates specifically to Laurel Road, last year, we generated $2.3 billion in loan refinancing. This year, in spite of, frankly, some of the noise around student lending in general, we will continue to grow that business. So that's just a data point for you.

[Operator:]

Thank you. Our next question will come from the line of Erika Najarian with Bank of America. And your line is open.

[Erika Najarian:]

My first question is for you, Chris. I just want to tap into your experience. Key is uniquely positioned to benefit from CapEx coming back online. And as we think about the excess liquidity in the system, are deposits going to be a leading indicator for line utilization? Or are your clients telling you that they're going to keep excess levels of cash for the time being. And additionally, this curve steepening from the long and rising, how does that play into historically the decision between capital markets and revolvers?

[Chris Gorman:]

Sure. So first, as it relates to deposits, I think it's probably somewhere in between your two scenarios. I think based on what we've all been through over the last 12 months to 18 months. I think you'll see people carry a little higher levels of cash. But clearly, I think they will definitely burn down some of those excessive deposits before they start borrowing. And I think as you think about going forward, the use of revolvers or going to various markets, I think to the extent that people have a defined use of proceeds, I think you'll see people try to lock in longer-term money because at current rates, I just think that makes a lot of sense for some of these long-term projects.

[Erika Najarian:]

Got it. And just as a follow-up on the question whether or not a steeper curve from a higher long end that could effect impact the decision between capital markets and revolvers in terms of funding preference?

[Chris Gorman:]

I don't think the steepness of the curve, while it matters a lot to us. I think what our clients really think about from a strategic perspective is this a long-term asset. And if I go out -- if I term it out as opposed to use my revolver, is that an advantageous financing for the long-term. I don't think they're driven by the steepness of the curve.

[Erika Najarian:]

Got it. And just for Don, the outlook for non-interest expense being relatively stable. Does that contemplate another record year in investment banking and debt placement fees?

[Don Kimble:]

That does contemplate that. As Chris highlighted, that we expect that to show growth on a year-over-year basis and also that show the stronger residential mortgage production as well. And so both of those are part of the reasons why the fee income is up and also the expenses are up on a corresponding basis.

[Erika Najarian:]

Okay. Thank you.

[Operator:]

Thank you. Next, we'll go to the line of Chris Usdin with Jefferies. And your line is open.

[Chris Usdin:]

Hi. Good morning. Thanks. I was wondering if you could talk a little bit about the reinvestments that you said you made this quarter, $6.5 billion ending balance increase. Can you just help us understand just where that front book, back book math is at this point on both securities and also if you just have any comments on loan pricing and spreads, too? Thanks.

[Don Kimble:]

Sure, Ken. As far as our securities portfolio that we did add to both the core book as well as a short-term treasury book. We've got as of the end of the period, about a $5 billion over the last two quarters increase in the core bond portfolio. That was really done in some of the core type of products and investments we would normally invest in, which would include CMOs and 15-year pass-throughs. We also did some commercial mortgage agency securities as well and attached swaps to those so that basically it locks in that fixed rate for the first, say, four to six years. And then converts it to a nice loading rate for us. And so the average yield on those purchases was around $140 million. The roll-off of our existing portfolio is around a $2.35 to $2.40 range. And so we do see continued pressure there based on where the current rates are, but is just consistent with what we're seeing in the markets overall. As far as that short-term treasury portion of the portfolio, we added again, about $5 billion also over the last two quarters. The average yield on that is about 40 basis points. And well, that's fairly low. It's a fairly short duration of the portfolio and really is just representing a safe substitute for the cash position as we're continuing to maintain cash levels of about $15 billion, which is up from our target level of about $1 billion and no more than $2 billion. And so just something we'll continue to evaluate as far as the overall outlook as far as putting some of those additional dollars to work. And hopefully, we start to see some of that additional commercial growth and utilization rates pick up, which would be a much better option for us as far as using some of that excess liquidity. On the loan side that we are seeing some tightening from the competitive perspective on the commercial side that, as you might imagine, there's stronger demand coming from banks to provide those loans. And so we’re seeing a little bit tightening there compared to where we were a year ago. And on the consumer side, spreads on a curve adjusted basis continue to be pretty good for us. The both Laurel Road and residential mortgage are wider spreads where they would typically be, even though the yields are still low compared to where we might want to see that overall portfolio, but generally holding up pretty well.

[Chris Usdin:]

Okay. And then, Don, just one more follow-up on PPP. Do you have the first quarter contribution from just the NII contribution of PPP in total?

[Don Kimble:]

Well, the net interest income -- or excuse me, the interest income, so this wouldn't include any funding cost associated with it. It was $65 million, and that was down from $70 million last quarter. And we would expect just some very slight reductions in that $65 million level over the next few quarters and essentially with the forgiveness triggering some acceleration of the fee income offsetting some of the reduction in future balances as that forgiveness goes through.

[Operator:]

Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo. And your line is open.

[Mike Mayo>:]

Hi. Chris, I know you built the investment banking business and you expect another record year, but that's -- it seems a little bold this early in the year. So what gives you confidence of, I guess, what are your backlogs? Are they record and how far above are they versus the prior record backlog, if that's the case? And maybe just a little bit about how you see the size of the pie in your wallet share and what percentage of your middle market customers have investment banking? Or just a little bit more color that gives you confidence?

[Chris Gorman:]

Sure. So as we look at the pipelines, as I mentioned, Mike, our pipelines are strong. And they're strong in the areas that have long lead times. But they're also strong in the areas that have a fair amount of velocity. Think about the debt markets, for example. So the pipelines are there. Also as we look at the mix, and I've mentioned this before, the level of M&A activity tends to have a multiplier effect. And so as we're advising on a lot of significant transactions, it gives us the opportunity to do what we do for our clients, provide capital after providing advice, also provide enterprise payments, help them hedge. So those are the things that give me confidence that we're going to be able to grow the business again this year. We also have a lot of repeat customers. We're really proud of the fact that a lot of our customers go to the markets relatively regularly, and we do a good job for them, and so they hire us in a repetitive fashion. Those are some of the reasons that I feel confident about the business. We also continue to hire quality people to bring on to our platform. We have what we think is a unique platform. Candidly, I still think it's underleveraged. And there's an opportunity for us in a very targeted way, go out and hire people that we think can advance the business.

[Mike Mayo>:]

And then a follow-up, your CEO letter says that you guys are the number one provider sorry number one provider of renewable energy financing. So what does that include? Is that bank lending and capital markets?

[Chris Gorman:]

Yeah. So that would be...

[Mike Mayo>:]

And what's the total addressable market? And where are you in that market?

[Chris Gorman:]

Sure, sure. So that's -- we have been a leader in -- we always talk about targeted scale, and renewables is a great example that way back in 2004, as we saw the utilities pivot to renewable energy, we built a business around both wind and solar. On our books today, Mike, we have about $5 billion of exposure. Obviously, over the years, we've raised tens of billions of dollars for the benefit of our clients. I think our pipelines in that business probably have visibility on $2 billion or so. What's really interesting is, I think as the whole plan comes together for the American Jobs plan, I think there'll be a big focus on renewable energy, and we feel like we're really well positioned. And so we'll continue to lean in. We'll continue to invest. We have good relationships with the whole ecosystem. And so that would be an example of targeted scale. It wasn't that big of a business when we started it, but it will continue to grow.

[Mike Mayo>:]

All right. Thank you.

[Chris Gorman:]

Thank you.

[Operator:]

Thank you. Next, we will go to the line of Gerard Cassidy with RBC. And your line is open.

[Gerard Cassidy:]

Can you guys share with us -- we all know what has happened with quantitative easing and the increase in the industry's deposits as evidenced by the over $3 trillion growth we saw last year in the banking industries deposits. You guys have certainly seen it on your balance sheet. And it shows up. And you mentioned that the stimulus programs have contributed to your deposit growth. Can you share with us, how do you see your customers using these deposits? And is there any evidence yet from the earlier stimulus plans that we saw in the spring of last year, the initial checks that individuals received as well as the initial PPP programs that they're actually drawing down the deposits? Or do you think that your deposits could remain elevated for an extended period of time because of the continuation of QE? And the government deficit spending we expect over the next 12 months to 18 months?

[Chris Gorman:]

I think the consumers are spending part of it. So you're right. The industry has about $3 trillion of excess deposits. We at Key have about $3 billion. And if you looked on our consumer balances, our consumer balances are up year-over-year, Gerard at about 17%. Importantly, on the deposits that are non-rate sensitive, they're up 42%. But we -- I think you will see those, particularly if there's not additional stimulus. We've had three waves now. I think you'll start to see those, burn down. We're certainly seeing it in card spend, for example. Don, what would you add to that?

[Don Kimble:]

No, I think you're right. I mean in the first quarter, I think we saw card spend up about 7% across our customer base. And maybe that's a leading indicator there. But Gerard, those deposit balances have been amazingly sticky. And I think it reflects the impact of the ongoing stimulus programs that come through and the checks that have been cut to the consumer. And so those have been very resilient as far as the overall balances. I think we will see balances remain strong for a period of time, even as the economy starts to pick-up, but would expect probably as we are also expecting to see partial lending picking up in the second half of the year. I would expect some of those commercial deposits to start coming under a little bit of pressure to. As Chris highlighted, maybe do a little bit of both where you pull back a little bit on that liquidity on the balance sheet. But also start to borrow against some of the lines to help fund some of the needed investments in inventory and just other growth.

[Gerard Cassidy:]

Very good. And then, Chris, in terms of using excess capital for acquisitions, key over the years has been successful in acquiring not necessarily depositories, but the complementary businesses, particularly in the investment banking and then Laurel Road, of course. Can you share with us your thoughts? And not so much, I'm not too interested in if you're looking at a depository, but more just the add-on businesses, are there opportunities or needs for you that you can buy another a broker-dealer or adviser or something like that to enhance the investment banking business as you go forward?

[Chris Gorman:]

I think there’s always a niche business and what we found, Gerard, is when we bring on these niche businesses. I'm really proud of the way we've been able to integrate them, because most of these businesses, by definition, are entrepreneurial businesses. The most recent one, obviously, was just last quarter when we purchased AQN, which is an analytics business. But there are clearly opportunities with our targeted scale for us to go out and acquire these entrepreneurial companies that, by the way, are good companies that we're able to integrate. But they really bring a skill set to Key as well. With Laurel Road, I think we acquired 40 full stack software engineers, for example. And that clearly will be helpful as we advance our digital strategy throughout Key. So yes, there are opportunities. And we'll keep our eyes open for those.

[Operator:]

Thank you. Next we'll go to the line of Terry McEvoy with Stephens. And your line is open.

[Terry McEvoy:]

Hi, Actually, just one question for you, Don. The cards and payments income, up 60% and over $100 million in the first quarter. I was hoping if you could just talk about how the stimulus plan kind of impacted prepaid card activity and maybe a better way to think about the run rate in a more normal operating environment?

[Don Kimble:]

Sure that if you look at the increase year-over-year, there was about $39 million. I would say 32-ish of that is really related to the prepaid card business that we've talked about before that's used to support various state government programs in this environment that at the same time, we saw that increase. We also saw a corresponding increase in our expenses of $32 million. And so near-term, the benefit really is from those deposits that are being maintained there. And so we would expect those programs to continue to wind down throughout the year. And so we will see that cards and payments-related revenue line item coming down for that, but also see a corresponding impact on the expense side as well. As we mentioned earlier, we were starting to see in the first quarter some nice trends as far as the year-over-year growth rates in all of our card programs, whether it was consumer credit card or debit card or whether it was the commercial card products that we have. And so we're excited about that core momentum and probably would expect to see growth there on a core basis, but might be a little cloudy to see that as we would expect to see some of that prepaid balance our activity throughout the year.

[Terry McEvoy:]

Great. And then just as a quick follow-up. The revised outlook for expenses up since January. Is any of that connected to the announcement last month and the build-out of Laurel Road for Doctors?

[Don Kimble:]

Well, I would say that we will have increased costs associated with that. But the run rate and the build-out was reflected in our January outlook. And so none of that really came through there that as you think about what the change in our outlook was and just using the midpoint of those guidance ranges that total revenues are up $160 million from what we would have shown before. Expenses are up $80 million. And so efficiency ratio of about 50% on that revenue growth, and that really relates to the growth coming from higher expected capital markets-related revenues and higher consumer mortgage revenues, which both have a -- a strong variable expense component to it.

[Operator:]

Thank you. Our next question comes from the line of Steve Alexopoulos with JPMorgan. And your line is open.

[Janet Lee:]

Good morning. This is Janet Lee on for Steve Alexopoulos. Just digging deeper into your NII guidance of up low single digit and your NIM outlook for tables is slightly up for 2021. Can you provide more details around what you're assuming in terms of the level and deployment of excess liquidity on your balance sheet? So how much of $15 billion of short-term investments in the first quarter is assumed to go into securities as we look out?

[Don Kimble:]

Yes. We would expect very incremental changes as far as deploying some of those that initially, the liquidity will be absorbed through additional loan balances. And so as we mentioned before, we expect the first quarter to be the low point for us for average loan balances for the year, and that's really led by the consumer growth initially. And then we would expect to see line utilization rates pick up in the second half of the year for commercial. And so that will be helpful. And then as far as the investment portfolio that over the last couple of quarters, we put to work a net say, $2 billion to $3 billion of additional investments outside of the treasury portfolio. And so I would think that, that would be an expected pace of maybe deploying $1 billion to $2 billion per quarter as far as shifting out of cash and putting that into the investment portfolio in addition to the loan growth.

[Janet Lee:]

All right. That's helpful. And shifting to fee income, can you talk through why service charges on deposits decline sequentially in the first quarter back to sort of the pre-pandemic levels? Is this more of a function of customers having elevated deposit balances and not incurring overdraft fees? Or is there something else going on?

[Chris Gorman:]

You nailed it. That's essentially what's happened here is on the service charge on deposits. The primary reason for the decline is related to just that very fact that the consumers have stronger balances and so they have lower NSF OD fees. And also the commercial customers have stronger balances, which results in fewer service charges for those accounts as well. And so that excess liquidity is providing a relief for the customers as far as fee income.

[Janet Lee:]

All right. Thanks for taking my questions.

[Chris Gorman:]

Thank you.

[Operator:]

Thank you. And with that, we have no further questions. I'll turn it back over to the speakers for any closing comments. End of Q&A

[Chris Gorman:]

Well, thank you. And again, I want to thank all of 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.

[Operator:]

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