Q4 2021 Regions Financial Corp Earnings Call
<unk> equity and economic empowerment for communities of color.
Before closing we're extremely proud of our achievements in 2021, but none of these would have been possible without the hard work and dedication of our nearly 20000 associates.
The past year pose unique challenges as we continue to transition to our new normal both on a personal and professional level. Despite continued uncertainty our associates remain steadfast they continue to bring their best to work every day, providing best in class customer service successfully executing.
Our strategic plan and maintaining strong risk management practices, all of which contributed to our success.
In 2022 and beyond we will continue to focus on growing our business by making investments in areas that allow us to make banking easier for our customers.
All while continuing to provide our associates with the tools they need to be successful, we will make incremental adjustments to our business by leaning into our strengths and investing in areas, where we believe we can consistently win over time.
As announced earlier this week a key priority in 2022 will be additional comprehensive changes to our NSF and overdraft policies, which are detailed in the appendix of our presentation.
These changes represent a natural extension of our commitment to making banking easier for our customers and complement the enhanced alerts Tom order posting process as well as our bank loan certified checking product, we launched last year.
It's important to note that the financial impact of these enhancements have been fully incorporated in our total revenue expectation for 2022.
Again, we're pleased with our results and have great momentum as we head into 2022 now.
Now David will provide you with some select highlights regarding the quarter.
Thank you John let's start with the balance sheet.
The impact of acquired loans from the interbank transaction adjusted average and ending loans grew 6% and 7% respectively. During the quarter, although business loans continued to be impacted by excess liquidity.
Lines have surpassed pre pandemic levels and encouragingly, we experienced a 240 basis point increase in line utilization rates during the fourth quarter.
In addition production remained strong with a line of credit commitments, increasing $4 $7 billion year over year.
Consumer loans reflected the addition of $3 billion of acquired interbank loans as well as another strong quarter of mortgage production accompanied by modest growth in credit card.
Looking forward, we expect full year 2022 reported average loan balances to grow 4% to 5% compared to 2021.
Let's turn to deposits.
Although the pace of deposit growth has slowed balances continued to increase this quarter to new record levels increase.
The increase includes impact of interbank deposits acquired during the fourth quarter.
As well as continued growth in new accounts and account balances.
We are continuing to analyze our deposit base and pandemic related deposit inflow characteristics in order to predict future deposit behavior.
On this analysis, we currently believe approximately 35% or $12 billion to $14 billion.
Of deposit increases can be used to support longer term asset growth through the rate cycle.
Additional portions of the deposit increases could persist on the balance sheet for a likely to be more rate sensitive, especially later in the fed cycle.
While we expect a portion of the surge deposits to be rate sensitive you will recall that the granular in nature and generally right insensitive construct of our overall deposit base represent significant upside for us when rates do begin to increase.
Let's shift to net interest income and margin.
Net interest income increased 6% versus the prior quarter, driven primarily from our interbank acquisition.
Favorable PPP income and organic balance sheet growth.
Net interest income from PPP loans increased $8 million from the prior quarter, but will be less of a contributor going forward.
Approximately 89% of estimated PPP fees have been recognized.
Cash averaged $26 billion during the quarter and when combined with PPP reduced fourth quarter's reported margin by 51 basis points. Our adjusted margin was 334% modestly higher versus the third quarter.
Excluding the impact of a large third quarter loan interest recovery.
Core net interest income was mostly stable as loan growth offset impacts from the low interest rate environment.
Similar to prior quarters net interest income was reduced by lower reinvestment yields on fixed rate loans and securities.
These impacts are expected to be more neutral to positive going forward.
The hedging program contributed meaningfully to net interest income in the fourth quarter. The cumulative value created from our hedging program is approximately $1 $5 billion roughly 90% of that amount has either been recognized or is locked in to future earnings from hedge.
Terminations.
Excluding PPP net interest income is expected to grow modestly in the first quarter aided by strong fourth quarter ending loan growth as well as continued loan growth in the first quarter, partially offset by day count.
Regions balance sheet is positioned to benefit meaningfully from higher interest rates.
Over the first 100 basis points of rate tightening each 25 basis point increase in the federal funds rate is projected to add between 60 and $80 million over a full 12 month period.
This includes recent hedging changes and is supported by a large proportion of stable deposit funding and a significant amount of earning assets held in cash when compared to the industry.
Importantly, we continue to shorten the maturity profile of our hedges in the fourth quarter.
Hedging changes to date support increasing net interest income exposure to rising rates positioning us well for higher rates in 2022 and beyond.
In summary, net interest income is poised for growth in 2022 through balance sheet growth.
And the higher yield curve and an expanding economy.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income decreased 5% from the prior quarter, primarily due to elevated other noninterest income in the third quarter that did not repeat in the fourth quarter organic.
Growth and the integration of <unk> capital partners and clear sight advisors will drive growth in capital markets revenue in 2022.
Going forward, we expect capital markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA.
Mortgage income remained relatively stable during the quarter and while we don't anticipate replicating this year's performance in 2022.
Mortgage is expected to remain a key contributor to fee revenue, particularly as the purchase market in our footprint remains very strong.
Wealth management income increased 5% driven by stronger sales and market value impacts and is expected to grow incrementally in 2022.
Seasonality drove an increase in service charges compared to the prior quarter.
Looking ahead as announced yesterday, we are making changes to our NSF and overdraft practices, which along with previously implemented changes will further reduce these fees.
NSF and overdraft fees make up approximately 50% of our service charge line item.
These changes will be implemented throughout 2022, but once fully rolled out together with our previous changes implemented last year. We expect the annual impact to result in 20% to 30% lower service charges revenue versus 2019.
Based on our expectations around the implementation timeline, we estimate $50 million to $70 million will be reflected in 2022 results.
NSF and overdraft revenue has declined substantially over the last decade and once fully implemented we expect the annual contribution from these fees will be approximately 50% lower than 2011 levels.
Since 2011, NSF and overdraft revenue has decreased approximately $175 million and debit interchange legislation reduced card and ATM fees another $180 million.
We have successfully offset these declines through expanded and diversified fee based services and as a result total noninterest income increased approximately $400 million over this same time period.
Through our ongoing investment in capabilities and services, we will continue to grow and diversify revenue to overcome the impact of these new policy changes.
We expect 2022 adjusted total revenue to be up three five to four 5% compared to the prior year driven primarily by growth in net interest income.
This growth includes the impact of lower PPP related revenue and the anticipated impact of NSF and overdraft changes.
Let's move on to noninterest expense.
Adjusted noninterest expenses increased 5% in the quarter.
Salaries and benefits increased 4%, primarily due to higher incentive compensation.
Base salaries also increased as we added approximately 660, new associates, primarily as a result of acquisitions that closed this quarter the.
The increased head count also reflects key hires to support strategic initiatives within other revenue producing businesses.
We have experienced some inflationary pressures already and expect certain of those to persist in 2022.
If you exclude variable based and incentive compensation associated with better than expected fee income and credit performance as well as expenses related to our fourth quarter acquisitions. Our 2021 adjusted core expenses remained relatively stable compared to the prior year.
We will continue to prudently manage expenses.
While investing in technology products and people to grow our business.
As a result, our core expense base will grow.
We expect 2022, adjusted noninterest expenses to be up 3% to 4% compared to 2021.
Importantly, this includes the full year impact of recent acquisitions as well as anticipated inflationary impacts.
Despite these impacts we remain committed to generating positive adjusted operating leverage in 2022.
Overall credit performance remained strong annualized net charge offs increased six basis points from the third quarter's record low to 20 basis points driven in part by the addition of interbank and the fourth quarter.
Full year net charge offs totaled 24 basis points, the lowest level on record since 2006.
Nonperforming loans continued to improve during the quarter and are now below pre pandemic levels at just 51 basis points of total loans.
Our allowance for credit losses remained relatively stable at 179% of total loans, while the allowance as a percentage of nonperforming loans increased 66 percentage points to 349%.
We expect credit losses to slowly began to normalize in the back half of 2022, and currently expect full year net charge offs to be in the 25 to 35 basis point range.
With respect to capital our common equity tier one ratio decreased approximately 130 basis points to an estimated nine 5% this quarter.
During the fourth quarter, we closed on three acquisitions, which combined absorbed approximately $1 $3 billion of capital. Additionally.
Additionally, we repurchased $300 million of common stock during the quarter.
We expect to maintain our common equity tier one ratio near the midpoint of our nine 5% to 975% operating range.
So wrapping up on the next slide our 2022 expectations, which we've already addressed.
In closing the momentum we experienced in the fourth quarter positions us well for growth in 2022 as an economic recovery continues pre.
Pre tax pre provision income remained strong expenses are well controlled credit risk is relatively benign capital and liquidity are solid and we are optimistic about the pace of the economic recovery in our markets with that we're happy to take your questions.
Thank you the floor is now open for questions.
I have a question. Please press the star key followed by the number one on your telephone keypad.
Is that any point. Your question is answered you may remove yourself from the queue by pressing the pound key.
We'll pause for just a moment to compile the Q&A roster.
Your first question is from the line of Erika Najarian with UBS.
Good morning Erika.
Hi, good morning.
So just going to actually didn't expect to ask this question, but the feedback that I got from investors in terms of the.
<unk> performance today.
Obviously your.
Outlook is quite upbeat is that the tangible book dilution from the deals that you announced or rather close in the fourth quarter surprise.
And David I'm wondering if you could share with us sort of the earn back period you expect for these deals.
Tangible book value.
Well, we look at several factors.
Not just tangible book value, we'll look at diversification of revenue we look at return on investment.
Because when you the alternative is buying your stock back which also.
As a reduction in the tangible book value. So youre trying to look at the tradeoff between how you put your capital to work frankly, I can't even remember what the.
What the payback was.
If we were looking at a bank acquisition, that's a little different where.
We would expect a payback period of three years or less but in this case, we're looking at diversification and being able to grow.
The return on that investment is higher than the return that we would have had if we were bought our shares back.
Your next question is from the line of Betsy <unk> with Morgan Stanley .
Good morning.
Good morning.
Couple of questions first on the announcement that you made yesterday on the changes to the overdraft insufficient funds fees I know you sized it for 2022 could you give us a sense as to.
If that were to go in full year full on what that level would be because obviously as we think into 'twenty three eight to understand how youre thinking about it annualized impact would be looking like.
The guidance, we provided Betsy is if you go back to 2019 total service charge revenue the impact is going to be somewhere between 20, and 30% of total service charge revenue.
Based on 2019 revenue.
Once all of the changes are implemented and annualized and that includes all of the things we already have done too. So it's a cumulative number.
So if you go back to that you can you can calculate and round numbers.
We'll be half, we're going to have half to maybe slightly more than that done in 2022.
And so.
And double that for close proximity of what the.
Total would be.
And when you see the service charges from 2019, you are talking about.
The service charges from 2019 in your income statement not what shows up as.
Regulatory like Overdrive, that's correct filing that's correct.
Okay.
And we think about it that way.
Ultimately.
All of these fees are associated with the consumer business.
And as we think about how we overcome.
That loss of revenue it is through growth in consumer checking accounts additional activity debit card usage debit card fees other things that come with that and as David has pointed out earlier. If you go back to 2211 timeframe and come forward, we've been able to significantly grow non fresh.
Revenue, while overcoming the loss of revenue associated with <unk>.
And other changes we expect the same will be true as we look forward.
Relative to the changes we're making here.
And Betsy just to help me out a little if you go into our public filings.
And our settlement in 2019, our service charge number was $729 million.
On top of that number.
Right right. Okay. I was just can confirm that alright, great. Thank you.
And then follow up question here just on.
How youre thinking about that.
Sobell acquisition, and how that's going to feed into not only the income statement I heard you talk about it.
It's in the capital markets revenue line, but maybe help us understand is there any balance sheet impact here and.
And the expectation that you have to grow this business from where it is today.
So I would say the balance sheet impact will be modest will have an opportunity to develop relationships that might lead to our providing credit to customers and door opening deposit relationships, we expect that to be true for sure. The primary benefit we derive from small is.
The capabilities.
Capabilities, we have permanent placement capabilities that we ultimately end up with I think we're one of four or five banks in the country that will have a complete array of real estate permanent placement products, whether it be.
Fannie license Freddie licenses for large and small dollar <unk> capabilities.
We can bank, our real estate customers needs across the spectrum.
As we've transitioned from the great recession to today, we've built I think a really solid real estate business real estate permanent placement revenue.
2021 will exceed $60 million that's from zero in 2014, effectively so we've been building that business around regional and National real estate developers really strong balance sheets, good liquidity and access to capital as the portfolio has performed very very well.
And we think this gives us an opportunity to extend those relationships and drive additional profitability.
And theres been some pretty recently some significant uptick in that.
And for that product right.
Yes.
Again, I think if you just look at the multifamily market.
It's awfully good.
Now those developers who like to.
To buy and build it hold want access to both the Fannie products and.
Freddie products from time to time.
Again found that to be.
Great source of revenue and a wonderful way to to build stronger deeper relationships with that customer segment.
Thank you.
Your next question is from the line of John <unk> with Evercore ISI.
Good morning, John .
Morning.
On the loan growth front.
You could maybe give us a little more color on the four 5% growth expectation for the year.
Maybe if you can unpack it.
A little bit of color on the growth you expect for commercial CRE and.
Consumer and how that could play out for the year.
Yes, John it's David.
So first thing we have to overcome and it depends on if youre looking at on the average which is where the 4% to 5% first thing you have to do is overcome.
PPP average, which was about $2 7 billion.
So.
But that in your model that if you look at areas, where we can grow clearly we're going to get benefit off interbank, having a whole year of inter bank along with its growth that we expect.
And so that's a big driver of our averaging mortgage ought to have a.
It may not have as much production as we have in 'twenty one for 'twenty, two but we still believe we will grow the balance sheet quite nicely. There. We expect credit card to continue to grow and then on commercial even.
After you consider overcoming the.
The PPP runoff on average at two seven we think we can still grow that on top of it as.
As we look at the industries that we were particularly strong in in 'twenty, one in the commercial space financial services.
Health care transportation, our asset based lending.
Homebuilder and.
And to a lesser degree technology those are areas that we did see growth in quite nice growth and expect to continue into 2022.
And it's been geographically diverse as well.
Great.
Okay Alright.
Separately.
The operating leverage expectation.
Based upon your guidance, you're looking for about 50 basis points of positive operating leverage.
Could you just talk to us about how.
Fed hike maybe.
Proved to be less than expected is that.
50 basis points of operating leverage still attainable, but you still have levers to pull.
It could be basically generate that despite the move by the fed.
Well.
It certainly makes it harder, but as we've always said our goal is to generate positive operating leverage over time and if our revenue growth isn't there then.
We double down on expense management.
Obviously, it didn't get there this year, nor did anybody else that I'm aware of but.
We believe there's a reasonable path to that.
And.
That's why we gave you the guidance it showed you.
That roughly 50 basis points or more and.
No.
We have things we can do during the year that can help us get there, but yes rates.
Not coming in at the pace, we think ours many of them, we think will put pressure on that calculation.
But we wouldn't give up on it just because of that.
Got it alright, thanks for taking my question.
Your next.
Question is from the line of Bill <unk> with Wolfe Research.
Thank you and good morning, following up on the.
The commentary around the positive operating leverage I was hoping you could frame.
A little bit more how much variability there is around that 3% to 4% increase that you have in your outlook for expenses.
As those rate hikes begin to flow through the forward curve reflects four hikes next year, but some are expecting more than that.
How does the number of hikes I guess to accept that we get more.
Influence the expense line.
Does that go.
Does that three or four outlook hold and on top of that it would be greatest.
If you could also discuss your confidence level in being able to control the expense base such that you continue you still achieve that positive operating leverage even under different inflation scenarios.
Well, yes, a lot there so let me see if I can.
Yeah, so on the expense side of 3% to 4%.
Large portion of that substantial portion of that is related to the acquisitions that we had so we closed on three deals in the fourth quarter one of them right at the end of the year. So we'll have a full year run rate on all of those coming through and that's the biggest single driver.
The 3% to 4% if you go back and look at our compound annual growth rate on expense management, we've actually done a pretty good job of controlling our expenses and we don't do that just one area, but as salaries and benefits and <unk>.
Furniture fixtures and equipment and occupancy and vendor spend all of those things. We are all over and John has is our continuous improvement programs still going where we're looking to improve processes. Each and every day leveraging technology to help us control our expense load.
So.
I think.
In terms of the revenue side.
We have four baked into our guidance that we just gave you for 25 basis points.
Moves each quarter. So on average you get two during the year.
And it depends on.
When we get 25 will be more than that will be more than for a lesson for I mean, you have to tell.
<unk> told you in.
In our guidance that each 25 basis points to $60 million to $80 million.
So you can put in your model and kind of.
With that.
Back to the.
The question earlier from Johnson car in terms of operating leverage.
We are committed to generating positive operating leverage over time.
And.
When things get more challenging we will do what we can to manage expenses. So.
I'll leave it at that.
Your next question is from the line of Ebrahim <unk> with Bank of America.
Good morning Abraham.
Good morning.
One just a.
Question follow up on the <unk>, it's been a big overhang on the stock and I get your guidance alone the impact this year.
David but just talk to us don't say exist the industry seems to be moving away from here.
Give a sense of like the use case of why there is a subset of overdraft fees need.
It needs to exist and why you feel looking both competitively and from a regulatory standpoint.
That component of <unk> fees will be defendable.
Well.
So as we put it in our guidance yesterday.
We're eliminating NSF fees altogether.
We still have overdraft fees for a service that we're providing which is liquidity to our customer base and they appreciate the ability.
To be able to have that liquidity in time of need and there's a cost to that.
Now we've done some things we've given alerts.
Changed our posting order.
We're going to get.
<unk> loans were going to give you a paycheck up to two days available.
In some cases and so we're doing a lot of things to make it easier for our customers bank with us and to understand where they stand at any point in time, but if they need that liquidity, we want to be there. We've limited our we will be limiting our overdraft is no more.
Then three per day too.
Which is.
One of the strongest in the industry. So.
We're doing a lot of things, we think that's a value play for our customers. They want that ability for that short term liquidity at the cost that we charge for it.
Noted and I guess, just a separate question around loan growth.
Apologies, if I missed it but.
Talk to us about the interbank acquisition, what that means for growth, especially some of the non footprint I think half of interbank is outside of the core regions footprint.
Give us a perspective in terms of the opportunity that you have that work in terms of what interbank destiny and how to scale that up.
Yes.
We acquired about $3 billion worth of loans right at the end of the at the beginning of the fourth quarter, we will get all of that and are averaging numbers, which is where our 4% to 5% growth is for next year.
Their production had been about 1% of the industry.
Which equated to about $1 seven in terms of production and that's what they were doing and we think we have the ability to take that and ramp it up over time.
And have nice growth there, we're excited about interbank and excited about the fact that our geographic expansion of that is outside of our core footprint. It brings us the ability to have more customers throughout the country to do other banking services with as well, including small business card.
Tractors that offer products to consumers. So it is a big portion of our growth expectation and we couldnt be more excited about adding interbank and the people that work there to the region's family.
Got it.
Questions.
Your next question is from the line of Ken <unk> with Jefferies.
Good morning, Ken Hey, good morning, guys.
Another just follow up on the expenses, David could you help us understand of the 3% to 4% growth what part of that is just organic growth what part is actually coming from the acquisitions getting into the run rate and then.
What are you doing in terms of offsets in terms of continuous improvement type of.
Efficiencies.
Yeah, Ken is as I mentioned earlier the <unk>.
The overwhelming majority of our growth is related to.
The acquisitions that we have we.
We've been able and we will continue to control our core expenses.
Managing the things I talked about <unk>.
Salaries benefits and head count.
Our square footage, whether it be branch or office square footage.
When you manage your your head count you managed a number of computers you have to have its vendor spend it's our procurement group really ensuring that from a demand management standpoint that people that are asking for vendors and third party services really need them and when we have to have them.
Making sure.
We get the best price for the for the services that we're getting that's ongoing that's part of our continuous improvement program.
And you couple that with.
Leveraging technology and taking out processes that we have we're not finished there now we have to create opportunities to reinvest.
So embedded in the 3% to 4% are the investments, we're making in people and our <unk>.
Certain markets that we have that we see opportunities for growth there, we invest in technology people and services to help us there. So all of that's embedded.
And the numbers that we're giving you.
Cut to the chase of the 3% to 4%.
A vast majority of that is related to the acquisitions that we announced.
I understand and I apologize I missed that comment earlier kind of follow up separately. David then on the just on that top spoke you terminated a little bit more this quarter just wanted to understand like what percentage of that book is now kind of locked out from either.
You've terminated or you understand that.
The maturity schedule.
And we see from your.
Your color NII slide what that expected trajectory is like so I don't think theres much change, but can you let us know if theres anything different in terms of how you're viewing the portfolio going forward. Thank you.
Yes, Ken So we continue to kind of read the tea leaves in the where the feds going in the market with regards to rates. So we took some of our protection off.
Unwind.
This summer so we have a little bit more asset sensitivity that comes in in the second half of the year.
But we have to continue to monitor that because it's important.
It's important.
Important for us to make sure that we have the proper sensitivity when we expect rates to go up we do and now it's just timing.
A month ago, maybe a rate increase or two now today. It is for this morning. There are people talking about maybe it will only be a couple. So I mean this is very volatile and we're trying to do the best we can anticipate.
Were those rate moves are going in.
We've locked in a good portion of our.
Fair value if you will of our.
Of our hedge portfolio over half so I think that.
We're in good shape, we can terminate some of those.
Quickly if we want to put more sensitivity in.
But right now we think we're in pretty good spot.
Do you have an upper bounds of the sensitivity and how much you, let it float up and thanks, Thanks for answers.
What we really want to do is.
We're not trying to top tick our margin and NII, what we're trying to do is have a repeatable predictable.
Income statement.
What we do when rates get to a point, where there's risk of it going down we do have risk parameters in terms of how much risk. We can have on NII was up 100 basis point move but for US is really trying to.
And to anticipate where the market's going to move so we can take full advantage.
Are there, but we don't want we don't want to have an unusual pickup in any given period, whether it be a quarter or a year that's not repeatable.
Not helpful to us or our shareholders over time. So we're trying to get back we had given you a range of getting up to our margin and the $3 70 range with a normal interest rate environment.
We're probably going to be in the higher $3 <unk> on a core basis.
This quarter coming up so we will have a little bit of growth there, but it's just making incremental moves.
On the portfolio as.
As we say the interest rate environment change.
Thanks, Andy.
Your next question is from the line of Gerard Cassidy with RBC.
Yes.
Good morning, John Jordan.
David.
Can you elaborate further on slide eight where you give us the interest rate exposure and you talked about your deposit beta.
Particularly in the first 100 basis points.
The 25% due to the higher betas on your third deposits can you tell us how large on the search deposit funded.
You give us some color on how you define surge deposits.
Yes.
Our total surge deposits.
Mathematically or about $39 billion.
Okay, and so when you think of those.
Those surge deposits in terms of Veda reaction. There is really two things that are happening with the surge deposits.
Of the surge deposits about 65% of those.
We think would have a.
Actually a lower beta.
Sorry, a higher beta.
And that's $25 billion and we would put that data.
At 75% Alright thing is going to be pretty high pretty reactive if you look at the other 35%.
Based on the nature of those accounts are those deposits went into the debt beta is going to be similar to our legacy debate.
Which is 10%.
Then if you take the rest of our core legacy deposits, we put a 10% beta on that as well.
And if you go back and look at the last 100 basis point rate increase that we had the last cycle. That's what the beta was so that's the math that we've really gotten too.
In our guidance that we're giving you.
And David on the surge deposits.
Exit non operating deposits from your corporate customers or the consumers. So that mix is money left over from the stimulus.
Yes, a big portion of those surge deposits our corporate deposits that came in that because that's the best place I could put their money and that's why we believe that 65%.
Of those deposits so call it $25 billion at 65% of the 39.
It's going to be very reactive because there are corporate customers that are likely to put them on a put those to work in a more meaningful place and we don't need to pay up for that so we expect those to probably.
Either move out or to.
To be more expensive.
Very good and then as a follow up.
You highlighted your net charge off ratio I think.
The lowest.
In about this.
Okay.
Pointed to net charge offs initially probably staying around the low levels you saw in the fourth quarter gradually in the second half of the year start to head towards maybe normalization.
Is that based on just because the rates are below that.
It's hard to maintain that or is it.
Formulaic or some underwriting that you have done that says no.
Sure.
We started to see higher charge offs later in the year excluding of course the acquisition.
In fluids.
Reported numbers.
Yes, it's not an underwriting changes.
It's a reality that.
Obviously consumers and businesses with propped up by stimulus consumers in particular, a lot of that stimulus is running out in this quarter in terms of the child care.
<unk> tax credit.
We have been unusually low hazard as has the.
The industry. So I think that our expectation is we would start to normalize because.
The run off of the stimulus, which starts manifesting itself in the second half of the year.
But that being said we still.
I think charge offs will be rather low lower than history.
And 25% to 35 basis points for 'twenty two.
If the economy continues to perform and.
And consumers do well in managed money well, maybe maybe our charge offs at the lower end of that range.
No.
A bit of it is trying to anticipate.
When normal quote normalization will occur.
Very good thank you for the color.
Sure.
Your next question is from the line of Matt O'connor with Deutsche Bank.
Good morning, good morning it.
It might be a little bit too early.
I'm sorry about this but given our rate expectations have increased from <unk> when does that start factoring into how youre underwriting.
Because obviously if rates go up to 30% or even more so it does put pressure on the borrowers.
Well I think Matt one thing so we're talking about $4 25 basis point moves to get off of virtually zero.
If you think of our consumer the consumer portfolios, our fixed rate portfolio. So they don't end up having much of an interest rate shock for moves.
On the on the corporate banking side.
Again four moves on them.
We've been monitoring our customers, we know, which where they stand and lot of them hedge we would expect as rates starting to start to move we actually put all of our customers would put on more hedge.
Protection, if you will.
So we again, we don't see a lot of payment shocks. There I think it's the risk is Brendan a stimulus and.
And also is there something unique in a given business or industry that could drive losses higher versus rates.
At this point.
Only other thing I'd say is a normal course of business and when underwriting credits were always dressing or interest rate sensitivity and among other things that might occur so that would not be a change in our common current practice.
Okay, and then just separately and I apologize if I missed that.
Capital markets revenue has been strong all year and it did increase.
Run rate.
For 'twenty, two but we have seen some of your peers have really strong cap market.
<unk> and I think part of it might just be a mix issue, but maybe you could talk to that if you do that earlier.
I'll have to look at the transcript.
No no I think it's a good question. If you just look at the bulk of our capital markets revenue distributed across both capital raising and environment Advisory services, So whether it's real estate permanent placement M&A.
Loan syndications or fixed income transactions.
We are generating relatively.
Similar amounts of revenue across those platforms. So we got good diversity now we've added clear sight advisers and we've added some ball capital.
So.
When you consider the contribution that those acquisitions will make in concert with the businesses that.
Our product capabilities.
<unk> that we've developed with.
Thank the run rate of 90 to 110 per quarter is appropriate.
Okay. Thank you.
Your next question is from the line of Stephen Scouten with Piper Sandler.
Good morning.
Yes.
Good morning, Thanks, so much.
Just one clarifying question first I wanted to make sure David from your earlier commentary that the loan growth the 4% to 5% does include the run off of Pvp or is it ex PPP impact no. It includes that that was one of the important points that includes overcoming that and having four and a half.
I mean, 4% to 5% growth on the average that you see for the year and that's in our supplement.
That's what I thought I heard thank you.
Great and then maybe one other question I had is can you talk a little bit about the handoff kind of from the hedging.
Income to the greater rate sensitivity that obviously now you are pulling forward a bit I know you have some detailed here on slide 20.
But I'm just kind of wondering if you can walk through that or is there the possibility that on a quarter to quarter basis. We could see some decline is that $114 million run rate kind of pulls down and the impact of higher rates pulled it back up.
Well I mean.
You can always have a little timing issue from a quarter quarter to quarter, but.
We've got a number of things going on that chart you can see in particular, our growth our loan growth in our interbank transaction that we had but a good portion of our hedge portfolio is locked in and were adding the sensitivity I forgot to ask the question earlier, but we added a little bit of sensitivity.
To help us in the second half of the year.
The key thing on the early moves too is that where we're still very asset sensitive because of our deposit base and so when you start seeing the first couple of moves.
Beta is pretty close to zero.
And so.
I think that will aid in the handoff, but it might not be perfect, but if youre looking at that.
We're making an investment in as over a period of time, we've kind of.
We are well positioned to grow as the economy continues to grow we get higher rates and Thats, where <unk> really shines.
Our deposit base.
That low core low cost core deposit base of ours.
Has been a differentiator for us because you haven't seen we haven't been able to extract the value out of it because we've been in such a low rate environment, but now we're starting to see that opportunity. If in fact, we get the rate increases that the that the Forbes have baked in.
Okay. That's very helpful and just one other point on that chart is the impact of organic growth. Obviously is increasing in each subsequent year in 'twenty. Three 'twenty four is that to convey that you think organic growth can be even better from a loan growth perspective, or just that it will be more meaningful given it will be at higher rate.
Well, it's a little bit of both I think we can continue to see absolute balance growth.
We've acquired new portfolios and as I mentioned, so just one example is interbank.
We added $3 billion net production there historically had been about $1 seven where in a lot of states and we have.
Distribution is far better.
And our bank than what they would have had.
And they were our regulated energy company right. So we have the ability to.
To take that to a new level and so that's just one example, that's why we continue to make investments because we see opportunities to take our portfolio and be able to push that through our network and all the people that we have working for us to continue to grow your.
Youre also getting helped by the rate environment. So that's baked into that 4% to 6% compound annual growth rate as well.
Perfect that's encouraging thanks for the color.
Your next question is from the line of Christopher <unk> with Wells Fargo.
Good morning, good morning.
So my question is about the 2023 expenses last month, you said two 5% was kind of.
Core run rate for at least to think about wage increases is that kind of a good starting point to think about expenses for next year.
Actually Chris we've we've had.
We've seen some inflation this.
This year that number is going to be a little bit higher as we think about merit increases payments, we need to make to retain certain folks in particular people that are in the technology side of the house.
Recruiting those those type things so that $2 has a little bit higher than that now that is baked into the guidance. We gave you.
So yes.
So I guess bottom line is we have experienced inflation and we expect that to persist into 2022.
Chris <unk> question was around 2023, if I heard you correct Chris.
That's correct.
And that.
That inflation, that's not transient.
Can be in the run rate for 'twenty, two and then Youre going to continue now will you be able to revert back to merit increases that are more consistent in 'twenty three.
Like we had in the past and I think that's.
That's accurate.
Yes, I guess I'm trying to figure out is the difference between deal related.
Cost that youre seeing this year versus <unk>.
Whether it be more of a run rate inflation or wage pressure.
Main thing is of the 3% to 4% that we're going to experience.
The vast majority of that is related to the acquisitions that we had.
Okay, and then one quick follow up please.
Last month, you said I think 2% was a good starting point to put money to work and given kind of a high level of dry powder or even with that.
The surge deposits is that still your thought process or do you think it's going to be at a higher level now given where the 10 years already.
No. We still think so we think the short end. This week, we told you that.
Probably half.
For short term rate increases going in this year, but we still think that the 10 year kind of hangs out in approaches 2% by the end of the year. So it doesn't move as much we do think there's opportunities and there's a lot of volatility there if we see the ability to put a $1 billion.
Two or more to work.
In the Securities book.
And we're convicted on that we'd be happy to we have more cash.
Idle cash than most everybody.
Because we just have been reluctant to want to take the duration risk because we just don't think we are appropriately compensated for it that being said things can change and if we see closer to that 2% on the 10.
That may.
First way to us to put a little bit more to work now.
Now remember, we're getting paid for all the increases on the short run short rate with the money at the fed So we're getting paid a little bit more there.
Thank you.
Your next question is from the line of Vivek <unk> with Jpmorgan.
Good morning, Hi, David.
Hi, Jon.
So just a clarification on a couple of the last two questions. So you said if the tenure gets closer to 2% with some people say do you have anything factored into your NII guidance or.
The reinvestment of some of that liquidity or not yet no we did not.
That would be on top of what we're giving you.
Okay and then on the.
On the expense question that was just asked so are you assuming the incentive comp increase that you had in 'twenty one is that.
Stays at that level and yet 22 guidance.
No, it's not forecasted to stay at that level.
That was okay.
Incentive comp was up I think across the industry and we don't forecast that it would remain at that level at this time.
Okay, and then partly because youre, assuming some of those revenues will not continue like mortgage.
Capital markets well no.
But given you are now a revenue growth, but that's all baked into the budget and so.
Don't get you don't get compensated.
At that.
Level over par if you hit your budget you got to have a much better year than that which we and most of the industry players did this year, but you reset your expectations now you're back down to par got to start all over again.
That makes sense.
Increasing targets so that will have.
The impact of reducing incentives.
Right right. Okay makes sense and then last one for both of your loan growth you have talked about.
Strong pipelines.
Which implies that youre expecting loan growth to remain good I you've seen that.
How are you seeing January has that continued to be strong because we obviously saw a big pick up later in the fourth quarter and is that continuing in these first.
Couple of three weeks.
Pipelines are still still good customers are optimistic.
They are.
Thank hopeful that we will see trends continue they're prepared to make investments.
<unk> are still constrained in some measure by some uncertainty and shortage of labor and a lot of cases, but we do have there are a lot of customers who are actively looking at investments and want to expand their balance sheets investment businesses.
Same is true of consumers who are.
And so we do expect to continue to see loan growth.
Okay, great. Thank you.
Your final question is from the line of Jennifer <unk> with <unk> Securities.
Good morning, Jennifer.
Good morning.
Could you just talk about your interest now in more non bank acquisitions.
If that's the case.
Our interest lies with a strong defense as well.
In terms of revenue diversification.
So.
We do continue to have an interest in non bank acquisitions.
I'd like to I think continue to add to some of the consumer lending capabilities. We have acquired if those opportunities arise invest.
Invest in capital markets.
I think that got a nice return on those investments and been able to leverage those new capabilities to expand relationships and opportunities within wealth management.
Always looking to acquire mortgage servicing rights of those are available and to potentially add to our mortgage business. So those would be a couple of.
Areas, where we would make investments.
Okay, great. Thanks, so much.
Thank you I will turn the call back over to John Turner for closing remarks.
Okay, well thank you.
Often proud of 2021 and all that our associates have accomplished during some very challenging times staying focused on our customers on each other.
First thing in our communities. We think we are carrying a lot of momentum into 2022.
Very optimistic about the prospects of it.
Emerging and good strong economy.
And so I appreciate your interest and support thank you very much.
This.
Today's conference call you may now disconnect.
Okay.
Okay.
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