Regions Financial Corp
NYSE:RF
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Regions Financial Corp
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Good morning, and welcome to Regions' Financial Corporation's Quarterly Earnings Call. My name is Natalia, and I'll be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Dana Nolan to begin.
Thank you, Natalia. Welcome to Regions’ fourth quarter 2021 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information are available in the Investor Relations section on our website. These disclosures cover our presentation materials, prepared comments and Q&A.
I'll now turn the call over to John.
Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. We're very pleased with our fourth quarter and full year results. We achieved a great deal despite a challenging interest rate in operating environment. Earlier this morning, we reported full year earnings of $2.4 billion in record pre-tax, pre-prevision income of $2.7 billion.
Despite continued economic uncertainty, we remain focused on what we can control and our efforts are paying off. We grew consumer checking accounts by 3% and small business accounts by 5%. Notably, our 2021 net retail account growth exceeds the previous three years combined and represents an annual growth rate that is three times higher than pre-pandemic levels.
We increase new corporate banking group loan production by approximately 30% and generated record capital markets revenue. Through our enhanced risk management framework, we deliver our lowest annual net charge off ratio since 2006. We made investments in key talent and revenue facing associates to support strategic growth initiatives.
We continue to grow in diversify revenue through our acquisitions of InterBank with all capital partners and Clearsight advisors. We successfully executed our Libor transition program to ensure our clients were ready to move to alternative reference rates. We continue to focus on making banking easier through investments in target markets, technology and digital capabilities. We surpassed our two-year, $12 million commitment to advanced programs and initiatives that promote racial equity and economic empowerment for communities of color.
Before closing, we're extremely proud of our achievements in 2021, but none of these would've been possible without the hard work and dedication of our nearly 20,000 associates. The past year posed 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'll 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 compliment the enhanced alerts, time-order posting process as well as our bank loan certified checking product, we launched late 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 Dave will provide you with some select highlights regarding the quarter.
Thank you, John. Let's start with the balance sheet, including the impact of acquired loans from the InterBank transaction, adjusted average and ending loans group 6% and 7% respectively during the quarter. Although business loans continue to be impacted by excess liquidity, pipelines 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 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 continue to increase this quarter to new record levels. The increase includes impact of InterBank deposits acquired during the fourth quarter, as well as continued growth in new accounts and account balances. We're continuing to analyze our deposit base and pandemic related deposit inflow characteristics in order to predict future deposit behave.
Based 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 or like to be more rate sensitive, especially later in defense cycle. While we expect a portion of the surge deposits to be rate sensitive, you will recall that the granular nature and generally rate insensitive construct of our overall deposit base represents 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 quarters reported margin by 51 basis points. Our adjusted margin was 3.34% 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 a 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 million 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 today, 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 a higher yield curve in an anding economy.
Now let's take a look at fee revenue and expense. Adjusted non-interest income decreased 5% from the prior quarter, primarily due to elevated other non-interest income in the third quarter that did not repeat in the fourth quarter. Organic growth and the integration of Subal Capital Partners and Clearsight 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 CBA and DBA.
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 a 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 2020, but once fully ruled 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 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 non-interest income increased approximately $400 million over this same time period. Through our ongoing 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 3.5% to 4.5% compared to the prior year, driven primarily by growth in 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 non-interest expense, adjusted non-interest 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 increased headcount 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 non-interest 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 record low to 20 basis points driven in part by the addition of InterBank in the fourth quarter. Full year net charge offs totalled 24 basis points, the lowest level on record since 2006. Non-performing loans continue 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 1.79% of total loans, while the allowance as a percentage of non-performing loans increased 66 percentage points to 349%. We expect credit losses to slowly begin to normalize in the back half of 2022 and currently expect full year net charge off to be in the 25 basis point to 35 basis point range. With respect to capital, our common equity tier one ratio decreased approximately 130 basis points to an estimated 9.5% this quarter.
During the fourth quarter, we closed on three acquisitions, which combined, absorbed approximately $1.3 billion of capital. 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 9.25% to 9.75% operating range.
So wrapping up on the next slide are 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 the economic recovery continues, pre-tax pre-provision income remained strong, expenses are well controlled, credit risk is relatively benign, capital and liquidity are solid, and we're optimistic about the pace of the economic recovery in our markets.
With that we're happy to take your questions.
[Operator instructions] Your first question is from the line of Erika Najarian with UBS.
Hi. good morning. So just going to actually, I didn't expect to ask this question, but the feedback that I got from investors in terms of the performance today, obviously your outlook is quite upbeat, is that the tangible book dilution from the deals that you announced or rather closed in the fourth quarter surprised. And David, I'm wondering if you could share with us sort of the earned back period you expect for these deals on tangible book value?
Well, we look at several factors not just tangible book value. We look at diversification of revenue. We look at return on investment because when you -- the alternative is buying your stock back, which also has a reduction in a tangible book value. So you're trying to look at the trade off between how you put your capital to work, frankly, I can't even remember what the payback was.
If we were looking at a bank acquisition, that's a little different where, we would expect a payback period in three years or less, but in this case, we're looking at diversification and being able to grow and return on that investment is higher than the return we would've had if we bought our shares back.
Your next question is from the line of Betsy Graseck with Morgan Stanley.
Couple of questions, first on the announcement that you made yesterday on the changes to the overdraft and sufficient fund 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 '23, need to understand how you're thinking about an annualized impact would be looking like?
yeah, so the guidance we provided Betsy is if you go back to 2019, take 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 the changes are implemented and annualized.
And that includes all the things we already have done too. So it's a cumulative number. So if you go back to that, you can calculate right and round numbers. We'll be half, we're going to have half to maybe slightly more than that done in 2022. And so, you can double that or close proximity of what the total would be.
And when you say the service charges from 2019, you're talking about the service charges from 2019 in your income statement, not what shows up as regulatory like overdraft
That's correct.
And, we think about it that way. Because, ultimately and all 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 2010, '11 timeframe and come forward, we've been able to significantly grow non-revenue while overcoming the loss of revenue associated with reg and other changes. We expect the same will be true as we look forward relative to the change we're making here.
And Betsy, just to help you out a little, if you go into our public filings and our supplement in 2019, our service charge number was $729 million. It's off that number.
Right. Right. Okay. I was just going to confirm that. All right. Great. Thank you. And then follow up question here, just on how you're thinking about the Subal acquisition and how that's going to feed into not only the income statement I heard you talk about it's in the capital markets revenue line, but maybe help us understand, is there any balance sheet impact here and the expectation that you have to grow this business from where it is today?
Yeah. So I would say the balance sheet impact will be modest. We'll have an opportunity to develop relationships that might lead to our providing credit to customers and/or opening deposit relationships. We expect that to be true for sure. The primary benefit we derive from Subal is the 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 a Fanny license, Freddy licenses for large and small dollar, CMBS capabilities, we can bank our real estate customer's needs across the spectrum.
And, 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 in 2021 will exceed $60 million. That's from $0 million 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. The portfolio has performed very, very well and we think this gives us an opportunity to extend those relationships and drive additional profitability.
And there's been some pretty recently some significant uptick in that demand for that product, right?
Yes. And, again, I think if you just look at the multifamily market and it's awfully good and those developers who like to buy and build and hold want access to both the Fanny products and the Freddy products from time to time and we've again, found that to be a great source of revenue and a wonderful way to build stronger, deeper relationships with that customer segment.
Your next question is from the line of John Pancari with Evercore ISI.
On the loan growth front, I wanted to see if you can maybe give a little more color on the 4% to 5% growth expectation I have for the year and maybe if you can unpack it by a little bit of color on the growth you expect for commercial and CRE and consumer and how that could play out for the year. Thanks.
Yeah. Hi John, it's David. So first thing we have to overcome, it depends on if you look at all the average, which is where the 4% to 5% first thing you have to do is overcome PPP average, which is about $2.7 billion. So put that in your model. And if you look at areas where we can grow, clearly, we're going to get benefit off InterBank having a whole year of InterBank along with its growth that we expect and so that's a big driver of our averaging.
Mortgage ought to have -- it may not have as much production as we have in '21 or '22, but we still believe we'll grow the balance sheet quite nicely from there. We expect credit card to continue to grow and then on commercial even a after you consider overcoming the PPP runoff on average of 2.7%, we think we can still grow that on top of it.
As we look at the industries that we were particularly strong in '21 in the commercial space, financial services, healthcare, transportation or our asset based lending, home builder 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.
Right. Okay. All right. Thanks. And then separately on the operating leverage expectation, based upon your guidance, you're looking for about 50 basis points operating leverage. Could you just talk to us about how if fed hikes maybe prove to be less than expected, is that 50 basis points operating leverage still obtainable? Do you still have leverages to pull to be, to basically generate that despite any 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 in there, then we, we double down on expense management and we obviously 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 that showed you that roughly 50 basis points or more, and we have things we can do during the year that can help us get there, but yeah, rates not coming in at the pace we think, or as many as we think we'll put pressure on that calculus, but we wouldn't give up on it just cause of that.
Your next question is from the line of Bill Carcache with Wolfe Research.
Thank you. Good morning. Following up on 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.
So how does the number of hikes, I guess, to the extent that we do more, influence to the expense line and does that 3% to 4% outlook hold? And on top of that, it would be great if, you could also discuss your confidence level and being able to control the expense base, such that, you continue that you still achieve that positive operating leverage, even under different inflation scenarios.
Well, yes, a lot of there. So let me see if I can help you out. So on the expense side of 3% to 4%, a large portion of that substantial portion of that's 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 those coming through and that's the biggest single driver of 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 in just one area, but it's hours and benefits and furniture, fixtures and equipment and occupancy and vendor spend, all those things, we are all over and John has us our continuous improvement program 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 four 25 basis points moves each quarter, So on average, you get two during the year.
And, it depends on, will we get 25? Will it be more than that? Will it be more than four or less than four? You have to we've told you in our guidance that each 25 basis points or $60 million to $80 million for. So you can put your model and kind of work with that. But back to the question earlier, I think from John Pancari, in terms of operating leverage, we are committed to generating positive operating ledge over time. And when things get more challenging, we'll do what we can to manage expenses. So I'll leave it at that.
Your next question is from the line of Ebrahim Poonawala with Bank of America.
I guess one just question follow up on the overdraft. It's been a big over hang on the stock and I get your guidance around the impact this year, David, but just talk to us downside risk the industry seems to be moving away from your -- give us a sense of like the use case of why there's a subset of order fees that needs to exist and why you feel okay both competitively and from a regulatory standpoint, but that component of fees will be defendable.
Well. So as we put 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 and time and need. And there's a cost to that.
And now we've done some things, we've given alerts, we've changed our posting order, we're going to give short -- small dollar loans. We're going to give you 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 to 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 no more than three per day to 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 Region's footprint. Give us a perspective in terms of the opportunity that you have there both in terms of what InterBank does today and how to scale that up?
Yeah. So we acquired about $3 billion worth of loans, right at the end of the -- at the beginning of the fourth quarter. We'll get all that in our averaging numbers, which is where our 4% to 5% growth is for next year, year. If their production had been about 1% of the industry, which equated to about $1.7 billion 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 are 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 contractors that offer products to consumers. So it is a big portion of our growth expectation, and we couldn't be more excited about adding InterBank and the people that work there to the Regions family.
Your next question is from the line of Ken Usdin with Jefferies.
Hey, good morning guys. Another, just follow up on the expenses, David. Can 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 like offsets in terms of, continuous improvement type of efficiencies?
Yeah. Ken, as I mentioned earlier, the overwhelming majority of our growth is related to the acquisitions that we have. We've been able and will continue to control our core expenses by managing the things I talked about managing salaries and benefits and headcount and our square footage whether it be branch or office square footage, when you manage your headcount, you manage the number of computers you have to have. It's 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 that we get the best price 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 to create opportunities to reinvest. So embedded in the 3% to 4% are the investments that we're making in people in our 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 that's embedded in the numbers that we're giving you, but cutting to the chase of the 3% to 4%, the vast majority of that is related to the acquisitions that we announced.
Yeah. Understand and I apologize, I missed that comment earlier. Follow up separately, David, then just on that topic you spoke -- you terminated a little bit more this quarter. I just want to understand like, what percentage of that book is now kind of locked out from either just that you've terminated or you understand the maturity schedule and we see from your -- the color and what that expected trajectory is like. So I don’t think there's much change, but can you let us know if there's anything different in terms of how you're viewing that portfolio going forward? Thank you.
Yeah, Ken so we continue to read the reason where the Fed is going in the market with regards to rates. So we took some of our protection off, it unwinds 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 for us to make sure that we have the proper sensitivity when we expect rates to go. We do. And now it's just timing.
A month ago, maybe a, a rate increase or two. Now, today it's four. This morning, there are people talking about, maybe it will only be a couple. So, there's a -- this is very volatile and we're trying to do the best we can to anticipate where those rate moves are going and we've locked in a good portion of our fair value if you will, 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 for answers, David.
What we really want to do is we're not trying to top tick our margin in 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 could have on NII with a 100 basis point move.
But for us is really trying to anticipate where the market's going to move. So we can take full advantage 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, that's not helpful to us score our shareholders over time.
So we're, we're trying to get back. We had given you a range of getting up to our margin in the 370% range with a normal interest rate environment. We're probably going to be in the higher 330 on a core basis this quarter coming up. So we'll have a little bit of growth there, but it's just making incremental moves on the portfolio as we see the interest rate environment change.
Your next question is from the line of Gerard Cassidy with RBC.
Morning, John. 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 of being 25% due to the higher betas on your third deposits. Can you tell us how large on the surge deposits on the [indiscernible]? And can you give us some color on how you define surge deposits?
Yeah, so our total surge deposits just mathematically are about $39 billion, Okay. And so when you think of those surge deposits of beta reaction, there's really two things that are happening with, with those surge deposits. Of the surge deposits, about 65% of those, we think would have a -- actually a lower beta that -- I'm sorry, a higher beta that's $25 billion. And we would put that beta at 75%, right? They think it's going to be pretty high, pretty reactive.
If you look at the other 35%, we think based on the nature of those accounts, that those deposits went into, that beta is going to be similar to our legacy beta with beta, which is 10% percent. 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 a hundred 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 to and our guidance that we're, that we're giving you
And, David on the surge deposit, are those excess non-operating deposits from your corporate customers or the consumers, that excess money left over from the stimulus?
Yeah, big, a big portion of those surge deposits are corporate deposits that came in that because that's the best place they could put their money. And that's why we believe, that 65% of those deposits. So call it $25 billion that 65% of the 39 it's going to be very reactive because they're corporate customers, that are likely to put, want to 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 you said the lowest in about 15 years, point to net charge-offs initially probably staying around the low levels. You're sore in the fourth quarter, gradually in the second half of the year, start to head toward maybe normalization. Is that based on just because the rates are so low, that it's hard to maintain that, or is there formulaic or some underwriting that you have done that says, no, we we're going to charge slow, start to see higher the charge us later in the year, excluding of course the acquisition that may influence the reported numbers?
Yeah. It's not an underwriting change. It's a reality that obviously consumers and businesses were propped up by stimulus consumers in particular. A lot of that stimulus is running out this quarter, in terms of the child care tax credit. We've been unusually low hasn't, as has the industry. So I think that our expectation is we would start to normalize because of the runoff of the stimulus, which starts manifesting itself in the second half of the year.
But that being said, it, we still think charge-off will be rather low, lower than history at 25 to 35 basis points for '22. If the economy continues to perform and consumers do well and manage money well, maybe, our charge off at the lower end of that range, so a bit of it is trying to anticipate when normal normalization will occur.
Very good; thank you for the color.
Your next question is from the line of Matt O'Connor with Deutsche Bank
Good morning. It might be a little bit too early to be thinking about this, but, given rate expectations of increase so much, when does that start factoring into how you're underwriting?; because obviously, if rates go up to 3%, or even more, it does put pressure on borrowers.
Well, I think Matt, one of the things, so we're talking about 4 25 basis point, moves to get off of virtually zero. If you think of a consumer, a lot of the consumer portfolios or fixed rate portfolios, so they don't end up having much of an interest rate, shocking four 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 a lot of them hedge.
We would expect as rates starting to start to move. We actually put on 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 running out to stimulus. And also is there something unique in a given business or industry that could drive losses higher versus rates at this point.
But, I only other thing I'd say is the normal course of business in -- when underwriting credits, we're always stressing 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 apologies if I missed it. Your capital markets, revenue's been strong all year and, and you did increase kind of the run rate for '22, but we've seen some of your peers have really strong cap markets fees in 4Q. And I think part of it might just be a mixed issue, but maybe you could talk to that if, you didn't early and if you did, I'll, look at the transcript. Thanks. Right?
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 advisory services. So whether it's real estate, permanent placement M&A loans, indications, or a fixed income transact actions we are generating relatively similar amounts of revenue across those platforms.
So we've got good diversity. Now we've added ClearSight advisors and we've added Sabal capital. And so when you consider the contribution that those acquisitions will make in concert with the businesses that or products capabilities that we've developed we think the run rate of 90 to 110 per quarter is appropriate.
Okay. Thank you.
Your next question is from the line of Steven Scouten with Piper Sandler
Yeah. Good morning. Thanks. So I 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 runoff of PPP, or is it ex-PPP impact?
No, it includes that it's that was one of the important points that it 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 it's in our supplement.
Perfect. That's what I thought I heard. Thank you. That's great. And then maybe the one other question I had is can you talk a little bit about the hand-off kind of from the hedging income to the, the greater rate sensitivity that obviously now you're pulling forward a bit. I know you have some detail there on slide 20, but I'm just kind of wondering if you can walk through that. Is there the positive ability that a quarter to quarter basis we could see some decline is that, $114 million run rate kind of pulls down and the, the impact of higher rates pulls it back up?
Well, I mean, it, it, you could always have a little timing issue from a quarter – quarter-to-quarter, but we've got a number of things going on that chart that you can see in particular our, our growth loan growth and our EnerBank transaction that we had, but a good portion of our, hedge portfolio is locked in and we're adding the sensitivity.
I've 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 we're, we're still very asset sensitive because of our deposit base. And so when you start seeing the first couple of moves, that beta is pretty close to zero. And so, I, think that'll aid in the handoff, but it might not be perfect.
If you're looking at the, making an investment in us over a period of time, we kind of, we think we're well positioned to grow as an economy continues to grow. We get higher rates and that's where regions really shines; because our deposit base that low core, low cost core deposit base of ours has been a differentiator for us. It's just, you haven't seen the, 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, that's very helpful. And just the one other point on that chart is the impact of organic growth obviously is increasing in each subsequent year in '23 and '24. 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 EnerBank; where we, added $3 billion that production there historically had been about billion seven we're in a lot of states and we have a distribution that's far better in our bank than what they would've had. And they were a regulated energy company, right?
So we have the ability to, 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 to take a portfolio and be able to push that through our network and all the people that we have working for us to continue to grow. You're also getting help by the rate environment. So that's baked into that four to 6% compound annual growth rate as well.
Perfect. That's encouraging. Thanks for the coming. Yeah.
Your next question from the line of Christopher Barath with Wells Fargo
Good morning. So my question is about 2023 expenses. Last month you said 2.5% was kind of a 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 had we've, we've seen some inflation this year that number's 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, type things. So that two and a half's a little bit higher than that. Now that is baked into the guidance if we gave you. And so I guess bottom line is we have experienced inflation and we expect that to persist into 2022?
Now Chris's question was around 2023. If I heard you correctly. Chris?
That's correct. And that, inflation that that's not transient that's going to be in the run rate for '22 and then you're going to continue now, will you be able to revert back to merit increases that are more consistent in '23? Like we had in the past and I think that's, accurate. I guess I'm trying to figure out is the difference between deal related cost that you're seeing this year versus what is going to be more of a run rate inflation or, or wage pressure?
Well, the, the main thing is of the three 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. So last month you said, I think 2% was a good starting point to put money to work and given kind of your high level of dry powder, even with the, surge deposits. Is that still your thought process or do you think it's going to be a higher level now given with the 10 years already?
No, we still think so. We think the short end as we, we told you that we probably have four short term rate increases going in this year, but we still think the, the 10 year kind of hangs out and approaches 2% by the end of the year. So it does move as much. We do think there's opportunities. There's a lot of volatility there. If we see the ability to put a billion to more, to work in the securities book and we're convicted on that, we'd be happy to, we, 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're appropriately compensated for it.
That being said, things can change. And if we see closer to that 2% on the 10 that may persuade us to put a little bit more to work 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.
Your next question is on the line Vivek Juneja with JP Morgan.
Hi David; Hi, John; So just to clarification on couple of the last two questions. So you said if the tenure gets closer to 2%, you might with some to work. So do you have anything factored into your NII guidance for reinvesting some of that liquidity or not?
No, we do not. That would be on top of what we're giving you.
Okay. And then on the, on the expense question that I was just asked, so are you assuming the incentive comp increase that you had in '21 is that stays at that level in your '22 guidance?
No. It's not forecast as to stay at that level. That was a, incentive comp was up, I think, across the industry and we don't forecast it. It would remain at that level at this time.
Okay. And then partly because you're assuming some of those revenues will not continue like mortgage and capital markets?
Well, no, we, given here now our revenue growth, but that's all baked into the budget. And so you, you don't get, you don't get compensated at that over par if you hit your budget, you got to have a much better year than that, which is what we, and most of the industry players did this year, but you reset your expectations. Now you're back down the par you got to start all over again.
Does that make sense?
We're yeah, increasing targets, so that will have the impact of reducing incentives.
Right, right. Okay. Makes sense and the last one for both of you loan growth, you talked about very strong pipelines which implies that you're expecting low and growth to remain good. Are you seeing that how are you seeing January? Has that continued to be strong because we obviously saw a bigger pick up later in fourth quarter. Is that continuing in these first couple, three weeks?
Yeah. Pipelines are still good. Customers are optimistic. The, they are, I think, hopeful that we'll see trends continue. They're prepared to make investments. Investments are still constrained in some measure by some uncertainty and by shortage of labor in a lot of cases.
But we do have there are a lot of customers who are actively looking at investment and want to expand their balance sheets, invest in businesses. And the same is true of consumers who are spending. And so we do expect to continue to see loan growth.
Your final question is from the line of the Jennifer Demba with Truist Securities.
Good morning, Jennifer.
Good morning. Could you just talk about your interest now and, and more non-bank acquisitions and, and where, if, if that's still the case where, where your interest lies, where, where the strongest interest lies terms of revenue diversification.
Yeah. So we're, we do continue to have an interest in non-bank acquisitions. We'd like to, I think, continue to add to some of the consumer lending capabilities that we have acquired. If those opportunities arise, invest in capital markets that I think that got a nice return on those investments and been able to leverage those new capabilities to expand relationships.
We're interested in opportunities within wealth management, always looking to acquire mortgage servicing rights, if those are available and to potentially add to our mortgage business. So those would be a couple of areas where we would make investment.
Great. Thanks so much
Thank you. I will turn the call back over to John Turner for closing remarks.
Okay. Well, thank you. We are awfully proud of 2021 and all that our associates have accomplished. During some very challenging times staying focused on our customers on each other, investing in our communities. We think we are carrying a lot of momentum into 2022 very optimistic about the prospects of a, of emerging and good strong economy. And so appreciate your interest and support. Thank you very much.
This concludes today's conference call. You may now disconnect.