Regions Financial Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
January 20, 2022

There are 14 speakers on the call.

Operator

Good morning, and welcome to Regions Financial Corporation's Quarterly Earnings Call. My name is Natalia, and I will 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. I will now turn the call over to Dana Nolan to begin.

Speaker 1

Thank you, Natalia. Welcome to Regions' 4th 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 of our website. These disclosures and I will now turn the call over to John.

Speaker 2

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. We're very pleased with our 4th quarter and full year results. We achieved a great deal despite a challenging interest rate Earlier this morning, we reported full year earnings of $2,400,000,000 and record pre tax pre provision income of $2,700,000,000 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%.

Speaker 2

Notably, our 2021 net retail account growth exceeds the previous 3 years combined and represents an annual growth rate That is 3 times higher than pre pandemic levels. We increased new Corporate Banking Group loan production by approximately 30% and generated record capital markets revenue. Through our enhanced risk management framework, we delivered 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 and diversify revenue through our acquisitions of Interbank, Saval Capital Partners and ClearSite Advisors.

Speaker 2

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 2 year $12,000,000 commitment to advance programs and initiatives that promote racial equity in 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 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.

Speaker 2

Despite continued uncertainty, our associates remain steadfast. They continue to bring their best of 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.

Speaker 2

These changes represent a natural extension of our commitment to making banking easier for our customers and complement 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 total revenue expectation for 2022. Again, we're pleased with our results and have great momentum

Speaker 3

as we

Speaker 2

head into 2022. Now, Dave will provide you with some select highlights regarding the quarter.

Speaker 4

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 grew 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 4th quarter.

Speaker 4

In addition, production remained strong with line of credit commitments increasing $4,700,000,000 year over year. Consumer loans reflected the addition of $3,000,000,000 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.

Speaker 4

The increase includes the impact of interbank deposits acquired during the Q4 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. Based on this analysis, we currently believe approximately 35% $12,000,000,000 to $14,000,000,000 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 but are likely to be more Especially later in the Fed cycle. While we expect the portion of 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.

Speaker 4

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 $8,000,000 from the prior quarter, but will be less of a contributor going forward. Approximately 89% of estimated PPP fees have been recognized. Cash averaged $26,000,000,000 during the quarter and when combined with PPP, reduced 4th quarter's reported margin by 51 basis points.

Speaker 4

Our adjusted margin was 3.34%, modestly higher versus the 3rd 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 The hedging program contributed meaningfully to net interest income in the 4th quarter. The cumulative value created from our hedging program is approximately $1,500,000,000 Roughly 90% of that amount has either been recognized or is locked into future earnings from Hedge Terminations.

Speaker 4

Excluding PPP, net interest income is expected to grow modestly in the 1st quarter 85 strong 4th quarter ending loan growth as well as continued loan growth in the Q1, partially offset by day count. Regent's 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 $60,000,000 $80,000,000 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 4th quarter.

Speaker 4

Hedging changes to date support increasing net interest income exposure to rising rates, positioning us well for higher rates in 2022 beyond. In summary, Net interest income is poised for growth in 2022 through balance sheet growth and a higher yield curve in an expanding 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 further non interest income in the 3rd quarter that did not repeat in the 4th quarter. Organic growth and the integration of Sabal Capital Partners and Clearside Advisors will drive growth in capital markets revenue in 2022.

Speaker 4

Going forward, we expect Capital Markets to generate quarterly revenue of $90,000,000 to $110,000,000 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 The fee revenue, particularly as the purchase market and 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.

Speaker 4

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 20 22. But once fully rolled out, together with our previous changes implemented last year, we expect the annual impact to result 20% to 30% lower service charges revenue versus 2019. Based on our expectations around the implementation timeline, we estimate $50,000,000 to $70,000,000 will be reflected and 2020 two results.

Speaker 4

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 2011 levels. Since 2011, NSF and overdraft revenue has decreased approximately $175,000,000 and debit interchange legislation reduced card and ATM fees another $180,000,000 We have successfully offset these declines through expanded and diversified fee based services. And as a result, Total non interest income increased approximately $400,000,000 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.

Speaker 4

We expect 2022 adjusted total revenue to be up 3.5% to 4.5% 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 non interest expenses increased 5% in the quarter. Salaries and benefits increased 4% primarily due to higher incentive Base salaries also increased as we added approximately 660 new associates, primarily as a result of acquisitions that closed this quarter.

Speaker 4

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 4th quarter acquisitions, our 2021 adjusted core 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.

Speaker 4

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 remains strong. Annualized net charge offs increased 6 basis points from the 3rd quarter's record low to 20 basis points driven in part by the addition of Interbank in the 4th quarter. Full year net charge offs totaled 24 basis points, The lowest level on record since 2006.

Speaker 4

Non performing 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 1.79 percent of total loans, While the allowance as a percentage of non performing loans increased 66 percentage points to 3 49%. We expect credit losses to slowly begin to normalize in the back half of twenty twenty two 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 1 ratio decreased approximately 130 basis points to an estimated 9.5% this quarter. During the Q4, we closed on 3 acquisitions, which combined absorbed approximately $1,300,000,000 of capital.

Speaker 4

Additionally, we repurchased $300,000,000 of common stock during the quarter. We expect to maintain our So wrapping up on the next slide are our 2022 expectations, which we've already addressed. In closing, The momentum we experienced in the 4th quarter positions us well for growth in 2022 as the economic recovery continues. Pretax pre provision income remains strong. Expenses are well controlled.

Speaker 4

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

Thank you. The floor is now open for questions. You may remove yourself from the queue by pressing the pound key. We will pause for just a moment to compile the Q and A roster. Your first question is from the line of Erika Najarian with UBS.

Operator

Hi, good morning. So just going to actually, I didn't expect to ask this question, but the feedback that I from investors in terms of the performance today. Obviously, your outlook is Quite a beat, is that the tangible book dilution from the deals that you announced or rather closed in the 4th quarter surprised? And David, I'm wondering if you could share with us sort of the earn back period you expect for these deals on tangible book value.

Speaker 4

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 tangible book value. So you're trying to look at Trade off between how you put your capital to work. And frankly, I can't even remember what the payback was.

Speaker 4

If we were looking at a bank acquisition, that's a little different where we would expect a payback period in 3 years or less. But in this case, we're looking at diversification and being able to grow. And the return on that investment is higher And the return we would have had if we bought our shares back.

Operator

Your next question is from the line of Betsy Grintik with Morgan Stanley.

Speaker 4

Good morning, Natalia. Good morning. Good morning. Good morning.

Speaker 5

A 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,

Speaker 4

what that level would be? Obviously, as we

Speaker 5

think into 'twenty three, need to understand how you're thinking about an annualized impact would be So

Speaker 2

the guidance we provided, Betsy, is if you go back to 2019, take the total service charge revenue, The impact is going to be somewhere between 20% 30% of total service charge revenue Based on 2019 revenue, once all the changes are implemented and annualized.

Speaker 4

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. And round numbers We're going to have half to maybe slightly more than that done in 2022. And so You double that for close proximity of what the total would be.

Speaker 5

And when you see 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.

Speaker 2

That's correct.

Speaker 5

That's

Speaker 4

correct. Okay.

Speaker 2

And we think about it that way because I mean ultimately, 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 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, 2011 timeframe and come forward, we've been able to significantly grow Non revenue while overcoming the loss of revenue associated with Reg E and other changes, we expect the same will be true as we look forward Relative to

Speaker 4

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 2019, our service charge number was $729,000,000 So it's off that number.

Speaker 5

Right, right. Okay. I was just going to confirm that. All right, great. Thank you.

Speaker 5

And then follow-up question here just on How you're thinking about the Sauble 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?

Speaker 2

Yes. 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 SPAWL is The capabilities we have, permanent placement capabilities that we ultimately end up with, I think we're one of 4 or 5 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 CMBS capabilities, we can bank our real estate customers' across the spectrum. And as we transition 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 $60,000,000 That's from 0 in 2014 effectively.

Speaker 2

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.

Speaker 5

And there's been some pretty recently some significant uptick in that demand for that product, right?

Speaker 2

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 Fannie products and the Freddie products from time to time and we again found that to be a great source of Revenue and a wonderful way to build stronger, deeper relationships with that customer segment.

Speaker 5

Thank you.

Operator

Your next question is from the line of John Pancari with Evercore ISI.

Speaker 2

Good morning, John.

Speaker 6

Good morning. On the loan growth front, I want to see if you can maybe give us a little more color on the 4% to 5% growth 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.

Speaker 4

Yes. John, it's David. So first thing, we have to overcome it. It depends on if you're looking at it on the average, which We're at the 4% to 5%. First thing you have to do is overcome PPP average, which is about $2,700,000,000 So Put that in your model.

Speaker 4

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 a May not have as much production as we have in 2021 for 2022, but we still believe we'll grow the balance sheet quite We expect credit card to continue to grow. And then on commercial, even 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, in 2021 in the commercial space, financial services, Healthcare, transportation, our asset based lending,

Speaker 3

homebuilder

Speaker 4

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.

Speaker 6

Okay. All right. And then Separately, on the operating leverage expectation, based upon your guidance, you're looking for about 50 basis points positive operating leverage. Can you just talk to us about how if Fed hikes maybe It proved to be less than expected. Is that 50 basis points operating leverage still attainable?

Speaker 6

Do you still have leverage And to basically generate that despite any move by the Fed?

Speaker 4

Well, it certainly It 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 double down on expense management and obviously didn't get there this year nor did anybody else. 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 And that's why we gave you the guidance and 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.

Speaker 4

But yes, rates It's not coming in at the pace we think or as many as we think will put pressure on that calculation, but we wouldn't give up on it just because of that.

Speaker 7

Got it.

Speaker 8

All right.

Speaker 6

Thanks very much.

Operator

Your next question is from the line of Bill Carcache with Wolfe Research.

Speaker 9

Thank you. Good morning. Following up on the commentary around the 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 4 hikes next year, but some are expecting more than that. So how does the number of hikes, I guess to the extent that we get more influence the expense line, Does that 3% to 4% outlook hold?

Speaker 9

And on top of that, it would be great if you could also discuss your confidence level in being able to control the expense base such that You continue that you still achieve that positive operating leverage even under different inflation scenarios.

Speaker 4

Well, you asked a lot of there. So let me see if I can So on the expense side of 3% to 4%, a large portion of that, substantial portion of that is related to the acquisitions that we had. So we closed on 3 deals in the 4th quarter, 1 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. We don't do that in just one area, but it's hours and benefits and furniture fixtures and equipment and occupancy vendor spend, all those things we are all over.

Speaker 4

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 4 baked into our guidance that we just gave you, 4 25 basis points moves each quarter. So on average, you get 2 during the year. And it depends on will we get 25, will it be more than that, will it be more than 4 or less than 4? I mean you have to We've told you in our guidance that each 25 basis points is $60,000,000 to $80,000,000 for us.

Speaker 4

So you can put your model and kind of Work with that. But back to the question earlier, I think from John Piccari in terms of operating leverage, We are committed to generating positive operating leverage over time. And when things get more challenging, we'll do what we can to manage expenses. So

Operator

Your next question is from the line of Ebrahim Lhunawala with Bank of America.

Speaker 3

Good morning, Ebrahim.

Speaker 10

Good morning. I guess one just question follow-up on the overdraft. It's been a big overhang 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 here. Give us a sense of like The use case of why there's a subset of overlap 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.

Speaker 4

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 And there's a cost to that. And now we've done some things. We've given alerts. We changed our posting order.

Speaker 4

We're going to give short small dollar loans. We're going to give your paycheck up to 2 days available Yes, 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 overdrafts to no more than 3 per day too, which is one of the strongest in the industry.

Speaker 4

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.

Speaker 10

Noted. And I guess just a separate question around loan growth. Apologies if I missed it, but Talk to us about the EnerBank acquisition, what that means for growth, especially some of the non footprint. I think half of EnerBank is outside of the core regions footprint. Give us a perspective in terms of the opportunity that you have there, both in terms of what EnerBank does today and how to scale that up.

Speaker 4

Yes. So, we acquired about $3,000,000,000 worth of loans right at the end of the at the beginning of the 4th quarter. We'll get all that in our 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 $1,700,000,000 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.

Speaker 4

We are excited 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.

Speaker 11

Glad to take my questions.

Operator

Your next question is from the line of Ken Usdin with Jefferies.

Speaker 2

Good morning, Ken.

Speaker 12

Hey, good morning, guys. Another just follow-up on the expenses. David, can you help us understand of the 3% to 4 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?

Speaker 4

Yes. 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, 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 3rd 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.

Speaker 4

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 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've given you.

Speaker 4

But Cutting to the chase of the 3% to 4%, the vast majority of that is related to the acquisitions that we announced.

Speaker 12

Yes, understand. I apologize if I missed that comment earlier. A follow-up separately, David, then on the just On that swaps book, you terminated a little bit more this quarter. I just wanted to understand like what percentage of that book is now kind of locked out from either You've terminated or you understand the maturity schedule. And we see from your that your The color NII slide what that expected trajectory is like.

Speaker 12

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.

Speaker 4

Yes, Ken. So we continue to kind of read the tea leaves and where the Fed is going in the market With regards to rates, so we took some of our protection off. It 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 for us to make sure that we have the proper sensitivity when we We do.

Speaker 4

And now it's just timing. A month ago, maybe a rate increase or 2. Today, it's 4. This morning, there were 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 to anticipate where those rate moves are going.

Speaker 4

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 a pretty good spot.

Speaker 12

And do you have an upper balance of the sensitivity and how much you've let it float up? Thanks. Thanks for the answer, Steve.

Speaker 4

What we really want to do is, we're not trying to top tick our margin 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 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 to have an unusual pickup in any given period, whether it be a quarter or a year, It's not repeatable. That's 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 in the 3.70 range with a normal interest rate environment, we're probably going to be in the higher 3.30s on a core basis this quarter coming up.

Speaker 4

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.

Speaker 7

Thanks again, David.

Operator

Your next question is from the line of Gerard Cassidy with RBC.

Speaker 2

Good morning, John.

Speaker 3

David, can you elaborate further on Slide 8 where you give us the interest rate exposure and You talked about your deposit beta, particularly in the first one hundred basis points of being 25% Due to the higher betas on your 3rd deposits, can you tell us how large on the search Deposit is on the balance sheet. And can you give us some color on how you define surge deposits?

Speaker 4

Yes. So, our total Surged deposits just mathematically are about $39,000,000,000 okay? And so when you think of Those surge deposits in terms of beta reaction, there's really two things that are happening with those surge deposits. Of the surge deposits, about 65% of those, we think would have Actually a lower beta I'm sorry, a higher beta, that's $25,000,000,000 We would put that beta At 75%. All right.

Speaker 4

I 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 that beta is going to be similar to our legacy Beta, 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 in the last cycle, that's what the beta was. So that's the math that we've really gotten to in our guidance that we're giving you.

Speaker 3

And David, on the surge deposit, on the excess non operating deposits from your corporate The consumers that have excess money left over from the stimulus?

Speaker 4

Yes. A big portion of those surge deposits are corporate deposits That came in because that's the best place they could put their money and that's why we believe that 65% Of those deposits, call it $25,000,000,000 at 65% of the $39,000,000 it's going to be very reactive Because there are 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 be more expensive.

Speaker 3

Very good. And then as a follow-up, you highlighted your net charge off ratio. I think you said it's the lowest in about 15 You pointed to net charge offs initially probably staying around the low levels you saw in the 4th quarter, Gradually in the second half of the year start to head towards maybe normalization. Is that based on just because the rates are so low That is hard to maintain that or is there some formulaic or some underwriting that you have done that says no, we're We'll start to see higher net charge offs later in the year, excluding, of course, the acquisition that may have influenced the reported numbers.

Speaker 4

Yes. 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 as has The industry, so I think that our expectation is we would start to normalize because of the run off of the stimulus, which starts manifesting in the second half of the year. But that being said, we still think charge offs will be rather lower than history 25 to 35 basis points for 2022.

Speaker 4

If the economy continues to perform and consumers do well and manage their money well, maybe our charge offs are at the lower end of that range. So A bit of it is trying to anticipate when normal normalization will occur.

Speaker 3

Very good. Thank you for the color.

Operator

Your next question is from the line of Matt O'Connor with Deutsche Bank.

Speaker 8

Good morning, Natalia. Good morning. It might be a little bit too early to be thinking about this, but Given rate expectations have increased so much, when does that start factoring into how you're underwriting? Because obviously, if rates go up 2% to 3% or even more does put pressure on borrowers.

Speaker 4

Well, I think, Matt, one thing, so we're talking about 4.25 basis point moves to get off of virtually 0. If you think of a consumer, a lot of the consumer portfolios are Fixed rate portfolio, so they don't end up having much of an interest rate shock on 4 moves. On the corporate banking side, Again, four moves on them. We've been monitoring our customers. We know where they stand.

Speaker 4

A lot of them hedge. We would expect as rates starting to start to move, we actually put off our customers would put on more hedge protection, if you will. So again, we don't see a lot of payment shocks there. I think it's the risk is running out of stimulus And also is there something unique in a given business or industry that could drive losses higher versus rates at this point. But the

Speaker 2

only other thing I'd say is the normal course of business and 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 current practice.

Speaker 8

Okay. And then just separately and apologies if I missed it. Your capital markets revenue has been strong all year and you did increase kind of run rate for 2022. But we've seen some of your peers have really strong cat market fees in 4Q. And I think part of it might just be a mix issue, but maybe you could talk to that if you did it earlier.

Speaker 8

And if you did, I'll look at the transcript. Thanks.

Speaker 2

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 and A, loan syndications or fixed income Transactions, we are generating relatively similar amounts of revenue across those So we've got good diversity. Now we've added Clearside 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 Our products capabilities that we've developed, we think the run rate of $90,000,000 to $110,000,000 per quarter is appropriate.

Speaker 8

Okay. Thank you.

Operator

Your next question is from the line of Stephen Scouten with Piper Sandler.

Speaker 2

Good morning.

Speaker 13

Yes. Good morning. Thanks. So 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 that PPP impact?

Speaker 4

No, it includes that. That was one of the important points that it includes overcoming that and having 4.5 I mean 4% to 5% growth on the average that you see for the year and it's in our supplement.

Speaker 13

Perfect. That's what I thought I heard. That's great. And then maybe the one other question I had

Speaker 4

is, can you talk a

Speaker 13

little bit about the handoff kind of from the hedging Income to the greater rate sensitivity that obviously now you're pulling forward a bit. I know you have some detail there on Slide 20, but But I'm just kind of wondering if you can walk through that. Is there the possibility that on a quarter to quarter basis we could see some decline as that one $114,000,000 run rate kind of pulls down and the impact of higher rates pulls it back up.

Speaker 4

Well, I mean, you could always have a little timing issue from a Quarter to quarter, but we've got a number of things going on in that chart that you can see, Our loan growth in our interbank transaction that we had, but a good portion of our hedge portfolio is locked in And we're 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 we're still very asset sensitive because of our deposit base. And so when you start In the first couple of moves, that beta is pretty close to 0. And so I think that will aid in the handoff, but It might not be perfect, but if you're looking at making an investment in us over a period of time, we think we're well positioned to grow.

Speaker 4

As economy continues to grow. We get higher rates. And that's where Regions really shines because our deposit base, that low cost Core deposit base of ours has been a differentiator for us. It's just you haven't seen we haven't been able to 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 forms have baked in.

Speaker 13

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 2023 2024. 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?

Speaker 4

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, where we added $3,000,000,000 Net production there Historically, it had been about $1,700,000,000 We're in a lot of states and we have a distribution that's far better And our banks in which they would have had, and they were a regulated energy company, right? So we have the ability to take that to a new level.

Speaker 4

And so that's just one example. That's why we continue to make investments because we see opportunities 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 helped by the rate environment, so that's baked into that 4% to 6% compound annual growth rate as well.

Speaker 13

Perfect. That's encouraging. Thanks for the color.

Operator

Your next question is from the line of Christopher Spahr with Wells Fargo.

Speaker 11

Good morning. 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 thinking about wage increases. Is that kind of a good starting point to think about expenses for next year?

Speaker 4

Actually, Chris, we've had we've seen some inflation 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 type of things. So that 2.5% A little bit higher than that now. That is baked into the guidance that we gave you. And so, I guess, bottom line is we have experienced inflation, and We expect that to persist

Speaker 2

into 2022. Now Chris' question was around 2023, if I heard you correct, Chris?

Speaker 11

That's correct.

Speaker 4

And that inflation, that's not transient. That's going to be in the run rate for 2022 and then you're going to continue now. Will you be able to revert back to merit increases that are more consistent 23, like we had in the past, and I think that's accurate.

Speaker 11

Yes. 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 wage pressure?

Speaker 4

Well, the 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.

Speaker 11

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 With the 10 years already.

Speaker 4

No, we still think so we think the short end, as we told you, we probably have 4 Short term rate increases going in this year, but we still think the 10 year kind of hangs out and approaches 2% by the end of the year. So it doesn't move as much. We do think there's opportunities. There's a lot of volatility there. If we See the ability to put $1,200,000,000 or more to work, in the securities book And we're convicted on that.

Speaker 4

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'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 increase on the short run, Short rate with the money at the Fed, so we're getting paid a little bit more there.

Speaker 12

Thank you.

Operator

Your next question is from the line of Vivek Juneja with JPMorgan.

Speaker 2

Good morning, Vivek.

Speaker 7

Hi, David. Hi, John. So just a clarification on a couple of the last two questions. So you said if the tenure gets closer to 2%, you might put some to work. So do you have factored into your NII guidance for reinvestment of some of that liquidity or not?

Speaker 4

No, we do not. That would be on top of what we're giving you.

Speaker 7

Okay. And then, 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 in your 'twenty two guidance?

Speaker 4

No, it's not forecasted to stay at that level. That was up. The incentive comp was up, I think, across Industry, we don't forecast it. It would remain at that low at this time.

Speaker 7

Okay. And then, partly, because you're assuming some of those revenues will not

Speaker 4

Well, no. We've given you our revenue growth, but that's all baked into the budget. And so you don't get compensated at that level over par. If you hit your budget, you got to 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 back Down the bar.

Speaker 11

You got

Speaker 4

to start all over again.

Speaker 2

Does that make sense? So Yes, increasing targets, so that will have The impact of reducing incentives.

Speaker 7

Right, right. Okay, makes sense. And the last one for both of you. Loan growth, you've talked about Very strong pipelines, which implies that you're expecting loan growth to remain good. Are you seeing that How are you seeing January?

Speaker 7

Has that continued to be strong? Because we obviously saw a pickup later in Q4 and is that Continuing in these first couple of 3 weeks.

Speaker 2

Yes. Pipelines are still good. Customers are optimistic. They are, I think, hopeful that we'll see trends continue. They're prepared to make investments.

Speaker 2

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 investments and want to expand the 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.

Speaker 7

Great. Thank you.

Operator

Your final question is from the line of Jennifer Demba with Truist Securities.

Speaker 13

Good morning, Jennifer.

Speaker 5

Good morning. Could you just talk about your interest now in more non bank acquisitions And we're if that's still the case, where your interest lies, where the strongest interest lies In terms of revenue diversification.

Speaker 2

Yes. So, 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. 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.

Speaker 2

So those would be A couple of areas where we would make investments.

Speaker 5

Great. Thanks so much.

Operator

Thank you. I will turn the call back over to John Turner for closing remarks.

Speaker 2

Okay. Well, thank you. We're 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 Prospects of emerging and good strong economy and so appreciate your interest and support. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Regions Financial Q4 2021
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