Bank OZK (OZK) Q4 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Bank OZK Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would like to hand the conference over to your today Mr. Tim Hicks. Please go ahead.

Good morning. I'm Tim Hicks, Chief Credit and Administrative Officer for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO; Brannon Hamblen, President; Greg McKinney, Chief Financial Officer; and Cindy Wolfe, Chief Banking Officer. We will now open up the lines for your questions. Let me ask our operator to remind our listeners how to queue in for questions.

[Operator Instructions] And our first question comes from the line of Catherine Mealor with KBW. Your line is open. Please go ahead.

Thanks. Good morning.

Good morning, Catherine.

I’ll just start with the margin and the level of interim interest and other fees that we saw this quarter. Appreciate all the detail you gave about it in the management comments, but just trying to think about how we think about this next year if you're saying that pay downs are going to be elevated still next year at this level of accelerated fee that we could still see into next year? Or is there really anything kind of one-time or temporary in nature about what we saw this quarter?

Good question. And the answer is yes, no, and all of the above. I think, yes, we had an exceptionally high level of minimum interest and pays on short-term renewals and extensions this quarter. And as we articulated that in previous three quarters had been about $6 million a quarter, which is a pretty healthy right itself, and jumped up to $22 million in the current quarter. So clearly, that was even $16 million over what had been a healthy level in the earlier quarters of the year. We expect good income, plumb that sort of source in 2022, because we will have another strong repayment year, but more of those repayments are on their normal cycle of loans that are going kind of to their full natural term and getting back on a normal cycle. So it's very unlikely that we'll have a quarter that would approach the quarter just ended. And if we had the $6 million quarter run rate for all of 2022, we would consider that a positive. So, I think when you're trying to calculate your run rate, as a starting run rate for net interest income, you definitely need to take out that $16 million. And then we mentioned in the management comments, Catherine that we also had a really healthy level of PPP loan income, another million plus in the quarter just ended, that's going to go away in another couple of quarters, because we're just about through that PPP resolution collection process. And then we – our special assets guys did a fabulous job in the quarter collecting a bunch of purchase loans, including some loans that have been charged off, had or prior to those acquisitions and so forth and collect fully collecting those. So we had a lot of interest income, another million or so there. So really, I think probably our net interest income for the quarter just ended was $18 million or $19 million above what would be a more typical normal run rate for the quarter. So, kudos to our staff, our special assets guys for the great job they did in collecting a lot of those assets. We have a really gifted, talented special assets team and they deserve credit for that. Kudos to our government guaranteed lending guys for the work they did on the PPP program and kudos to our RESG guys for their real expertise and very thoughtful and intentional structuring of loans, so we can achieve those kind of minimum interest and payoff numbers. Those sayings were always nice to get. But we had an exceptionally good quarter of those in Q4. And it would not be prudent to make those in any sort of run rate.

Got it. That’s really helpful. And then maybe a follow-up on that is just on core loan yields outside of that, if we back out PPP and the minimum interest, I'm getting a loan yield of about 5.28%. And you also mentioned in the management comment that new loan yields are coming in lower than where the portfolio is yielding today. And so anyguidance you can give us on how big that gap is, today, and where the core loan yields may bottom before we start to benefit from a rising rate environment?

We're saying new loans originated probably everywhere from on an extreme low side, 2.5% loan rate to 6% on the high side. So definitely, if you look at that range, where the new loans were originating are at lower rates than the loans that are paying off. Now, there's a flip side to that. And that is that, as you can see on Page 15, I think it is our management comments documents, a lot of our current loan portfolio will not reprice instantly when the Fed starts raising rates, because the loans are at floor rates that are substantially above the formula rates now. And you can see we give you a very detailed table that shows how many loans are at their floors at every quarter point increase in rates. So – and that table is getting better and better those bars to the right are getting lower every quarter as we replace new loans that are with a formula that's very near their current floor with old loans that add floor rates that were much higher. So the new loan portfolio that has been originated, that's replacing the old higher rate stuff is more rate sensitive, and hence will adjust more quickly when rates rise. So, depending on how much and how fast the Fed raises rates, the fact that we're originating loans that today have a lower rate than the loans that are paying off, the Fed may help mitigate that by raising the rates on those variable rate loans. And the new ones are pretty much all right at their floor rate on the formula right now. So they'll adjust quickly. It's hard to know the timing of Fed rate increases, it's hard to know the magnitude of Fed rate increases. I'm hearing guys talk from two to seven rate increases this year. Well, who knows? I mean, that's - who knows, and it's hard to know that. But if we do get more Fed rate increases that will help us mitigate the impact of the fact that newly originated loans are -- have formula rates lower than the loans that are paying off with those floors. The other thing I would tell you is we're keenly aware that we've got to have more volume to generate more net interest income going forward. And our guys are doing a really good job on working their pipelines and creating good opportunities for us there.

Great. Very super helpful. Thank you so much.

Thank you.

Thank you. And our next question comes from the line of Timur Braziler with Wells Fargo. Your line is open. Please go ahead.

Hi, good morning.

Good morning.

Hi, it's nice to see the momentum building in RESG, maybe talk a little bit about some of the broader trends you're seeing, which vertical that growth is coming from kind of some of the larger metro cities started to reengage and the typical size of a product you're putting on today is?

All right. Timur, I'm going to let Brannon Hamblen take that question since he's on the front lines of that every day.

Timur, good morning. Thanks for the question. We've got some really positive trends and we obviously noted in the results from Q4 and in terms of the what and the where it's- it continues to be coming from all directions. Each of our LPOs, the guys are just doing a phenomenal job of getting out there and quoting and winning loans and some with sponsors that we've done a lot of business with, and some we've never done business with. So our- we've talked many times about the advantage our capital position gives us in terms of doing a lot with those we really like and reaching into other opportunities on different and even larger loans. And the guys are doing that. They’re continuing to originate across a spectrum of size in terms of the what multifamily is still probably the dominant property type. And life science we talked about a lot was probably behind that in Q4. After that it's pretty evenly distributed across various property types. And in terms of the where, we are seeing opportunities around not necessarily in the middle of San Francisco, but in different directions from there as you're seeing a continual move of the Fan, big employee - employment drivers moving out of the core, but near. And so we're benefiting a lot and a lot of opportunities in the Bay Area. Did some good business in New York and Q4 as well. We comment on New York in that portfolio and how it's been drifting down over time. And it's - but it's a very active market, as evidenced both by pay-offs we see there, but new originations as well. But really, across the country, we're continuing to see a really diverse opportunity, and increasing volume of it as evidenced by our Q4 results.

Brannon, let me add, and correct me if I'm wrong on this. But we're probably also seeing the broadest range of opportunities on larger mixed use projects than we've seen in quite some time and maybe ever. And we're looking at some of the loans that - loan opportunities that would be our largest loan opportunities ever, that we think we've got a good shot at getting in and getting closed. And that could - that volume of really large complex mixed use projects that we're looking at could have some fairly significant implications for our volume and later in 2022 and 2023.

Absolutely the case. Absolutely the case. And as I've alluded to in our continual and consistent strategy of keeping our capital levels where we are, I think, that's going to come and play in a big way. And in the foreseeable future, and of course, those mixed-use deals are the ones that tend to be the large ones that that give us great quality, great diversity and great leverage levels, and, of course, great sponsorship.

And I would also add for that, Brannon mentioned the Bay Area has been a significant source of growth. We're also seeing some really excellent opportunities in Southern California, L.A. and San Diego area, and, of course, continued to have a lot of opportunities in Florida. And the portfolio is just getting more diverse. We're -- with New York coming down in volume and I think you'll see New York at some point in this next year possibly begin to turn back north in volume. You're going to see us do some nice originations there, for sure. In New York, we've got a lot of pay downs coming to New York. So it's going to be a horse race between the rich nations and the pay downs to flip that one, but we're doing much more business and all sorts of other markets across the country. And there's a table that we put in a couple of quarters ago, few quarters ago in our management comments, just to kind of highlight the number of MSIs in which we operate and that growing diversification of the portfolio, we think that's a real positive thing as well.

Okay, that's great color. Thank you for that. And then maybe just adding to that, I noticed in the management comments that the expectation for origination in 2022 is to outpace 2021, but notice that you stopped short of expecting a record there versus the expectation for record payoffs. I guess, is that conservative, just given the timing of some of these transactions? I guess maybe just if you can put any kind of parameters on that would be great.

Timur, yes, what I would say about that is, we, as we sit here today, we definitely expect a strong origination year for 2022. But there are a lot of factors that would cause us to not want to get out of our skis in terms of what could happen, 6, 9, 12 months away. But as we sit here today, and I'll just stick with the script, it's going to be strong origination volume, and we really saw a build last year, that's continued. It's not weakened. We have probably - the payoffs that we project are a natural maturation of the portfolio and those things would probably happen. So I'm going to stop short of saying any records in originations next year, but I like where the year shapes up for us right now, based on, especially some of the things we talked about in terms of new opportunities and markets that are really opening up, sponsors that we've not done business with before that we're - the guys are signing up and loans of size. So between the velocity and the size, new opportunities, the origination in 2022, we're feeling very positive about.

Okay. I appreciate that. Thank you. And then last, for me just kind of rounding out the topic. Can you remind us what the typical timeframe is from a loan being originated to the borrower starting to draw on that line? And then what’s finally, the loan being refied or purchased out?

You know, that -- a great question. Like so many others, it's a complex question. I would say, sort of the main that you could think about would be, anywhere from 12 to 18, on larger loans, maybe 24 months. And if you got this to a large project, it's going to take longer; it's going to take longer for the equity to get in. But I would also tell you that a lot of our loans, we originate with an initial funding that's of meaningful size that but based on a low leverage on the land value, type sizing. So while our full funding does take a number of months to get to where we can appropriately structure some funding, initially, we do that, and that is a common occurrence in the portfolio as well.

Okay, and then the time for refire purchase out?

I believe our latest average was around 34 months. I don't have that number right off the top of my head, but it stayed historically, it lengthened out a bit in COVID. But it's, going to start coming back in as the various economic factors influence that, of course, with rates moving. But in combination with already, a lot of our portfolio, being assured or not, not in terms of its long term budget, its evolution, you're going to see, that's that's one reason that we're expecting perhaps another record year of payoffs. So, but again, I would say in the in the 33 month to 36 month time frame, is what we've seen historically.

Great, appreciate all the color and nice quarter.

Thank you. And our next question comes from the line of Stephen Scouten with Piper Sandler. Your line is open, please go ahead.

Hey, good morning, everyone.

Morning, Stephen.

Oh, appreciate the color Brannon. I want to dig a little deeper on some of what you just noted. And I know you said you don't want to get too far off script given who knows what happens 6, 9 months from now. But if I think about, 13.5 billion in unfunded commitments, let's call it 9 billion in new origination that seemed possible next year, versus maybe 7 billion to 8 billion in repayments if they're going to be higher than this year. It seems like the potential even over the timeline of funding that you just laid out is 22 billion to 23 billion of fundings versus maybe 7 billion or 8 billion of repayment. So even if I kind of do a weighted average over that unfunded book and the new originations it seems like the growth potential here in 2022 just in RESG, let alone, indirect auto and community banking that seems to be turning the tide is pretty attractive. I want to know if I'm missing something or I'm thinking about the wrong way or…

Yes. Stephen, let me jump in there on that. The 13 billion in unfunded commitments, those loans will fund over three years for the most part. And a little tail of that may drag out even into a year for. So you can't assume that 13 billion is going to fund next year. And you can assume that much of what we originate in 2022 is going to fund in 2022. So when you think about our origination volume for 2022, and our unfunded commitments are yes, all things that 90% are plus or minus. So those things will fund over time, that's kind of fund over several years. So we do expect a significant level of originations in 2022. We expect record level of payoff most likely in 2022. We think that is a net positive number. But, your assumption that a lot of our originations from this year are going to fund this year and all or most of our unfunded commitments are going to fund this year is way too optimistic. We expect positive net loan growth next year, but those uncommitted and to be originated amounts and RESG will fund for several years. Is that helpful?

Yes, and I wasn't trying to suggest that entire amount, I was thinking 40% of that 23 billion funded, and you're talking, 9 billion versus maybe 7.5 billion in repayment. So it still seems like a kind of attractive.

Yes, that last scenario. That's not a -- that's plausible scenario. I'm not saying that's our guidance, but that's how you check the scenario.

Yes. Okay.

Oh. [Indiscernible]

No, I wish that'd be great. But no, I know, that's not how it works. And then I just wanted to dig back, I know George you referenced figure 15 earlier, and I did notice that there was a pretty meaningful improvement there as you guys originate more new loans. And there's less at the floors. But I'm curious to give some more color about what that does to your overall asset sensitivity and up 100, 200, it seems like that would have made a decent dent there and just kind of as you guys lay out those assumptions, what you're looking at from a deposit data perspective, especially given that you guys don't have quite as much liquidity built as probably some of your peers have seen?

Yes, well, every month, as we originate new loans and have our loans pay off. And there's a lot of velocity on both sides there. That graph on page 15 gets better. And they're really two graphs. One is total commitments, and one is the actual funded balances. And since the older loans tend to be more funded, and the newly originated loans tend to be more in the commitment phase, you can see the delta between those two graphs and, and that kind of gives you a visual image of, of how new originations are moving those bars to the right down, which is what we want and payoffs of old originations are moving those bars to the right down. So that is, that is positive for the asset sensitivity of the portfolio. And that is getting better, literally every, every month. So we're, we're pleased with the direction of that. And, if and if we can get those numbers more favorable before the Fed starts raising rates, that just makes the portfolio benefit more right at the outset from those first writing currencies. So we would hope to see further improvement between now and March, which seems to be the predominant expectation on when Feds going to start raising rates. So that's helpful the deposit beta question is a great question and overall on page 33 of our management comments document, we would give you a little more detail than we've given in the past on breaking down the deposit book here. And you can see the really excellent work that Sandy Wolfe and Carmen McClennon and Ottie Kerley, Andrew Harper and the other folks on the deposit and retail banking teams are doing growing non-interest bearing accounts and, and non-time accounts, both consumer and commercial. And at the same time working down some of the CD categories from higher levels and working down public funds brokered and recycled deposits that tend to be more expensive deposit. So I think the guys have been doing some really good blocking and tackling, and improving the quality and enhance the right sensitivity of our deposit base. Certainly, when fed starts raising rates, our deposit cost, will, will go up, everybody in the banking industry will go up pretty much there'll be a few exceptions, I guess. We think that we've done a good job laying the groundwork to have much lower deposit betas, over a full interest rate increase cycle, early, mid and late cycle and the increases than we experienced in the last interest rate cycle. And so how that plays out, it's going to depend on competition and have fed postures, how quickly they move and what else they do withdraw liquidity from the financial system. As far as they've already announced and are rapidly along the way with tapering their rate of asset purchases, and the shrinkage of their balance sheet, I think will have a significant impact on availability of funds liquidity in the system that will affect deposit rates, none of us really know that, I don't think the Fed even knows how they're going to do that yet, or if they are there, they're not telling. So there are a lot of variables there. But we feel like we're much better positioned than we've been in the past to deal with that rising rate environment.

Yes, definitely. Thanks for pointing that chart out. That does show impressive kind of multi-year improvement. So I appreciate that. That's really – I’ll let some other people jump in. But congrats on a great year and look forward to another one in 2022.

Thank you, Stephen.

Thank you. And our next question comes from the line of Michael Rose with Raymond James. Your line is open. Please go ahead.

Hey, good morning, everyone. Just wanted to touch on the commentary in the management comments on page 17 just around expenses. You kind of cited what everyone else is citing wage, inflation, etcetera. And also some offsets, and I know you're selling the Magnolia branch this quarter. But if you could just help us quantify what that could mean to the expense run rate. As we move forward, just given the, some of the puts and takes you guys have clearly expense control has been really strong here. And that's been one of the hallmarks of the company, but just looking for some color on kind of what the magnitude could be on a run rate basis? Thanks.

Yes. Michael, let me make a comment or two, and then I'm going to let Greg comment on that. But, we accelerated our annual salary review process, it's a very detailed process where we go through every single employee in the company with their supervisors and set their right and pay. We gave, we accelerated that to the July, October timeframe from what would have normally been a September through December timeframe. And a lot of those rises were given early and you can see that in, a million and then $2 million, sort of increase quarter-over-quarter and our salary and benefits line item. The raises were much more significant in percentage terms since what's reflected in those line items because as we did that, we were closing and selling some branches were closing some branches. We were re-engineering some workflows, we were identifying some unproductive activities and personnel and we were eliminating those positions, so we gave really good rises to a lot of people in that in July through October timeframe and accelerated those. But avoided really having a big hit to our non-interest expense kept that pretty manageable, really working hard to offset a chunk of those costs. I'm really proud of the work that our guys did in that. And it was extremely laborious and difficult process to really dig down and understand everything at a super granular level there. And the guys just rolled up their sleeves and worked hard on it, like we did some really good work. We will, as it says in the comments, continue to see higher cost, because we've got a bunch of unfilled positions that we are filling, we have some raises that a smaller number that didn't take effect until January one, and we're going to add some new positions and some areas where we have growth opportunities. So Greg has done some work on that. So I'll let Greg provide some additional color on that.

Thanks, George. Good morning, Michael. As George said, that's, we've really been focused on the talent, the staffing the competition, how do we how do we make sure we've got the right people in the right places, across the entire entirety of our company? A lot of what we, what we did in Q3, and Q4 puts us in a really good position. Today, with respect to those guys, clearly, as George indicated, and as we say in our comments, we hope to feel positions and continue to, to add new, add new team members to support future growth. I think Michael, if you take if you take the Q4 non-interest expense, I think if you assume that growth, probably on average 2 million to 3 million a quarter, over each quarter during 2022, that's probably a pretty good assumption of where we would expect our non-interest expense to end up for the full year of 2022. Obviously, it may not be, a linear increase, it may be a little bit choppy, but most of that's going to be in the salary and benefits line item. And, the, the actual amount that that ends up is really going to be dependent upon, our ability to find team members to, to fill open positions and to continue to grow our staff to support future growth. So, I think that's the 2 million to 3 million range is a pretty good on average assumption for overhead growth.

So is that like a gross number or like a net number? Because I assume there's some offsets. Are you just talking about like total expenses? So like, like, clearly….

Total non-interest expenses.

Okay, so that but what would some of the offsets be because it sounds like the number actually might be higher, but you have some savings that you can bring out, elsewhere, whether it be further branch cuts, etcetera.

Yes, Michael I think, I think we're there on most of the savings. I mean, there, there are some smaller items we're still working on. But we, we pretty much accomplished what we needed to do as far as rationalization of branch network. And those sorts of things in that second half of, of 2021. So yes, we'll sell the Magnolia branch. I don't think we have another branch slated to close at this point. We think everything that we got in that regards contributing, we actually have a few branches, we're going to open, we will over the next couple of years have a few branches that we relocate, that will have some benefits of improving the quality of our location and market at the same time, they were in at least one or two of those situations to get some cost sites out of that. So there are some things we're doing there. But those things are small potatoes and Greg's $2 million to $3 million a quarter increase in non-interest expenses, kind of a net net number, I think, is that right, Greg?

Yes, that's correct, George.

Okay, great. And maybe just as my follow up, the share repurchases were a little bit higher this quarter than I was expecting you increase the size of the program. Stock is around one five of tangible just remind us George how we should think about the tenor and pace of share repurchases and how you think about intrinsic value? Thanks.

Well Tim runs that program, so Tim I'm going to bounce that to you.

Alright. Thanks, Michael. Yes, we were certainly very active in Q4 on the share repurchases. Obviously, we raised some preferred stock and increased our authorization in really the beginning of November and became really active. And in November and December, we're starting to stock our stock price, when we started, that program was certainly less than where it is today. We do try to be somewhat opportunistic, and how we, how we utilize that. So if our stock prices is increasing, we're going to be less active compared to if it's if it's being pulled back. So if we see a pullback, we'll be more active. But on a whole, I would expect this to be slightly less active in Q1 than we were in Q4. Just because we're starting at a little bit higher, higher place than where we started, started the repurchases in Q4.

Thanks for the color, guys. Appreciate it.

Thank you. And our next question comes from the line up Jennifer Demba with Truist. Your line is open, please go ahead.

Thanks so much. Good morning.

Good morning, Jennifer.

George, you guys have about 4.3 million of NSF and overdraft charges in 2021. A lot of banks have revamped their programs again. What do you see for the U.K. in the next few quarters on that front?

Yes, well, let me say we've broken out the service charge data into two lines in the management comments, and you'll see that queues in case going forward. And the real reason for that is you've got other service charges, you got your NSF ODs and really that NSF OD line could be broken out because insufficient charge and overdraft charges are really two different things. So I'm going to let Cindy Wolfe, our Chief Banking Officer who has over all of that domain, all of our retail banking operations and so forth report up to her and deposits and deposit strategies are all heard. So Cindy, you want to take that?

Sure, George. Thank you, Jennifer, like other banks are in a seven OD fees remain below pre-pandemic levels. And our focus for quite some time has been on the fees we charge in association with value added products and services where you have a client that received something of value, and is happy to pay a fee for what we're providing. So that said, we have taken two steps that appear to be similar to some of the things other banks have announced recently. In November of 2021, we eliminated the transaction fee, we had historically charged for automatic transfers from one account to another to cover an overdraft. And then back in February of 2021, we rolled out a new checking product that has no overdraft or NSF fees. It is a bank on certified checking account and that the unbanked and under banked called Freedom advantage checking. We have really made emergency savings a focus of our retail bank. And since we've done that we've seen a nice increase in savings account sales, we believe that the focus should be on helping people develop healthy savings and spending habits and that that will also help our clients avoid NSFs and overdrafts. So while we have not eliminated all the fees associated with NSF and OD, we have made some similar moves to other banks. And of course, we have not ruled out taking other steps in the future.

Jennifer, I would point out, Jennifer, let me point out on page 16, consistent with what Cindy said our NSF OD fees if you compare Q4 of 2021 to pre-pandemic Q4 of 2019 that number is down $1 million a quarter. Our other service charge fees are up over that period of time, $1.5 million a quarter from Q4 of 2019 to Q4 of 2021. And that's all part of Sandy's strategy that she and her team are implementing to create more service charge revenue from really value add things to our customers and do more things that eliminate, reduce customers incurring NSF and OD pays. I think that trend will continue on both sides as our strategy to continue to grow these other higher value things, as Cindy was talking about. And I do think market and regulatory efforts over a longer period of time will result in a continued reduction in NSF fee income, and then probably overdraft fee income as well.

So do you see a material amount of pressure on that line item for 2022, given the recent changes, or do you think you're at a pretty good run rate?

I think it's, I think it is premature to judge the timing of that. It's a fluid situation on a competitive price and a fluid situation on the regulatory front. But I do think you will see the other service charge line item increase, because they're doing a good job of selling products and services that our customers seem to be very willing and enthusiastic about, even though it means paying a fee part. And I think you'll see further reductions over time and that NSF fee. The timing of that it's hard to hard to know, and then I think the OD fees will also go down over time.

Thanks, George.

Thank you. Our next question comes from the line of Matt Olney with Stephens. Your line is open. Please go ahead.

Hey, thanks. Good morning, I want to ask more about the impact of higher interest rates. And what the bank is doing today to better prepare for this. And the loan floor is obviously going to be a challenge in the near term, as the Fed moves higher, but I'm just curious what else the bank is doing to better prepare for higher rates? Thanks.

Well, obviously Matt, we've been keeping our securities portfolio pretty short. We got about $150 million a month in cash flow off that securities portfolio. And the investments we're buying now, we're keeping in that short to short, medium sort of term, duration. So considerable efforts to keep that where we're not paying down a bunch of long term investments, and so forth. And then a strong propensity as we've always had to make the vast majority of our loans variable, right, and we give you statistics on that in the management comment documents about what percentage of those are bearable, right, and to put floors and them and as we recycle older loans and replace them with newer loans. We're certainly getting floors that are much, much more conducive to having a high level of asset sensitivity and portfolio. So that's really the way we're preparing trying to do things on the deposit front, they will lower deposit data and do things on the asset side, both investments and loans that will enhance asset sensitivity there.

Yes, that makes sense. Thanks for that. And then I was also hoping George, you could put some more commentary around loan growth expectations in 2022. I know you expect to be positive, but I think the consensus forecast is calling for around a mid-single digit loan growth for 2022. And just trying to appreciate if those expectations are still reasonable or for a little bit too optimistic, given your commentary to today.

Matt, I don't think those expectations that you describe are unrealistic. I mean, it's a there. There probably more variables in the world today, economically and politically and regulatory wise and geopolitically wiser than there have ever been in my 42-year career. I mean, gosh, you just listen to the news every day and read the stuff that's going on in the world. It is a -- it's complicated world, and we've got a great pipeline. Going into the year we seem have a lot of our business units that have positive momentum. We know we've got a big, almost certainly record level of pay-offs coming in this next year. But we felt like we can outrun that. But, trying to get more precise on what percentage actual growth we're going to have this year, it's, it's, it's impossible to know that. Because you got to originate a lot of loans, you're going to have to do a lot of pay-off, some of those pay-outs might push as they did last year, if their supply chain problems or in 20 of their supply chain problems, some of those pay-offs may accelerate. If customers can lock in permanent financing and they're concerned rates are going up, they're going to try to get to the permanent financing solution faster if they believe rates are going to go up and their permanent financing is going to cost more lighter. So there are just a lot of variables that could push or accelerate pay-offs. There are a lot of variables economically that could cause folks to push project a few months or accelerate a project based on what they consider the opportunities to be in your playing all that out against an extremely dynamic macroeconomic environment, political fiscal, monetary policy, geopolitical environment COVID health environment. So I, I think the assumptions that you articulated they're not unreasonable, but it could be more or less than that, depending on how those things play out.

Okay, that's, that's helpful. And definitely we appreciate there's lots of moving parts this year, more so than more so than those. And just lastly, I guess, circling back on expenses with Greg, if I plug in that $2 million to $3 million per quarter growth off the fourth quarter starting point, I'm at about 9% growth in 4Q 2022 versus 4Q 2021 am I thinking about that right, Greg?

Yes, at least so Matt, yes.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from the line of Brock Vandervliet with UBS. Your line is open, please go ahead.

Thanks. Good morning. Yes, we built the ocean on our ESG questions, so I won't I won't go there. Let's see on it just was kind of a two part. One if you could get an update on the on the auto business. I know that was impacted last year by kind of a return to that business as well as can't get if you can't get product you can't finance it, that sort of thing with the pipeline issues affecting the auto business. And more broadly, do you think you're obviously thinking pretty creatively about the consumer facing business now? Do you think you've got the all the product sets that you really need there or their other initiatives your you may be working on behind the curtain?

Brock, our indirect businesses, indirect [Indiscernible] and we don't do any direct auto.

I'm sorry, I'm sorry…

I understand. It's easy to it's easy to think of all indirect has been auto but we don't do the auto because we just don't think you can get the return on investment at our scale that we can get out of the Marine RV business and the same quality issues. So we like what we're originating both from a quality and a yield perspective. The guys have rejiggered that business model over the last couple of years. We've been ramping it up since early last year. So they are now I guess, probably in their third or fourth kind of quarter of ramping that up. We did gain some a little bit of momentum on that in Q4 and we expect positive net growth in that portfolio and 2020. And, I'm reluctant to quantify what that is, but we do expect originations and fundings to exceed the pay-offs on that portfolio in 2022 and it to become a small but noticeable contributor to growth in 2022. The consumer book that you mentioned, we are continuing to do work to make our consumer facing products more competitive, and doing things to enhance the sales of consumer loans through our branches. And I think we'll see some positive trends and that in 2022, as well, again, that's not going to be a huge line of business. But if that contributes 50 million, or 100 million or 200 million in gross, that was the origin. So I do think we'll see some positive direction there. Volume, it's hard to know at this point in time, but we are focused on growing those as part of our plan to diversify our business more broadly.

Okay. And just as a follow up, not much to talk about with respect to credit, which is great. How are you feeling about just the size of the reserve at this point?

I think we feel it's appropriate. We gave disclosure in our management comments that stated that the greatest weight in our model selection as of December 31, was on the Moody's moderate recession scenario. And then the Moody sustained downturn was the second greatest weight and Moody's baseline scenario, we gave the third highest weight and our, our model selection allocation. And the reason for that is the Moody's baseline scenario by yearend had gotten to be a pretty optimistic almost an upside scenario in our view. And that was quite a shift from where the Moody's baseline scenario was a quarter before. So as we looked at the litany of open items on fiscal policy, monetary policy, and all the things that are talked about with Matt only a few minutes ago, we just felt like there were a lot of uncertainties and risk, things that could possibly lead to bad miscalculation, or a fiscal policy miscalculation that could throw the economy and in a more difficult setting. So we adopted a pretty conservative and slightly negative bias to scenario selections for our ICL as of December 31. I think that's appropriate. I mean, there's just a lot of a lot of things out there that could cause our economy to get more difficult situations. And we think we were appropriately took those things into account in our scenario selections and qualitative adjustments to the models scenarios at 1231. Tim and Greg might want to weigh in on that, too. But that's my take on it.

George, I don't know that I've got anything else to add on that. I mean, obviously, if there are a lot of unknowns that we were cautiously conservative about as far as our ACL goes, if we have more clarity on those over the next few months or quarters, if certainly that would could impact our level of ACL. But there's just a lot of unknowns today. And I think we were appropriate. And where we are, we set up scenarios and where our resulting ACL ended up at 1231.

Brock over the last two years, there have been a lot of negative assessments of economic prospects in the U.S. and those over 2021 got progressively better and that was reflected in our ACL. But, we don't want to get too optimistic too fast. While there's still a lot of variables at play and release a lot of our ACL and then that come back later because while we got the optimistic, release too much, and then you have to build it back. So we want to we want to actually see these economic cards play out and adjust our reserve based on real economics and that'll help economics.

Yes, I think it's an interesting point, you could see a lot of other banks that have nailed themselves to the the baseline scenario have to have to tack pretty rapidly at some point.

I don't like to be, I could be right. But we're kind of, we're kind of in the mind-set of, we want to, we want to see all this play out. And before we release, and know that we're really back to a very positive economic situation with a lot of variables resolved before we get too aggressive and releasing that ACL. Thank you, Brock.

Thank you. And our next question comes from the line of Brian Martin with Janney Montgomery. Your line is open, please go ahead.

Hey, good morning, just a couple for me, just most of have been answered. But just going back to the capital, you talked about the buyback. Just Tim maybe on the -- if you're just general commentary on the M&A outlook, given what sounds like fabulous opportunities on the organic side, and, the buyback being utilized. But just the level of opportunities, maybe you're looking at today or seeing, can you give a little comment on that?

Yes, Brian, I'd be happy to. We do think there will be continued consolidation in the industry. Over the next many years, we hope to be able to participate in that, at some point, we are spending more time looking at opportunities. I personally am spending more time looking, looking at opportunities. But the timing of those obviously are hard to hard to predict. And as you pointed out, we've got a lot of good traction, organically through our ESG and community banking, and our asset based lending groups and equipment, finance, lending group and indirect lending to a lot of good momentum that we feel very positive about organically. So we don't have to do M&A. But if we can find something that's accretive through our franchise one way or the other, then then we'll certainly be interested in looking at it. And we certainly have a lot of capital where we can do multiple, multiple things at the same time. So it's not, it's not one, one strategy that that is going to utilize all of our capital, we can do multiple, multiple, multiple items at the same time. So we're looking, we have appetite, but certainly can't predict when that might occur.

Got you. Okay. And then maybe just one or two others, just the I think last quarter, George maybe talked about the securities portfolio, maybe getting a little bit bigger, depending on where the yield curve was at I guess. Any, any change in your outlook there?

Brian, no, I mean, that's very much a day to day, moment to moment situation and opportunity. As I mentioned, we've got about $150 million a quarter and our month and cash flow from that portfolio. So, we're trying to knowing that rates are going up trying to find things and moments to refoot that money to work as it rolls off, but not taking too much interest rate risk on it. So there will come a day when we'll want to be much more aggressive in loading up that portfolio. Then we are now but, we're not anxious to see that portfolio grow a ton right now because I think whatever you buy is going to get devalued going forward, but we still have to keep some of that money at work as well. So it's a delicate balance. We're working every day and Lu [Ph] King and Christy Harper and Rush Harding and the rest of the team who were running that portfolio for us are doing a great job on it, and I think they'll I think they'll figure it out as we go but it's a tricky time to be putting money to work there.

Got you. Okay. And then maybe just the last one was just on the -- it looked like a nice start to the ABL Group. Just kind of wondering that in the CBSG if you can give any commentary on how you're thinking about better the momentum there going forward.

Yes, the ABL Group is close to deal and had several more training interactions in the pipeline that they're looking at and working on, and some of those transactions they're looking at look, look very positive. So we're, we're optimistic about that. Our corporate and business specialties group is primarily subscription finance. We had a lot of pay downs on that there. I think their average balance for the quarter was probably much higher than their quarter end balance, because right at the end of the year, a lot of those borrowers did capital calls for a year end and cleaned up their subscription lines. But the unfunded part of that business is growing; we're doing more business, there not less. Even though the funding’s were down with the play-offs right at the end of the year. But that's doing well. And they of course, manage a small share national credit portfolio, I think it's down to about $50 million, plus or minus and continuing to shrink. I don't see us unless there's a real buying opportunity, reloading that portfolio, but if market conditions might have very advantageous today, so we might. But the mind-set right now is that portfolio 50 million or so continues to just run off in a normal sort of, is it pays off sort of way. And those guys are looking at some other non-subscription line, non-real estate, structured finance opportunities where our expertise applies, and our equipment finance guys and structured finance guys on the equipment finance side are also getting some pretty good opportunities they're looking at, and we would think they're going to have some volume this year. So real pleased about the way all of the units in our lending world are working. And, some are going to contribute a lot more growth than others. But I think we've got almost every unit moving in a positive direction course we will, we will have PPP payoff, headwinds remaining. I think we had about 80 million or so PPP loans at the end of the year, the last little piece of that, that probably pays off mostly in Q1 and Q2 and should almost all be gone if not all gone by the end of this year. So that's a little bit of a headwind and growth and community banking, but the guys had a lot of PPP payoffs last year and still absorb that and, and offset that with new originations for the most part. So we're feeling pretty good about all units being able to contribute to growth this year.

Got you. Okay. Thank you very much for taking the questions.

All right. Thank you.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to George Gleason for any further remarks.

All right, thank you. We appreciate you guys joining the call. There being no further questions. That concludes our call. We look forward to talking with you in about 90 days. Have a great quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.