Hancock Whitney Corporation (HWC) Q4 2021 Earnings Call Transcript

Hancock Whitney Corporation (HWC 1.02%)
Q4 2021 Earnings Call
Jan 18, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

[Technical difficulty] today's conference call, Trisha Carlson, investor relations manager. You may now begin.

Trisha Carlson -- Investor Relations Manager

Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation and in the company's most recent 10-K and 10-Q, including the risks and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made.

As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited. We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements.

Some of the remarks contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the Investor Relations website. We will reference some of these slides in today's call.

Participating in today's call are John Hairston, president and CEO; Mike Achary, CFO; and Chris Ziluca, chief credit officer. I will now turn the call over to John Hairston.

John Hairston -- Chief Executive Officer

Thank you, Trisha, and happy new year, everyone, and thank you for joining us today. We are very pleased to report that fourth quarter results produced a strong finish to a record year. The company grew to over $36 billion in total assets as both loan and deposit growth exceeded expectations. Annual earnings per share were $5.22 compared to a loss in 2020, while operating pre-provision net revenue totaled $538 million in 2021, an increase of $46.5 million or 9%.

Revenue initiatives are progressing, and we are pleased to report positive quarterly net loan growth for the first time in 2021 with over $650 million in core loan growth more than offsetting just over $400 million in PPP forgiveness. As you can see on Slide 7, the growth was across the footprint and in specialty lines of business, reflecting improving economic activity, increased line utilization and contribution of newly hired bankers in growth markets. As a side note, the bankers we detail on Slide 20 added around $125 million in new loans during the fourth quarter. For the year, core loans grew 4% compared to 2020, and our expectations are for continued growth in 2022 of 6% to 8%, with typical quarterly seasonality reflected in our results.

I'd also like to point out that despite the impact from the pandemic on our markets and clients, our credit metrics are greatly improved and today are among the best in class. Criticized commercial loans are down over $100 million or 27% compared to 2020, and NPLs declined $85 million or 59% from a year ago. With net charge-offs returning to historically low levels, we are pleased at how our portfolio has performed during these unprecedented times, allowing us to recapture in 2021 some of the reserves added in 2020 at the beginning of the pandemic. Our capital remains solid with our CET1 ratio virtually unchanged this quarter.

The company enjoyed beneficial capital creation from strong earnings. The revaluation of OCI and outsized balance sheet growth resulted in a TCE ratio a little under our targeted 8% at year-end. During the quarter, we saw deposits grow by $1.3 billion related to seasonal year-end deposits and Hurricane Ida-related funds. Adding stimulus funding during 2021 and total deposits organically grew almost $3 billion during the year.

The work we started pre-pandemic, coupled with the derisking efforts in 2020 had put us on a path to achieving updated corporate strategic objectives, or CSOs, noted on Slide 19, including the previously announced path to a 55% efficiency ratio. We are looking forward to carrying the momentum from the strong finish to a brighter 2022, not only for our company but for our clients, our associates, and communities as we hopefully begin to emerge from today's ongoing pandemic environment. I want to take a moment to thank my colleagues at Hancock Whitney for their perseverance and their dedication to clients and each other as they work as a team to build momentum through 2021. I'll now turn the call over to Mike for further comments.

Mike Achary -- Chief Financial Officer

Thanks, John, and good afternoon, everyone. Results for the quarter were strong with reported EPS of $1.55. Included in the results were $4.9 million or $0.04 per share of net nonoperating income items, which were mostly storm-related. Excluding these nonoperating items, EPS came in at $1.51 for the quarter with PPNR essentially flat linked quarter.

As John pointed out, certainly the quarter was a strong finish to a record year for the company. So I'd like to cover a few important themes that we think drove the results. First was balance sheet expansion. As mentioned on an EOP basis, we grew core loans $652 million and deposits $1.3 billion this quarter.

The deposit growth coupled with PPP forgiveness led to a nearly $1 billion increase in our average excess liquidity. Putting that liquidity to work by deploying into loans, bonds or even funding some deposit runoff, is one of the major keys to our success in 2022. Meeting and then beating our fourth quarter expense goal was another major theme with expenses coming in at just under $184 million, so $3 million below our established goal of $187 million. The past year's efficiency efforts have been significant and impactful and certainly set the foundation for achieving our 55% efficiency ratio goal by fourth quarter of 2022.

And the last major theme for the quarter was continuing improvement in credit. The fourth quarter makes six consecutive quarters with quarter-over-quarter improvement in our credit quality metrics to now among the best in class. Moving to a few operating comments for the quarter. Our NIM was 2.80%, down 14 basis points linked quarter.

The impact of the $1 billion increase in average excess liquidity was a significant impact to the NIM and alone was responsible for 10 basis points of the quarter's compression. Otherwise, the NIM would have been down about 4 basis points, which would have been consistent with our previous guidance. As mentioned, efforts to deploy excess liquidity into loans and bonds are ongoing. As talk about rates rising in 2022 continues, we included some enhanced interest rate sensitivity disclosures on Slide 15.

You'll see expanded details regarding our swap and hedging position, rate floors as well as historical loan and deposit beta information. Please note that we do not have any rate increases built into our 2022 forward guidance or updated CSOs detailed on Slide 19. Any increase in rates in 2022 will be accretive to our guidance. Based on today's rate environment, we do expect the NIM will remain flattish to slightly down from current levels until about midyear and then begin to widen.

Certainly, that is very dependent upon the pace of loan growth, as well as overall excess liquidity deployment. And finally, we were opportunistic with our buyback authorization. And with the quarter's market disruption, we repurchased just under 394,000 shares at an average price of $48.98. At this point, I'll turn the call back to John.

John Hairston -- Chief Executive Officer

Thank you, Mike. Let's just open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question comes from Michael Rose with Raymond James. Please proceed.

Michael Rose -- Raymond James -- Analyst

Hey, good afternoon, guys. Hope you're well. Wanted to start on --

John Hairston -- Chief Executive Officer

Good afternoon, Mike.

Michael Rose -- Raymond James -- Analyst

Good afternoon -- which want to start off on loan growth. You know, this quarter, really strong. Ex PPP looks to be up about 13% annualized. But I wanted to dig into the increase in core C&I, which looked to be up about $600 million Q-on-Q.

Can you give us some color on what drove that and, you know, what we should expect as we think about C&I next year? I mean, was it just new clients? Was it, you know, a pickup in utilization? Was it, you know, kind of all of the above? Thanks.

John Hairston -- Chief Executive Officer

Yeah. Thanks, Michael. Good question. I'll talk about the first part and then get to line utilization second.

So, overall loan production was terrific for the quarter. We were very pleased with it. Pay downs were light, or at least lighter than we expected. They were still there but not quite as large as we anticipated.

And if you look at the growth, the slide that shows across the markets and the specialties, the core business really enjoyed strong production and pull-through rates across all of our geographies: east, west and central. And then the robust activity in equipment finance and healthcare certainly helped. So overall loan production was a good bit better at a commitment lever -- commitment level rather than our last pre-pandemic here in 2019. So '21 over '19 was much better, stronger.

And that reflects, I think, all the bankers that we've added, the markets we've spread to better tech, better asset quality and an early push in 2021, which wasn't easy to normalize the cadence of both our front-end shop and the supporting areas. So really, a lot of credit goes to the team for doing in that. When you get the line utilization, that also was a tailwind. And just as a reminder, our utilization pre-pandemic was right out in the fourth quarter of '19, a little over 47% and then reached the bottom in the first quarter of '21 at a little under 38%.

So a pretty big drop. And then since then, we've seen three quarters of increasing utilization leading up to Q4. So when looking at utilization, that certainly was a tailwind, and we expect to see that continue upward through the year. And certainly, every quarter might not be as big an increase in utilization as Q4, but certainly, we'd see it going up over time.

Any additional questions on that, Michael? I'll cover what you were looking for.

Michael Rose -- Raymond James -- Analyst

No, I think that's helpful. Just if we could switch to expenses. I think core expenses are down now kind of seven quarters in a row. You guys are guiding expenses to be down, looks like another 2% this year.

All we keep hearing about those is wage inflation. It looks like you obviously had hired some bankers in the back half of the year. I expect that you would hire more. So can you just break down where the incremental cost savings are coming? Because clearly, wage inflation and technology costs are on the rise for everybody.

So if you can just walk us through what drives that 2% decline. Thanks.

Mike Achary -- Chief Financial Officer

Well, Michael, this is Mike. I think that as we move into 2022, it really is as much as anything else. We've established, I think, a pretty good runway for expenses with where we landed in the fourth quarter of '21. So it really is just kind of continuing that level of expenses through the next four quarters or so.

And we've guided to basically on an annualized basis for expenses to be down around 2% or so between '21 and '22. We've talked about things like strategic procurement, which I think will help us continue to cut cost as we move into '22. And as we've said I think many times before, we're really interested in cutting costs, not only to become more profitable. I think we've done that work in '21, but it really is to create room within our expense base for continued investments back into the company.

So technology investments and then certainly, we'd like to continue to hire new bankers, as we did primarily in the second half of '21. And then of course, we have the specter of inflation and specifically wage inflation. And we've accounted for all of those things in the guidance that we've given for '22. So it's really just about execution, I think, from this point forward.

Michael Rose -- Raymond James -- Analyst

OK. Very helpful. And then if I exclude the nonrecurring items, it looks like you guys are at an ROA of about, you know, mid-to high 1.40 range, that's kind of at the high end of the CSOs a couple of years out, understanding that there's some puts and takes, right, and you're not going to have the negative provision. But also, can you just give some color around maybe some broad structure around what goes into that, especially the ROA target in terms of, you know, expectations, if you can provide any color on loan growth or NII or any expectations for that?

Mike Achary -- Chief Financial Officer

Yes. So if you go to Slide 19 in the earnings deck, really the top half of that slide gives our overall guidance for 2022. So I think unless you have any specific questions for the most part, most of that information should be pretty straightforward. And I think as an aside, if you do the math around each of those items that we're guiding to, when we look at PPNR for 2022, if we back out the impact of the PPP loans both in '21 and what remains in '22, we're looking to actually grow kind of our core PPNR between 10% and 12% in '22.

So that's part of obviously what's built into the CSOs that you see at the bottom of Slide 19. Now one of the things we did in the table at the bottom of Slide 19 is we took 2021 CSOs and then have adjusted them for the really unusual items in '21 that really aren't going to be repeating, we believe, on a go-forward basis. So specifically, we backed out the impact of the PPP loans in 2021 and then also backed out the impact of the negative provisioning that we did in '21. And so when you do that, you kind of arrive at an adjusted '21 CSOs, and then you see on a go-forward basis what we're projecting for three years down the road.

Michael Rose -- Raymond James -- Analyst

Very helpful. [Inaudible]

John Hairston -- Chief Executive Officer

Michael, this is John. Yeah, thank you, Michael. And just as an add-on, remember that any rate increases, as Mike said in his prepared comments, are not built into those CSOs, and they're essentially determined to be a run rate in the current environment. And obviously, any change in the credit environment, the economy would be -- I mean, excuse, the rate environment of the economy would be beneficial if rates were to rise.

Michael Rose -- Raymond James -- Analyst

Appreciate it. Thanks, again.

John Hairston -- Chief Executive Officer

Thank you.

Operator

Thank you, Mr. Rose. The next question comes from Brad Milsaps with Piper Sandler. Please proceed.

Brad Milsaps -- Piper Sandler -- Analyst

Hey, [Technical difficulty]

Mike Achary -- Chief Financial Officer

Hi, Brad.

Brad Milsaps -- Piper Sandler -- Analyst

Thanks for taking my questions. Mike, maybe I wanted to start with the balance sheet and specifically the liquidity. I think at the end of the quarter, you had around $3.8 billion of fed funds and then another $0.5 billion of PPP loans that will come back. I think in the deck, you alluded to the plan to invest about $1.5 billion in the bond book that started in 4Q '21.

Just curious if that number in your mind could go higher. It looks like you didn't do a lot of your investing in the bond portfolio to kind of late in the quarter based on the period versus the average. Just curious kind of how to think about that cash on the balance sheet vis-a-vis a lot of the deposit growth that you had in the quarter that some of that might be temporary given insurance proceeds and public funds.

Mike Achary -- Chief Financial Officer

Yeah, I'd be glad to. And thank you for the question, Brad. So obviously, we're starting the year, as you mentioned, with kind of excess liquidity at the $3.8 billion. And then certainly, on top of that, we have the better part of $500 million of PPP loans that will be forgiven in the first half of '22.

So as we go through the year, the things we've kind of talked about has obviously been extremely important to our ability to deploy that excess liquidity, I think, is first and foremost, loan growth. So certainly, the loan growth and the momentum related to that loan growth that we've been able to achieve really the last three quarters of '21, I think, puts us in an excellent position to hit the guidance around loan growth that we've given in this document. So that's the 6% to 8% on an end-of-period basis. If you kind of translate that into dollars, that's between $1.24 billion and $1.65 billion of loan growth that we're looking at guiding to for next year.

So obviously, the preference in terms of deploying that excess liquidity is really loans first. And that's what we intend to do. Related to the bond portfolio, what we had talked about last quarter, beginning with the fourth quarter was growing the bond book by about $300 million in the quarter. So that's where the $1.5 billion comes from.

For '22, that would be about $1.2 billion. But to answer your question about how we look at that, certainly, as we go through the year, that number certainly could change. And again, that's something I think we'll evaluate each and every quarter as we go through the year, depending upon the kind of loan growth we're getting, whether we have any deposit runoff to fund for the excess liquidity and then certainly what the reinvestment yields might be related to the bond portfolio. Certainly, with today's activity, specifically in the 10-year, if that continues to a certain level, you know, certainly, the reinvestment yields that I think will be available on the bond portfolio will certainly be better than what we achieved in the fourth quarter, which was around 158 basis points or so.

So that really is how we kind of think about managing the balance sheet and then specifically deploying that excess liquidity into '22.

Brad Milsaps -- Piper Sandler -- Analyst

Great. That's helpful and -- very helpful. Thank you. And for my one follow-up.

On Slide 8, where you guys talk about new loan production yields, do you think 3Q was sort of the bottom there and you'll continue to see improvement? I'm kind of curious kind of the mix of the new stuff you're putting on. Is that mostly variable? Is it a good percentage fixed rate? Or is it kind of more reflect your current mix? Just kind of wanted to get a sense of how the back book can reprice as rates move higher, hopefully throughout the year?

John Hairston -- Chief Executive Officer

Sure. This is John. I'll start with that. In terms of the loan growth that occurred in Q4, it was mostly variable, as you suggested.

The driver for the difference of 10 bps, 3Q to 4Q though was really mix. It wasn't that the rate environment really improved that much or really at all. It was more in the mix of what we delivered. And so if you look at the two primary sources of growth, which would be your core markets like we have on the left side of the page, you just mentioned in the regions and then the right side toward specialty, the higher percentage of the total net growth number that is generated in the core markets will drive a mix that's better and a little higher yielding.

So there was no real change in risk appetite, no change in strategy. We just simply had a higher production level and less pay downs in the core market. So any time that happens, that's going to be more beneficial to new to money -- I mean new to bank rate. So to the extent that occurs in the next several quarters, then that bodes well for the starting point in those credits.

Does that answer your question? Or would you like to asking anything to clarify?

Mike Achary -- Chief Financial Officer

And then, Brad, I think you asked about the mix of the production in the fourth quarter, roughly speaking, it was about two-thirds variable, one-third fixed. So certainly, I think that sets us up for, you know, potentially rocky rates in the future.

Brad Milsaps -- Piper Sandler -- Analyst

Great. Very helpful. Thank you, guys. I'll hop back in queue.

I really appreciate it.

John Hairston -- Chief Executive Officer

You bet. Thank you.

Operator

Thank you, Mr. Milsaps. The next question comes from Brett Rabatin with Hovde Group. Please proceed.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good afternoon, everyone.

John Hairston -- Chief Executive Officer

Hi, good afternoon.

Brett Rabatin -- Hovde Group -- Analyst

I wanted to -- I first wanted to -- I first just go back to the margin. I appreciate all the color on Slide 15 as it relates to the sensitivity. Could you maybe talk about just the expectations for the margin? And if you look at the 3.2% gradual number for 100 basis points and 7.3 for immediate, I think about your balance sheet and I think about the repricing and what you're doing in the bond portfolio and the liquidity that you're expecting to deploy. It would seem to me like if the fed does raise in March and you're having some reduction in the public fund seasonality in 2Q would seem like your margin could be on a pretty good path for the back half of the year.

I know the guidance is related to no fed hikes, but assuming we had, you know, three throughout the year, I was curious if maybe you would give us some thoughts on the margin path, particularly in the back half of the year.

Mike Achary -- Chief Financial Officer

Yeah, Brett, this is Mike. And yeah, certainly, the guidance that we're giving, you know, really is fast in any kind of increase in rates. And that really does call for kind of this notion of flattish NIM for the next couple of quarters and then certainly begin to widen in the second half of the year. And I think that widening primarily comes from, as we mentioned earlier, the deployment of FX excess liquidity, really primarily into loans and then secondarily into bonds.

But certainly, if we do get rate hikes this year and certainly, that's looking like more and more of a certainty each and every day, you'll note that at the bottom of 15, we have some historical information about our rate base both on loans and deposits from the last time we had a rising rate environment. And you can see I think we did pretty good on loans with a beta of about 48%. And then on the deposit side, that's actually total deposits about 25%. So if those numbers can kind of translate into a similar type of betas [Inaudible], then again, without giving any specifics at this point, I would certainly think that we'd be able to see our NIM begin to rise sooner than mid-year.

And then in the back half of the year, the cumulative impact of the deployment we've talked about will certainly be, I think, pretty accretive to the NIM. So I know that's not a whole lot in the way of specifics. But at this point, you know, that's pretty consistent, I think, with the guidance with the add-on with the impact of what our rates might be.

John Hairston -- Chief Executive Officer

And this is John. The only thing I'd add is a note that the PPP contra to NIM that occurs throughout the -- it seems like it's been every quarter there's been a number as the PPP runoff's impact to NIM. That really becomes immaterial in the second half of the year. So some of that inflection point we shared around flat to the midpoint and then beginning to recover in a flat rate environment is tied to the absence of that contra and the continued deployment in loans and therefore, a little more favorable earning asset mix.

So, I don't know if this color is helpful or not, but if you just look at the revolving base of credit that we have, it's about 90% higher in the year '21 from end of year '19 back when utilization was a good bit more than it is today. So if you take the bigger revolving base and, you know, and higher line utilization back to what we would consider norm and at the top of Page 15 on the right, you sort of see the rate floors on an incremental basis, you can sort of back into what the pace of net interest income creation that comes until you begin to really run off all the excess liquidity. So, it kind of gives you a first story. And as you go up every quarter, obviously, the benefit changes and goes higher.

Brett Rabatin -- Hovde Group -- Analyst

Yes, I appreciate the color. That's -- it's obviously a complicated equation with the whole thing to come into it on a quarterly basis. So I appreciate that. I guess the other thing I wanted to just ask about was just thinking about the banker hires and, you know, what the pipeline looks like for maybe this year, if you've got any visibility into that.

And, you know, if you think that the second half of last year is a good kind of indication for what you might see this year.

John Hairston -- Chief Executive Officer

Yeah, thanks for the question. I mean it certainly won't be for lack of trying. We continue to have conversations. Some of those are obviously warmer than others, depending on where they're coming from and what the market is.

Probably the best weapon we have to moving people. And generally, once you get past the first part of the year, those conversations begin to be a little bit more finite, but as end-of-year bonuses are satisfied and people are a little bit more flexible in their considerations of where they want to spend the rest of their career. But our best weapon is a very consensus appetite for risk between our credit organization line, so when they sense in those interviews and talking with both the banking leader chain of command and the credit chain of command, I think people sense that synchronicity, and it's encouraging and maybe fresh to them. And so as a result, we think our chances are pretty good at continuing hires.

So, you know, you never say it's done until they're in the door, right? So I don't want to go into any numbers or really even talk about any markets or targets, but -- and certainly, our efforts are fervent in pursuing some additional benefit. And you can see why in terms of the fourth quarter. I think we shared in the deck. I don't recall what slide it is, but about $125 million of the fourth quarter net growth actually came from those new team members in new markets.

So it's not an inconsequential benefit. It's tangible and it's there for us to see.

Brett Rabatin -- Hovde Group -- Analyst

OK. And if I could just sneak in one last one around fintech. You know, a lot of banks are talking about their investments on the platforms to possibly improve efficiency over time. You know, I was curious if you guys wanted to talk about fintech a little bit in terms of anything you're doing with investing and kind of how you view fintech as a potential provider for improved efficiency.

John Hairston -- Chief Executive Officer

Sure. It's a good question, a fair question. I mean, overall, tech is obviously important and part of the improving efficiency that we've enjoyed the past year and that we will enjoy continuing through '22 and '23 is from technology uplift that improve both effectiveness, which is really revenue generation and efficiency, which affects the AR and the expense ratio. So it's really important.

Fintech, we don't have today announced a partnership with fintech, although it wouldn't surprise me if we had one sometime this year. Obviously, it's important to get it right because a misstep can cost you several quarters of starting over again. But we look at it as a potential partner to help us with deploying additional liquidity. Now those will be secondary providers.

Obviously, our desire to finally launch our digital lending in the retail space will occur a little later this year as some of our branch tech uplifts wrap up and we ride those same rails to have a very efficient digital delivery utility. So we'll talk about that a little more when we get to second or third quarter in terms of timeline and expected impact. But all of that's cooked into the '22 guidance.

Brett Rabatin -- Hovde Group -- Analyst

OK, great. Appreciate all the color.

John Hairston -- Chief Executive Officer

Sure. Thanks for the questions.

Operator

Thank you, Mr. Rabatin. The next question comes from Jennifer Demba with Truist. Please proceed.

Jennifer Demba -- Truist Securities -- Analyst

Good afternoon.

John Hairston -- Chief Executive Officer

Hi, Jennifer.

Jennifer Demba -- Truist Securities -- Analyst

Just wondering, the guidance -- the fundamental guidance that you gave for the year 2022, curious as to where you see the most opportunities for upside or downside within that guidance right now, John?

John Hairston -- Chief Executive Officer

I'm going to let Mike talk about the impact on NIM from the upside of rates, and then I'll cover a couple of other items. Do you want to start with that, Mike?

Mike Achary -- Chief Financial Officer

Yeah. Obviously, I think given that the guidance that we're giving is with no rate increases, certainly, if we get -- again, as it seems likely any rate increases this year, that's very accretive to our guidance. And as we go through the year and rate increases do happen, we'll adjust the guidance that we give on a quarterly basis.

John Hairston -- Chief Executive Officer

Yeah. In terms of others -- of other guidance, the 6% to 8% of end-of-period loan growth has a lot of different moving parts, Jennifer, included in it. If -- but one of those inputs is expected paydowns. If rates begin to move up, then the impact on cap rates and on PE multiples of takeouts, which have been the two primary sources of paydowns for us, you would expect those to begin to diminish without really having at least a significant impact on production.

So in a rising rate environment, we enjoy the benefit of -- to NIM because deposit betas will absolutely lag loan betas. And then secondly, we think we'll see more utilization online. It's hard to predict right now, but that could go up through the year. And then thirdly would be what I just mentioned in terms of paydowns beginning to diminish.

I think we've got the expense number pretty tight, Mike, as it is, and I'm impressed given the work that we've all done. So I think the chance of an upside beat is probably going to be more in revenue because of what happens to the balance sheet and in NIM.

Mike Achary -- Chief Financial Officer

Yes, I'd agree, John. And I think, you know, certainly, there's a little bit of a wildcard when it comes to deposits. Deposits have been, you know, pretty, I would say, erratic, but just hard to kind of project or predict this past year. And you can see that we're guiding to flat to down.

And certainly, we have lots of excess liquidity to fund any kind of deposit outflows that might occur, and it also puts us in a position whereas rates do rise, you know, we can lag those increases and stand some degree of deposit runoff. The other category that I would mention, certainly, there's risk I think with expenses, it just kind of goes without saying that in this environment, if we do more investments that we're counting on at this point, hire more bankers, you know, or if our assumptions around inflation or wage inflation, you know, were on the low side, then certainly, there would be some risk on the expense side. But, you know, at this point, I wouldn't at all describe that as a significant risk. I think we've accounted for all of those items in terms of our planning for next year.

So just pointing out a few things that, you know, could be perceived as risk.

Jennifer Demba -- Truist Securities -- Analyst

Thanks so much.

John Hairston -- Chief Executive Officer

You bet. Thank you.

Operator

Thank you, Ms. Demba. The next question comes from Catherine Mealor with KBW. Please proceed.

Catherine Mealor -- KBW -- Analyst

Thanks. Good afternoon. 

John Hairston -- Chief Executive Officer

Hi, good afternoon, Catherine.

Catherine Mealor -- KBW -- Analyst

Just one follow-up on the CSO goals. As we move through the next year or two and we are in an environment where we continue to see rate hikes, will you update your CSOs to reflect a higher rate environment? Because I would imagine in that environment, your objective could very feasibly go a lot higher than this 1.35 to 1.45. Or is that just kind of give you flexibility, you know, if there's kind of expense growth or other credit changes or kind of other offsets that, you know, offset a much higher spread growth in that kind of environment?

Mike Achary -- Chief Financial Officer

Yeah, Catherine, good question. And, you know, typically, when we publish our CSOs, you know, again, they're three-year goals down the road. And we typically update those at least on an annual basis. So, I would expect us to do that a year from now.

I don't know that we'll update the CSOs as we go through '22. I think that's just probably a little dependent upon actually what occurs and what kind of rate increases we get and what we think those impacts will be. But as of now, the game plan would be to update the CSOs on an annual basis. In terms of our guidance for '22, as we go through the year, I think we'll update those based on circumstances, both internal, as well as external.

John Hairston -- Chief Executive Officer

Catherine, this is John. The only thing I'd add to what Mike shared is the purpose of all that detail on Page 15 is to try to give the building blocks of what the impact of a better environment may be after given the baseline. So depending on how quickly you think rates go up and what you estimate for both loan and deposit base is given, what the balance sheet looks like today, it should be pretty straightforward to model that just based on what you think the market is going to do. So that was really why we shared all that detail as we recognize the CSOs are flat, and I think the whole market is pricing and rate increases these days for March, and we try to give as much detail as we could do the math.

I hope it was helpful.

Catherine Mealor -- KBW -- Analyst

Yeah. No, it definitely is. And it shows -- I think there's significant upside even to where you're your objectives if you do think that there can be rate hike. I guess I was just trying to think through just like how much upside there could be because if you can get to, let's call it, the midpoint of 1.40 ROA without any rate hikes, and that's pretty amazing if we think about how asset-sensitive you are and if you assume that there are four to six hikes coming.

So I just didn't want to get to too optimistic within that objective, just knowing that there would be offsets. And for example, you may invest more, right? If all of a sudden, you do have rate hikes and your margin is expanding more than maybe you may change your kind of expense goals. I was just kind of trying to think about how you want to get with how much upside there really is to that midpoint of the 1.40 ROA.

Mike Achary -- Chief Financial Officer

Yeah. I think those are all the right things to think about. The other thing is certainly, when we begin our planning process probably in the fall or late fall, I don't think anybody was really expecting rate increases of '22. And look -- and here we are now with potentially three or four or pick a number.

So the environment has changed pretty dramatically, pretty quickly. And as we know, in the pandemic age, things can change, both externally and internally in that manner. So --

Catherine Mealor -- KBW -- Analyst

Got it. Very helpful. Thank you so much for all the details.

John Hairston -- Chief Executive Officer

You bet, Catherine. Thank you so much.

Operator

Thank you, Ms. Mealor. The next question comes from Kevin Fitzsimmons with the D.A. Davidson.

Please proceed.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey, good evening, everyone.

John Hairston -- Chief Executive Officer

Yeah. Good evening, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Just a couple of quick ones. Most of the questions have been asked and answered. The ACL-to-loan ratio is still quite strong here at 1.80%. I see the guidance for '22 talks about continuation of modest reserve releases.

So would you define modest reserve releases as what you've been -- given that you're using the more continuation kind of what you've done in the last three quarters or so, that kind of piece or -- and to that end, I mean, just if you can update us or refresh us on where that settling point might be for that reserve and when you might get there? I know that's a hard thing in terms of budgeting, but just how to -- help us how to think through it. Thanks.

Mike Achary -- Chief Financial Officer

Sure, be glad to, Kevin. So related to really your first question, yes, the past two quarters, our reserve releases have been $29 million this quarter, with $28.8 million last quarter. So certainly pretty consistent, I think. And charge-offs as well, only $700,000 this quarter, and that's down from just under $2 million last quarter.

So when we say that our kind of program related to modest reserve releases will continue, it really does mean, I think, continue at something near this level. You know, certainly, there are lots of factors that go into that, the level of future charge-offs, the macroeconomic environment, what those assumptions might be on a go-forward basis, what's happening with our own loan portfolio, least of which -- or not least of which what's going on with the pandemic and various surges or variants. So all those things kind of go into, you know, the modeling that we very carefully do around what we end up reporting each and every quarter. So certainly, for the next couple of quarters, again, to answer your direct question, you know, I would point you to reserve releases, you know, in the neighborhood of what we've done in the last couple of quarters and would suggest that that guidance is probably good for the next couple of quarters.

Related to your -- the last part of your question, you know, and again, we've given this information in past quarters and it really is just to provide some context. It's not to suggest that these are levels that we think we'll settle at. But if we go back and look at our day one CECL, that was about 128 basis points. So if you kind of make the adjustment for the energy portfolio that we sold in the second quarter of 2020, that goes down to just under 100 basis points.

So again, that's really just for context. It's not to suggest that the aim is to get -- or the aim or the intent is to get to those levels. What level we eventually settle at before, you know, the provisioning maybe goes to zero and then we begin to build, you know, will depend on a multitude of variables that I think is just really probably too difficult to make that kind of call right now. So again, you know, to kind of wrap up the guidances for reserve releases around the magnitude that we've done in the last couple of quarters for a couple of quarters.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK. That's helpful, Mike. Thank you. And just one quick follow-on on -- you mentioned how you guys took advantage of the market disruption and stepped in and repurchase shares.

Given the dip we saw in the TCE ratio and that stock has done better, is it less likely to expect as active and approach to our buybacks here in the next few quarters?

Mike Achary -- Chief Financial Officer

Yeah. I don't think so. I think that will depend a lot again on future market disruptions and certainly, with the volatility in the market, and you saw that, for example, on a day like today, the fact that our TCE ratio is where it is right now isn't a major hindrance to us to -- a hindrance that prevents us from doing repurchases on a quarterly basis. For example, the magnitude that we did in the fourth quarter.

So again, we'll continue to be opportunistic, I think, in how we approach the buyback. And again, the fourth quarter was a good example of kind of what that means.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK. Thanks very much.

Mike Achary -- Chief Financial Officer

Thank you.

Operator

Thank you, Mr. Fitzsimmons. The next question comes from Christopher Marinac with Janney Montgomery Scott. Please proceed.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Thanks. Good afternoon. Just wanted to follow back up on the return on tangible common, you know, looking out three years. John and Mike, if you're able to hit the 15% or beat it, the capital that throws off, what does that mean for your capital distributions? And how do you think of that kind of on a cumulative basis?

Mike Achary -- Chief Financial Officer

Well, for -- I'll start off, and John certainly add color a bit. For now, if we think about our capital priorities, it really is first and foremost, earnings support for our dividend, and then we certainly would like to continue to grow capital to support our organic loan growth. And after that, we begin to look at things like potentially increasing the common dividend, and that's something we evaluate really on a quarterly basis with our board. So nothing is planned right now.

But certainly, I think as we go through potentially this year, that's something we could look at a little bit more intently and then certainly buybacks and continue to be opportunistic in terms of buybacks. So that really is kind of the way I think we think about capital deployment right now. But if I think about your question and maybe go down the road a little bit further, if we are able to achieve these kinds of goals and these levels of profitability, certainly, we'll be building, I think, significant levels of capital. And at that point, I certainly think that one of the things that we'd like to do is look at maintaining our dividend payout ratio at levels that might eventually lead to higher levels of dividend increases and then again, potentially where our valuation is looking at continuing buybacks may be doing something a little bit more impactful.

But again, all of that is really hypothetical based on certainly us achieving these goals and targets on a go-forward basis.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great. That's helpful. And I guess just related, is there any lower bound on the CET1 ratio as time passes, not necessarily in '22, but just in the big picture?

Mike Achary -- Chief Financial Officer

Lower band in terms of a level that we would want to go below?

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Correct, yeah.

Mike Achary -- Chief Financial Officer

I mean we -- again, we look at this in a way that we'd like to continue building our ratios. And I think we'd like that common Tier 1 to really be no lower than around where it is right now, so call it the 11% level I think is probably a good parameter.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great, Mike. Thanks very much.

Mike Achary -- Chief Financial Officer

[Inaudible]

Operator

Thank you, Mr. Marinac. We have a follow-up question from Catherine Mealor. Please proceed.

Catherine Mealor -- KBW -- Analyst

OK. Thanks for letting me jump in again. I just had a question about the guide for fees to be flat this year over last. Is that -- are you taking a more conservative view on service charges returning to levels that we saw maybe pre-COVID within that guide? Or is that more of a kind of a statement on the downside, you know, risk we have on the mortgage line? Just kind of trying to think through on the fee moving pieces.

John Hairston -- Chief Executive Officer

Sure. It's a good question. And the guidance, really, Catherine, is a blend of one big put and one big take and that is the management year over year in the secondary mortgage business just simply because production is expected to decline even if the rates we're at right now. I think the refi boom -- although it was a little bit of an uptick in refi business in Q4, at least it was for us.

We anticipate some stabilization in first quarter and then kind of bleed down for the rest of the year. So that would be a headwind. And then on the -- that's the headwind. On the tailwind side, our card fees, merchant fees, really anything related to business card ventures continued to outperform on the upside.

And then wealth to some degree outperforms once you get past the reduction from the sold mutual fund complex. So when you put those altogether, it gives you a clinical push. But obviously, the rate environment can change that. It could make it a little better or a little worse.

So when we roll it together, we got to the push, and it wasn't a -- we've been coy to get to a flattish description. That was just the way the math came together. But certainly, the environment could yield an upside if it lines up a little bit better than we forecasted.

Catherine Mealor -- KBW -- Analyst

OK, great. That's helpful. Thank you.

John Hairston -- Chief Executive Officer

You bet. Thank you for the follow-up.

Operator

Thank you, Ms. Mealor. There are no other questions waiting at this time. And I would like to pass the conference back over to John Hairston for additional remarks.

John Hairston -- Chief Executive Officer

Well, thank you very much for moderating, and thanks to all of our friends on the sell-side for choosing us to attend the call, and we certainly appreciate our buy-side investors attending. And we hope to see you on the road in person sometime this year. Everyone, have a great day and be safe.

Operator

[Operator signoff]

Duration: 50 minutes

Call participants:

Trisha Carlson -- Investor Relations Manager

John Hairston -- Chief Executive Officer

Mike Achary -- Chief Financial Officer

Michael Rose -- Raymond James -- Analyst

Brad Milsaps -- Piper Sandler -- Analyst

Brett Rabatin -- Hovde Group -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Catherine Mealor -- KBW -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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