Regions Financial Corporation

Good morning, and welcome to the Region's Financial Corporation's quarterly earnings call. My name is Christine, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen only. At the end of the call, there will be a question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. I will now turn the call over to Dana Nolan to begin.

Thank you, Christine. Welcome to region's third quarter 2022 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the investor relations section of our website. These disclosures cover our presentation materials, prepared comments, and Q&A. I will now turn the call over to John.

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. Once again, Regents delivered another strong quarter, underscoring our commitment to generating consistent, sustainable long-term performance. We generated earnings of $404 million, resulting in earnings per share of 43 cents. Our results include the resolution of a previously disclosed regulatory matter, the establishment of an incremental $20 million reserve for potential losses, associated with Hurricane Ian and the strategic sale of $1.2 billion of unsecured consumer loans. Excluding the regulatory matter and other adjusted items, we once again generated record adjusted pre-tax, pre-provision income. This quarter's results reflect strong revenue growth driven by higher rates, robust loan growth, low deposit costs, and well-controlled operating expenses. Asset quality remains broadly stable with credit metrics in line to slightly better than pre-pandemic levels. In general, we feel good about the health of both our corporate and consumer customers. Many of our business customers have adopted operating models capable of thriving in uncertain operating environments and remain cautiously optimistic about opportunities to grow and expand their businesses. Consumers continue to maintain strong liquidity levels, and unemployment in our footprint remains at historical lows. This quarter's results are further evidence the investments we have made in talent, technology, and strategic acquisitions continue to pay off. As expanded products, capabilities, and expertise are helping us to meet customer needs and deepen relationships. Before wrapping up, I want to take a moment to speak about Hurricane Ian. This was an incredibly powerful storm, and communities in Florida and South Carolina all faced difficult challenges as they began the recovery process. I'm extremely proud of the way our teams are responding to meet the needs of our customers, fellow associates, and communities affected. Reasons has a long history of helping communities through difficult times and will continue to support the recovery efforts. In closing, we have a strong balance sheet that is well positioned to perform in any economic environment. We have a solid strategic plan, an outstanding team, and a proven track record of successful execution. While sentiment across both business and consumers remains generally positive, we will continue to monitor our portfolios for indicators of stress. We have robust credit and interest rate risk management frameworks that in a disciplined and dynamic approach to managing concentration risk, which has positioned us well to continue to deliver consistent, sustainable, long-term performance. Now, David will provide some highlights regarding the quarter.

Thank you, John. Let's start with the balance sheet. Average loans grew 4% while ending loans grew 1% during the quarter. Ending loans reflect the impact of the strategic sale of $1.2 billion of consumer loans on the last day of the quarter. It represents another example of our disciplined approach to capital allocation. Average business loans increased 5%, reflecting high-quality, broad-based growth across all businesses and industries, specifically financial services, wholesale durables, transportation, information services, and multifamily. Approximately 70% of the growth again this quarter was driven by existing clients accessing and expanding their credit lines to rebuild inventories and expand their businesses. Commercial line utilization levels ended the quarter at approximately 43.1%, modestly lower versus the prior quarter. However, loan production remained strong, with link quarter commitments up $4.4 billion. Unfavorable capital market pricing continues to augment loan growth. However, we believe improved market conditions will eventually lead to clients refinancing off our balance sheet through the debt markets. Average consumer loans grew 3%, while ending loans declined 1%, driven primarily by the previously mentioned loan sale. Growth in average mortgage, credit card, and other consumer was offset by declines in other categories. Within other consumer, interbank loans, which are primarily prime and super prime, grew 14% compared to the prior quarter. We expect full-year 2022 average loan growth of approximately 9%. This assumes a slowing rate of growth compared to the third quarter. Let's turn to deposits. As expected, deposits continue to normalize in the quarter. Average total consumer balances were modestly lower quarter over quarter, largely consistent with typical pre-pandemic seasonal effects. Despite inflationary pressures, consumer balances have remained relatively stable, supported by wage increases and prudent spending. Additionally, new customers and additional account acquisition remains healthy. Normalization has been more evident in average corporate and commercial deposits, which are down $2.9 billion quarter over quarter. However, overall liquidity managed by the corporate bank on and off-balance sheet is relatively stable compared to year-end levels, reflecting the movement of some customer funds to off-balance sheet treasury management options. The movement to these products and the remixing out of non-interest bearing checking accounts into higher yielding money market and savings accounts is as expected and is reflected in our overall deposit beta assumptions for this cycle. Ending balances have declined approximately $3.7 billion year to date, in line with our full year expectation for overall deposit reduction of between $5 and $10 billion. A rapidly rising rate environment is a significant competitive advantage for regions, based on the combination of our legacy deposit base and the more resilient components of surge deposits. Let's shift to net interest income and margin. Reflecting our asset-sensitive profile, net interest income grew $154 million, or 14% quarter over quarter, while reported net interest margin increased 47 basis points, to 3.53%. Our adjusted margin was 3.68%, reflecting the combined effects of average cash balances of $14 billion and PPP. The cycle to date deposit beta remains low at 9%, contributing to higher than anticipated net interest income growth. We expect full year deposit betas in the high teens. In addition to higher rates, growth in average loan balances provided further support for net interest income. Looking forward, while we do expect cash balances to continue to normalize, we do not anticipate accessing more expensive wholesale borrowing markets for multiple quarters. This, coupled with additional hedge maturities in the fourth quarter, provides further runway for margin expansion. Total net interest income is projected to increase 7% to 9% in the fourth quarter and is now expected to be approximately 33% to 35% higher than the first quarter of 2022. Reported net interest margin is projected to surpass 3.80% in the fourth quarter. While we have purposely retained leverage to higher interest rates during a period of low rates, our attention has shifted to normalizing our interest rate risk profile in today's uncertain environment. Through the first half of 2022, we added $15 billion of swaps and securities. The swaps become effective in the latter half of 2023 and 2024 and generally have a term of three years. This represents approximately 75% of the total hedging amount expected this cycle. As previously disclosed, hedging already completed will support a 3.60% margin floor even if rates move back to below 1%. We made some modest tactical changes to our profile in the third quarter, primarily extending some of our current protection. we still expect to execute an additional $5 billion of hedges and will balance market rate levels and risk to growth as we decide the appropriate time to finish the program. Now let's take a look at fee revenue and expense. Adjusted non-interest income declined 5% from the prior quarter as a modest increase in wealth management was offset by declines in other categories. Service charges declined as the impact of policy enhancements implemented in mid-June offset increases in other service charges, including Treasury management. We expect to implement a grace period feature sometime in 2023. Overdraft policy changes made to date are expected to result in full-year service charges of approximately $630 million in 2022. In 2023, after including the impact of a grace period feature, full-year service charges are expected to be approximately $550 million. Within capital markets, activity was negatively impacted by the delay of M&A deals and higher rates in real estate capital markets. Results also include a positive $21 million CBA and DBA adjustment. We expect capital markets to generate fourth quarter revenue in the $80 to $90 million range, excluding the impact of CBA and DBA. Card and ATM fees decline quarter over quarter. Credit card income was negatively impacted by higher costs associated with a reward liability, while check card and ATM fees produced lower interchange due to a decline in both transaction volume and discretionary spending resulting from higher inflation. Elevated interest rates and seasonally lower production drove mortgage income lower during the quarter, but was partially offset by higher servicing income. Wealth management continues to perform well despite ongoing market volatility. We expect this business to grow incrementally year over year. We also expect full-year 2022 adjusted total revenue to be up 11% to 12%, driven primarily by growth in net interest income, partially offset by lower PPP-related revenue and the impact of overdraft policy changes. So let's move on to non-interest expense. Reported professional and legal expenses reflect a charge related to the resolution of a previously announced regulatory matter. We do anticipate $50 million of this charge will be mitigated by insurance reimbursement proceeds, which we expect to receive in the fourth quarter. Excluding this and other adjusted items, Adjusted non-interest expenses increased 4% compared to the prior quarter. Salaries and benefits increased 3%, primarily due to an increase of 277 full-time equivalent associates, as well as one additional day in the quarter. This increase was partially offset by lower variable-based compensation and a decrease in payroll taxes. Over 70% of the increase in associate headcount are customer facing within our three lines of business. We expect full year 2022 adjusted non-interest expenses to be up 4.5% to 5.5% compared to 2021. Importantly, this includes the full year impact of the acquisitions we completed in the fourth quarter of last year, as well as inflationary impacts. With the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 6% in 2022. Although the consumer loan sale and hurricane-specific reserve create some volatility in certain credit metrics this quarter, underlying credit performance remains broadly stable. Reported annualized net charge-offs increased 29 basis points. However, Excluding the impact of the consumer loan sale, adjusted net charge-offs were in line with our expectations at 19 basis points, a two basis point increase over the prior quarter. We are seeing some deterioration in certain commercial segments that contributed to a quarter-over-quarter increase in non-performing loans, but it is important to note that we remain below pre-pandemic levels. Provision expense was $135 million this quarter. The increase relative to the second quarter was due primarily to another quarter of strong growth in loans and commitments, normalizing credit from historically low levels, and a $20 million reserve bill for potential losses associated with Hurricane Ian. These increases were partially offset by a net provision benefit of $31 million associated with the consumer loan sale. Our allowance for credit loss ratio is up one basis point to 1.63% of total loans, while the allowance as a percentage of non-performing loans remains strong at 311%. Our year-to-date adjusted net charge-off ratio is 19 basis points. and we now expect our full year 2022 adjusted net charge-off ratio to remain approximately 20 basis points. We ended the quarter with a common equity Tier 1 ratio at an estimated 9.3%, reflecting solid capital generation through earnings partially offset by continued strong loan growth. Given the uncertain economic outlook, We plan to manage capital levels to the mid to upper end of our 9.25% to 9.75% operating range over time. So in closing, we've delivered strong year-to-date performance despite volatile economic conditions. We will continue to be a source of stability to our customers, but also remain vigilant with respect to any indicators of potential market contraction. Pre-tax, pre-provision income remains strong, expenses are well controlled, credit remains broadly stable, and capital and liquidity are solid. With that, we're happy to take your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. You may press star 2 if you would like to remove your question from the queue. Please hold while we compile the Q&A roster. Thank you. Our first question comes from the line of Ibrahim Punwala with Bank of America Merrill Lidge. Please proceed with your question.

Good morning, Ibrahim. Good morning, John. I guess maybe just to start out means obviously revenue backdrop and I looking pretty good heading into next year. Just give us a sense of how you're thinking about using some of these towards franchise investments, how we should think about expense growth going from here, both in terms of investments you're making, inflationary costs that you're seeing, and just using a better revenue backdrop to actually invest in the franchise. Thanks.

Yeah, Abraham, this is David. So as you saw, we made quite a bit of investment last year in the fourth quarter through three non-bank acquisitions. We continue to look for opportunities in all three lines of business to continue to grow our franchise. We have a lot of things going on. We have our new systems we're going to be putting in over time, and we'll see cost increases related to that, but we have our continuous improvement program that we continue to leverage to keep our total expense growth under control. We're not going to give you guidance for next year, but we do have a page in the deck that shows you what our compound annual growth rate has been very strong in managing and keeping our costs down, and we're going to continue to do that while making appropriate investments. We don't have anything specific. We're on the look for opportunities to help grow our three lines of business, though.

And those, Dave, are essentially tuck-in deals, be it FinTech or fee kind of deals that you've done recently similar to those?

That's correct.

Got it. And just one quick question on these. Obviously, your hedging strategy is well understood. As we think about in a world where rates overshoot expectations relative to the forward curve, is there any risk to a potential drag to the margin, at least in the short run where Fed's not cutting, but we actually see rates going much higher than what the forward curve's pricing is?

Well, I think you have a couple of different things. Higher rates for our type of franchise is good for us, so to the extent we overshoot you know, 4.5%, 5% of Fed funds will benefit from that. Clearly, if it stays up there longer, you end up having some incremental credit risk because if rates are that high, that means inflation continues to be higher than the Fed wants and they have to keep going. So there could be some incremental credit risk until you get to settle down from a rate increase standpoint. The reason we haven't completed our hedging program and the reason we have $13 billion of cash is partially wanting to, and I don't want to use hedge again, but part of trying to figure out where rates might go. So we have a bit of dry powder. That's about $5 billion that we have dried, not counting the 13 on the books to hedge. And we're looking for a better foothold. So we can be patient. Our NII is growing nicely without that. And I think in our material, we show you that we can protect a margin right now of 360 if rates were to go back to 1% or below. So being patient, I think, is the right thing for us to be.

Thanks for taking my questions.

Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question. Morning, John.

Morning. Morning. Just on the credit front, if you could give us a little more detail on the unsecured consumer loan sale in terms of the actual types of credits that were sold and any remaining sales expected on that front, and if so, how are you thinking about the loss content on that? any remaining transactions on that side?

Sure, John. This is David. So we acquired Interbank in the fourth quarter last year. It's an unsecured consumer portfolio. We told you at that time we could grow that portfolio double digits. That industry was about $175 billion industry, so you're talking about $1.7 billion and $2 billion worth of production each year. But we also had this other unsecured consumer portfolio that we had built up over time that those loans were not being serviced by us or serviced by a third party. And we thought that the right thing to do from a capital allocation standpoint, a risk reduction standpoint, would be to sell that portfolio as we continue to invest in growing our interbank book. As you can see in the slides, we had reserved About $94 million, we ended up taking charge off of 63. So we had $31 million worth of provision benefit that's flowing through the financials this quarter. But it was really a capital allocation and a risk reduction measure. And we don't anticipate at this time having anything else. We don't have any other unsecured portfolios like that. That's not true. We do have a small one that's in runoff. Got it. Okay.

All right. That's helpful. And then separately also on credit, sorry, but can you give us a little detail around the increase in MTAs? I know you mentioned some commercial segments. So what commercial areas did you see that increase? Anything indicative of a trend you see there? And then I know you mentioned that you're seeing some normalization in credit that influenced your provisioning. In what areas are you seeing that normalization, and could that interpret into higher charge-off expectations for 23, even though I know you're at 20 bps for 2022? Thanks.

Yeah. John, this is John. So we are seeing some stress in the office portfolio, particularly urban office, a reflection of some of the back-to-work changes that we're all seeing in the economy. Consumer discretionary. related kinds of businesses where consumers are choosing not to spend as freely as they had been. Some softness in not-for-profit healthcare related to rising labor costs and inflation. Similarly, in senior housing, again, we're seeing, I would say, some impacts from both labor and inflationary costs, and then some disruption in technology-related businesses. All that I'd characterize as the beginnings of what we would call normalization. We're at historically low levels in terms of credit quality, the best I've seen in my almost 40-year career. And so we do expect credit metrics to begin to normalize in 2023 and beyond. Currently at 52 basis points of NPLs, still much better than pre-pandemic levels. Charge-offs, as you noted, 19 basis points for the quarter. We expect 20 for the year. We'll firm up our guidance for 2023 in late December or January, but our current projection is that charge-offs in 23 will be somewhere between 25 and 35 basis points as we begin to see a return to more normal levels, again, of credit quality.

All right, thanks for taking my questions. Very helpful, John. Thank you.

Our next question comes from the line of Ken Usen with Jefferies. Please proceed with your question.

Morning, Ken. Hey, good morning, everyone. If I could just focus in on the fee side, I see you're continuing to reiterate your 23 overdraft service fees guidance of 550. I just wanted to take you through you know, the recent just settlement and, you know, the incremental changes that you're making and the confidence you have in continuing to reiterate that level of service fees for next year. Thanks.

Yeah. Ken, thank you for the question. You know, I think what we're observing is customer patterns are very much what we expected when we made changes. So you might recall that we – changed our posting order. We provided customers with alerts. We reduced the cap on daily overdraft fees. We eliminated charging for NSF. We eliminated charges for overdraft protection transfers. Most recently, we're giving customers access to their paycheck two days in advance. We also have implemented an overdraft protection line of credit to help customers And in probably the second half of 2023, we'll also implement a grace period. All that designed to help customers better manage their finances. And we're seeing a positive impact. It's not necessarily a trend, but I would say over the last quarter, we've seen about a 20% reduction in the number of customers who are overdrawing their account, which is, again, I think a very positive thing. We've talked about historically how we've dealt with changes in fees, and I point to overdraft fees as an example. Since 2011, we've seen almost a 40% reduction in the collection of overdraft fees, and yet we overcame that and grew non-interest revenue over that same period of time by almost $500 million. So we have a history of continuing to evolve and change our business to to overcome losses in fee revenues. We're doing that through growth in capital markets, growth in treasury management, growth in wealth management, and other parts of our business. And we feel good about the impact to customers and believe that we can manage the impact to our business.

Got it. Okay. And second follow-up, just in terms of wealth management really has bucked the market trend here, continuing to increase in a really tough market. Can you just talk about is that new customer wins and business ads, and is that more than overcoming just the natural market challenges?

Yeah, it's a combination of a number of things. One, we have a very strong retail investment services business, works very closely with our branch bankers, and in this environment, We see a lot of customers who are interested in acquiring annuities, so we've seen nice growth in that source of fee revenue. Our institutional business is growing, and we've had some nice wins there. And then within wealth management, both opportunities to move new business, new customers, and we've additionally seen about 20% of our increase in fee revenue in the personal wealth management business as a result of customers moving money to us during this period of time where they're looking for more stability. Our approach to the business is as a fiduciary, and I think during uncertain and volatile times, customers are choosing to increase their level of business with us. So all those things are contributing to growth and wealthy income.

Okay, great. Thank you.

Our next question comes from the line of Erica Najarian with UBS. Please proceed with your question.

Good morning, Erica.

Good morning. My first question is for David. David, you're implying an exit rate for NI of 1.375 billion in the midpoint of the range of your guide. And I'm wondering, you know, as we think about that as a jumping off point, You know, do you think that you can continue to, you know, grow that level of NII based on the forward curve in 23?

Yeah, I mean, I think we have, as I mentioned earlier, we have some dry powder left. We still have $13 billion of cash. We don't have to access the wholesale market for several quarters based on our estimates. We have still a little bit of hedging to do. We did some slight repositioning this past quarter to help continue to grow NII and our resulting margin and really taking advantage of what could be a much higher rate environment. I would tell you our guidance is baked on a 75 basis point increase in November followed by 50 and then 25. If we had to do it all over again, we'd probably have that a little bit higher rate So I think we have some incremental opportunities to grow. And, you know, our loan growth has been nice. We have a very solid balance sheet. You know, we leverage our deposit franchise. And I think we're hitting a pretty good tailwind here, hopefully wrapping up the year strongly and really positioning 23 to be a pretty pretty spectacular year as well. Again, we'll give you better guidance when we get to the earnings call in January.

Got it. And as a follow-up, as we think about deposit trends, clearly the rate curve implies a terminal rate over 100 basis points greater than when we last spoke in this type of earnings context. I'm wondering if you could give us a sense of, you know, how do you, you've been very active with regards to managing some of the surge deposits. How do you think about deposit growth from fourth quarter? Do you think most of the surge deposits and that impact would have been driven out of the bank? And additionally, with a 9% cumulative beta in the third quarter, how should we think about terminal beta within, you know, the new Fed funds? rate that the forward curve is implying?

Yeah, so we've been saying all along that we expected deposits to decline in corporate space, in particular those surge deposits of $5 to $10 billion. We're down about 4.5 since last year in. And I think that we still expect that to happen. We're We're holding on to more than we thought, and so perhaps that's a positive to us. You know, I think as you think about betas, so our beta last cycle was about 29, right at 30%. We've been guiding that it's going to be higher this go-round to the mid-to-upper 30s. You know, our Q into beta now is at 9. I think link quarter we're at 11%. You know, this next quarter, you're going to see that move up a bit. We expect about a 30% beta in the fourth quarter. It'll take our cumulative to the mid-teens. And then in the first quarter, we're probably going to see even a higher beta than that, call it 50%, which will get our cumulative to about 25% at that time. So I think you're going to just continue to see this eke up a bit. We believe our beta, as like last time, will be lower than our peers, which is the value of our franchise, but call it mid-30s to upper 30s.

Thank you.

Our next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your question.

Morning, Gerard. Morning, David. Hey, guys. Morning. Can we follow up on the credit side of it again? I know your levels of credit delinquencies and charge-offs are extremely low. But, John, when you were talking about some of the commercial stuff, can you share with us just how large the syndicated loan portfolio is today, as well as the leveraged portfolio? And are there any signs that a syndicated portfolio is, you know, showing signs of more weakness than your just in-footprint portfolio?

Sure, Gerard. First of all, no would be the answer to the last question. Okay. And the syndicated portfolio represents about 25% of our overall portfolio. Interestingly, we've had a 27% increase in investment-grade balances over the last 12 months, and so the investment-grade portion of our overall portfolio is about 40% today. Over the last three years or so, we've seen the probability of default come down by 19 basis points. In other words, the quality of our book continues to improve, we believe. Our leverage book, as defined by 3x4, is roughly $9.5 billion in total, and about 86% of that is in shared national credit exposure. Again, pretty high quality, we think, and we're not seeing any deterioration to speak of in that portfolio at all.

I'll draw this, David. We have oftentimes people don't get to the back of our deck, but on page 25 we have a lot of what John was just speaking to, and it really shows quite a bit of improvement in terms of probability of default and the investment grade improvement.

Great. Thank you. And then following up on deposits, obviously, as you've pointed out, David, a few times on the call, the strength of the franchise is the deposits, which is true for most banks prior to quantitative easing, of course. But what's striking is your slide 19, that those medium customer deposit balances just remain so healthy. Have you guys dug into it? I think you may have referenced about maybe – some higher paychecks on the consumer side that's keeping balances up, but what are you guys sensing from why these balances just don't seem to be really falling off just yet?

Yeah, so the consumer has been very resilient, in particular this bucket that we have on that page. You know, that group happened to be, that cohort happened to be the recipient of a lot of stimulus. They're also the recipient of minimum wage increases, Our unemployment rate is below 4%. So these are people working, and they're being prudent where they're spending. And so they just haven't – they just have not spent more than they make. And I think it's attributable to what John just mentioned in terms of overdrafts being down too. I think people are being more cautious and careful in this period of time. And, you know, with inflation, you would expect this group to be hit more adversely. but they also disproportionately benefited. So that's why you're seeing this. On the surface, it doesn't make sense to you, but that's what the data is telling us. And we've gotten pretty granular with this group, account by account by account, which is where we got the information from.

And, David, this group you're referring to, is this, would you say, a FICO score group of high 600s to low 700s? Is that about right?

It's not just lower income, lower FICOs. It has to do with how people manage their money. So it's lower balances. So this customer segment was under $1,000. That could be people that have fine FICOs. They just spend about what they make, so they don't have a lot in their accounts. So it's not necessarily the lower FICO band.

Okay, great. Thank you.

Our next question comes from the line of Bill Carcacci with Wolf Research. Please proceed with your question.

Thank you. Good morning, everyone. Hi, Bill. Following up on your comment on slide 19, does the data tell you that the Fed is going to have to do more, or does your interpretation of this suggest rather that consumers and businesses are just in a better position to weather the downturn? Curious to hear sort of just your interpretation of slide 19.

The Fed doing more in terms of raising rates and slowing inflation or stimulus or what, from what context are you?

Yeah. Yes. The Fed doing more in the sense that it's the, it's, it's this high level of liquidity and capacity to spend that is in and of itself fueling inflation. And perhaps, uh, you know, that, that could lead the Fed to do more, uh, from that perspective.

Well, we certainly think the Fed, um, is, is getting after inflation and, um, As a result, we think their move is going to be pretty strong this next couple of moves at least. But this customer segment is just better prepared. So are businesses, frankly, better prepared for whatever downturn or slowdown we might have. Our base case is not a recession, but we do think the probability of that has increased. And if the Fed moves at the pace we think, there's a strong likelihood that that can happen. But we think it will be fairly mild. But we do think that customer spend patterns are down. We saw that in our debit card transactions. This quarter, quarter over quarter, they were down. And so we think people are already being prudent with that. The inflation that we're seeing is coming from labor. In a very tight labor market, it's hard to get on top of that unless the unemployment rate goes up some. So I think that's what will happen over time. And then other inflation is being driven by commodities, which is really a supply imbalance right now versus demand. But with the Fed moving at the pace that they're moving, it's going to slow that down. It's going to bring demand back to supply. And I think you'll see the expectation is you would see a slowdown from that standpoint.

That's very helpful. And the expectation of... of a mild recession to the extent that we have one that's consistent with your reasonable and supportable outlook on slide 23, but just for sensitivity purposes, could you give a sense of what kind of impact taking the unemployment, say, to 5%, the 5% level would have on the reserve rate, for example?

I can give you some data points, but it's important to know that when you start picking on one particular item, there are a host of things that go into the calculation. So what you're asking for is everything else being stable except for unemployment going to 5 or 6 percent. So if you were to do, and no other changes, no response from the bank, no anything, you would probably have a reserve that's 20 percent higher under a 6% unemployment. But again, you start taking into account what does the 6% unemployment mean? Where are interest rates? And so our NII is likely overwhelming whatever credit issues that we might make in. So it's a nice thing to think through, but there are just too many parts to kind of figure out what the net-net is. We think higher rates for regions. is still in that positive.

That's very helpful. Thank you. And if I can, just for clarification, ask a final question on slide 23. Sorry, I forget what slide it was, but your overall commentary about protecting them in that 3.6% range, I think was slide 20, in 2023 and beyond. How far beyond 23 does the protection extend, and would that protection still hold in an extreme where rates fall to take it to an extreme where if ZERP were to return, is the protection still in place, or is it only up to a certain level of Fed funds?

Well, generally when we put in hedges, they're about three years in duration. So if we're talking about middle of 23 and 24 start, So you're three years out from that. So you're a 26-27 protection. And so we will look to extend those. We still have room for more hedging. And it's dynamic. We study this every single quarter. And we've got a group that does it every day. And so this is just a static position that we're showing you as of the date we produce it.

That's very helpful. Thank you for taking my questions.

Okay.

Our next question comes from the line of Steven Scouten with Piper Sandler. Please proceed with your question.

Hey, good morning. I guess I wanted to ask, David, maybe to you first, what is it that makes you think these deposit betas will be higher this time around based on what you've seen so far? Is it really just a blending in of those surge deposits? Is it any sort of change in customer behavior? I just would think with all your liquidity, they would actually be a little bit lower based on what we've seen so far.

Well, I think, one, we're coming from, you know, zero. And, you know, we did have a lot of surge deposits, $40 billion worth of surge deposits. We think that that's going to, you know, a third of that's going to move out. We expected five to ten. It hadn't happened yet. If we've missed it, we've been probably a little bit more conservative. We'd much rather give you a mid-30s than a 29 where we ended the last cycle. I think expectations would be, for everybody, it should be a bit higher. We're coming from a low and going to a higher rate environment than we saw last time as well. We kind of peaked last time pretty quickly and then started to come back down and I think 19 it was. So, again, if we missed it, it's probably because we're a little conservative.

Okay. That's helpful. And then just you referenced the level of liquidity cash balances here a number of times that you still have. Securities have been down in the last couple quarters. Obviously, we saw some of those service deposits out, and you referenced no more borrowing. So I'm just – all those puts and takes there – I guess how low could you see cash balances go, and do you think you'll have to continue to take securities lower to offset more of these potential outflows without borrowing?

We generally would run with $1 billion to $2 billion of cash. We have $13 billion to really take care of those surge deposits that we expect to run out. We've been a little bit opportunistic with not deploying our cash and securities because we didn't need to. because we had good loan growth and we had good hedging and protection and so our NII was growing nicely. There was no reason for us to, we could have generated more NII, but at the risk of missing an opportunity to invest that cash in a much better environment, which is what we're getting. So I think being patient here is important and we really want to use that cash to fund our loan growth more importantly. That's our first order of business. versus trying to put it in the securities book at this point. If we see where we think rates may cap out, could we use our securities book for some incremental hedging? Yeah, we can do that. But think about it as, you know, we still have a lot of access to borrow from FHLB. Our total liability cost right now, 23 basis points, is the lowest in the peer group, and we don't see where we need to access wholesale anytime soon.

Okay, that's great. Thanks for the time, and congrats on the NII story playing out. Oh, thank you.

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

I'm actually all set on my question and answer. Thanks. All right, Matt.

Thank you. Our final question comes from the line of Michael Rose with Raymond James. Please proceed with your question.

Michael. Hey, good morning. Thanks. Hi, good morning. Just two quick questions. You know, just as it relates to Hurricane Ian, you know, I think around 12% of your deposits are, you know, within, you know, some of the counties that got kind of hit. Historically, you've seen some deposit inflows from aid and things like that. Is there any sort of expectation that you have for, you know, potential deposit inflows and is it material?

Michael, at this point, we don't. There's still a lot of uncertainty. This thing, Ian, hit right here at the quarter end. We did our best estimate trying to figure out what the damage was going to be. But you're rightly to point out that oftentimes in these storms, there's a lot of money that comes into it, federal dollars, state dollars, and insurance money. But we haven't really contemplated any of that. And our deposit guidance does not reflect any additional deposits coming from those sources.

Okay, helpful. And then maybe, I'm sorry if I missed this, but so the range for capital markets was moved a little bit down. As we think about going into next year, obviously the backdrop is softening to some degree. Is that kind of the new range that we should kind of expect in the kind of the near to intermediate term for that business?

I wouldn't sign off on that just yet for next year. We'll give you better better range when we get to the January earnings. That was really just more for this next quarter because of what we are seeing right now, in particular with M&A and real estate capital markets. So, you know, don't lock that in for 2023. Okay.

I understand you're not going to give any sort of guidance, but I totally get. What would be kind of the broader puts and takes in your eyes to be within the prior range or above it or below it, etc.

I think if we can get M&A back on track to where it was, if you can get real estate capital markets to open up a bit, you just get more activity. The whole capital markets are kind of down right this minute. We're going to continue to add some bolt-on acquisitions or at least looking for opportunities. We had a couple that we added this past year. And so we're going to do some things to see if we can't help augment the pressure that we're feeling from the lack of having, again, M&A in the real estate capital markets. Just to be clear, we're not contemplating acquisitions in the quarter. Yeah, no, no, no.

To his question. I understood. All right, I appreciate the details.

Thank you, guys. Okay, thank you. Okay, well, that was the last question. Thank you all for your interest in our company. Appreciate you participating today. Have a good one.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.