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spk00: 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.
spk08: Thank you, Christine. Welcome to Regents' fourth 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. With that, I'll now turn the call over to John.
spk14: Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. Let me begin by saying that we're very pleased with our fourth quarter and full year results. Earlier this morning, we reported full year earnings of $2.1 billion, reflecting record pre-tax, pre-provision income of $3.1 billion, adjusted positive operating leverage of 7%, and industry-leading returns on both average tangible common equity and total shareholder return. Our results speak to and underscore the comprehensive work that's taken place over the past decade to position the company to generate consistent, sustainable, long-term performance. We have enhanced our credit, interest rate, and operational risk management processes and platforms while sharpening our focus on risk-adjusted returns and capital allocation. We made investments in markets, technology, talent, and capabilities to diversify our revenue base and enhance our offerings to customers. For example, investments in our treasury management products and services led to record revenue this year. Similarly, our wealth management segment also generated record revenue despite volatile market conditions. And now we're seeing positive results of our comprehensive strategy. Over the course of the year, we grew revenue in average loans. while prudently managing expenses, further illustrating the successful execution of our strategic plan. So as we enter 2023, it is from a position of strength. Our business customers have strong balance sheets. They have benefited from population migration, and many continue to carry more liquidity than in the past. Our consumer customer base remains healthy. Deposit balances remain strong, and credit card payments remain elevated. The job market continues to be solid with approximately two open jobs available for each unemployed person across the region's footprint. We have a robust credit risk management framework and a disciplined and dynamic approach to managing concentration risk. Our portfolios are more balanced and diverse than at any point in the past. We have a strong balance sheet that's well positioned to perform in an array of economic conditions. We have solid capital and liquidity positions to support balance sheet growth and strategic investments. And most importantly, we have a solid strategic plan, an outstanding team, and a proven track record of successful execution. So as we look ahead, although there is uncertainty, we feel good about how we're positioned. Now Dave will provide some highlights regarding the quarter.
spk13: Thank you, John. Let's start with the balance sheet. Average loans increased 1% sequentially, or 9% year over year. Average business loans increased 2% compared to the prior quarter, reflecting high-quality, broad-based growth. Average consumer loans declined 1% as growth in mortgage, interbank, and credit card was offset by the strategic sale of consumer loans late in the third quarter. quarter and continued runoff of exit portfolios. Looking forward, we expect 2023 ending loan growth of approximately 4%. From a deposit standpoint, as expected, deposits continued to normalize during the quarter, consistent with a rapidly rising rate environment. Average total consumer balances were modestly lower, primarily driven by higher-balance customers seeking marginal investment alternatives. Meanwhile, the median consumer balance remains relatively stable, still about 50% above pre-pandemic levels. Normalization was more pronounced in average corporate and commercial deposits, which were down 2% during the quarter. As anticipated, our business clients continue to optimize the level and structure of their liquidity positions. We experienced remixing away from non-interest-bearing deposits to other options, both on and off balance sheet, including those offered through our treasury management platform. Ending deposit balances have declined approximately $7 billion year-over-year, in line with our previously provided 2022 expectations. Looking forward, we do anticipate further deposit declines of approximately $3 to $5 billion in the first half of 2023, reflecting continued Federal Reserve balance sheet normalization, seasonal trends, and late-cycle rate-seeking behavior. We expect to experience stabilization of deposit balances mid-year, with the potential for modest growth in the second half of the year. Our deliberate approach to managing liquidity allows for deposit normalization and growth in the balance sheet without the need for material wholesale borrowings in the near term. So let's shift to net interest income and margin. Reflecting our asset sensitive profile, net interest income grew to a record $1.4 billion this quarter, representing an 11% increase, while reported net interest margin increased 46 basis points to 3.99%. its highest level in the last 15 years. While deposit repricing continues to accelerate, the cycle to date beta remains low at 14%. Importantly, our guidance for 2023 assumes a 35% full cycle beta by year end. There is uncertainty regarding full cycle deposit betas for the industry. However, we remain confident that our deposit composition will provide a meaningful competitive advantage. Growth in net interest income is expected to continue until the Federal Reserve reaches the end of its tightening cycle. Once the Fed pauses, we would expect deposit costs to continue increasing for a couple of more quarters. This equates to 1% to 3% net interest income growth in the first quarter and 13 to 15 percent growth in 2023, assuming the December 31st forward rate curve. Earlier in 2022, we added a meaningful amount of hedges focused on protecting 2024 and 2025. The swaps become effective in the latter half of 2023 and 2024 and generally have a term of three years. Activity in the fourth quarter focused on extending that protection beyond 2025. We will look for attractive opportunities to continue to expand this protection. We have constructed the balance sheet to support a net interest margin range of 3.6 to 4% over the coming years, even if interest rates move back towards 1%. If rates remain elevated, Our reported net interest margin is projected to surpass the high end of the range until deposits fully reprice. So let's take a look at fee revenue and expense. Reported non-interest income includes $50 million of insurance proceeds related to a third quarter regulatory settlement. Excluding that, adjusted non-interest income declined 9% from the prior quarter. as stability in wealth management income and a modest increase in card and ATM fees were offset by declines in other categories, mainly mortgage and capital markets. Service charges declined 3% due primarily to three fewer days in the fourth quarter versus the third. We expect to offer a grace period feature to cover overdrafts around mid-year 2023. and when combined with our previously implemented enhancements, will result in full-year service charges of approximately $550 million. Within capital markets, increases in M&A fees were offset by declines in all other categories, including a negative $11 million CVA and DBA adjustment. Despite an increase in servicing income, Elevated interest rates and seasonally lower production drove total mortgage income lower during the quarter. With respect to outlook, we expect full-year 2023 adjusted total revenue to be up 8% to 10% compared to 2022. Let's move on to non-interest expense. Reported professional and legal expenses declined significantly this driven by charges related to the settlement of a regulatory matter in the third quarter. Excluding this and other adjusted items, adjusted non-interest expenses increased 2% compared to the prior quarter. Salaries and benefits increased 2%, primarily due to an increase in associate headcount during the fourth quarter and higher benefits expense. Equipment and software expenses increased 4%, reflecting increased technology investments. The fourth quarter level does provide a reasonable quarterly run rate for 2023. We expect full year 2023 adjusted non-interest expenses to be up 4.5% to 5.5%, and we expect to generate positive adjusted operating leverage of approximately 4%. From an asset quality standpoint, overall credit performance remains broadly stable while experiencing expected normalization. Net charge-offs were 29 basis points in the quarter. Excluding the impact of the third quarter consumer loan sale, adjusted full-year net charge-offs were 22 basis points. Non-performing loans remained relatively stable quarter over quarter and were below pre-pandemic levels. Provision expense was $112 million this quarter. While the allowance for credit loss ratio remained unchanged at 1.63%, the increase to the allowance was due primarily to economic conditions, normalizing credit from historically low levels, and loan growth. These increases were partially offset by the elimination of the hurricane-related reserves established last quarter. Just to remind you, we believe our normalized charge-offs based on our current book of business should range from 35 to 45 basis points on an annual basis. However, due to the strength of the consumer and to businesses, we expect our full year 2023 net charge-off ratio to be in the range of 25 to 35 basis points. From a capital standpoint, we ended the quarter with a common equity Tier 1 ratio at an estimated 9.6%, reflecting solid capital generation through earnings, partially offset by continued loan growth. Given the uncertain economic outlook, we plan to manage capital levels near the upper end of our 9.25% to 9.75% operating range over the near term. So in closing, We delivered strong results in 2022 despite volatile economic conditions. We are in some of the strongest markets in the country, and while we remain vigilant to indicators of potential market contraction, we will continue to be a source of stability to our customers. Pre-tax, pre-provision income remains strong. Expenses are well controlled. Credit remains broadly stable, and capital and liquidity are solid. And with that, we'll move to the Q&A portion of the call.
spk00: 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 John Pancari with Evercore ISI. Please proceed with your question. Good morning.
spk15: In terms of your deposit beta, regarding that 35% beta assumption by year end 23, what is your, maybe help us think about what your assumption is around non-interest bearing mix as a percentage of total deposits. How do you see that trending through the year. What's underlying that assumption? Thanks.
spk13: Yeah, John, this is David. So what we did, we're at 39% non-interest bearing right now. We've always had more non-interest bearing than most everybody. That's just the nature of our deposit base. We said we would continue to see deposit runoff this year somewhere in the $3 billion to $5 billion range. And for our guidance, we've taken all that out of NIB. So you should expect that percentage of NIB to decline somewhat during the year. Now, that's just what we put in the guide. We could see some mixed changes from that NIB, and maybe that's the most harsh it could be, so that's why we put it in the guide. So I don't know if there's a follow-up there, but
spk15: Okay, no, that's helpful, and I think the other color on the data provides some of the additional detail. But just separately, if I could just hop over to credit for my follow-up. Could you give us a little bit of color around what drove the increase in charge-offs in the quarter? It looks like that may have been in CNI, but I want to get a little bit of color around what you're seeing there. Are you seeing any stresses in certain pockets of your loan categories that you're watching that are starting to generate some losses? And then also, what drove the the 14% increase in the criticized loans. Thanks.
spk14: Yeah, John, this is John. So we did see a little uptick in business services charge-offs in the quarter related to a handful of credits. We've identified a couple areas or a couple segments of the portfolio where we see elevated stress. That'd be office, health care, consumer discretionary, senior housing, and transportation on the small end of trucking in particular. We're seeing elevated levels of, or elevating levels, I should say, of classified loans in particular. So to the second part of your question, we are seeing some normalization in the portfolio. Classified loans are increasing toward levels that we would expect to be more, quote, normalized. and the categories in which we're seeing that change are the five identified, but there are some odds and ends in the portfolio as well as inflationary impacts and rising rates affect isolated customers. In general, we still feel very good about credit quality, and as David said, we're guiding to 25 to 35 basis points of charge-offs in 2023.
spk13: And, John, I'll add, if you look at page 19, we tried to help you with the the areas that John just mentioned in terms of the higher risk segments, and you can see on that page the strength of the allowance to cover those increases in the criticized level that we have listed in the supplement. And, you know, we don't necessarily have loss in every one of those that migrated into criticized, but what we do see, we have already embedded in the reserve and it's factored in, as John mentioned, in our guidance of 25 to 35 and charge-offs for 2023.
spk15: Yeah, thanks, David. I appreciate that. If I could just pass one more on that. On the reserve, you pretty much kept it stable this quarter. Can you maybe discuss the likelihood of incremental builds here, or do you think it fairly represents the scenarios of outlooks that you're looking at here?
spk13: Well, we certainly believe it represents what we think is the lost content that exists today. Obviously, every quarter we have to reassess the economy, the quality of the portfolio at those times. So we think we have it covered. The only bill that you would see from this standpoint that we know of would be related to new loan growth. And we're going to have some of that. We said we would grow loans about 4% end-to-end during the year, so we'll need to provide for that But we think at 163, 1.63% is a good coverage ratio for the risk that we have in the portfolio. Based on our current economic assumption.
spk15: Yeah. OK, great. Thank you.
spk00: Our next question comes from the line of Ken Houston with Jefferies. Please proceed with your question.
spk14: Good morning, Ken.
spk07: Hey, good morning, guys. I just want to follow up on the funding side of the balance sheet. You talk a little bit about, you know, you guys have had that ability to just keep your loan to deposit ratio in a good spot. And just wondering if you kind of help us understand what you expect to do over time in terms of your wholesale debt footprint, including long-term debt, and what that would imply then for what you expect to do with the securities book over time as well. Thank you.
spk13: Yeah, so we continue to have one of the lowest loan deposit ratios. I think you were leading to that. You know, we're in great markets. We continue to work on growing accounts, whether it be checking accounts or operating accounts. That's the hallmark of our whole franchise is the strength of that deposit base. So we will continue to leverage that deposit base in terms of our funding mix. At least for the first half of the year, we don't see the need to go into any wholesale borrowings. We have plenty of access to that should we need it. Most of our peers, I think, have all tapped wholesale funding already. So we're being able to leverage that, and that's where we give you the pretty strong guide in terms of our NII growth for the year of 13 to 15 percent. We'll see what the deposit flows are. As we mentioned to John earlier, the deposit outflows we see that we put in our guide is $3 billion to $5 billion. Now, remember, we said $5 billion to $10 billion. This past year, we were at $7 billion. So we've been estimating it pretty well, and we're taking for our guide all of that out of NIB. So we'll see what happens during the year, but... You don't expect us to be looking for wholesale funding until at least the second half of the year.
spk07: Okay. And then just to follow up, you're going to do that grace period, and we saw you reiterate the 550 of service charges. Can you just kind of just give an update on the state of the consumer there and behavioral changes and any other changes? Any other learnings and findings that kind of continue to make you confident in upholding that 550 zone of service charges? Thanks.
spk14: Yeah, well, can we continue to see consumers maintaining good deposit balance levels? Spending is up modestly, but we think being managed very carefully by our customer base, we feel good about the health of the consumer overall. With respect to overdrafts and the changes that we've made to benefit customers, we've seen about a 20% decline in the number of customers who are overdrawing their accounts on a month-to-month basis, which we're happy about. That's ultimately the objective is to help customers better manage their finances. So I would say all in all, we feel good about our guide and good about the impact that the changes that we've made have had on our consumer-customer basis.
spk13: Yeah, Ken, let me add that embedded in the service charges is Treasury management, and Treasury management has had a fantastic year. If you look at the fourth quarter for Treasury management, we were up 7% fourth quarter of 22 to fourth quarter of 21. If you look at the entire year, we were up 9% in TM. So that's been a positive to us. It's helped bolster that downward trend. trend of service charges due to all the account changes that we've made and will be a strength for us going into 2023 and gives us confidence, as John mentioned, that we can meet the 550 in service charges for the year.
spk07: Okay. Thank you.
spk00: Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question. Good morning, Matt.
spk06: Good morning. Just a big picture, a strategic question. Obviously, you've done an amazing job growing that interest income and getting the rate call right. It seems like three for three here. But I guess the flip side is the kind of revenue mix has become more dependent on rates and the balance sheet, right, as you think about the fee composition. So, all right, long story short, the question is, what strategic opportunities do you have to grow to see revenues and maybe something that's more from an acquisition point of view to accelerate that?
spk14: Well, we've been, as you know, active making non-bank acquisitions, particularly adding to our capital markets capabilities. And we're pleased with, despite the fact that we had a bit of a soft quarter in the fourth quarter, really pleased with the contribution that those capital markets investments are making to help us continue to strengthen relationships with customers and grow non-interest revenues pretty dramatically over the last six or seven years. Likewise, we are excited about the investments we've made on the consumer side, whether it be the acquisition of Ascentium Capital, which is part of our corporate banking group, Interbank, which gives us a chance to grow loans to homeowners, mortgage servicing rights that we've acquired, which have been helpful, And then in the wealth space, we've made some acquisitions that have been modestly incremental, helpful to us, and we continue to look for opportunities there as well. So we are, I think, positioning ourselves as we continue to create capital to make additional investments as we see those opportunities arise. We're consistently looking, and I think you can look for us to continue to try to build on the investments that we've already made.
spk13: Yeah, Matt, let me add that so the fact that we've been able to grow NII is actually a positive thing. We recognize it does lower the percentage of non-interest revenues in total, but we're very proud of the fact that we've been able to manage our balance sheet in this manner. More importantly, we're trying to take the volatility out of that line item, and so if you look at our Billy, the hedge, we're locking in what we believe to be a very strong margin range of 360 to 390 over time, regardless of what the rate environment does. And so that gives us a lot of stability there. And if that means we have higher NII and the percentage of NIR is a bit lower than it historically has been, we're okay with that. To John's point, we are going to look to use our capital for some non-bank acquisitions like you have seen us do. Nothing too big, but just to bolster the NIR string to make us more resilient in just about any environment that we have.
spk06: I understand that's helpful. And then just somewhat related, I've been asking a lot of your peers the same question, but you all seem to be building capital kind of well beyond what I would have thought that you would need. And you've talked about kind of the upper end to 925, 975, CET1, and that's not new, but I guess the question is why are you and others potentially all building what seems to be well in excess of what you need for CCAR? Are you anticipating something from CCAR changing? Is there kind of pressure behind the scenes from rating agencies, regulators, or are just all the banks deciding on their own to be a little more conservative given the cycle where we are? Thank you.
spk14: Yeah, well, Matt, we can't speak for the other banks. I would say for us it is a bit of an uncertain time. We think there potentially are opportunities to continue to make non-bank acquisitions that will arise. We were fortunate enough to make three in a short period of time at the end of 2021. And just operating at the upper end of our range gives us some flexibility, and we'd like to continue to maintain that given the uncertain environment that we're operating in.
spk13: And if you look at CCAR, degradation and capital was one of the lowest of the peer groups. So we don't need capital to take care of the risk embedded in our balance sheet. It's really opportunistic opportunities we're looking for. And frankly, having a little bit more capital doesn't hurt us from a return standpoint. You know, we generated over 30% return on tangible common equity. And so having, you know, upper end of the 975 won't impact in any meaningful way.
spk06: Yeah, agreed. All right. Thank you very much.
spk00: Our next question comes from the line of Betsy Gracek with Morgan Stanley. Please proceed with your question. Morning, Betsy.
spk12: Hey. A couple of questions. One, just on the loan growth outlook, I know you indicated you know, expect ending balance to be about 4% up year on year. Could you just give us a sense as to how you're thinking through the dynamics of, you know, which pieces of the loan growth are likely to accelerate, you know, be on the high side, lower side, and then, you know, how much longer that runoff portfolio is going to impact the numbers? Thanks.
spk13: Yeah, so we expect loan growth to slow just with general economy slowing. I think our growth opportunities will manifest itself in the corporate banking group, commercial and corporate banking, as line utilization likely goes up a bit. I think there will be some opportunities in the real estate. We did have some growth of real estate, primarily multifamily, still happy with With that, we do have one of the lowest concentrations of investor real estate compared to the peer group. But we look at utilizing our capital selectively with the right customers, doing the right things, in particular, like I said, multi-family. On the consumer side, our interbank acquisition we had in the end of 21, as John mentioned, is doing well for us. We look for that to have opportunities to continue to grow customers. and mortgage, while it's going to be challenging again in 23 because of the rate environment, although it's settled back a bit, will give us some opportunity to grow a bit in the consumer side. As you mentioned, we do have some runoff portfolios. Our last one, probably by the time we get to the end of this year, we're probably not having a discussion about exit portfolios anymore.
spk14: I would just add, despite the fact that We expect the small business customer to be under some pressure and more challenged economy. We're seeing real opportunity through the Ascentium Capital platform, making loans to businesses on business essential equipment. We're able to leverage that platform, which is very specialized in nature, through our branch system in our existing customer base. And over 35% plus of our branches in 2022 originated a loan through Ascension Capital. We'll see more of that grow, I think, and, again, another opportunity to leverage an acquisition into our existing customer base.
spk12: Yeah, that was going to be one of my follow-ups, just trying to understand Ascension and the dynamic and the driver that it is for you. And I guess the underlying question here is, what's the average size of this loan, an Ascension loan? Is it more of a small business size or medium? Or maybe give us some color around that.
spk14: Yeah, it is a small business. It's loans originated on equipment that is, as I said, business essential. So the thesis is that that business owner is likely to pay that loan first because he or she has to have the equipment to operate the business. The average size of the loan is about $75,000, and the term would be three to four years on average.
spk12: Okay, great. And then just lastly, follow up on... the funding question that came up earlier. I mean, we're hearing from others that borrowing from federal home loan banks is interesting. You know, even though the base rate sticker price might look a little higher, you know, you obviously get some dividend back from the slump. You also get, you know, the fact that you don't have to pay the FDIC. So I'm just wondering, is it at all attractive to you at some point to lean in more there or not?
spk13: Well, I think we'll need to evaluate with that closer when we get to the point where we need it. We still have opportunities. We've had $2 billion to $3 billion worth of corporate deposits that have moved off our balance sheet to seek higher rates that we weren't willing to pay. Those are our customers. We still have their operating account. They've just moved their excess cash elsewhere. So there's an opportunity to go back to those customers first. before we need to seek other wholesale funding. But I think we have all avenues. We have term debt, too, that can help us with the FDIC as well. We'll just have to evaluate the total cost of all of our opportunities at that time, which I said earlier is really going to be in the second half of the year.
spk11: Right. You haven't needed that at this stage. Got it. Okay. Thanks so much. Appreciate it. You bet.
spk00: Our next question comes from the line of Steven Scouten with Piper Sandler. Please proceed with your question.
spk04: Good morning, Steven. Good morning. So it's hard to pick apart anything in this quarter. Results were fantastic. I guess the one question I get from people is as we start to see, you know, maybe some normalization and credit is how do you really highlight for folks how much different your franchise is today versus pre-cycle? I know you've laid some of that out in mid-quarter presentations, the the shift to investment grade and so forth, but how would you combat that pushback from some folks?
spk14: I think balance and diversity is the first thing I would point to. When you look at pre-Great Recession, our balance sheet, whether it be on the right side or the left side, assets or liabilities, we had concentrations in certain asset classes and we were very dependent on interest-bearing deposits for funding. If you look at the reshaping of our balance sheet over time, the liability side of our balance sheet I think is really strong and provides, as we've talked about to this point, a foundation for our outperformance, and we expect that will continue. On the asset side of the balance sheet, we have only less than 10% of our outstandings are in investor real estate. That's down significantly from pre-crisis. We also, I think, have been very committed to concentration risk management. We have a very active and ongoing credit risk management process, which we believe will produce much better results than we have previously delivered. We're committed to consistent, sustainable long-term performance, and that requires that we manage credit risk well. At the end of the day, I know we've got to deliver, and we intend to do that, but we think we're well-positioned.
spk13: I would add that we also developed not too long ago a new tool. We call it R-Click, which doesn't mean anything to you, but what it does is it analyzes the cash flows of each of our customers. And we built that and developed that tool to give us an idea of a product and service that a customer may need from us that they don't have. What we found is it gave us such good information that on cash flows every month, that it gave us an earlier indicator of potential credit stress. And that's part of what you're seeing when you see us move things into criticized categories. We can be more proactive because we have better information to manage credit risk management through that tool.
spk04: Got it. That's extremely helpful. And maybe just one other question for me there is, You know, loan growth, the 4% guide, I completely respect all the shifts and concerns in the environment that may take that down there. But, you know, you put up 11% growth this quarter. You know, utilizations continue to increase. Where could you outperform that 4%, I guess, if the environment maybe wasn't as bad as we might fear? And how do you think about that shift you've talked about into capital markets and what could really drive that, you know, pushing some of those customers back into that space?
spk14: So we're currently modeling about $2 billion, I think, in credit outstanding that could move off the balance sheet if the capital markets open. That's a rough number, but that gives you some indication of a, quote, headwind if the capital markets do open. So that could be a plus or minus, to answer your question, and I think would be the one area where we probably would see more more growth than we anticipated if that did not happen.
spk13: You know, our line utilization is still below historical levels. You know, every one point increases about $600 million in outstanding, so to get people drawn on their lines, perhaps that could be helpful. We'll see what the rate environment looks like with regards to mortgage. We'll see what the economy looks like for consumers to improve their home and Leverage Interbank. So there are some opportunities for us to outperform those numbers if the economy kind of continues along its current path. It's still fairly healthy, and inflation is coming down. So I think we have some opportunity to outperform there.
spk04: Great. Appreciate it, McCullough. Thanks.
spk00: Our next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your question.
spk03: Hi, Gerard. Hi, John. How are you? Hi, David. Hi, Gerard. Can you guys share with us, you give that interesting slide in your deck about how your deposit customers have more deposits in their accounts than pre-pandemic. I think it's slide 17. Have you reached out and what's driving these numbers? Because obviously you hear about the savings rate nationally is down, but You and your peers are showing numbers like this, and I was just wondering if you could share with us some of the trends that you're seeing here that keeps these balances the way they are.
spk13: Yeah, the specific page on 17 on the right-hand side, we're talking about those customers that had less than $1,000 in their account and that, you know, compared to – the end of 19, they have six times the balances. A big driver is that cohort was the recipient of a lot of stimulus. That stimulus could have come in the form of absolute transfer payments. It could have come in the form of minimum wage increases. Those are permanent. So what we've seen is that our customers actually are making more money And they're keeping their spending under control, even though we have inflationary pressures. So, you know, that cohort has had more wage growth than most everybody else. And we don't see it going away. We're a bit surprised. And we're watching it every month to see if there's a change. But I think the slide was fairly consistent with what we showed you last quarter as well. So, you know, you're really talking about just the consumer growth. on page 17, but business customers continue to have more liquidity as well.
spk03: I got it. So the wage growth, they're having better wage growth than most people on this call then, right, David? Yes, sir. Moving on to slide 19. In the high-risk industry segments, a couple of questions. One, Can you share with us, and maybe you addressed this already in the earlier comments on the slide, but in the office space, is it mostly the Class B and C or Class B that you're more focused on than Class A? And then second, could there be other industry segments that could show up in this slide six months from now or 12 months from now?
spk14: Yeah, Gerard, I'd say with respect to your question about office, that would be accurate. We're focused on, let's say, the non-Class A. 82% of our portfolio is Class A. 63% is in the Sun Belt. About 36% of our portfolio is single tenant. So the portion that we are concerned about would be Class B space. A good percentage of it is also in suburban markets, 74%, I think, in suburban markets. In terms of industries or segments that we have some concern about, I would say that we're still watching senior housing closely. I think it's performed okay post-pandemic, but it's an area that we had some concern about, rising cost, availability of labor, things that impact that particular segment, and then consumer discretionary. As people continue to feel the pressure of rising costs and or the uncertainty of the environment, we think that, and as unemployment begins to moderate a bit, we think that consumer discretionary is an area that could be impacted.
spk03: Very good. Thank you.
spk00: Our next question comes from the line of Kerry McEvoy with Stevens. Please proceed with your question.
spk05: Morning. Hi, good morning. Thanks for taking my questions. Maybe first one is hoping you could provide a little bit more details on, I guess it's slide seven in one of those footnotes, specifically how the $40 million security hedge benefit in the fourth quarter will, and I'll put in quotes there, migrate to loan yields as those hedges on loans mature. And I guess from a high level, trying to make sure I understand the impact of that six-plus-billion-dollar hedge on securities that matured last quarter.
spk13: Yeah, sure. So what we did at the end of December of 21 is we wanted to add some more sensitivity to the fourth quarter. We had some hedges that were maturing in that fourth quarter that received fixed swaps, but Um, we wanted to, to move that and have those effectively terminate a quarter earlier. We could have torn those up, but it would have taken a lot of effort to do so because there are a bunch of small notionals in there and the cost and time to do that. Um, really there's an easier way to do it, which is we, we purchased a pay fix swap, uh, for that quarter. Um, and so when that sensitivity came back, it generated about $40 million, uh, in, in the quarter. Now, our sensitivity naturally comes back in the first quarter because we have received fixed swaps that are maturing right at the end of the year. So that sensitivity came back naturally in the first quarter, and that's why you won't see a decline due to this $40 million that we had in the fourth quarter. That is also why we've been able to give you guidance that we're going to grow NII in the first quarter somewhere between 1% and 3%. So it's not a cliff. You don't need to worry about having a cliff effect for it. Does that make sense?
spk05: It does, yeah. Then as a follow-up, and I don't mean to be too cute, but I've had a few people ask me, if I look at your 1Q and full year 23 NII guide, the fourth quarter appears lower than the first quarter. So maybe could you just talk about kind of the trajectory of NII as you think about it today? Sure.
spk13: Well, we've given you a guide for the year of 13% to 15% up. We've also given you a guide from the fourth quarter to the first quarter growth of 1% to 3%. Now, obviously, there's more pressure as after the Fed stops raising rates. For a quarter or two, you're going to see deposit costs continue. They lag, so you're going to continue to see pressure after that. it's going to affect everybody in the industry that way. And so you'll see that decline at some point quarter over quarter during the year. So that's why it's harder just to extrapolate the fourth quarter. But, you know, we'll see where the Fed goes. You know, our guidance is predicated on the December 4s. If that changes, then, you know, we'll come back and update our outlook. But that gives you enough information to be able to model and do your sensitivities. But, yeah, there will be some declines in NII based on the Fords sometime during 2023.
spk05: Thanks for all the color. Have a nice weekend. You too.
spk00: Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question.
spk02: Good morning. Hey, good morning, guys. Nice quarter. I had a follow-up on capital. You guys had a nice bump up in ratios this quarter. And just given the loan growth outlook you're talking about, it seems like you'll be at the top end of that target range for CET1 by the end of 1Q. I know the buyback hasn't been a big priority for you recently, but at what point do you think that it might make sense to turn back on?
spk13: Yeah, so as we think of capital allocation, before I get there, let me point out one thing. We do have the impact of the regulatory change that will hit us in this first quarter, as everybody. It's about 10 basis points working the other way. But your question is broader. How do we think about capital allocation, including repurchases? So first off, we want to use our capital to support our loan growth. We want to pay a dividend in the 35% to 45% range. We've been at the low end of that, so we would like to operate over time and at least in the middle of that. We want to use some of our capital for non-bank acquisitions, in particular to bolster our non-interest revenue, as we discussed. I've forgotten who asked that question. And then, you know, to kind of – we use the share repurchase as the toggle to keep our capital – where we want it to be, which we said would be at the upper end of our range of $9.75. We just think that's prudent with uncertainty. It doesn't overly negatively affect our return. So if we go meaningfully over that, we could turn on share repurchases, and we'll just have to see how that the capital generation should be very strong in 2023. We should have enough to do all the things I mentioned, and if we can't put our capital to work doing a non-bank acquisition, then we'll give it back to the shareholders.
spk02: Okay. Appreciate the color there. And then back on the $3 to $5 billion deposit runoff outlook you talked about earlier. I was glad to hear you seem to go conservative with assuming all that runoff was in non-interest-bearing deposits. I was curious regarding the big picture, what you're seeing in the book that gets you to that $3 to $5 billion range, and how sensitive is that to a stronger move up in fed funds if we end up seeing that. And then how are you thinking about funding that runoff? Where that's going to come from the securities book, which is lower rate, or if you're assuming some of that or most of that comes out of cash at this point.
spk13: Yeah, we have plenty of cash right now to take care of that runoff. So that's not a big deal. That $3 to $5 billion, there's some corporate changes in there that will be seeking rates. There's some consumer changes that are seeking rates. Historically, movements like this happen late cycle. So we're getting there, we all think, that we're getting towards the end of the cycle. And so people will look to capture that upside so they can lock in the best rate before rates start going the other way. So, you know... How much conservatism we have in there, we'll see. You know, we had a pretty big run-up in deposits, $40 billion during the pandemic, and we're holding on to quite a bit of that, more so than we originally thought. But I think it'd be prudent to – we think it's prudent to put in this runoff of three to five and, again, conservatively all in NIB.
spk02: Great. Thanks, guys.
spk00: Our next question comes from the line of Bill Carcacci with Wolf Research. Please proceed with your question.
spk01: Good morning. Good morning. Good morning. Could you speak to concerns that we could see the mix of time deposits and non-interest bearing deposits return potentially not just to pre-COVID levels but back to pre-GFC levels in this environment? You've given a lot of great detail on the strength of your deposit franchise, but it'd be great to hear your thoughts on sort of that risk both broadly at the industry level and more specifically for reasons as we look ahead from there.
spk13: Yeah, you're breaking up a little bit, but I think what your question was is how do we think about time deposits versus non-interest bearing deposits and where will we settle out over time? So we're sitting here today at 39% non-interest bearing. There have been some movements out of that to because we were over 40% into CDs. So we do believe there's going to be some remixing that's built into our beta assumption of 35% through the end of the year. We still think we'll have more NIB than most everybody because that's the nature of our deposit book. You know, very granular deposits, in particular on the consumer side where we have leading primacy That makes a difference. So money goes in, money goes out. They're not seeking rate. They use it as their operating account. And so we believe that we will continue to see some decline in the NIB. Again, conservatively, we put $4 billion out of that. We think there's probably a chance that it won't all come out of NIB, but we thought that was the best thing to do from a guidance standpoint.
spk01: That's very helpful. Thank you. And then separately, I wanted to follow up on your comments around the NIM protection that you've put in place. How would you respond to the view that the downside protection that banks are putting on in this environment doesn't make a lot of sense because of the negative carry associated with it? Since the forward curve discounts everything that we see in the current environment, you're effectively just investing at whatever the yield curve is at the moment.
spk13: Well, the most important thing to remember is our hedging strategy is not meant to generate increases in NII. It is a risk reduction measure. It's a hedge. It's to protect us in low rates. When you have a deposit franchise like we do that has lower costs than our peers, and that's the way it's been historically, as rates come down, we don't have a mechanism to protect our net interest margin. Because we can't lower deposit costs as low as our peers can. Therefore, we have to do it synthetically. And that's what the hedge program does. And we set these up generally forward starting so we don't have negative carry until they start or the risk of negative carry until they start. And frankly, if we do at that time, that means rates are higher. And the rest of our book is earning that much more. And we're okay with that. What it means is, yes, it costs us a little bit in NII, but we have a leading margin. So we're okay. You can't think of it as a trade as some people talk about it as being a trade. That's not what it is. It's a hedge to protect us at a low rate.
spk01: It's very helpful. Thank you for taking my questions.
spk13: Okay.
spk00: Thank you. Your final question comes from the line of Jennifer Demba with Truist Securities. Please proceed with your question.
spk14: Good morning, Jennifer.
spk10: Good morning. Question on loan growth. I'm just curious how much competitive retrenchment you're seeing from the banks you compete with most often, and how offensive are you willing to get for credits that look really attractive right now?
spk14: Well, I would say, first of all, there's plenty of competition out there. While there are certain segments, particularly real estate, where there are some competitors who are not as active today for a variety of reasons in general, the market is very competitive, whether it be large banks, regional banks, smaller banks that we compete with. And so we've got to be actively calling on our customers and our prospects to and being very diligent in our activities, making sure that we're in the market in front of customers. When we're doing that, we get opportunities. With respect to how aggressive we want to be, we don't change our approach to how we think about credit risk management, how we think about pricing and structure. We want to win because we have expertise, because we provide really good ideas and solutions to customers. think that that resonates and as a result has helped us continue to build on growth in our portfolios.
spk10: Great. Thanks a lot.
spk14: Okay. That's all the calls, I think. I'll just end by saying we're awfully proud of our 2022 results and the momentum that we're carrying into 2023. We've worked hard over the last 10 years to to remake our business and to build a balance sheet, an income statement, and importantly, a culture of risk management that will allow us to deliver consistent, sustainable performance. And we think we're seeing that now. We're going to continue to focus on organic growth and investing in our business. And we believe that we'll continue to deliver the kinds of results that you've seen in 2022. Thank you for your interest in our company and have a great weekend.
spk00: This concludes today's teleconference. You may disconnect your lines at this time.
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