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spk12: good morning and welcome to the region's financial corporation's quarterly earnings call my name is christine and i'll 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 region's fourth quarter 2023 earnings call. John and David will provide high-level commentary regarding our results. 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.
spk03: Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. This morning, we reported full-year 2023 earnings of $2 billion, reflecting record pre-tax, pre-provision income of $3.2 billion and one of the best returns on average tangible common equity in our peer group at 22%. 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 earnings regardless of the economic environment we're experiencing. We've enhanced our credit and interest rate risk management processes and platforms while sharpening our focus on risk-adjusted returns and capital allocation. Although the industry continues to face headwinds from lingering economic and geopolitical uncertainty, as well as the continued evolution of the regulatory framework, we feel confident about our positioning and adaptability heading into 2024. We will continue to benefit from our strong and diverse balance sheet, solid capital and liquidity, and prudent credit risk management. Our proactive hedging strategies continue to position us for success in an array of economic conditions. And our desirable footprint, granular deposit base, and relationship banking approach will continue to serve us well. Our strategic plan continues to deliver consistent, sustainable, long-term performance as we focus on soundness, profitability, and growth. In closing, I'm excited to work alongside the 20,000 region associates who put customers and their needs at the center of all we do and focus on doing the right things the right way every day.
spk14: Now, Dave will provide some highlights regarding the quarter. Thank you, John. Let's start with the balance sheet. average and ending loans decreased modestly on a sequential quarter basis, while ending loans grew a little over 1% compared to the prior year. Within the business portfolio, average and ending loans declined 1% quarter over quarter. We are remaining judicious, reserving capital for business where we can have a full relationship. Loan demand remains soft as clients continue to exhibit cautious behavior. We are seeing clients make long-term investments when they have to, but if they can defer, they're holding off. In general, sentiment varies across industries, with some continuing to expect growth, while others have a more muted outlook. Average and ending consumer loans remained relatively stable, as growth in mortgage and interbank was partially offset by declines in home equity and the green sky exit portfolio sell we completed this quarter. Looking forward, we expect 2024 average loan growth to be in the low single digits. From a deposit standpoint, deposits increase modestly on an average and ending basis primarily due to increases in interest-bearing business products, which we expect will partially reverse with tax season in the first quarter. Across all three businesses, we continue to experience remixing from non-interest-bearing to interest-bearing deposits. However, the pace of remixing has slowed. Within consumer, we continue to see balance normalization, but we believe the pace of remixing will continue to slow as short-term market rates appear to have peaked and the relationship of checking balances to spending levels is getting closer to pre-pandemic levels. Our overall views on deposit balances and rates are unchanged. We expect incremental remixing out of low-cost savings and checking products of between $2 and $3 billion, and total balances stabilizing by mid-year. This results in a non-interest-bearing mixed percentage remaining in the low 30% range. So let's shift to net interest income. Net interest income declined by approximately 4.5% in the quarter, driven mostly by deposit cost and mixed normalization, as well as the start of the active period on $3 billion of incremental hedging. Asset yields benefited from the maturity and replacement of lower yielding fixed rate loans and securities. During the quarter, we returned to full reinvestment of paydowns in the securities portfolio and added $500 million over and above that to the portfolio balance, taking advantage of attractive market rate and spread levels. Interest-bearing deposit costs were 2.14% in the quarter, representing a 39% rising rate cycle beta. Growth in higher-cost corporate deposits increased our reported deposit betas by approximately 1%, but allowed for the termination of all outstanding FHLV advances. This and a more pronounced slowing in the pace of rate-seeking behavior by retail customers drove modest net interest income outperformance compared to expectations. As we look to 2024, we expect net interest income trends to stabilize over the first half of the year and grow over the back half of the year. $3 billion of additional forward starting hedges in the first quarter and further late cycle deposit remixing will be a headwind. However, we expect deposit trends to continue to improve, with interest-bearing betas peaking in the mid-40% range. The benefits of fixed-rate asset turnover will persist, overcoming the headwinds and driving net interest income growth in the second half of the year. With respect to outlook, we expect full year 2024 net interest income to be between $4.7 and $4.8 billion. Our guidance assumes four 25 basis point rate cuts with long-term rates remaining stable from year end. However, the path for net interest income is well insulated from changes in market interest rates. The primary driver of net interest income in 2024 will be deposit performance. The lower end of our expected 2024 net interest income range assumes a 25% beta as rates fall, while the higher end assumes a deposit beta similar to what we have experienced during the rising rate environment. In a falling rate environment, we are prepared to manage deposit costs lower to protect the margin. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle. These market price deposits include index and other high-beta corporate deposit types that will reprice immediately with Fed funds. The other primary contributor is CDs, with a seven-month average maturity. While these products will lag in a falling rate environment, we are positioned to offset this cost. So let's take a look at fee revenue and expense. Adjusted non-interest income increased 2% during the quarter as a sequential decline in capital markets was offset by modest increases in most other categories. Full-year adjusted non-interest income declined 5% primarily due to reductions in capital markets and mortgage income, as well as the impact of the company's overdraft grace feature implemented late in the second quarter. Partially offsetting these declines were new records in 2023 for both treasury management and wealth management revenue. With respect to outlook, we expect full year 2024 adjusted non-interest income to be between $2.3 and $2.4 billion. Let's move on to non-interest expense. Reported non-interest expense increased 8% compared to the prior quarter, but included two significant adjusted items, $119 million for the FDIC special assessment and $28 million in severance-related costs. Adjusted non-interest expense decreased 5% driven primarily by lower operational losses. Full year adjusted non-interest expense increased 9.7% or approximately 6% excluding elevated operational losses experienced primarily in the second and third quarters. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend. We expect full-year 2024 adjusted non-interest expenses to be approximately $4.1 billion. From an asset quality standpoint, overall credit performance continues to normalize as expected. Reported annualized net charge-offs for the fourth quarter increased 14 basis points. However, excluding the impact of the Green Sky loan sale, adjusted net charge-offs decreased one basis point versus the prior quarter to 39 basis points. Full-year adjusted net charge-offs were 37 basis points. Total non-performing loans and business services criticized loans increased during the quarter. Non-performing loans as a percentage of total loans increased to 82 basis points due primarily to downgrades within industries previously identified as higher risk. Keep in mind, between 2013 and 2019, our average NPL ratio was 107 basis points. We expect to see further normalization towards these levels in 2024. Provision expense was $155 million, or $23 million in excess of net charge-offs, and includes an $8 million net provision expense related to the consumer loan sale. The allowance for credit loss ratio increased three basis points to 1.73%. Excluding the loan portfolio sold during the quarter, the allowance for credit loss ratio would have increased six basis points. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization, as well as higher qualitative adjustments for incremental risk in certain higher risk portfolios. Our average net charge-offs from 2013 to 2019 were 46 basis points. we've seen modest acceleration towards these normalized levels in recent quarters. As a result, we expect our full year 2024 net charge off ratio to be between 40 and 50 basis points. Turning to capital and liquidity, given the evolution of the regulatory environment, we expect to maintain our common equity tier one ratio around 10% over the near term. This level will provide sufficient flexibility to meet the proposed changes along the implementation timeline while supporting strategic growth objectives and allow us to continue to increase the dividend commensurate with earnings. We ended the year with an estimated common equity Tier 1 ratio of 10.2% while executing $252 million in share repurchases and $223 million and common dividends during the quarter. With that, we'll move to the Q&A portion of the call.
spk12: 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.
spk10: Please hold while we compile the Q&A roster. Thank you. Our first question comes from the line of Scott Severs with Piper Sandler.
spk12: Please proceed with your question.
spk05: Good morning, everyone. Thank you for taking the question. Excuse me. I appreciate the comments on the main levers for NII or within NII for your guidance. I was hoping you could discuss a little more about the deposit repricing thoughts that you had. You know, maybe specifically thoughts about sort of the bifurcation between commercial and consumer deposits, and then just any opportunities you've seen with the Fed already having sort of peaked out, presumably, any opportunities you've had already to maybe take some actions to ease the pressure on costs.
spk14: Sure, Scott. This is David. One important thing to note is that about 30% of our customer base is really the driver of our interest-bearing deposit data. If you look at that, a little over half of that's related to our commercial book. And those deposits are indexed. So to the extent Fed changes rates, those will index the day that changes. So you're talking about 55, almost 60% of that will come down as rates come down. The other represents consumer deposits. So these have been CDs and money market accounts where we've seen migration out of non-interest bearing accounts. The money market piece, both of these have to be competitive. We have to watch what our competitors are doing to some degree. But we have mechanisms to really start working that down. Part of that is making sure we don't go too long on our CD maturities. So we've been fairly short. I think I mentioned in the prepared comments our average CD term is seven months. And so we don't want to extend that much going forward. As a matter of fact, we'd like to shorten that to coincide with what we think is going to happen with the Fed. And we have four cuts baked in to our guidance to hit the midpoint of our guidance, which is on page six of our presentation. And we think that starts probably at the May meeting. And we know that's different than what the market participants believe. But we think that that's going to be slower versus faster. It's important to note we're neutral to short-term rates, and so it's all about managing our deposit costs. And I think we have a good plan to do so. We've given you really a range. It's a pretty tight range on NII performance on the page six, and we kind of talk about betas. So, you know, if our betas kind of follow what we had, and as rates have gone up, we're at 39 a day. We said we'd probably finish in the mid-40s. If we have that coming back down, then we'll be at the upper end of our range. If we're only at 25% beta as rates come down, knowing things won't match perfectly, then we'd be at the lower end of the range. So our midpoint is a 35% beta, which we think is very doable, in particular relative to that half of that, a little over half of that's related to indexed deposits on the commercial side.
spk05: Perfect. Thanks for that color, David. And then maybe on the lending side, noted soft fine demand, which is very understandable. Just curious how you expect demand to trend as the year unfolds.
spk03: Yeah, Scott, this is John. Our current projections are we believe economic activity picks up toward the second half of the year. And we believe we will experience some growth in core middle market banking and and small business banking through our Centium platform, asset-based lending, which would be typical of this period of time, and on the consumer side, mortgage and interbank continue to contribute to growth. Again, any growth we have will be modest, and that will occur likely toward the back half of the year.
spk05: Perfect. All right. Thank you all very much.
spk12: Our next question comes from the line of Ibrahim Kunwala with Bank of America. Please proceed with your question.
spk00: Good morning. Good morning. I just maybe wanted to follow up on the fee income guide. Maybe if you can drill into where do you see growth across fee revenue, particularly what are you assuming in their capital markets markets? was a weakish fourth quarter. So we'd love to hear our outlook on capital markets income within two years. And then do you expect to do more purchases for mortgage servicing rights as you did in the quarter? And should that boost mortgage income? Thank you.
spk14: Yeah. So your, that's David. So your first point on capital markets, and we had a pretty tough capital markets finish in the fourth quarter. A bit of that is timing. We think some deals in particular in the M&A world got pushed into the first quarter and You know, the rate environment has really hampered our real estate corporate banking income line a bit. We think those rebound. Both of those rebound. We think M&A has a tendency, a chance to pick up probably towards the back half of the year after we've seen a little bit of rate relief, if you will. So, you know, we have a pretty good – Pretty good feel about our capital markets rebound for 2024. Relative to mortgage servicing rights, as you know, we have a good capital position. We look to support our business to grow our loan book. We think loan growth will be muted, so we look to other ways to put the capital to work. Mortgage servicing rights has been one of those. We feel good about that asset class because we're good at it. We have a low-cost servicing system. group, and we're looking to grow when packages make sense and the economics work to our advantage. There have been a number of those on the market. You know, if we can hit the bid that we have to make sure we get an appropriate risk-adjusted return, we'll do that. We suspect there will be a couple of opportunities during the year, as there usually are. But we have room to grow that without adding a lot of fixed overhead have to add people to do the servicing, but we don't have to add a lot of fixed overhead.
spk03: Yeah, I'd just add two things, Ibrahim. One is we continue to grow consumer checking accounts and consumer households. That contributes to growth. Secondly, we had the best year we've probably ever had in treasury management as we see increases in the number of operating accounts that we are originating and services we're providing the customers. And finally, wealth management had maybe the best year it's had, certainly in some time, and we expect wealth management fee revenue to continue to grow in 2024.
spk00: That's helpful. And just one other one, David. I guess the one flex on deposit pricing is your loan-to-deposit ratio at 77. Just give us a sense of is this steady state in some way in the mid to high 70s where you see running the bank going forward? Or if rates get cut, you could see this ratio drift into the 80s, and that probably provides you some pricing flexibility. Thank you.
spk14: Yeah, so we really don't run the bank trying to solve for our loan deposit ratio. It's just kind of a result of all of our activities that we have. You know, at 77%, we're a little bit lower than the peer median by two, three points. It gives us some flexibility to not have to put a lot of pressure on the deposit base. Remember my opening comments where we want to be fair and balanced with regards to our customers, making sure that we're competitive. But we don't have to push. We don't have to be at the upper end of pricing just to maintain those deposits. We have a good core deposit base, and it gives us flexibility to not have to chase with rate. And that's why our deposit costs have a tendency to be a bit lower across the board.
spk00: Thank you.
spk12: Our next question comes from the line of Manan Gosalia with Morgan Stanley. Please proceed with your question.
spk01: Hi, good morning. You know, I think you mentioned earlier on in the call that clients are deferring longer-term investments if they can. Can you talk about what's driving that? Is it just rates and they're waiting for rates to come down? Is part of it the environment and they need more certainty there? So any light on your conversations there would be helpful.
spk03: Yeah, I think probably all of the above. Clearly, rising interest rates have had some impact. Rising cost, cost of goods, cost of labor has had an impact. And then uncertainty related to the economy, geopolitical conditions, the political environment here in the U.S. all have, I think, created some restraint. Borrowers are, I believe, more optimistic today than they were 60 to 90 days ago, and that's in line with what appear to be improving economic conditions, but still reluctant to initiate long-term investments currently just based upon the things that I described.
spk01: So as we think about deposit betas when rates go down, I think you and a number of your betas have suggested that, okay, loan growth will accelerate as we get a resolution in some of these matters and as rates go down. But then on the flip side, does that mean that deposit competition picks back up? You know, I'm just trying to assess the level of confidence on the high and low end of that range of that 25 to 45 percent down beta.
spk14: Well, we still think loan growth for the year is going to be relatively muted. And, you know, competition for deposits has always been fairly intense. You know, what you don't want to do is use rate. You want to have a relationship banking model, which is what we do. We leverage off of the checking account of the consumer and an operating account of a business. And with that comes all other type of funding. You know, for us, we have no wholesale borrowings to speak of. We've paid off all of our FHLB advances, so we have the ability to lever up there to cover incremental growth without having to reprice our deposit base. So if there's incremental pressure or competition on deposits, I don't think it will be all that meaningful for us in particular.
spk01: Thank you.
spk12: Our next question comes from the line of Ryan Nash with Goldman Sachs. Please proceed with your question.
spk09: Good morning, Ryan. Good morning. Good morning, John. Good morning, David. Maybe a question on capital. David, in the slides you talked about maintaining 10%, you're over 8% on an adjusted basis. Maybe just talk about how you think about uses of capital outside of loan growth. I know we had some buyback this quarter. I think in December we were talking about the potential. for securities portfolio restructuring? Maybe just talk a little bit about how you think about incremental uses of capital from here.
spk14: Yeah, so obviously let me just go through the kind of checkpoints as we think about it. So we want to use our capital to support loan growth. It's going to be fairly muted, as I mentioned. We want to pay a fair dividend, 35% to 45% of our earnings, so we think that's covered. We then have excess capital that we look to put to work in growing our business. We've looked at mortgage servicing rights, as I mentioned just a couple calls ago. And we'll continue to look for businesses that we think can help us grow. We have talked about the securities repositioning. We continue to evaluate that. We have not made any decisions to do that just yet. And outside of that, we don't want our capital to get too far away from 10%. And the 10% is pegged on the fact that we think We're close enough with our ability to accrete capital every quarter to adapt to whatever the regulatory environment is going to be. There's a lot of uncertainty with regards to what that's going to look like, and there's no need for us to continue to ramp up capital to an unnecessary level and hurt our return. We think we're in an optimal spot to be able to maneuver, and so we think the 10% number is the right place to be.
spk09: Got it. Maybe to come at net interest income and net interest margin from a little bit of a different perspective, you gave us guidance for the first quarter and NIM is expected to be around 350 for the full year. Maybe, David, you or Darren talk about how you see it evolving over the course of the year. When you look out as we think about the declining rate cycle, where do you foresee the net interest margin settling out over time? I know historically we've talked about a 3.6% to 4% range, maybe just a little bit of color on where you see it settling out over the course of the next couple of years. Thank you.
spk14: Yeah, so I think you're going to see that margin pressure a little bit in the first quarter and slightly in the second quarter. The first quarter has another, call it $3 billion of received fixed swaps that will become effective that will have some negative carry that hurts us a bit in the first quarter. And then, you know, things start to change a bit beginning in the second quarter, so literally like after the first month. So I think you'll see a little bit more of a movement in the first quarter and a tiny movement in the second. And then we can start to rebound a bit where we'll finish, we think, you know, for the year in the 350 range. I think as things settle down, we had talked about 360 to 4%. that 360 was predicated on rates really going back down to very low levels, and that's the purpose of our whole hedging strategy is because we have lower deposit costs than most everybody, if we're going to protect our margin, we have to do it synthetically. And so we have about $20 billion in any given year of received fixed swaps and some other derivatives to help us manage the net interest margin in the 360 to 4% range. You're likely over time to be kind of in the middle of that, and we think that that's a possibility in time. Things have to settle out, and we've got to get deposit costs back to tie up with where rates are. But we can probably exit the year in the 360 range.
spk09: Thanks for the call, David.
spk14: Thanks.
spk12: Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.
spk04: Morning. On the operating leverage side, I mean, your guidance implies negative operating leverage, unsurprisingly, for 2024. But as you look at your trajectory on the revenue front, your assumptions there combined with your expense expectations. How do you view the likelihood of achieving positive operating leverage in 2025? And when do you expect that you could break into a more positive trajectory on a quarterly basis? Thanks.
spk14: John, I have a tendency to look at it on an annual basis, and you're right. We can't generate positive operating leverage in 24, primarily because of our outperformance in the first two quarters of 23, where we were having above 4% margin, which is way above most everybody. I think that's been acknowledged in the marketplace. I do think we can get back in 25 to generate positive operating leverage, and we'll start trending there towards the back half of the year as we see us bottoming out in terms of net interest income and margin in the second quarter, and then we can start to grow from there. We'll see what the economy looks like. We'll see what loan growth looks like. We think that picks up a bit. And we think the pressure on deposit made us start to go the other way. And as I just mentioned, we can exit with a little stronger margin. So I think positive operating leverage towards the back half is a possibility. And definitely for 2025. And we're going to get there for 2025. Right.
spk04: Okay, great. That's helpful. And then secondly, around credit... Regarding the MPA increase, I know you flagged the downgrades, the risk rating downgrades in some of the higher risk sectors. Maybe can you give us a little bit more color? Was it concentrated in any one sector? Was there a broader scrub of the loan book that you completed that led you to the multiple downgrades? Or is it just episodic? And then I guess just separately, Can you talk about the reserve? I know you build it a bit here. What's the outlook there? Could you continue to add from here?
spk03: Thanks. I'd just say, John, with respect to the increase in NPLs, we've called out portfolios that have been under some stress for a number of quarters now. What we saw in the quarter was some migration from criticized classified to non-performing, specifically in senior housing, in transportation and warehousing, transportation specifically, and office, and then additionally manufacturing of consumer discretionary items. So that is and was our expectation. We have one large technology credit that moved in the third quarter. That is episodic, we believe, and something that we can and believe we will manage through. So when you look at the migration, as we pointed out, We are moving back to more traditional sort of historical levels of non-performing loans, which is somewhere between 80 and 100 to 110 basis points. I think maybe David said the average was 102 or 106, 107 from 14 and 19. And we've guided to 40 to 50 basis points of charge-offs, which we think is in line with our expectations for potential loss in the portfolio over time. I think we feel we have good insight into the credits that we're managing as to why I would say the burden of increasing interest rates, increasing cost, cost of labor, operating costs, all those things have had an impact specifically on the industries that we've historically now called out, transportation, senior housing, office, consumer discretionary. And with respect to the allowance, we have a process we follow. go through every quarter, and I think we currently believe, obviously, that we've provided for potential losses in the portfolio over time unless we experience growth in the portfolio, paydowns in the portfolio, some changes and outstandings in the portfolio, or in economic conditions. You can assume that our allowance is appropriate and likely won't change. The trajectory of it will not change unless the economy changes.
spk14: And the only other thing, John, on that would be if If the risk ratings change, then that, up or down, that also impacts your provisioning or release of reserves. So I had that point with the other two or three that John mentioned.
spk04: And David, I'm sorry, if I could just, regarding that last point, isn't risk rating migration negatively assumed? Isn't it now assumed as part of your outlook, just given where we are in this downturn?
spk14: Yeah, that's right. You look at your reasonable and forecast period and think about where the credits are going. If that changes, though, to go the other way, that can cause you not to have to provide any more. So we've provided what we think we need to have. If things get better, then you don't need the reserves that you put up. You can release those reserves. If things get worse, then you have to provide more. You know, generally, loan growth is also a driver of having to add to the provision. If your loans are going the other way, then you don't need the reserves that you had set up for them, so you can have a release related to that. Economic conditions got a little better in the fourth quarter than the third, so that was a positive. But net-net, you know, we're continuing to look at the life of the loan and where that's going to go, and we think we have appropriate reserves for losses that are there.
spk04: Okay, great. Makes sense. Thank you, David.
spk12: Our next question comes from the line of Dave Rochester with CompassPoint. Please proceed with your question.
spk06: Hey, good morning, guys. On the NII guide, I was just wondering how slide six might change if we don't get those cuts you're factoring in for the year. I know you mentioned you're neutral to those, so maybe this range wouldn't change much. Just figured that might maybe change some of the deposit flow and beta assumptions in here and maybe some other stuff.
spk14: yeah so we tried to put that in if you look at the lower box on the lower end of that we say stable that was trying to address exactly what you were what your question is so to the extent that that we're kind of where we are um that was all within this range that's right that's right but the lower end yep gotcha and then for for the the 12 to 14 billion in the fixed rate loan production and securities investment you mentioned per year
spk06: I was just curious what the breakdown of that was for securities and loans and what yields you're putting on today and on both securities and investment and new loan production just on average. I know you've got many different categories of loans you're producing.
spk14: Yeah. So I think just in total, the kind of front book, back book between those two is about 200, 250 basis points of pickup. If you look at that 12 to 15, about a quarter of that's related to securities and That going on is front book, back book pieces have caught 300 basis points, and loans, front book, back book are probably in the 150 to 200 range.
spk06: Okay, great. And then just on capital, given your comments on 10% CT1 targeting that unadjusted, what does that mean for the pace of buybacks here? Is the fourth quarter pace a good one going forward for the next few quarters maybe? And then as it relates to your adjusted CO2 on ratio, which is just over 8% you've got here, how are you thinking about where you want that to be over time as the new regs kick in?
spk14: Well, one, we don't know what the new rules are going to be. So we fully loaded it with 8-2 to show you that that doesn't impact our stress capital buffer or our absolute minimum. We're in good shape there. We just need to see where the rules come out. By the time all that happens, AOCI is going to be in a different spot than it is today, assuming rates continue to come down a bit. We saw a pretty big move in all of the peers with AOCI this quarter. From a capital standpoint, we think 10 is the right number. What was it? The buyback pace. Again, we use the buyback as our last mechanism to help us keep our common equity tier one in that 10% range. And so the pace is do your favorite earnings expectation, take out the dividend, use a bit of that with low single-digit loan growth, and then the rest is either going to be buying mortgage servicing rights or things of that nature, and then we toggle with share repurchases. So, you know, I don't want to comment on whether we stay on the pace because then I'm getting your earnings guidance. That's a trick.
spk06: Understood. All right. Thanks, guys. Appreciate it. Thank you. All right.
spk03: Thanks.
spk12: Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your questions.
spk02: Morning, Gerard. Hey, Gerard. Hi, John. Hi, David. David, can you share with us, you guys have given us good detail on credit quality, and John, you pointed out that You know, the non-performing loan increase was to the sectors of your portfolio that you've already identified as being weak. Could we look at it another way? And you give us good details on slides 27 and 28 on the leveraged portfolio and the shared national credit portfolio. How are those portfolios holding up credit-wise? And when you think back to where we were a year ago, I remember many of the calls, the word recession was used quite often in those calls. We're not hearing that on this fourth quarter earnings call from nearly all the banks. So have these portfolios held up better than what you would have thought it from a year ago?
spk03: I would say yes, Gerard. The leverage portfolio is largely relationship-based. credit business. Those are banking relationships that we enjoy. We're close to those customers and we've been close to them throughout this period of elevated rates. There was some risk as rates rose that we had that there may be some softness in the portfolio, but I think it's performed well. The same is true of our shared national credit book. As we began to build a capital markets business to help us grow and diversify revenue and to meet more customer needs, We naturally then began to expand the size of our shared national credit book so that we could serve those customers that had need for those products and services. And with that, as you can imagine, comes some tall tree risk, single name risk. And while I mentioned earlier we have a technology credit that's fairly substantial, that's an NPL, that is an example of a shared national credit exposure that we have good visibility into. has very limited risk of loss, but still is a non-performing loan. But overall, I would say just based upon reflection on the performance of that book, it's been good. We've enjoyed expanding relationships, growing revenue from capital markets and or deposits, treasury management that we enjoy with those customers. And so I think we've been pleased with the performance of both the leverage book and the shared national credit book.
spk02: Very good. And then coming back to loans, I think, David, in your comments, you talked about loan demand remains soft and you're looking for low single digit growth for average loans in 2024. I know during our careers, the shadow banking industry has continued its competition against the banks, but it seems today there's more coverage of the private equity side getting into lending, maybe greater than we've seen in years. How are you guys competing against the private credit markets? And at the same time, are any of those companies, credit lenders customers of yours that you have to balance that relationship of a customer competing against you?
spk03: We have very modest exposure to private equity who then is we're not lending to private equity to in turn lend into our customer base. So if we have any exposure it would be very modest there. Separately we don't see private equity as a competitor necessarily within our core middle market customer base. I asked Ronnie Smith the question the other day if he could name a customer that we lost to private credit, and we can't think of one. Now, that doesn't mean it's not occurring in some of the markets that we're in, but by and large, given our focus on the core middle market business and investment-grade type shared natural credit exposure, we're not seeing private credit as a competitor today. On the wholesale side now, there are lots of competitors on the consumer side that we're seeing in a variety of different ways, including mortgage and home improvement that we compete with.
spk02: Which are non-traditional depositories. That's right. Okay, great. Thank you, John.
spk12: Our next question comes from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.
spk14: Good morning. Good morning. Hello?
spk10: Christopher Spahr, your line is live. Let's go ahead and move to the next caller.
spk12: Our next question comes from the line of Brandon King with Truist. Please proceed with your question.
spk07: Good morning. Hey, good morning. So, appreciate the guidance on expenses and expense control there. But I did have a question on just an update on the technology modernization project and kind of what you're baking in for expenses in 2024 and if part of that or the expense savings is related to, you know, maybe delaying some of that project for the years.
spk14: Yeah, Brandon, so we've given you our overall expense guide to be essentially flat after you carve out operational losses from the past year. We continue to make investments in our business. We call it R2, which is our transformation project in cyber and risk management, consumer compliance, a lot of investments. in areas of the bank that we're looking to offset elsewhere. Our R2 project has come along very well. We spend anywhere, depending on the year, 9 to 11 percent of our revenue in terms of technology cost. We don't expect that to change materially in the short term. We continue to evaluate how we can better leverage technology. I think we have a lot of upside potential to leverage that in our business to continue to improve and to continue to take out manual steps, manual processes, and have a technology solution to. We think our investment in technology is the right thing to do, and we're going to have a modern core deposit platform in the not-too-distant future, which we think will be a competitive advantage for us as well. So anyway, that's kind of the spending range, if you will, 9 to 11 for revenue.
spk07: Okay. And just to confirm, no delays in the timing of that?
spk03: Yeah, to answer your question specifically, that project is on time and on budget, no delays.
spk07: Okay, okay. And then just had a follow-up on credit, and particularly senior housing. Just wanted to get more details as far as your exposure there, and what are you thinking as far as ultimate loss content and protections from a credit loss?
spk03: Yeah, you know, we're seeing improvement in the senior housing space, notwithstanding the fact that we have a couple of credits we're carrying as non-performing. We... Generally, occupancy rates are improving over time. Today, we've got about $53 million in, I'm sorry, $57 million in, $118 million in non-performing loans and reserves against those credits of about 3.7%. So I think we maybe provided information on slide 20 in your deck. But we are seeing improvement in senior housing as occupancy rates pick up and people become a little more comfortable with communal living again amongst that age group.
spk07: Okay. Thanks for all the color.
spk12: Our next question comes from the line of Erica Najarian with UBS. Please proceed with your question. Hi.
spk11: Good morning. Good morning. One follow-up question, Dave. I think very notable what you said to Ryan's line of questioning, the 3.6 exit rate for the net interest margin in the fourth quarter. You know, a lot of investors are now focused on that exit rate. So I'm just wondering if I could ask you sort of what the component pieces is, or are, rather. So unless you would change anything on the – In terms of adding swaps, it seems like you do have $1.6 billion of notional rolling off in the fourth quarter. So I guess that's a good guy. You also mentioned a terminated swap gain in your 10Q, but you had like a forward look for four quarters, wondering what that could be for 4Q24. And then more notably, obviously, you guys have said unequivocally that it's the deposit assumptions that's really going to make a difference. I'm wondering sort of what the speed is that you're assuming on that 35% down beta, you know, especially if you think that the first rate cut, I think you said, was in May.
spk14: Yeah, so I think all in, the big drivers there are controlling the deposit costs. We do have the headwind of the $3 billion notional for starting swap in the first quarter, and then we're kind of in the run rate. The terminated... swaps are in the amortization already. Those aren't the huge drivers. I think after we get our headwind and if rates start to come down, then like I said, almost 60% of our beta is associated with index deposits on the commercial side, so they'll start to come down. You start then having the loan and security repricing, the fixed maturity repricing, adding 200, 250 basis points, it overwhelms that headwind towards the back end of the year, and you get a little bit of loan growth in the back end. All that helps you propel you to a much stronger fourth quarter finish than you have at the beginning of the year. So I think if you really looked at what is the one big thing that you have to get done, and it's controlling the deposit cost, and we do that through managing the beta as rates change. Like I said, 55%, 60% of it indexed. The other is decisioning we have to make. And that gets to be a little herky-jerky because, as I mentioned, some of that's money market that we can change pretty quickly. The other is CDs. We're locked in today. It's seven months. And as things renew this month, next month, and going forward, we're looking to be shorter rather than longer in so that we are prepared to take advantage to reduce our deposit costs as rates come down.
spk11: And a follow-up to that, you know, you mentioned 55 to 60 percent of that down data will be coming from these indexed commercial deposits. You know, one of your peers made a differentiation between indexed and contractual yesterday. And I guess just, you know, give us some sense of How much of that is contract versus index? But really it sounds like you're confident that either way you can control that to the downside, especially if, as you said, loan growth remains soft this year.
spk14: Yeah. So when we say index, we're talking about it's tied to Fed funds. When Fed funds changes through the contract, it changes automatically. It's not a contractual number locked in like effectively a CD. It's the day... It's just like a loan that's based on SOFR. I mean, SOFR changes, so does the loan rate that day. And so that's what we're talking about when we say index deposits.
spk11: Okay. Got it. Thank you.
spk02: Thank you.
spk12: Thank you. Our final question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
spk13: Good morning, Matt. Good morning. Any updated thoughts on potential regulatory changes to the debit card interchange rate or overdraft fees and thinking about potential offsets to that?
spk14: Well, so debit interchange, you're going through a discussion to adjust that down. As was written in the original law, they had to revisit the costs associated with debit interchange. To the extent that does get put into place, that will have a negative impact to us. I think that was going to be kicking in in June. So it's about a half a year, and based on our numbers, that's about a $45 million risk item to us in our NIR. Relative to the overdrafts, we're a long way from knowing where that comes out, if there are any changes, and I think that's a 2020. 2025 date that was mentioned, that just hit the wire. I think there's going to be a lot of discussion on that because we're disappointed in that. We think provision of liquidity to our customer base is really, really important. We do charge a fee for that, but we're paying an item for somebody and charging a fee, and to the extent we return that item to wherever it was written or used, that entity is going to charge a fee. And so it doesn't, it's not helpful to not be able to provide liquidity to our customer base. And so we're hoping there's going to be further discussion on that point. And I think it'd be premature to really talk about the impact of OD until we get further down the road. Yeah.
spk13: Okay. And then just separately, you know, good to see the elevated check fraud came down as you expected and the outlook kind of implies that you're confident that you're past this issue. I guess just want to reconfirm that and then also just any meaningful changes that you made to address it and whether it showed up in expenses or not.
spk03: I would just say that the countermeasures that we put in place, which include talent, technology, process changes, all have been effective. And we believe going forward the run rate will be $20 to $25 million a quarter in operating losses. And the expenses associated with those countermeasures are embedded in our run rate and in our projection for expenses for 2024.
spk14: You know, we've got to continue to be vigilant with regards to this, just like we are with cyber. So we have bad people attacking us, as does every financial institution, and we have to continue to stay ahead of it. We feel good about what we put in place, but we are not sitting idle. We're continuing to push and challenge ourselves to get even better than we are today.
spk13: Okay, perfect. That's helpful. Thank you.
spk03: Thank you. Okay, operator, is that the end of the calls?
spk12: Yes, I would now like to turn the floor back over to you for closing comments.
spk03: Okay, well, thank you very much. Appreciate everybody's participation today and interest in our company. Have a good weekend.
spk12: This concludes today's teleconference. You may disconnect your lines at this time.
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