Q3 2022 Regions Financial Corp Earnings Call
Good morning, and welcome to the regions 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'll be a question and answer session. If you wish to ask a question. Please press star one on your telephone keypad.
I will now turn the call over to Dana Nolan to begin.
Thank you for saying well I'm Gonna read on third quarter 2022 earnings call, John and David will provide high level commentary regarding a corner earnings documents. Once you layer on a forward looking statement disclaimer and non-GAAP information are available on the Investor Relations section of our website.
These disclosures are on <unk>.
I shouldn't materials prepared comments and Q&A I will now I'll turn the call over to John .
Dana and good morning, everyone.
We appreciate you joining our call today.
Once again delivered another strong quarter underscoring our commitment to generating consistent.
Stable long term performance.
We generated earnings of $404 million, resulting in earnings per share of 43 cents.
Our results include the resolution of our previously disclosed regulatory matter.
I wish more of an incremental $20 million reserve for potential losses associated with hurricane Ian and the strategic sale of $1 $2 billion of unsecured consumer loans.
Getting the regulatory matter and other adjusted items, we once again generated record adjusted pretax pre provision income.
This quarter's results reflect strong revenue growth driven by higher rates robust loan growth low deposit cost and well controlled operating expenses.
Asset quality remains broadly stable with credit metrics in line to slightly better than pre pandemic levels in general we feel good about the health of both our corporate and consumer customers.
Many of our business customers have adopted operating models capable of thriving and uncertain operating environment and remain cautiously optimistic about opportunities to grow and expand their businesses.
Consumers continue to maintain strong liquidity levels and unemployment in our footprint remains at historical lows.
This quarter's results are further evidence the investments we've made in talent technology and strategic acquisitions continue to pay off.
As expanded products capabilities and expertise are helping us to meet customer needs and deepen relationships.
Before wrapping up I want to take a moment to speak about hurricane Ian.
This was an incredibly powerful storm and communities in Florida, and South Carolina, all face difficult challenges as they begin the recovery process.
I am extremely proud of the way our teams are responding to meet the needs of our customers fellow associates and communities affected.
<unk> has a long history of helping communities through difficult times, and we will continue to support the recovery efforts.
In closing we have a strong balance sheet that is well positioned to perform in any economic environment.
We have a solid strategic plan.
Outstanding team and a proven track record of successful execution.
While sentiment across both business and consumers remains generally positive.
We will continue to monitor our portfolios for indicators distress.
We have robust credit and interest rate risk management frameworks.
Disciplined and dynamic approach to managing concentration risk.
Which has positioned us well to continue to deliver consistent sustainable long term performance.
Now Dave will provide some highlights regarding the quarter.
Thank you John let's start with the balance sheet average loans grew 4%, while ending loans grew 1% during the quarter ending loans reflect the impact of the strategic sale of $1 $2 billion of consumer loans on the last day of the quarter represents another example of our disciplined approach to capital allocation average business loans.
<unk>, 5%, reflecting high quality broad based growth across all businesses and industries, specifically financial services wholesale durables transportation information services in multifamily.
Approximately 70% of the growth again, this quarter was driven by existing clients accessing and expanding the credit lines to rebuild inventories and expand their businesses.
Commercial line utilization levels ended the quarter at approximately 43, 1% modestly lower versus the prior quarter. However loan production remained strong with linked quarter commitments up $4 $4 billion.
Unfavorable capital market pricing continues to augment loan growth. However, we believe improved market conditions will eventually lead to clients refinancing off our balance sheet through the debt markets average consumer loans grew 3%, while ending loans declined 1% driven primarily by the previously mentioned loan.
Sale.
Growth in average mortgage credit card and other consumer was offset by declines in other categories within other consumer interbank loans, which are primarily prime and Super Prime grew 14% compared to the prior quarter.
We expect full year 2022 average loan growth of approximately 9%. This assumes a slowing rate of growth compared to the third quarter.
Let's turn to deposits.
As expected deposits continued to normalize in the quarter average total consumer balances were modestly lower quarter over quarter, largely consistent with typical pre pandemic seasonal effects. Despite inflationary pressures consumer balances have remained relatively stable supported by wage increase.
<unk> and prudent spending.
Additionally, new customers and additional account acquisition remains healthy.
Normalization has been more evident than average corporate and commercial deposits, which are down $2 9 billion quarter over quarter. However, overall liquidity managed by the corporate bank on and off balance sheet is relatively stable compared to year end levels, reflecting the movement of some customer <unk>.
John's to off balance sheet Treasury management options.
The movement to these products and the Remixing out of noninterest bearing checking accounts into higher yielding money market and savings accounts is as expected and as reflected in our overall deposit beta assumptions for this cycle.
Ending balances have declined approximately $3 $7 billion year to date in line with our full year expectation for overall deposit reduction of between five and $10 billion.
A rapidly rising rate environment is a significant competitive advantage for regions based on the combination of our legacy deposit base and a more resilient components a surge deposits.
Let's shift to net interest income and margin.
Reflecting our asset sensitive profile net interest income grew $154 million or 14% quarter over quarter, while reported net interest margin increased 47 basis points to 353%.
Our adjusted margin was 368%, reflecting the combined effects of average cash balances of $14 billion and P. P. P.
The cycle to date deposit beta remains low at 9% contributing to higher than anticipated net interest income growth.
We expect full year deposit betas in the high teens.
In addition to higher rate growth in average loan balances provided further support for net interest income.
Looking forward, while we do expect cash balances to continue to normalize we do not anticipate accessing more expensive wholesale borrowing markets for multiple quarters.
This coupled with additional hedge maturities in the fourth quarter provides further runway for margin expansion.
Total net interest income is projected to increase 7% to 9% in the fourth quarter and is now expected to be approximately 33% to 35% higher than the first quarter of 2022.
Reported net interest margin is projected to surpass three 8% in the fourth quarter.
While we have purposely retained leverage to higher interest rates during the period of low rates our attention has shifted to normalizing our interest rate risk profile in today's uncertain environment.
Through the first half of 2022, we added $15 billion of swaps and securities. The swaps become effective in the latter half of 2023, and 2024 and generally have a term of three years.
This represents approximately 75% of the total hedging amount expected this cycle.
As previously disclosed hedging already completed will support a three 6% margin floor, even if rates moved back to below 1%.
We made some modest tactical changes to our profile in the third quarter, primarily extending some of our current protection.
We still expect to execute in an additional $5 billion of hedges and well balanced market rate levels and risk to growth as we decide the appropriate time to finish the program.
Now, let's take a look at fee revenue and expense adjusted noninterest income declined 5% from the prior quarter as a modest increase in wealth management was offset by declines in other categories.
Service charges declined as the impact of policy enhancements implemented in mid June offset increases in other service charges, including Treasury management.
We expect to implement a grace period feature sometime in 2023.
Overdraft policy changes made to date are expected to result in full year service charges of approximately $630 million in 2022.
In 2023, after including the impact of a Grace period feature full year service charges are expected to be approximately $550 million.
Within capital markets activity was negatively impacted by the delay of M&A deals and higher rates in real estate capital markets.
<unk> also include a positive $21 million CVA and DVA adjustment.
We expect capital markets to generate fourth quarter revenue in the $80 million to $90 million range, excluding the impact of CVA and DVA.
Card and ATM fees declined quarter over quarter credit card income was negatively impacted by higher costs associated with a reward liability while check card and ATM fees produce lower interchange due to a decline in both transaction volume and discretionary spending resulting from higher.
<unk>.
Elevated interest rates and seasonally lower production drove mortgage income lower during the quarter, but was partially offset by higher servicing income.
Wealth management continues to perform well despite ongoing market volatility we expect this business to grow incrementally year over year.
We also expect full year 2022, adjusted total revenue to be up 11% to 12% driven primarily by growth in net interest income, partially offset by lower PPP related revenue and the impact of overdraft policy changes.
So let's move on to noninterest expense.
Reported professional legal expenses reflect the charge related to the resolution of our previously announced regulatory matter we.
We do anticipate $50 million of this charge will be mitigated by insurance reimbursement proceeds, which we expect to receive in the fourth quarter.
Excluding this and other adjusted items adjusted noninterest expenses increased 4% compared to the prior quarter.
Salaries and benefits increased 3%, primarily due to an increase of 277 full time equivalent associates as well as one additional day in the quarter.
This increase was partially offset by lower variable based compensation and a decrease in payroll taxes.
Over 70% of the increase in associate head count our customer facing within our three lines of business.
We expect full year 2022, adjusted noninterest expenses to be up four five to five 5% compared to 2021.
Importantly, this includes the full year impact of the acquisitions, we completed in the fourth quarter of last year as well as inflationary impacts.
With the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 6% in 2022.
Although the consumer loan sale and Hurricane specific reserve create some volatility in certain credit metrics this quarter underlying credit performance remains broadly stable.
Reported annualized net charge offs increased 29 basis points. However, excluding the impact of the consumer loan sale adjusted net charge offs were in line with our expectations at 19 basis points, a two basis point increase over the prior quarter.
We are seeing some deterioration in certain commercial segments that contributed to a quarter over quarter increase in nonperforming loans, but it is important to note that we remain below pre pandemic levels.
Provision expense was $135 million this quarter.
The increase relative to the second quarter was due primarily to another quarter of strong growth in loans and commitments normalizing credit from historically low levels and a $20 million reserve build for potential losses associated with Hurricane Ian.
These increases were partially offset by a net provision benefit of $31 million associated with the consumer loan sale.
Our allowance for credit loss ratio was up one basis point to 163% of total loans, while the allowance as a percentage of nonperforming loans remained strong at 311%.
Our year to date adjusted net charge off ratio is 19 basis points and we now expect our full year 2022, adjusted net charge off ratio to remain approximately 20 basis points.
We ended the quarter with a common equity tier one ratio at an estimated nine 3%, reflecting solid capital generation through earnings partially offset by continued strong loan growth.
Given the uncertain economic outlook, we plan to manage capital levels to the mid to upper end of our nine 5% to 975% operating range over time.
So in closing we delivered strong year to date performance. Despite a volatile economic conditions, we will continue to be a source of stability to our customers, but also remain vigilant with respect to any indicators of potential market contraction pre.
Pre tax pre provision income remained strong expenses are well controlled.
Credit remained broadly stable and capital and liquidity are solid wood.
That we're happy to take your questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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Please hold while we compile the Q&A roster.
Okay.
Thank you. Our first question comes from the line of Ebrahim <unk> with Bank of America Merrill Lynch. Please proceed with your question.
Good morning Ebrahim.
Good morning, John .
Maybe just to start out obviously.
Revenue backdrop and are looking pretty good heading into next year, just give me give us a sense of how you're thinking about using some of these towards franchise investments. How we should think about expense growth going from here both in terms of investments you're making in <unk>.
Are you seeing any cost that you are seeing and just using a better revenue backdrop to actually invest in the franchise.
Yes.
David So as you saw we made some quite a bit of investment last year in the fourth quarter through three non bank acquisitions. We continue to look for opportunities in all three lines of business to continue to grow.
Grow our franchise.
We have a lot of things going on we have our.
Our new system that were systems, we're going to be putting in over time.
We will see cost increases related to that but we have our continuous improvement program that we continue to leverage to keep our total expense growth under control, we're not going to give you guidance for next year, but we do have a page in the deck that shows you what our compound annual growth rate has been very strong and managing.
Keeping our costs down and we're going to continue to do that while making appropriate investments.
Don't have anything specific.
We are on the look for opportunities to help grow our grow our three lines of business.
And those data are essentially tuck in deals be finished vehicle fee kind of deals that you've done.
Recently similar to those so that's correct.
Got it and just one quick question on the hedging side he's been understood as we think about in the world where it needs with expectations relative to the forward curve is that any of this too.
So that the margin at least in the short run red beds, not cutting, but we actually see the it's growing much higher than what the forward gross pricing.
Well. Thank you have a couple of different things higher rates for our type of franchise is good for us so to the extent we overseas.
455% when fed funds will benefit from that.
Clearly if it stays.
If it stays up there longer.
You end up having some incremental credit risk because if rates are that high that means inflation continues to be.
Inflation continues to be higher than the fed wants and they have to keep going.
So there could be some incremental credit risk until you.
Until you get to.
Settle down from a rate increase standpoint.
They are.
The reason, we haven't completed our hedging program and the reason we have $13 billion of cash is partially.
Wanting to and I want to use hedge again, but part of.
Trying to figure out where rates might go so we have a bit of dry powder. That's about $5 billion that we have dry not counting of 13 on the on the books to hedge.
And we're looking for a better foothold so.
We can be patient or NII is growing nicely without that and I think in our material. We show you that we can protect the margin right now of $3 60, if rates were to go back to 1% or below.
<unk>.
Being patient I think is the right thing for us to be.
Thanks for taking my questions.
Yes.
Our next question comes from the line of John <unk> with Evercore ISI. Please proceed with your question.
Good morning, John Good morning.
Good morning.
On the credit front, if you could.
For more detail.
Unsecured consumer loans.
In terms of.
Thanks will.
Types of credits that were sold.
Remaining sales expected on that front and if so how are you thinking about the loss content on any remaining transactions on that side.
Sure John This is David.
So we we acquired interbank.
The fourth quarter last year, its an unsecured consumer portfolio. We told you at that time, we can grow that portfolio double digits that industry was about $175 billion industry. So youre talking about $1 billion seven at $2 billion worth of production each year, but we also had this other unsecured consumer.
So that we had.
And built up over time.
Those loans were not being serviced by us are serviced by a third party and we thought that the right thing to do from a capital allocation standpoint, and risk reduction standpoint would be to sell that portfolio as we continue to invest in growing our interbank book.
As you can see in the.
And the slides, we had reserved about $94 million.
Ended up had taken charge offs of 63, so we had $31 million worth of provision benefit.
Fluid through the financials this quarter, but it was really it was really a capital allocation and our risk.
Reduction measure and we don't we don't anticipate.
At this time, having anything else, we don't have any other unsecured portfolios like that but that's not true we do have a small.
Small and that's in runoff.
Got it Okay, Alright, that's helpful and then steffan.
Currently also on credit sorry, but.
Can you give us a little detail around the decrease in MPS I know you mentioned some commercial segments of what commercial areas did you see that increase anything indicative of a trend that you see there and then.
I know you.
You mentioned that you are seeing some normalization in credit that influenced your provisioning.
What areas are you seeing that normalization and could that interpreted to clear.
Higher charge off expectations for 'twenty, three even though I know you've got a 20 bps for 2022.
Yeah, John This is John .
So we are seeing some stress in the office portfolio, particularly urban office reflection of some of the back to work.
<unk> that we're all seeing in the economy.
<unk> consumer discretionary related kinds of businesses, where consumers are choosing not to spend as freely as they had been some softness in not for profit health care related to rising labor costs.
And inflation Similarly in senior housing again, we're seeing I would say some impacts from both labor and inflationary cost and then some disruption and technology related businesses all of that.
Characterize as the beginnings of what we would call normalization. We're at historic low levels in terms of credit quality. The best I've seen in my almost 40 year career and so we do expect.
Credit metrics to begin to normalize in 2023 and beyond currently at 52 basis points of Npls still much better than pre pandemic levels of charge offs. As you noted 19 basis points for the quarter, we expect 'twenty for the year.
We will firm up our guidance for 2023 in late December or January but our current projection is the charge offs in 'twenty three will be somewhere between 25, and 35 basis points as we begin to see a return to more normal.
<unk> again.
Our credit quality.
Alright, Thanks for taking my questions very helpful. Jim.
Thank you.
Our next question comes from the line of Ken Houston with Jefferies. Please proceed with your question.
Good morning, Ken.
Hey, good morning, everyone.
Just focusing on the fee side I saw you're comparing to.
Reiterate your 23 Overdrive service fees guidance of $5 50, I just wanted to take us through.
The recent settlement and.
The incremental changes that youre, making in the confidence you have in continuing to reiterate that level of service fee for next season.
Yes.
Ken Thank you for the question.
<unk>.
What we are observing is customer patterns are very much what we expected when we made changes.
You might recall that we.
Changed our posting order, we provided customers with alerts we reduced.
The cap on daily overdraft fees, we eliminated charging for NSF we.
Eliminated charges for overdraft protection transfers most recently, we're giving customers access to their paycheck two days in advance. We also have implemented an overdraft protection line of credit to help customers.
And then probably the second half of 2023, we'll also implement a grace period. So all of that designed to help customers better manage their their finances, and we're seeing a positive impact.
Not necessarily a trend but.
I would say over the last quarter, we've seen about a 20% reduction in the number of customers who are overdrawing their accounts, which is again I think a very positive thing we've talked about historically, how we've dealt with changes in fees and I point to overdraft fees as an example since 2000.
11, we've seen almost a 40% reduction in the collection of overdraft fees and yet we overcame that and grew non interest revenue over that same period of time almost $500 million. So.
We have a history of continuing to evolve and change our business to two.
To overcome losses in fee revenues were doing that through growth in capital markets growth in Treasury management growth in wealth management.
Other parts of our business and so we feel good about the impact to customers and believe that we can manage the impact to our business.
Got it Okay and second follow up just in terms of wealth management really is buck the market trend here continuing to increase at a in a really tough market can you just talk about is that.
New customer wins.
Business adds and is that.
More than overcoming just the natural market challenges.
Yes.
The combination of a number of things one we have a very strong retail investment services business works very closely with our branch bankers and in this environment you see a lot of customers who are interested in acquiring annuity. So we've seen nice growth in that source of fee revenue, our institutional business as <unk>.
Rowing and we've had some nice wins, there and then within wealth management, both opportunities to move new business, new customers and we've additionally, seen about about 20% of our increase in fee revenue.
The personal wealth management business as a result of customers moving money to us during this period of time, where theyre looking for more stability our approach to the businesses is as a fiduciary and I think during uncertain and volatile times customers are choosing to increase their.
A business with us so all of those things are contributing to growth in wealth wealth fee income.
Okay, great. Thank you.
Our next question comes from the line of Erika Najarian with UBS. Please proceed with your question.
Good morning, Erin good morning.
Good morning.
My first question is.
For David David Youre, implying an egg.
1.3, 75 billion in the midpoint of the range of your guide and I'm wondering as we think about.
That is the jumping off point.
Do you think that you can continue to grow that level on.
On the forward curve in 'twenty three.
Yes, I mean, I think we have as I mentioned earlier, we have some dry powder left we still have $13 billion of cash we don't have to access the wholesale market for <unk>.
Several quarters based on our estimates we have.
So a little bit of hedging to do.
Did some slight repositioning this past quarter to help continue to grow NII and and our resulting margin and really taking advantage of what could be a much higher rate environment I would tell you our guidance is baked.
On a 75.
75.
Basis point increase in November followed by 50, and then 25.
If I had to if we had to do it all over again, we probably have that a little bit higher.
So I think we have some.
Incremental opportunities to grow.
And our loan growth has been nice we have a very solid balance sheet.
We leverage our deposit franchise.
And I think you can.
<unk>.
We're hitting a pretty good tailwind here hopefully.
Hopefully wrapping up the year strongly and really positioning 'twenty three to be a pretty pretty spectacular year as well again, we'll give you better guidance when we get to the earnings call in January .
And as a follow up.
As you think about deposit trends clearly the rate curve.
Like the terminal.
<unk> 100 basis points.
Greater than last spoken this type of earnings.
Contact.
Wondering if you could give us a sense of you know how.
How do you you've been very active with regards to managing some of the surge deposits.
Do you think about deposit growth from fourth quarter do.
Do you think most of the surge deposit and that impacted us in Germany.
And additionally, with a 9% cumulative beta in the third quarter, how should we think about terminal beta within the.
The new fed funds.
Right.
The forward curve is implying.
Yes so.
We've been saying all along that we expected the deposits to decline in the corporate space in particular, those surge deposits, 5% to $10 billion were down about $4 five since year end since last year end and I think that.
We still expect that to happen.
We're holding onto more than we thought and so perhaps that's a positive to us.
I think as you think about betas.
Ada last cycle was about 29 right at 30% we have been guiding that is going to be higher. This go round to the mid to upper thirty's.
Our cumulative beta now is at nine.
Linked quarter, we had 11.
This next quarter Youre going to see that move up a bit.
We expect about a 30% beta in the fourth quarter. It will take our cumulative to the mid teens and then in the first quarter, we're probably going to see even a higher beta than that call. It 50%.
Which you'll get our cumulative to about 25% at that time, So I think youre going to just continue to see this acre.
Bit but.
We believe our beta as late as like last time will be lower than our peers, which is the value of our franchise.
But call it mid thirty's to for <unk>.
Thank you.
Our next question comes from the line of Gerard Cassidy with RBC capital markets. Please proceed with your question.
Good morning, Gerard room, David Hey, guys.
Morning.
Can we follow up on the credit side of it again I know your levels of credit delinquencies and charge offs are extremely low.
But John when you were talking about some of the commercial stuff can you share with us just how large the syndicated loan portfolios today as well as the leveraged portfolio.
Are there any signs that that's.
Syndicated portfolio is showing signs of more weakness in your just in footprint and portfolio.
Sure.
Sure Gerard first of all no would be the answer to the last question Okay.
The syndicated portfolio represents about 25%.
Of our overall portfolio.
Interestingly, we've had a 27% increase in aggressive investment grade balances over the last 12 months.
And so the investment grade portion of our overall portfolio is about 40% today.
Over the last three years or so we've seen the probability of default come down by 19 basis points.
In other words, the quality of our book continues to improve we believe.
Our leverage book is defined.
$3 four is roughly nine and a half a billion dollars in total and about 86% of that is in the shared national credit exposure. So again pretty high quality, we think and we're not seeing any deterioration.
Asian to speak of.
That portfolio at all.
Draw this David we have.
So you won't get to the back of our deck, but on page 25, we have a lot of what John was just speaking to.
And it really shows the.
Quite a bit of improvement in terms of probability of default and a investment grade improvement.
Great. Thank you and then following up on deposits, obviously as you pointed out David a few times on the call the strength of the franchises the deposits which is true for.
Most banks prior to the prior to quantitative easing of course, but what's striking is your slide 19 that those medium customer deposit balances just remains so healthy.
Have you guys dug into it is it.
I think you made reference about maybe some higher pay checks on the consumer side, that's keeping balances, but what are you guys sensing from why these balances just doesn't seem to be really falling off just yet.
Yes, so the consumer has been very resilient in particular this this bucket that we have on that page.
They that group happened to be that cohort happened to be the recipient of a lot of stimulus.
They also the recipient of minimum wage increases or unemployment rates below 4%, so people working and being prudent where theyre spending and so they just haven't.
They just have that spent more than they make and.
And I think it's attributable to what John just mentioned in terms of overdrafts being down to I think there will be more cautious and careful and this this.
The period of time.
With inflation you would expect this group to be hit more adversely.
But they also disproportionately benefited so thats why youre seeing this.
On the surface it doesn't make sense to you, but that's what the data is telling us.
We've gotten pretty granular with this group.
Account by account by account, which is where we got the information from.
And David This group you're referring to is this would you say a FICO score group of high 600 is the low seven hundreds or is that about right. It's not it's not just.
Lower income lower FICO.
It has to do with how people manage their money. So that's lower balances. So this customer segment was under $1000.
That could be people that have five FICO is they just spend spend about what they make so they don't have a lot in their account so it's not necessarily the lower FICO band.
Great. Thank you.
Yes.
Our next question comes from the line of Bill <unk> with Wolfe Research. Please proceed with your question.
Thank you and good morning, everyone.
Sure.
Following up on your.
Your comments on slide 19.
Does the data.
Ill tell you that.
If that is going to have to do more or where does your interpretation of this suggests rather that consumers and businesses are just in a better position to weather the downturn I'm curious to hear sort of just your interpretation of it.
Slide 19.
Some.
The fed doing more in terms of.
Raising rates and slowing inflation, our stimulus or what from what context or yes.
So the fed doing more in the sense that it's this high level of liquidity and capacity to spend that is in and of itself fueling inflation and perhaps.
That could lead the site to do more.
From that perspective.
We certainly think the fed.
Is getting after inflation and.
As a result, we think their move is going to be pretty strong. This next.
Next couple of moves at least.
And.
But this customer segment is just they are just better so our business is frankly better prepared for whatever downturn or slowdown we might have seen our base case is not a recession, but we do think that profitability of that has increased and if the fed moves at the pace. We think there is a strong likelihood that that can happen.
It will be fairly mild.
But we do think that.
Customer spend patterns are down we saw that in our debit card.
Transactions this quarter quarter over quarter they were down.
And so we think people are already being prudent.
With that the inflation that we're seeing is coming from labor in a very tight labor market, it's hard to get on top of that and less unemployment rate goes up some.
So I think thats, what will happen over time, and then other inflation is being driven by commodities, which is really a supply imbalance right now.
Versus demand, but with the fed moving at the pace that they're moving is going to slow that down it's going to bring demand back to supply.
And I think Youll see us the expectation is you would see a slowdown from that standpoint.
That's very helpful and the expectation of.
Mild.
Reception to the extent that we have one that's consistent with your reasonable and supportable outlook on slide 23, but just for sensitivity purposes could you give a sense of.
What kind of impact taking the unemployment safe to 5%.
5% level.
And the reserve for example.
I can give you some data points, but it is important to know that when you start picking on one particular item. There are a host of things that go into the calculation. So what youre asking for is everything else being stable except for.
Unemployment going to five or 6%.
So if you were to do and no. Other changes no response from the bank no anything you would probably have a reserve that's 20% higher under a 6% unemployment but.
Again, you start taking into account.
6%.
Unemployment.
Our interest rates and so our NII is likely overwhelming whatever credit issues that we might make in so.
It's a it's a nice thing to think through but there are just too many parts that kind of.
Figure out what the net net is we think higher rates.
Four regions.
It's still a net positive.
That's very helpful. Thank you and if I can just for clarification ask up.
Final question on Slide 23.
<unk>.
Sorry.
Yes.
Forget what slide it was but your overall commentary about protecting them in that three 6% range I think it was slide 20.
2023 and beyond.
Beyond 'twenty three days of protection extend and would that protection is still hold and then extreme where rates fall.
Sure.
To take it to an extreme where if <unk> were to return to the protection is still is the protection still in place or is it only up to a certain level of fed funds well generally when we put in hedges are about three years in duration. So if you were talking about middle of 'twenty three 'twenty four start so you're three years out from that so youre at 26 2000.
Seven protection.
And.
And so we'll we will look to extend those we still have room to.
For more hedging and it's dynamic we study. This every single quarter and we've got a group of desert everyday and so this is just a static.
Position that we're showing you as of the date, we produce it.
Sure.
That's very helpful. Thank you for taking my questions. Okay.
Our next question comes from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.
Hey, good morning.
I guess I wanted to ask David maybe for you first.
Is it that makes you.
I think these deposit betas will be higher this time around based on what you've seen so far is it really just the blending into those surge deposits.
Any sort of change in customer behavior.
I just would think with all your liquidity that would actually be a little bit lower based on what we've seen so far.
Well I think one will come from.
Zero.
And.
We did have a lot of surge deposits $40 billion for the surge deposit suite, we think that that's going to.
No.
A third of that is going to move out expected, 5% to 10 hadn't happened yet.
If we've missed it we've been probably a little bit more conservative.
We much rather give you a mid thirties then.
Then a 29, where we ended last cycle, but.
I think I think expectations would be for everybody it should be a bit higher.
We're coming from a low in going to a higher rate environment than we saw last time as well.
And so we kind of peaked last time pretty quickly and then started to come back down in.
19, it was so.
Again, if we miss it is probably because we're a little conservative.
Okay. That's helpful. And then just you referenced.
The level of liquidity cash balance a fair number of accounts that you still have securities have been down in next couple last couple of quarters. Obviously, we saw some of those deposits out and you referenced no more borrowings.
All of those puts and takes there.
How low could you see cash balances go and do you think youll have to continue to take securities lower to offset more of these potential outflows without borrowing.
Yes, we do.
Generally would run with 1 billion to $2 billion of cash we've got.
13 to really take care of.
<unk>.
The surge deposits that we're going that we expect to run out and we've been a little bit opportunistic with not deploying our cash and securities because we didn't need to.
Because we had good loan growth and we had good hedging in protection and so our NII was growing nicely. There was no reason for us to we could have generated more NII, but at the risk of missing an opportunity to invest that cash at a much better environment, which is what we're getting so I think being patient here.
As important and we really want to use that cash to fund our loan growth.
More importantly, our first order of business.
Versus trying to put it in the Securities book at this point, if we see where we think rates make cap out could we use our securities book for some incremental hedging, yes, we can do that but.
Think about it as.
We still have a lot of access to bar from FHA Albi our toe.
Liability cost right now at 23 basis points is the lowest in the peer group and we don't see where we need to access wholesale anytime soon.
Okay. That's great. Thanks for the time and congrats on the NII story playing out.
Thank you.
Our next question comes from the line of Matt O'connor with Deutsche Bank. Please proceed with your question.
Actually all my questions have been answered thanks.
Alright, Matt.
Okay.
Thank you. Our final question comes from the line of Michael Rose with Raymond James. Please proceed with your question.
Michael Hey, good morning, Thanks, Good morning.
Just two quick questions.
Just as it relates to hurricane in.
I think.
Around 12% of your deposits are within some of the counties that got kind of historically, you've seen some deposit inflows from aid and things like that.
Is there any sort of expectation that you have for <unk>.
Potential of deposit inflows and isn't material.
Michael at this point, we don't there is still a lot of uncertainty there, saying Ian hit right here at the quarter quarter end, we did our best estimate of trying to figure out what the damage was going to be but youre right to point out that oftentimes in these storms. There's a lot of money that comes into federal dollars state dollars.
Insurance money, but.
But we haven't really contemplated any of that in our deposit guidance does not reflect any additional.
Deposits coming from those sources.
Yes.
Okay helpful. And then maybe I am sorry, if I missed this but sort of the range for capital markets was moved a little bit down.
As we think about going into next year.
Obviously the backdrop is.
Softening to some degree is that kind of the new range that we should kind of expect in the kind of the near to intermediate term for.
With F&I.
I wouldn't I wouldn't sign off on that just yet for next year, we'll give you better better range. When we get to the January earnings that was really just more for this next quarter because of what we're seeing right now in particular with M&A.
And in real estate capital markets. So.
Don't lock that in for 2000.
'twenty three.
Okay, I understand youre, not going to give any sort of guidance I totally get what would be kind of the broader puts and takes in your eyes.
B within the kind of the prior range or above at or below it et cetera.
I think a.
We can get M&A back on track to where it was.
If you can get real estate capital markets to open up a bit can you just get more activity the whole capital markets are kind of down right. This minute.
We're going to continue to add some bolt on acquisitions or at least looking for opportunities.
We had a couple that we added this year this past year and so we're going to do some things to see if we can't help augment the pressure that we're feeling from the lack of having again M&A in our real estate capital markets.
So just to be clear, we're not contemplating any acquisitions in the quarter yes.
Question.
Understood.
Alright appreciate it.
The detail. Thank you guys.
Okay. Thank you okay.
That was the last question. Thank you all for your interest in our company appreciate you participating today.
Have a good.
Ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.