Q4 2022 M&T Bank Corp Earnings Call
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Welcome to the T Bank fourth quarter and full year 2022 earnings conference call.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to Brian Clark head of marketing and Investor Relations. Please go ahead.
Thank you Gretchen and good morning.
Thank you everyone for participating in <unk> fourth quarter and full year 2022 earnings conference call.
It's by telephone and through the webcast.
If you have not read the earnings release, we issued this morning, you may access it along with the financial tables of schedules by going to our website.
Www MTB dot com.
Once there you can click on the Investor Relations link and then on the events and presentations link.
Also before we start I'd like to mention that today's presentation may contain forward looking information.
Josh scenarios statements about this information as well as reconciliations of non-GAAP financial measures.
Alluded in today's earnings release materials, as well as our SEC filings and other investor materials.
These materials are also available on our Investor Relations webpage, and we encourage participants to refer to them for a complete discussion.
We're looking statements and risk factors.
These statements speak only as of the date made and <unk> undertakes no obligation to update them.
Now I'd like to turn the call over to our Chief Financial Officer, Darren King.
Thank you, Brian and good morning, everyone.
As we reflect on 2022, we want to start by taking a moment to recognize the hard work and dedication of our more than 22000 colleagues.
Tireless efforts to support our customers and communities during challenging times are the heartbeat of <unk>.
We also give a shout out to number three and the early responders who saved his life.
Can you remind us all about the bigger game of life.
A year ago, we outlined three key objectives for 2020 to complete.
Complete our long awaited merger with peoples United.
Boy excess liquidity to reduce asset sensitivity, while protecting shareholder value and to distribute capital that isn't required to support lending in our communities.
Achieving those objectives, we believe aligns with our goal to build a customer focused bank and result in balance sheet.
<unk> consistent predictable earnings over long periods of time.
Against those objectives here are a few.
Highlights of the work done in 2022.
We closed the acquisition of peoples, United the largest in our history.
We also completed the systems conversion and continue the process of integrating this valuable franchise.
The financial benefits of this combination are consistent to slightly better than our expectations at announcement.
We repositioned the balance sheet to deploy excess liquidity, reducing our interest bearing deposits held at banks from $41 9 billion at the end of 2021 to under $25 billion at the end of 2022.
And deploying that excess liquidity, we reduce costly wholesale funding.
We organically that is excluding the impact of peoples grew loans by $4 $1 billion and added $7 billion in net investment securities growth.
These efforts, which also included the retention of most of the residential mortgage production as well as the acquired peoples, United 12 billion dollar longer duration securities portfolio.
I've led to reduction in asset sensitivity, helping.
Helping to protect our net interest margin from future rate shocks.
In terms of capital, we resumed common share repurchases and last year's second quarter, now, having repurchased $1 $8 billion in common stock representing 6% of outstanding shares and our common dividend grew by 7% in 2022, representing the sixth year of consecutive increases.
And despite the impact from the acquisition and the rapid rise in long bond yields our CET one ratio remains strong at 10, 4%, which continues to exceed our median peer bank.
Our hard work translated into strong full year financial results.
GAAP based diluted earnings per common share which include merger related charges were $11 53.
<unk> to $13 80 in 2021 down 16%.
Net income was $1 99 billion.
Compared with $1 $86 billion in the prior year improved by 7%.
These results produced returns on average assets and average common equity of 1.05% and $8 six 7% comp.
Compared to $1, two 2% and 11, 4% respectively in 2021.
We note that these results were impacted by merger related expenses associated with the peoples United transaction.
Such expenses amounted to $580 million in 2022 or $2 63 per share.
Those same expenses were $44 million or 25 per share in 2021.
In accordance with the SEC's guidelines. This mornings press release contains a reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
Consistent with our long term practice <unk> provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions.
We believe this information provides investors with a better picture of the long term earnings power of the combined institution.
Non operating income, which excludes the after tax impact from the amortization of intangible assets as well as merger related expenses was $247 billion during 2022 up 30% compared to one with $1 9 billion in.
In the prior year.
Net operating income per diluted common share was $14 42 <unk>.
Compared with $14 11.
In 2021 up 2%.
Net operating income for 2022 expressed as a rate of return on average tangible assets and average tangible common shareholders' equity was $1 three 5% and 16, 7%.
This compares with $1, two 8% and 16, 8% respectively in the prior year.
On a net operating basis, we generated 4% positive operating leverage and 43% growth in pretax pre provision net revenue.
This was due in large part to the $2 billion or 53% increase in taxable equivalent net interest income.
The net interest margin increased from 63 basis points year over year.
We're pleased with the results we achieved in 2022 in the face of many challenges not the least of which was a rapid shift in monetary policy.
But our work is not done.
We will continue to recognize the value created by our merger while building a more capital efficient less asset sensitive balance sheet that will produce stable and predictable revenue and earnings over the long term.
Let's take a look at the results for the fourth quarter.
Diluted GAAP earnings per common share were $4 29 in the fourth quarter of 2022.
22% compared to $3 53 in the third quarter of 2022.
Net income for the quarter was $765 million, 18% higher than the $647 million in the linked quarter.
On a GAAP basis <unk> fourth quarter results produced an annualized rate of return on average assets of 153% and an annualized return on average common equity of 12, 5% 9%.
This compares with rates of $1, two 8% and 10, 43% respectively in the previous quarter.
Included in GAAP results were after tax expenses from the amortization of intangible assets amounting to $14 million in each of the two most recent quarters, representing <unk> <unk> per common share in both quarters.
Pre tax merger related expenses of $45 million related to the peoples United acquisition were included in the fourth quarter's GAAP results.
These merger charges translate to $33 million after tax or <unk> 20 per common share.
<unk> net operating income for the fourth quarter, which excludes intangible amortization and the merger related expenses was $812 million up 16% from the $700 million in the linked quarter.
Diluted net operating earnings per common share were $4 57 for the recent quarter compared to $3 83 in 2022 third quarter.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of one 7% and 21, 3% in the recent quarter.
The comparable returns were 144% and $17 eight 9% in the third quarter of 2022.
Both GAAP and net operating earnings for the fourth quarter of 'twenty two were impacted by certain noteworthy items.
Fourth quarter results included a $136 million gain related to the sale of <unk> insurance agency.
Reported in other revenue from operations as well as $135 million.
Contribution to <unk> charitable foundation reported in other cost of operations.
These items collectively net and did not material impact net income.
Let's take a deeper dive into the balance sheet and the net interest margin.
Actual equivalent net interest income was $1 $84 billion in the fourth quarter of 2022.
An increase of $150 million or 9% from the linked quarter.
The increase was driven largely by the $143 million impact from higher rates on interest, earning assets inclusive of the effect from interest rate hedges.
The incremental $19 million from volume and mix of earning assets.
Actually offset by $12 million reduction in interest received on non accrual loans.
Net interest margin for the past quarter was 4.6% up 38 basis points from 368% in the linked quarter.
The primary driver of the increase to the margin was higher interest rates, which we estimate boosted the margin by 32 basis points.
In addition, the margin benefited from a reduced level of cash held onto positive the federal reserve, which we estimate added six basis points.
Total average loans and leases were $129 $4 billion during the fourth quarter of 2022.
Up one 5% compared to the linked quarter.
Looking at the loans by category on an average basis compared with the third quarter.
<unk> and industrial loans and leases increased by $1 7 billion or four 5% to $40 billion.
With $1 2 billion or 4% growth being broad based across our core commercial banking clients and $542 million or 22% growth in average dealer floorplan balances.
Yeah.
During the fourth quarter.
Average commercial real estate loans decreased by $592 million or 1% to $45 7 billion driven.
Driven largely by declines in average construction loans.
On an end of period basis construction balances increased slightly from the linked quarter.
Permanent average commercial mortgage balances were nearly flat quarter over quarter.
Residential real estate loans increased $372 million or about 2% to $23 3 billion.
Due to the continued retention of new mortgage originations retained for investments, partially offset by normal amortization.
Average consumer loans were up $384 million or about 2% to $23 billion.
Recreational slant financed loan growth continues to meet the main driver. These.
These average loans grew $325 million or 4%.
Average, earning assets excluding interest bearing cash on deposit at the federal reserve increased by $3 2 billion or 2%.
Due to the $1 9 billion growth in average loans and $1 $4 billion increase in average investment securities.
Average interest bearing cash balances decreased by $5 7 billion to $25 $1 billion during the fourth quarter of this year essentially in line with our projections.
The sequential quarter decline was due to the drop in deposit balances and the cash deployed to fund loan growth and to purchase investment securities.
Average deposits decreased $3 8 billion or 2% compared to the third quarter.
Our efforts to grow and retain deposits has helped reduce the rate of decline compared to recent quarters. However, due to the rapidly rising rate environment and increased competition for deposits. There has been a mix shift within the deposit base to higher cost deposits.
Average demand deposits declined $2 6 billion.
Savings and interest bearing checking deposits declined by $2 3 billion.
We offset by a $1 $1 billion increase in time deposits.
Average commercial deposits declined $4 8 billion.
As business owners shifted money into both off and on balance sheet sweep accounts pay down debt and made distributions.
On balance sheet sweep average balances increased $2 5 billion during the fourth quarter of 2022.
Turning to noninterest income.
Noninterest income, excluding the $136 million gain from the sale of the <unk> insurance agency totaled $546 million in the fourth quarter compared with $563 million in the linked quarter.
Trust income was $195 million in the recent quarter up 4% from the $187 million in the third quarter.
The increase was due largely to the impact of better market valuations on assets under management and administration.
Service charges on deposit accounts were $106 million compared with $115 million in the third quarter.
The decline primarily reflects the waiver of service charges in October and November on acquired customer deposit accounts. These.
These service charges were also waived in September .
Mortgage banking revenues were $82 million in the recent quarter down 2% from the linked quarter.
Revenues from our residential mortgage business or $54 million in the fourth quarter compared with $55 million in the prior quarter.
Both figures reflect our decision to retain a substantial majorities of mortgage originations for investment on our balance sheet.
Commercial mortgage banking revenues were $28 million in both the third and fourth quarters.
That figure was $49 million in the year ago quarter.
Other revenue from operations, excluding the gain from sale of the insurance agency or $131 million down $22 million sequentially.
The decrease was due to the impact of two fewer months of revenues related to the empty insurance agency, which was sold in October lower commercial loan fees, reflecting lower capital markets activities and a write down on the underlying assets and certain bank on life insurance contracts.
Turning to expenses.
Okay.
Operating expenses for the fourth quarter, which exclude the amortization of intangible assets and merger related expenses were $135 billion or $138 million higher than the linked quarter.
This increase was largely due to the $135 million charitable donation in the fourth quarter.
Excluding merger related expenses.
Salary and benefits expense decreased by $30 million due to one less business day, the realization of acquisition synergies and the impact of the sale of the <unk> insurance agency.
The quarter included $21 million and higher sequential advertising and outside data processing and software expenses.
Both of these categories tend to show some degree of seasonality.
The efficiency ratio, which excludes intangible amortization and merger related expenses from the numerator and securities gains or losses from the denominator was 53, 3% in the recent quarter compared with 53, 6% in 2022 third quarter and 59, 7% in the fourth quarter of last year.
Excellent turn to credit.
Despite the challenges of labor shortages and persistent inflation credit remained stable.
The allowance for credit losses amounted to $1 93 billion at the end of the fourth quarter up $50 million from the end of the linked quarter.
In the fourth quarter, we recorded a $90 million provision for credit losses compared to the $115 million provision in the third quarter.
Net charge offs were $40 million in the fourth quarter compared to $63 million in last year's third quarter.
The reserve build was largely due to growth in our C&I and consumer portfolios.
Baseline macroeconomic forecast.
Experienced nominal deterioration during the fourth quarter for those indicators that our reserve methodology is most sensitive to including the unemployment rate GDP growth in residential and commercial real estate values.
At the end of the fourth quarter non accrual loans were $2 4 billion.
And represented one 9% of loans essentially unchanged from the end of the linked quarter.
As noted net charge offs for the recent quarter amounted to $40 million.
Annualized net charge offs as a percentage of total loans were 12 basis points for the fourth quarter compared to 20 basis points in the third quarter.
Loans 90 days past due on which we continue to accrue interest were $491 million at the end of the recent quarter compared to $477 million sequentially.
In total 74% of these 90 days past due loans were guaranteed by government related entities.
Turning to capital.
<unk> common equity tier one ratio was an estimated 10, 4% compared with 10, 7% at the end of the third quarter the.
The decrease was due in part to the impact of the repurchase of $600 million in common shares, which represented 2% of our outstanding common stock as well as growth in risk weighted assets.
Tangible common equity totaled $14 7 billion.
Up slightly from the end of the period of the prior quarter.
Tangible common equity per share amounted to $86 59.
Up 3% from the end of the third quarter.
Now turning to the outlook.
As we look forward into 2023, we expect an inflation and higher interest rates will continue to impact the banking and our customers.
We believe we are well positioned to sustain a strong net interest margin and pre tax pre provision net revenue to risk weighted assets with our goal to generate top quartile return on average tangible common equity.
As a reminder, the acquisition of peoples United closed on April one 2022.
Thus the outlook for 2023 includes four quarters of operations and balances from the acquired company compared to only three quarters during 2022.
This 2023 outlook also reflects the sale of <unk> insurance agency that closed in October of 2022.
During the first nine months in 2022 this business recorded revenues of $31 million and the results of its operations were not material <unk> net income.
Additionally in December our subsidiary subsidiary Wilmington Trust and.
Announced the sale of its collective investment Trust business.
Trust income associated with this business totaled $165 million in 2022, and after considering expenses. The results of operations from this business were not material to <unk> net income.
Sale of this business is expected to close in the first half of 2023.
Since the timing of the closing is uncertain. This outlook includes the full year of the collective investment Trust business.
First let's talk about our net interest income outlook.
We expect taxable equivalent net interest income to grow in the 23% to 26% range when compared to the $5 $86 billion during 2022.
This range reflects different rates of deposit balance growth deposit pricing and loan growth.
Consistent with the current forward curve, our forecast incorporates 225 basis point federal funds fed funds hikes in the first quarter of 2023, and $1 25 basis point cut in the fourth quarter.
Key driver of net interest income in 2023 will be the ability to efficiently fund, earning asset growth.
We expect continued intense competition for deposits in the face of industry wide outflows.
Full year average total deposit balances are expected to be down low single digits.
Impaired to the $158 5 billion.
During 2022.
In order to offset the positive declines and to ensure a stable liquidity profile, we plan to issue senior debt during 2023.
We continue to expect deposit mix to shift toward higher cost deposits with declines expected in demand deposits and growth in time deposits as well as on balance sheet sweeps.
This is expected to translate into a through the cycle deposit beta in the high 30% to low 40% range.
Yes.
Next let's discuss the drivers of earning asset growth.
We currently plan to grow the securities portfolio by $4 billion compared.
Compared to the $25 billion balance at the end of 2022 with the addition of longer duration mortgage backed securities throughout the year.
Next turning to the outlook for average loans, we expect average loan and lease balances during 2023 to grow in the 8% to 9% range when compared to the 2022 full year average of $119 3 billion.
This implies total average loan and lease balances in the fourth quarter of 2023 to be flat to slightly up from the $129 $4 billion average during the fourth quarter of 2022.
Mix of C&I, CRE and consumer loans inclusive of consumer real estate loans is almost one third each at the end of 2022.
We expect this trend to shift slightly as C&I growth outpaces CRE.
As we've seen during the second half of 2020 to higher levels of interest rates are expected to slow down the growth in our consumer loan book in 2023.
Turning to fees.
Excluding the $136 million gain on the sale of the <unk> insurance agency in the fourth quarter of 2022.
As well as securities losses, non interest income was $2 $3 billion in 2022.
We expect 2023 noninterest income growth to be in the 5% to 7% range compared to 2022.
The outlook for 2023 reflects approximately 10 months of foregone income.
From <unk> insurance agency as a result of the sale.
Overall mortgage banking revenues are expected to be up 5% to 7% compared to 2022.
Commercial mortgage banking revenues are expected to rebound in 2023, and we will return to a gain on sale residential mortgage banking model in 2023.
However, with the high level of interest rates, we expect muted origination volumes and thus anticipate total residential mortgage banking revenues to be relatively stable compared to 2022.
We expect service charges on deposit accounts to be $3, 6% higher than 2022, and anticipate trust income to be 8% to 10% higher in 2023.
Turning to expenses.
We anticipate expenses, excluding merger related costs, the charitable contribution and intangible amortization to be up 10% to 12% when compared to the $4 $5 $2 billion, we experienced during 2022.
Approximately half of this increase reflects an extra quarter of peoples United expenses.
This outlook also incorporates the impact from the sale of the <unk> insurance agency.
We do not anticipate incurring any material merger related costs in 2023, and intangible amortization is expected to be in the $60 million to $65 million range during 2023.
Yeah.
As a reminder, first quarter expenses will be elevated as a result of our typical seasonal increase in compensation expense.
For the first quarter of 2023, we anticipate an uptick in the range of $90 million to $95 million.
That amount last year was approximately $74 million.
Turning to credit.
We expect credit losses to be higher.
The strong results in 2022, but to remain below <unk> legacy long term average of 33 basis points.
Provision expense over the year, we will follow the seasonal methodology and will be affected by changes in the macroeconomic outlook as well as changes in loan balances.
For 2023, we expect the taxable equivalent.
Tax rate to be in the 25% range.
Finally, turning to capital.
We believe the current level of core capital exceeds that needed to safely run the company and to support lending in our communities. We plan to return excess capital to shareholders at a measured pace.
<unk> common equity tier one ratio.
10, 4% at December 31, 2020 to comfortably exceeds the required regulatory minimum threshold, which takes into account our stress capital buffer or SCB.
With a solid starting CET, one ratio and the potential to generate additional amounts of capital over the next few years, we don't expect to change our capital distribution plans.
We anticipate continuing to repurchase common shares at a pace of $600 million per quarter.
Under our current capital plan.
Before we go to Q&A.
I wanted to take them on.
<unk> back on some comments made at the beginning of the call where we reference number three and how he is winning the game of life.
Sometimes numbers can be symbols with deeper meaning than what meets the eye.
The defined proportion.
I'd like to take a moment and share what I see with some of these numbers.
The first game after number three went to the hospital.
Our team returned to kickoff.
The first time it has done so in three years and three months.
First playoff game was won by three points.
Number 2014, and 17 are key leaders on our team the difference between 14% and 17 is three that.
That number seems to come up quite often.
If you look at those key leaders and you dropped the one.
And from 2014 and the one in front of seven Youre left with four 7%.
47 is an interesting number.
I know, you're all thinking about the periodic table of elements 47 is the atomic number of silver.
The Vince Lombardi Trophy is made out of silver.
That interesting.
But it gets even even weirder.
The symbol for silver is AG.
If you reverse those letters you get G E.
Which is the abbreviation for Georgia, the potential site of the AFC Championship.
And all of this is happening in 2023.
That number again.
Probably just a set of random coincidences.
Or is it.
With that let's open it up to questions.
If you'd like to ask a question at this time. Please press Star then the number one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star to you to get to as many questions as possible. We ask that you. Please limit yourself to one and one follow up we'll take our first.
Question from Matt O'connor from Deutsche Bank.
Go ahead, Matt.
But now we've got you.
Okay, sorry about that.
Sticking with the threes I think at one point you talked about a long term NIM of three six to three nine.
So the cities involved there there divisible by three and.
So why don't we kick it off with that.
Alright.
I guess.
Our outlook for the net interest margin over the long term hasnt changed Matt.
The question is what's the long term.
<unk>.
When we look at.
The structure of an average bank balance sheet and the mix of funding that is deposits or or wholesale funding.
Those costs tend to be pretty competitive and it's the mix that ultimately drives the margin over the long run and when you look at.
When you look at where we see our balance sheet going in that of the industry. We think it's.
We're in a unique time right now.
Where.
Pricing has not kept deposit pricing has not kept up to.
Rates on loans, and that's ultimately going to close and so well.
Will we see that in 2023, those those numbers unlikely, but as we go into 2425, when we start to see the margin move back down into those normal historic ranges, we think so.
And the most important thing about why do we talk about that is.
We don't want to set up the bank and the expense structure, assuming that margins like that are going to hold because recent history suggests that that's just not likely if it happens too that's great but we.
We don't want to build the bank so that.
We're counting on those kinds of margins for the expense run rate that we have.
Okay. So three years once again, three popping up to normalize on the NIM, but did.
Did I Miss any comments on the NIM for 'twenty, three or most importantly, what you're modeling for the fourth quarter of this year. Thank you.
For the first or the fourth Matt sorry.
Both on the full year and then most importantly, the fourth quarter of 'twenty three what are you thinking on the NIM and then I think that would assume both the forward curve and then I.
Commercial loans tend to reprice, a little bit sooner than maybe like funds move. So if you have a <unk> 23 estimate and then framing the puts and takes which.
That's helpful, including with the repricing earlier of the commercial loans.
Yes sure.
If you look at the.
The year.
Based on our current outlook, we think the average NIM for the year stays above 4%.
You would probably see a little move up in the first quarter, just because of the impact of day count.
<unk>.
And so youll see a pop up but actually it's quite likely that net interest income in dollars might actually be lower will likely be lower in the first quarter of 'twenty three than it was in the fourth quarter of <unk>.
2022.
Taking into account that forward curve thats relatively flat, but it starts to see some cuts at the end of the year, we think the marginal be higher in the first half of year than in the second half of the year and probably heads down towards 4%.
As we get to the as we get to the fourth quarter of 2023.
Okay. Thank you very much.
Yeah.
Our next question comes from John <unk> from Evercore ISI.
Good morning.
Morning, John also wondering if maybe you could talk a little bit about me.
Efforts here to protect the NIM.
At that level, particularly as we look at potential cuts.
Anything in terms of balance sheet positioning that we should be considering in terms of.
Beyond what you're already doing.
To protect the NIM at these levels.
Yes.
There's a few things.
John that we've been working on all this year.
To start to protect the NIM.
You know first and you've.
You've seen us increase the size of the securities portfolio, and we've talked a little bit about growing that a little bit further in 2023.
Within there we also anticipate.
Shifting the duration a little bit we've taken some duration so far.
On the balance sheet in the mortgage portfolio.
We will slow that down and we'll take that duration in our securities portfolio with some MBS.
Yeah.
We'll also be doing we mentioned some term funding.
Which you know well, we'll lock that in which will which will also help and then the thing that ultimately is the biggest benefit to maintaining the margin and reducing asset sensitivity is deposit pricing right and so it's a little bit painful when it's when it's when it's compressing on the way up when it's catching up to the loan pricing, but ultimate.
<unk> the best.
The best way to combat declining rates.
As through repricing of deposits and so those three things would be the biggest help.
We will and continue to have a hedge portfolio that helps reduce some of the asset sensitivity in the short term might help the NIM at some of the earlier hedges.
That were put on that or a lower received fixed rate roll off and so those are kind of the three major things that would have helped us reduce our asset sensitivity and will help us protect the NIM at these kind of higher levels as as time goes on.
Okay. So no major change in terms of the hedging swaps other than what is rolling off correct.
Yes.
Well.
We will see how much we grow from where we are at the end of the first quarter.
Because of the position of the balance sheet and what we'll do will likely not be to add two outstanding notional, but to add to forward starting is likely what we would do.
Right got it okay. Thanks, and then just one other follow up on the commercial real estate front can you maybe give us.
Update on what Youre seeing there in terms of credit trends, maybe trends in delinquencies and criticized assets and any signs of stress in the office portfolio that would that would help thanks.
Sure.
Within the commercial real estate portfolio.
The biggest trend that we've had going on for probably the last four quarters is just the reduction in the construction.
Portfolio and so a large number of construction projects were originated in.
Late 18 and during 2019.
As the pandemic went they continued but at a slower pace and those have been coming to completion this year and as those of <unk>.
Come to completion, they've turned into permanent mortgage financing oftentimes not on our balance sheet and so you've seen the decline in commercial real estate largely being construction related when we look underneath at some of the major categories and we look at the criticized we actually seen hotel criticized balances peak.
Probably about two or three quarters ago. It got as high as about 86% of our hotel portfolio is now down below 50%.
And if we're seeing remixing in the criticized there is two categories. One is healthcare, which we've talked about a little bit before and Thats typically.
Assisted living and senior housing and the.
That is not from a lack of demand that we're seeing some challenges in that portfolio, it's their ability to staff.
And so we've seen occupancy rates in these portfolios come up.
Most pandemic, but they're not able to get all the way back to pre pandemic levels, because theres not enough staff to adequately care for the.
For the folks that want to live there and then the other place obviously, we're looking at is office and we're paying a lot of attention to office.
The portfolio.
Think as as of as of the end of the year right around 20% criticized were watching lease explorations and lease sign ups.
Vast majority of our real estate portfolio has lease expirations out.
2024 and later.
So far what we've seen is is decent.
<unk> you are seeing some movement down in.
Price per square foot.
But what we've been doing is going through all of the lease portfolio is there.
Office portfolios and stressing.
Both vacancy rates and lease rates to see what the debt service coverage ratio is and what.
Making sure that we've got adequate coverage.
If we talk about our expectations for charge offs.
In.
As we go into this year, that's the place where we would have the most concern when we talk about charge offs moving up from the levels. We've seen in 2022 there'll be some of those portfolios that is a place where we really got it right.
Got it. Thank you Dan it's very helpful and frankly and I hope the number three is that number a touchdown Eagles when the Super Bowl by this year.
We appreciate that it's been a it's been a long tough year up here.
Little good news would be nice.
Our next question comes from Frank Schiraldi from Piper Sandler.
Hi, Darren.
And Frank just one.
Wanted to ask about just I guess a follow up on.
The office, Bob if you could just remind us where that total.
Office exposure is in that specifically.
The exposure is.
New York City.
Okay.
Yes.
Not probably should you'll see this when the when the K comes out but the office exposure in total.
It's right around $5 billion.
When you look at what's in New York City, it's about 15% that would be New York City.
Okay. So it's pretty it's pretty widespread across predominantly in the northeast.
Okay.
And then just a follow up on an increase in terms of.
I think you mentioned that the permanent creep book were sort of flattish linked quarter with construction balances.
But all in all.
And it sounded like I, just want to make sure I understand for the for 2023 is the expectation that that permanent Cree book will.
Grow.
Just to a lesser extent in the C&I book or do you still are you still looking for for outflows in that or.
Thinking about outflows by pre books.
Yes, overall, Frank we're thinking that the overall Cree book.
Does continue to drift down, but at a much slower rate than what we've seen.
In 2022.
It'll be.
It'll be a modest decline.
<unk>.
Well on average, it's actually going to be up because of the peoples, United but if you look versus the fourth quarter.
The permanent book on average is relatively flat compared to where the.
The fourth quarter was it most of the decline would continue to be on the construction side of things.
Remind you the construction portfolio is the one that 10 is one of the ones that cancer.
Tends to carry higher loss rates and the stress test, which is part of the reason why we've been working to.
Obviously support our customers so that they can finish the projects, but then to not add meaningfully to that once those reached their completion and permanent financing.
Got it okay. Thank you.
Our next question comes from Ken <unk> from Jefferies.
Yeah.
Go ahead Ken.
Yes.
Maybe we will continue on and we will catch Ken.
And a little bit.
Our next question comes from Ebrahim <unk> from Bank of America.
Hey, good morning, good morning.
Maybe on the balance sheet. So you mentioned about $4 billion in.
Securities purchases from 25 billion at year end.
If you don't mind, reminding us like what that implies for the cash balance as we think about one of them.
Steady state I think cash was about $25 billion for the fourth quarter.
Is $20 billion at ATC.
The bank expects to be and how much of that might go away from bank deposits run off so just talk to us and said on that.
Yes.
Sure.
There will be some movement ebrahim between cash and securities over the course of the year.
If you if you look at the as ads at the end of the year.
Probably.
Down in the $9 billion range. If you look at the average for the year, probably thinking the slightly below $20 billion between 2000 $19 billion is probably the spot.
That number is going to move around a little bit obviously, depending on.
<unk> outflows.
In deposits.
As well as our funding needs to support loan growth.
As well as to make sure we're managing the bank's liquidity profile and so.
Those will move around a little bit over the course of the year, but those are.
Round numbers, where we're where we're forecasting 2023.
Got it and I'm, sorry, if I missed it did you talked about issuing some debt.
Did you quantify how much debt do you expect to issue to the course of the year.
I Didnt mentioned in a number you know obviously that this is dynamic right and that the amount is going to be a function of what's happening with deposit funding and runoff and whatnot, but.
Right now we think it's in the $3 to $4 billion range over the course of.
Of 2023.
And what would be the cost of the debt today, given just the shape of the yield curve I'm just wondering if it's better to lock in some funding at relatively short term.
Based on the market.
Well it's.
It's a great question and others, obviously the rate is depending on the tenor right in right now.
You like the the opportunity to reprice the shorter dated notes.
But they are trading higher than the than the longer term debt and so we think low to mid fives is the range of.
Yields on that depending on the term.
And what we'll be trying to do since we've really.
Brought down the level of wholesale funding at the bank will be to not lock in all in one tenor but to start to build a more balanced maturity profile as we think about the funding of the bank. So that we don't have massive.
<unk> coming due all at the same time and so I think as you think about it.
Think about it.
Not being all one tenor and one type of but something that starts to build a little bit of a profile that is spread out over the next few years.
Got it and just as a separate note the <unk>.
God book or the CRE office do you have the debt service coverage ratios handy in terms of where they were at the end of the year.
I don't know that I have that right off the top of my at the tip of my fingers here give me one second and let me see if I can find it but.
It has.
In aggregate that portfolio has been.
It has still been above one and when we look at the Ltvs in that portfolio.
Still run below 60% on a weighted average basis, obviously, there are some above that and some below.
But as we look at it right now and we look at the clients ability to support the.
<unk>.
To support the asset.
Either with cash flow or.
How much equity they have in the property.
We're we feel pretty comfortable with it.
With where we sit but we're watching it as we've talked about theirs.
One of the places, where we're where we see the most risk and where we're focusing a lot of our attention from a credit perspective.
Thank you.
Okay.
Our next question comes from Manny <unk> from Morgan Stanley .
Hey, Good morning, I was hoping you can break down your loan growth guidance for next year.
In the past you've spoken about.
The lending synergies from the peoples acquisition and the footprint there.
I think you mentioned small business card an equipment finance so just.
You can break down how you see that contributing to loan growth of 23, and how you see that evolving.
Okay.
I guess as we look at.
Peoples impact on 2023 from a loan perspective, it's certainly additive.
But it's one of those things where the loan balances take a little bit of a time to build and to show up in a material way. So when we look at it 2023.
We continue our focus on C&I and we expect to see strong growth in the C&I portfolio.
And over 2023.
On an average basis.
Principle number because its four quarters of peoples and not just three and so.
<unk> ish percent over the average in 2022.
But outside of that as it comes down a little bit more looking into the 3% to 5% range Theres a bunch of pieces in there one of the ones that we talked about that.
That impacted the fourth quarter was our dealer floor plan business and what we've seen is some inventory builds as the supply chain is open up and consumer purchases slow down a little bit with rising rates and so we saw some movement there we.
We did see some broad based.
Movement in our core commercial customer.
The leasing business are we prefer to call. It our equipment finance business continues to show steady growth, which would show up in the C&I balances.
And then the other thing where we're we'll be intensely focus is on building out our small business.
Business banking segment, that's one of the places where we see a great opportunity in the new England franchise.
And to deploy our methods of banking.
When you look at the other portfolio of CRE, we talked about relatively flash display somewhat down.
<unk>.
The consumer real estate are also flat to down and Thats really thats, the consumer mortgage business and that's really just a reflection of normal amortization and because we will stop.
Holding.
The originations will go back to gain on sale and then we think the consumer portfolio slows down a little bit.
Again, just because of the interest rates and the pace of activity in terms of.
Car buying as well as recreational vehicle purchases. The one offset there which is also a peoples related thing but.
But unfortunately.
Grow the balances that much as we expect to launch our credit card into the peoples, United markets, which will help grow credit card balances, but as I mentioned, there are still relatively small and so hard to see in the in the balanced growth, but nice from a margin perspective.
What are the other things that is in the peoples franchise.
Which we like as we've talked about it before the mortgage warehouse lending business.
But it's a tough part of the cycle for the mortgage warehouse lending business.
With refinance activity.
Almost nonexistent and purchase a little bit low that the balances there.
We're likely to still be a headwind.
Think that they go down materially from here, but they won't go back to where they were in 2020 in 2021 without.
The decrease in the in the long term mortgage rates.
That's really helpful.
You've also mentioned in the past that C&I is benefiting now because there's less capital markets activity.
Are you, assuming some sort of reversal in your 23.
We're just we're cautious about.
The level of economic activity and seeing some slowdown in inflation and GDP and what that translates into in terms of demand from our clients.
It's really not much more than that there isn't any sign that we see that that we're seeing a material slowdown.
We're not seeing credit concerns, we're just seeing cautiousness while.
While people wait to see how the economy plays out in 2023 and so.
We're cautious on it as well.
Got it and then just a follow up on one of the prior questions.
On the stress test.
Spoken about the adverse effects of the excess cash balances and of course, the fed has been stressing CRE more than the other asset classes.
Just given that December 31st will be used as a starting point for the next stress test.
You've done it now for how long do you think you're positioned going into that.
We've certainly made a meaningful shift.
In the balance sheet this year.
Cash balances, we mentioned are down the better part of $17 billion from from where they were at the end of last year, the mix of C&I and CRE when we focus just on commercial balances.
It's almost 50 50.
Where it was 60 40 before CRE and when we look at the C or the construction balances.
They're down a couple of billion dollars and so and not to mentioned the margin is up and so the <unk> <unk>.
Start point is higher.
Things that we've got our eye on and we're not we're uncertain a little bit is how the merger expenses will be treated.
<unk>.
In the stress test this year, but once we get through 2023, it should be clean and so that will be helpful.
And then the other question is what's the fed's scenario right.
We haven't seen it yet.
It's very likely that it will continue to focus on the real estate sector.
Previously you hit it focused on hotel and retail.
Those seem to be doing a little bit better. So it wouldn't surprise us if the new focus is office and healthcare and so.
Just depends on where the emphasis is.
From that perspective, as well, but we.
We start from a really strong capital position.
We've got the current SCB covered which is pretty pretty high.
And we continue to move the balance sheet in a positive direction, which if if it doesn't get us all the way, where we want to be in 2023.
It should curious a long ways towards where we want to be in 2024.
Very helpful. Thanks, so much for taking my questions.
And our next question comes from Ken <unk> from Jefferies.
Alright, thanks, sorry about before.
Is it going guys.
On the cost side, you mentioned, obviously the conversion is being passed can you give us an update on what proportion of the initially expected $330 million of saves from peoples, where in the fourth quarter run rate and if not fully there when do you expect to get there.
Yeah, Ken the vast majority of the saves are in there through the end of the fourth quarter.
We're probably if you think about we were targeting 30% of the cost base were like 27% or something in that range is.
Is what we've achieved so far.
Yes.
When you look at it on a percentage basis were almost there when we look at on a dollar basis. The run rate is actually a little bit higher than we thought it would be because of inflation, but when you talk about the percentage save it's still the same.
And so some of that will come out over the course of the year, we're running a carrier.
A little bit higher staffing in the branches.
As we stabilize a little bit higher staffing and some of the call centers.
And so those things will normalize themselves over the course of the year, but but when we look at where we sit.
From my perspective, we are pretty much closed the book on the cost saves that we.
That we expected to achieve.
Couple of other things that have worked out very positive is the the onetime expenses turned out to be a little bit less than we thought we incurred a little bit less in severance expense.
We also incurred a little bit less and some contract terminations than we thought at due diligence.
And the nice thing is.
The peoples was an asset sensitive franchise and with rates going up.
<unk> is coming in better than we thought and so the <unk> is.
A little bit higher than we expected.
So overall the numbers that we thought we would we would realize post post close and post conversion.
Our in line to slightly better than.
And what we thought.
We're almost back to breakeven on tangible book value.
So overall, we're very very positive about.
Where things sit early on and as we mentioned before excited to go to work in new England, and bring Mt's brand of banking into that new market.
Got it great. So then one follow up to that is that if that if that's the case that youre pretty run rate. Then we can all take a look at the kind of implied underlying expense growth off of this fourth quarter and knowing that you have the seasonal step up in the first so can you just kind of frame that for us.
What do you think about that organic side, what's driving it.
And in terms of the initiatives that youre focusing the most in terms of incremental expense growth from here.
Yes.
The biggest driver of that is compensation.
And when you look at 2022, we made some meaningful adjustments to our associates compensation, we raised the minimum wage.
We've been dealing with with competition for talent like everyone has and compensation expenses about 55% of our total expense base and so when you look at the at the driver of that growth, it's really that that compensation costs thats driving it.
Outside of that the other line item Youll see where we will be investing in have been is in.
Outside of <unk>.
Ada processing and software.
I think for us and for the industry, you see more and more reliance on purchased software and what those purchase software contracts come licenses and maintenance fees.
Which tend to go up.
Three year than any other place.
Probably a little bit of growth is in advertising and promotion.
<unk>.
As we continue to stabilize the franchise and introduce ourselves in new England, we will see an uptick in that as we go forward and then kind of normalizing to what I would describe as a normal percentage of our operating expense.
Overtime.
Thank you.
The next question comes from Steven asked soap Hospitalist from J P. Morgan.
Hey, Derik.
Stephen how are you doing good.
Good I want to start so looking at this quarter with the second quarter, where you funded loan growth with excess liquidity talking about issuing sub debt.
When do you think you'll start growing deposits again is this back half 'twenty, three where do you see the loan to deposit ratio.
Funding through the year, maybe ending the year.
Well.
There's always an ability to grow deposits, it's just at what cost right and so we're always looking at.
Number one our focus is on customers and customer relationships and so for situations, where we would have single service time deposits or money market accounts, we may not choose to pay right. There because we can fund the bank more efficiently in the wholesale markets, but for customers, who are operating account customers, which is our core.
Our funding base and part of our long term strategy, then we're more willing to pay right and so we're always we're always making that tradeoff.
So to say that it's going to officially ended in the second half of the year I think would be what would be a little foolhardy, but but our idea is obviously there will be a spot you get to where customers maintain balances in their checking accounts, if youre a consumer or your operating account. If you are a business and you kind of hit that floor and when will that floor.
I think we start to see it as rates stabilize.
You'll see that as we go through 2023.
But also we know that the deposit pricing lags.
<unk> and fed funds and moves legs movements in.
And loans and so.
Our goal will be to stabilize it as we go through the year.
But obviously, making those trade offs that I mentioned as we as we work with clients.
Okay.
And then so where do you see the loan to deposit ratio moving Oh, sorry.
Right.
The I think over time.
And again time.
Maybe let's call it three years.
Just to pick on our number three.
Is over the long term loan to deposit ratios for us and for the industry will trend back to their long term average and when we think about those loan to deposit ratios and those long term averages Thats also part of the reason why we talk about that net interest margin over the long run.
Normalizing back to where it's been historically.
So.
We're kind of we think maybe around 80 ish little bit a little bit little bit above as we get to the end of 2024.
2023.
But it's obviously a function of how we how we choose to pay and fund the bank.
Okay great.
Great. Thanks for taking my questions.
Yeah.
And our last question comes from Gerard Cassidy from RBC capital markets.
Darin.
Good morning Gerard.
I was going to say another three was in the middle of the call. Your stock was up 3%, but now it's up over that so I can use that.
Well, we appreciate that and the three reference.
There is some thing that happens in every call and kind of seems to run its course, so three as this one.
There you go.
Question for you regarding your comments about the commercial real estate portfolio.
When you look at it particularly for office.
Concern of course with the work from home, possibly being more permanent and there'll be less space needed.
Possibly vacancy rates go up in the office space. What do you think is the greater risk the occupancy rates going higher because of that trend or the refinancing risk where your customers.
Having to refinance because their mortgages are terming out they have to refinance and the rates are just so much higher today than when people took down these mortgages, maybe five years ago.
Right so.
I think its hard Gerard to pinpointed on one or the other because they work together right.
If occupancy and price per square foot was okay or holding up then you probably got the coverage to refinance.
When youre loan is due.
I remind you when we underwrite whether it's multifamily office.
Our hotel.
We underwrite to long term interest rates and long term occupancy rates and so we've got some some protection built in with our clients when we when we underwrite so theres a little bit of room there.
But.
As we look at it I think in the short term, it's the refinance risk is a little bit bigger.
Over the long run.
We debate this a lot internally, let me go back and forth with.
Our chief Credit Officer.
This trend of more remote work, it's hard to handicap, where that is going to end up right. You can see some changes in the economy you see some some movements with with some of the tech firms with employment.
That may or May not drive people back into the office, we don't know.
But when you see.
Younger people early in their professional career, you can see the benefits to being co located with their coworkers and so that trend I think ultimately starts to come back is it five days a week, probably not but it's not going to be zero and at least this is Darren opinion, so take it for what it's worth.
To me the bigger issues. When you look long term at the population there is a big chunk of the population called the baby boomers that are approaching retirement age they're not enough of them.
Coming in up in the next wave to use all the space that they needed to sit and to be employed and thats a longer term cyclical trend, which will affect these things in and so.
There's going to be some pain in the short term no doubt.
Overtime rates will move up and down and refinancings will happen.
There'll be some.
Some movement in and out but to me the longer term trend is what's happening with the population and the working population and what's the capacity that exists today versus what the likely future looks like absent any other changes.
In politics, and I will leave it at that before we get into a discussion I don't want to get into.
Sure.
A follow up question based upon your experience in your conversations with your colleagues at M N T.
But what do you think is driving what we're seeing today where the.
Seasonal reserve builds are you and your peers, obviously have to take a look at the economic forecast. Many people use Moody's wishes weaker this quarter than last quarter, which drove up reserves, but at the same time I think you mentioned your net charge off numbers are expected this year to be below your.
Through the cycle levels spreads in many areas high yield loan high yield securities or even one of your peers that the corporate loan spreads havent widened out yet whats going on where we are.
Not seen I don't think some metrics, telling us we're going to have a tough downturn.
Or is the reserve build is pointing to the weaker economy.
Yeah, I think Gerard the to me when I when I think about the way we all.
Set aside reserves.
We've got.
Yeah.
It's weighted heavily on your economic forecast.
And your Rns period, you reasonable supportable period, which for a lot of the industry as the first couple of years, and then Theres a reversion to the long term average and so what youre seeing today is the current view, where the charge offs are well below the long term average.
So the allowance is always going to take that long term into account and then and then you're forecasting and bringing forward those losses based on the assumptions that go into the rns period.
And the expectation for unemployment to go up and for GDP to come down is is there its in the baseline for Moody's it's moved a little bit most people like us will not just look at the baseline, but look at a more severe economic.
Scenario as well as a better one.
And you kind of weight those.
And.
It doesn't necessarily need to be what you see today in the in the pricing and the spreads versus what's in the forecast that they should be connected but theyre not always right and theres always going to be points in time, where these disconnects exists and.
And so we look at it we think about the provision is keeping the bank safe.
Capital by another form.
But as we underwrite business, we're always looking at each individual relationship and its ability to payback and the spreads are going to be a reflection of the the expectation of that credit risk through the cycle.
And so for US we've had so many long term relationships, where we've seen the behavior of these these clients through the cycle and their willingness to step up.
Many times bring outside resources to help maintain there.
Maintain their payments in state.
Accruing and so each organization is different but that to me is a little bit of why you might see a disconnect between what's actually pricing today versus whats in the.
In the seasonal outlook.
Okay, and just quickly on the seasonal outlook what was the weighted unemployment rate that you guys came up with in your analysis you mentioned to use the base case, but you also took into account the more severe cases as well.
Yes, we're kind of in the four four.
Four one range on Nokia and unemployment.
In the base.
And that's during the rns period, obviously right.
Once you get pass that then youre reverting to the long term.
Okay I appreciate it thank you Darren.
We have reached our allotted time for the question and answer session I will now turn the call back over to Brian Clark for closing remarks.
Again, thank you all for participating today and as always a clarification of any of the items on the call or news release is necessary.
Please contact our Investor Relations Department at area code seven one.
842.
<unk> 38.
Thank you I have a good day.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect and have a wonderful day.
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