Q4 2022 First Citizens BancShares Inc (Delaware) Earnings Call
[music].
Yeah.
Ladies and gentlemen, thank you for standing by.
Welcome to the fresh citizens Bancshares fourth quarter and year end 'twenty.
Earnings Conference call.
At this time all participants are in listen only mode. After the speaker's presentation. There will be a question answer session to ask a question Jeremy session need to press star one on your telephone.
If you require operator assistance during the program. Please press Star then Jamie.
As a reminder, today's conference is being recorded.
I would now like to introduce the host of this conference call. Mr. Monahan Senior Vice President of Investor Relations you may begin.
Thank you good morning, everyone and thank you for joining us for first citizens Bank fourth quarter earnings call. It is my pleasure to introduce our chairman and Chief Executive Officer, Frank holding as well as our Chief Financial Officer, Craig Nicks, who will provide an update on our financial results and outlook. We are also pleased to have several other member.
Of our leadership team in attendance with us today, who will be available to participate in the question and answer portion of the call if needed.
During the call, we will be referencing our investor presentation, which you can find on our website.
The agenda for today's presentation is on page two of these materials. Following the completion of our presentation, we will happy happily take questions.
As a reminder, our comments will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined for you on page three of the presentation. We will also reference non-GAAP .
Initial measures in the presentation reconciliations of these measures against the most directly comparable GAAP measures are found in section five of the presentation.
Finally for citizens is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties.
With that I'll turn it over to Frank.
Yeah.
Thank you Deanna and good morning to everyone.
We appreciate all of you joining us today.
I'll make some comments about the year and then update you on our 2023 strategic priorities and then I'll turn it over to correct mix to highlight our financial results for the fourth quarter and the outlook for 2023.
Starting on page five 2022 was a great year for citizens.
In addition to the completion of our merger we delivered solid financial results marked by strong topline growth.
Low credit losses, and well controlled expenses.
We were pleased with the performance of our lines of business.
Robust achieving robust loan growth in both the general and commercial banks.
Despite a challenging year for deposits driven by unprecedented quantitative tightening we experienced modest growth in noninterest checking accounts and only a slightly slight decline in deposits during the year.
Our merger integration is substantially complete.
And we're now focused on creating positive operating leverage by growing revenues and after my and optimizing our operations.
We remain on track to achieve our $250 million cost savings goal.
During the third quarter, we announced a share repurchase plan to optimize our capital levels and we completed the planned early in the fourth quarter repurchasing one 5 million class a common shares.
This plan allowed us to return excess capital to our shareholders, while exceeding our CET one target.
And is expected to be approximately 10% accretive to earnings per share in 2023.
Our capital position remains strong relative to our risk profile and we believe that we will have the ability to resume share buybacks in the second half of this year.
From a profitability standpoint, we finished right in line with our guidance and are pleased with our financial results for the fourth quarter and full year.
Strong loan growth and rising interest rates drove a 20% increase in net interest income over the prior year.
This strong margin growth combined with solid noninterest income growth and well controlled expenses.
Drove a year over year 45, 5% increase in pre provision net revenue.
Earning asset yields increased by 68 basis points.
And we were able to manage rising deposit costs, despite a challenging and competitive environment.
The pace of rate hikes did begin to put pressure on margin as we entered the fourth quarter.
During my tenure at first citizens, we've been through several tightening cycles, and we've always grown and prospered through them.
Looking at noninterest income our fee income producing lines of business provided a continued support to our net revenue led by growth in rental income on operating lease assets as our rail portfolio saw increased utilization and positive momentum from higher lease rates.
We also we also saw growth in areas, such as wealth and card despite a challenging market environment for well.
Yeah.
You'll remember that we announced the elimination of certain NSF and O D charges that took place in the second half of 2022.
Reducing deposit service charge income.
But we've had.
Strong growth in commercial service charges to help offset some of this and that's F O D impact.
Despite inflationary headwinds, we maintained prudent expense discipline, which resulted in positive operating leverage for the full year.
As well as an improvement in our efficiency ratio, which we expect to maintain in the low to mid fifties on annualized basis moving forward.
We're pleased with the growth in loans, we saw in 2022 with total loans, increasing by $5 $6 billion or eight 5% over year end 2021.
We saw growth in the general bank and within the commercial bank and in an industry verticals and business capital.
While we experienced an increase in non accrual loans in the fourth quarter.
Net charge offs remain well below historic norms.
Overall credit quality remains strong and we are not seeing broad based signs of stress in our loan portfolio.
Okay.
Now turning to page six.
I'll quickly highlight a few of our strategic priorities moving forward.
Investing in our core businesses to achieve profitable organic growth.
We're pleased with the momentum in many of our core lines of business, including our branch network well busy.
Business capital the.
The industry verticals and middle market banking.
And we're going to continue to add revenue producers and enhance our capabilities in these areas to remain competitive and expand market share.
Optimized capital and focus on core deposit growth.
A key foundation to our strategy is our focus on full long term banking relationships, which in addition to making loans includes the deposit relationship.
Our goal is to fund, earning assets with low cost stable deposits and this remains a significant component of our go to market strategy.
In terms of capital allocation, our number one priority is focused on our customers, but to the extent, we have excess capital after funding internal growth.
Strategy is to redeploy it into share repurchases at attractive prices.
Yeah.
Yeah.
Our focus on talent and talent acquisition and retention.
We're going to continue to be proactive in adding talent to support our continued growth.
In addition to our focus on talent and our associates, we will remain focused on our customers to make sure. We're aligning our products and services across all segments in ways that meet their financial needs.
As we move into 2023, we will continue to work on distributing the capabilities, we have as a firm across our lines of business more broadly.
Which will help create additional revenue synergies as clients have access to a wider variety of products.
Capitalize on the benefits of shifting from merger integration to operating as a combined company to boost our operating leverage.
While we are an in line to achieve our cost savings goals.
We're going to continue to focus on further optimizing optimization and efficiency as we believe there is an opportunity to build upon the efficiency we have recognized to date.
And we will continue to assess.
Processes and capital and capitalize on revenue synergies and opportunities.
Okay.
Manage risk effectively.
We're committed to strong risk management and regulatory compliance in 2023, we will continue to build out and execute on our new regulatory capabilities to ensure we meet.
The requirements of the large financial institutions framework.
We have made great progress on our readiness to comply with heightened regulatory standards and.
And we've worked hard to develop the capabilities and planning needed to ultimately satisfy the regulatory standards.
In the coming year, we will be intently focused on executing upon these plans.
Yeah.
To conclude while we.
We acknowledge certain concerns and the broader economy, we enter 2023 was solid capital and liquidity positions.
And are well positioned to continue to build customer relationships and grow our balance sheet profitably.
We will remain focused on our client focused model.
And committed to delivering solid results, regardless of the market conditions.
I want to thank our associates across the company for working so hard to make us successful in our transformation to a large financial institution and at the same time supporting our shareholders customers and communities.
And with that I'll turn it over to Craig mix.
Thank you Frank and good morning, everyone.
Turning to page eight of the deck fourth quarter GAAP net income to common stockholders was $243 million or $16.67 per common share.
Fourth quarter GAAP results were impacted by the strategic decision to exit $1.2 billion of bank owned life insurance policies.
The resulting in a tax charge of $55 million.
Favorable market conditions prompted us to exit this long term illiquid asset and as we received proceeds from the surrender allows.
It allows us to invest in high quality liquid assets at higher yields, resulting in minimal capital and liquidity accretion.
On an adjusted basis net income to common stockholders was $306 million or $20.94 per common share, yielding an annualized Roe of $13 eight 9%.
And then a of 1.15%.
E T. S was in line with the guidance, we provided on our third quarter call.
Comparable EPS Roe V.
ROTC shown on this page for 2020, one period off of first citizens Bancshares on a standalone basis.
A T P. R O a NIM in the net charge off and efficiency ratios.
Presented as if the companies were combined during the 2021 historical periods I'll dive a little deeper into these components in a moment as we look at the underlying trends that produced are resolved.
On pages 910, and 11, we provide two condensed income statement and commentary the.
The table at the top of the page represents our reported GAAP results.
In the table at the bottom supplement says results showing net income adjusted for notable items.
Commentary for quarter to date GAAP results is included on page nine and for adjusted result on page 10.
Page 11 discusses year to date results with GAAP commentary at the top part of the highlight section and adjust it at the bottom.
All income statement are presented as if FCB in CIT emerged during the 'twenty, one 2021 historical periods presented.
I'm in the middle of the page summarizes the impact of notable items to derive the adjusted results from the reported results.
The most significant notable items in the fourth quarter included the reclassification of $135 million in depreciation and maintenance expense maintenance expense on operating lease equipment for noninterest expense to noninterest income of $55 million tax charge I, just mentioned related to the bowling surrender.
And $29 million in merger related expenses.
So focusing now on page 10, adjusted net income available to common shareholders was 306 million for the fourth quarter.
Down from $326 million in the third quarter and for $291 million in the fourth quarter of the prior year.
The decrease during the linked quarter was due to an increase in provision for credit losses, and slightly lower pre provision net revenue.
<unk> build was primarily due to an increase in reserves on loans individually evaluated for impairment slightly higher net charge offs. The net loan growth and continued deterioration in the economic outlook, all partially offset by a change.
And portfolio mix.
The increase over the comparable quarter, a year ago with day to $171 million or 51, 7% increase in P. P and are only partially offset by $157 million increase in provision expense.
Page 12 provides detail with respect to notable items for the relevant quarterly and year to date period during.
During the fourth quarter. These adjustments had a net impact of adding $4 27 sets to GAAP EPS.
Turning to page 13, net interest income totaled $802 million for the quarter.
The linked quarter by $7 million as we anticipated in our fourth quarter guidance rising deposit costs and an increase in interest bearing deposit balances called.
Core net interest income growth to decelerate.
Our cumulative deposit beta increased from 6% to 14% during the quarter in line with our expectation.
Interest income increased by $134 million over the linked quarter due to loan growth.
Higher yield on earning assets interest expense increased $127 million due to higher funding cost and interest bearing deposit balances and.
An analysis of the comparable quarter and year to date period is provided at the bottom of the slide for your reference.
Turning to page 14, net interest margin was 336% in the fourth quarter, a four basis point decline from the third.
Created by 80 basis points from the fourth quarter a year ago.
Before I discuss the key components of the net decline in margin from the linked quarter. It is important to note that with the pace of the share repurchase program that began in early August .
Fully felt the impact of the reduced earning assets in our margin this quarter, which is essentially tied to the foregone cash which would have continued to increase in yield given the fed rate hikes this past quarter.
This had a four basis point negative impact on the margin during the fourth quarter.
While the yield on earning assets continued to benefit from repricing, which occurred during the quarter deposit repricing repricing caught up amidst the competition for deposits.
With deposits growing slightly more than lives on the quarter. It had a slight negative drag on margin.
Additionally, a reduction of noninterest bearing deposits during the quarter also contributed to the slight decline.
Moving forward, we believe the strength of our balance sheet will enable us to weather these interest rate headwinds favorably.
We expect to continue to benefit from increasing asset yields while deposit costs are expected to level off in the back half of 2023.
Turning to page 15.
The line graph on the left hand side of the page indicate we continue to be asset sensitive, albeit slightly less than prior quarters due to reduced cash balances.
We have and will continue to take a measured approach to interest and market rate gets mad is meant to position our balance sheet to benefit from higher interest rates.
While at the same time, providing some downside protection against lower interest rates we have.
Estimate that a 100 basis point shock and rates would increase net interest income by three 4%.
A 100 basis points ramp would increase it by one 5% over the next 12 months unchanged from the prior quarter.
The main drivers of our App.
Asset sensitivity or our variable rate loan portfolio, which represents 45% of total lives our cash position and expected modest deposit beta is driven by our strong core deposit base.
Turning to page 16, we provide some additional some additional information on our actual and expected deposit betas.
In terms of our deposit base, 56% of our deposits exhibit lower betas and 44%.
But moderate to higher betas.
The 56% of deposits shown on the slide that exhibit lower betas, our non interest income bearing deposit and branch network checking with interest savings accounts.
Branch network money market accounts, and Cds representative of about 26% of total deposit exhibit.
Alright, betas, and finally direct bank money market savings and time deposits represented representative of approximately 18% of total deposits exhibit higher betas.
Our cumulative beta through the fourth quarter was 14%.
Which was in line with our projected last quarter.
We expect the cumulative beta to increase to 22% by the end of the first quarter.
Deposits continue to catch up from recent rate increases.
The interest rate hiking cycle, we forecast our cumulative beta will be approximately 25%.
However, as Frank mentioned earlier, we are in unprecedented times with respect to fed tightening our through the cycle deposit data will ultimately be dependent on whether we continue to grow our loan portfolio as expected, but under the current rate forecast comes to fruition and the impact of that the competitive environment for <unk>.
Positive.
Turning to page 17, we said GAAP non interest income for the past five linked quarters and for the comparable year over year periods.
Noninterest income as adjusted is shown in the blue bars for the same periods.
Focus my comments on adjusted noninterest income.
Adjusted non interest income increased by $2 million from the linked quarter to $290 million. While the total change was not significant we did see a $9 million improvement in rental income of operating lease assets.
Net and Thats net of maintenance and depreciation driven by higher gross revenue from continued strong utilization and higher lease rates as well as lower depreciation and maintenance expenses maintenance expense on operating leases can be more idiosyncratic with.
This quarter more favorable however, we do expect it to move higher in coming quarters.
Our fee generating lines of business also had another great quarter, and we saw increases in service charges on deposit accounts.
Factoring in insurance commissions increased cardholder income and higher fee income and other service charges.
Changes were partially offset by a decline in other noninterest income spread across several smaller.
Your line items.
Noninterest income was up $26 million over the prior year quarter with the largest driver being improved adjusted income on operating lease equipment for similar reasons I just discussed.
The linked quarter.
Turning to page 18, we show GAAP noninterest expense for the past five linked quarters and for the comparable year over year periods noninterest expense as adjusted as shown in the blue bars for the same periods and I'll focus my comments on adjusted.
The primary drivers.
Of the $13 million increase over the linked quarter included a $6 million increase in marketing costs due to efforts in the direct bank to maintain and attract new deposit balances.
Net occupancy expense increased by $3 million, primarily due to increased repairs that were episodic in nature and utilities costs, primarily attributable to inflation.
<unk> costs were up by $2 million.
The adjusted efficiency ratio of 54, 8% for Maine.
Remained in our target range of low to mid fifties, while we will continue to make expense management a priority for 2023 and beyond we feel that our continued recognition of cost saves is helping maintain expense growth in the low single digits that otherwise would be in the 5% to 6% range given inflation headwinds.
Page 19 outlines our adjusted noninterest income and expense composition, which remained relatively stable compared to the prior quarter aside from changes to rental income on operating leases and other income explain just a moment ago.
Page 20 shows balance sheet highlights and key ratios.
Won't spend time covering days as I'll cover the significant component of <unk>.
Subject to subsequent pages of the deck.
Turning to page 21, we had another good quarter of loan growth with loans, increasing by $1 billion over the linked quarter or by five 6% on an annualized basis as our teams continued to deliver to deliver for our customers and.
And we benefit from reduced prepayments due to the higher interest rate environment.
Loan growth for the quarter was primarily driven by the branch network, which grew by $1 billion of 14, 7% on annualized basis within the branch network growth is concentrated in business and commercial lives.
Mortgage loans grew by $355 million or 15, 4% on an annualized basis.
Growth was primarily due to slowing prepayment rates, but production was up and our arm loans, which we kept on the balance sheet.
We continue to see our mortgage pipelines naturally slow given the rate environment.
During the fourth quarter, approximately 90% of our funded mortgage loan volume was for purchases compared to an approximate 50 50 purchase versus refinance split in the fourth quarter of last year.
Total loans in the commercial bank declined by $523 million during the quarter.
Driven primarily by lower factoring balances, which declined $448 million due to the expected seasonal decline following the third quarter Hi, Mark. This decline was partially offset by $193 million in growth and business capital loans.
On a year over year basis loans increased by $5 6 billion or about eight 5% primarily due to increases in the branch network, which grew by $3 5 billion and mortgage channel grew by $1 6 million.
And the company within the commercial bank industry verticals grew by 1 billion led by strong growth in healthcare and TMT business capital is up 306 hundred $32 million over 'twenty, one and all of these increases were offset by $742 million decline in real estate finance loans.
As we look back on both the quarterly and full year results I would like to recognize our sales teams for their hard work and excellent execution. Following the merger as well as for the resulting strong performance that these efforts have spread across our many lines of business.
Page 22 shows our loan composition by type and segment for reference.
Turning to page 23.
It increased by $1 9 billion or eight 4% on an annualized basis from the linked quarter. The main driver of the growth was a $3 $5 billion increase in interest bearing deposits due to increases in time deposits and savings accounts, partially offset by a decrease in money market deposits.
A large portion of this growth was delivered through our direct bank.
As you'll remember from our previous call. We have worked diligently to leverage this channel to increase balances to help fund our loan growth we.
And we do anticipate continued deposit growth in the direct bank in 2023 to help support loan growth.
While this channel is higher cost compared to the traditional branch network.
Us to reduce more expensive F. <unk> borrowings that we have added in the past few quarters.
Our cost of deposits increased by 43 basis points during the quarter to 78 basis points in line with our guidance.
<unk> is representative of the impact from the fed rate hike and our need to raise rates to stay competitive with our peers.
Our cost of funding has quickly caught up with our yield on earning assets.
Our cumulative deposit beta was well controlled at 14%.
Fight the fed funds rate, increasing by 425 basis points.
At the end of 2021.
We expect continued increases in deposit costs in the first quarter, we expect them to moderate and flatten in mid 'twenty three.
As the fed reduces its pace of increase increases and begins to lower rates.
For your reference we have included our deposit composition by type and segment on page 24, turning to page 25, our balance sheet continues to be funded predominantly by deposits.
Representing over 93% of our funding base as I mentioned last quarter.
<unk> borrowings we initiated had quarterly call features in them and you'll note. We decrease those borrowings by approximately $1 6 billion this quarter.
Which is reflective of the deposit growth I just spoke to a moment ago.
We believe the non deposit concentration metrics will continue to flatten.
Our deposit balances continue to increase in the first quarter.
Continuing to page 26.
See the credit quality continues to be strong even though we did see a small uptick in net charge offs and an increase in nonaccrual loans during the quarter.
The 14 basis point net charge off ratio remains well below historic levels and beat our guidance.
Provision for credit losses increased by $19 million due to a higher provision build and a $6 million increase in net charge offs.
Moving to the bottom of the page the non accrual rates loan ratio increased to eight 9% this quarter from six 5% last quarter.
<unk> below the fourth quarter of 2019 pre pandemic level.
97%.
The increase in non accruals was driven primarily by our non owner occupied commercial real estate portfolio and more specifically related to general office exposure in the commercial banking segment.
You May remember, we discussed potential concerns in this portfolio last quarter and some of these changes have now pushed through to the portfolio.
We've been closely monitoring this portfolio since the start of the pandemic and are continuing to see market disruption due to hybrid work model models, which impact take it and see.
And leasing rates.
We are also seeing an uptick in charge offs and credit quality metrics in our small ticket leasing portfolio within business capital as borrowers continue to face inflationary pressures.
Supply chain disruption.
We are also monitoring this portfolio closely and have modified our.
Credit risk appetite for new originations during the recent months.
While we do not believe these two portfolios are necessarily predictive of trends in the broader portfolio. We are actively monitoring them to ensure any potential trends are identified early.
Our allowance ratio increased by four basis points to one 3% during the fourth quarter.
Moving on to page 27, we provide a roll forward of the ACL from the late quarter.
For our CFO modeling, we'd start with the Moody's baseline scenario and then wait to both the upside and downside scenarios depending on market conditions.
This quarter baseline estimates reflected a continued slowdown in the economy.
Elevated interest rate environment and meaningful reduction in real estate values.
All of which impacted our allowance levels.
As we have now begun to see our baseline for cast more closely aligned to the downside scenario, we adjusted our scenario weightings this quarter given that our baseline reserves now incorporate more recessionary risk.
Our current weighting this 30% to the upside 30% to the baseline and 40% to the downside, reflecting a 10% shift between the downside weighting and the baseline weight and from the previous quarter.
The ACL increased by $40 million over the third quarter, now totaling $922 million or one 3% of total loans.
Did have a net reserve build in the fourth quarter and are operating our company with the expectation for a mild recession in 2023.
Our reserve Bill for the quarter was due to the net growth in loans and.
An increase in specific reserves on individually evaluated loans as well as a slightly more negative macroeconomic outlook than in the prior quarter. These negative impacts were partially offset by a decline related to a mix shift during the quarter to portfolios with lower reserve rates the.
ACL provided nine three years coverage of fourth quarter net charge offs on a portfolio with a weighted average life of approximately three and a half years.
Turning to page 28, our.
Our capital position remains strong with all ratios above or in the upper end of our target ranges.
At the end of the fourth quarter as our CET one ratio was 10 eight.
8% and our total risk based capital ratio was 13.18%.
29 basis points decline in our CET ratio was primarily the result of our share repurchase activity, which concluded in October net income growth continued to outpace load driven risk weighted asset growth.
And a decrease in CET, one help to optimize our capital ratio closer to our target ranges, whereas before our share repurchase plan, we were well above them.
As Frank mentioned in his comments, we plan to pursue another share repurchase plan in the second half 2023 comp.
Confident in our ability to execute on this plan, while remaining within our target capital ranges.
During the fourth quarter tangible book value per share increased modestly due to strong earnings performance, which more than offset the impact of ASC I and the share repurchase plan.
Turning to page 29, the summarized Ive always surrender strategy as well as list its financial benefits.
Much of our investment activity during the fourth quarter was a result of this decision and while this resulted in a $55 million tax charge in the fourth quarter, we anticipate the payback on the strategy to be approximately two years. This is in line with our long term view of the business and emphasis on driving tangible book value growth.
We're able to pre invest the additional liquidity and high yielding investments, which should help to meaningfully increase our investment portfolio yield in the first quarter of 2023 <unk>.
The impacts from the surrender are reflected in our financial outlook and I will share next.
Turning to page 31, I will conclude by discussing our financial outlook for the first quarter and full year 2023.
The first column with our fourth quarter 2022 results the numbers for noninterest income and expense our adjusted for notable items.
Column two provides our guidance for the first quarter of 2023 column three for the full year.
There are a lot of variables that can impact this projection.
Guidance continues to assume.
Recessionary impacts are mild.
Okay for loans during the fourth quarter loans grew an annualized rate of five 6% down from the high double digit percentage growth rate in the second and third quarters.
We expect flat to low single digit percentage annualized loan growth in the first quarter as the absolute rate environment put downward pressure on our customers lending appetite and given seasonal patterns typically witness during this period.
For the full year, we believe that mid single digit percentage growth in the fourth quarter is more indicative of where it will be for the full year 2023.
While the absolute rate environment and economic uncertainty.
Tempering, our clients' appetite to borrow in some segments, we still have strong pipelines and many of our core areas and coupled with low rates of prepaying that this will lead us to mid single digit loan growth in 2023.
We think loan growth will be driven by continued momentum in business and commercial lending and the branch network.
Market business due to continued additions to our sales force continued expansion of our wealth business.
Through adding bankers and expense and expanded presence outside of the Carolinas market.
And further growth.
Both in our industry verticals and business capital segments.
Offsetting this growth we do expect to see continued declines in real estate finance.
It's been client appetite to borrow is diminished in the current rate environment and we remain selective on the terms to extend the credit.
We do acknowledge that uncertainty around the external environment, especially regarding economic growth and the pace of continued interest rate hike could cause actual growth rates to deviate.
From our expectations.
Moving on to deposits during the fourth quarter, we actively took steps to the curb to curb some of the higher priced deposit attrition, we experienced in the second and third quarters.
And successfully grew balance in the fourth quarter at an annualized rate of over 8% led by the direct bank.
Our expectation for the first quarter, it's high single digit annualized percentage growth based upon the momentum in our direct bank and the seasonality in both our branch network and homeowners Association banking business.
Our expectation is that this heightened growth in the first quarter will enable us to pay down some of the outstanding <unk> advances. We currently have on the balance sheet.
On the full year, we expect mid single digit percentage growth with noninterest bearing growth also in mid single digits.
While the high interest rate environment is a headwind here, we believe that client acquisition and our relationship based approach that emphasizes no load alone will help drive our deposit growth in 2023.
From an interest rate perspective, our outlook assumes that rates follow the implied forward curve.
We forecast two interest rate hikes in the first quarter of 2023 and one in the second with the fed funds rate, peaking at a range of five to five 5% and.
In the back half of the year, we forecast to 25 basis points reduction in the fed funds rate ending the year at a range of four 5% to 475%.
The expected timing of the cut leads to a reduction in the inversion of the yield curve in the back half of 'twenty, three which helps moderate some of the pressure on net interest margin.
Now on the net interest income.
For the first quarter, we expect flat to slightly negative annualized percentage decline compared to the fourth quarter, primarily on reduced day count and.
We expect net interest margin to be stable relative to the fourth quarter.
On a full year basis, we expect net interest margin to be stable to modestly increasing and <unk>.
Year over year net interest income growth to be in the mid teens percentage growth range largely on the heels of improvement that we achieved in 2022.
Our forecast includes some lagged pricing impact on deposits and we project our cumulative deposit beta will increase of 14% to 22% in the first quarter. However, our variable loan portfolio will help temper.
The impact of increased deposit costs throughout 2023, we expect to benefit from the large favorable gap between new production yields and existing book yields on fixed rate loans and investments.
This continued repricing of fixed rate loans and investments will help us achieve moderate margin expansion starting in the second quarter.
And then in the back half of 2023, however, it's important to point out that most of the benefit the margin expansion are behind us.
The net interest income outlook remains uncertain and changes to our interest rate assumptions could have meaningful impact to deposit product and pricing decisions as well as customer behavior and competitive dynamics.
While we don't expect meaningful dis intermediation of our noninterest bearing accounts is something we will continue.
To monitor.
From a credit loss perspective, we are.
Not seeing broad concerning trends in our portfolio.
With the stress related to a few smaller portfolios that I mentioned earlier.
We are actively monitoring the portfolios and have taken proactive proactive steps to limit our exposure. We do expect net charge offs to continue to uptick in the next quarter.
And the range of 15 to 25 basis points and begin to return to more historical levels for the full year 2023, we expect net charge offs in the 20 to 30 basis points range. We continue to expect strong credit performance in our General Bank segment in many areas and in many areas of our commercial segment.
And again have not seen signs of deterioration broadly.
On the noninterest income compared to the fourth quarter, we expect flat to low single digits annualized percentage declined primarily due to the reduction bully income and seasonal factor and declines being partially offset by continued growth in our wealth and payments lines.
Lines of business in terms of full 2023 guidance, we expect flat to low single digit percentage growth, while we project mid to high single digit growth in net operating lease income for the full year, we do expect a slight quarterly decline in the first quarter based upon lower maintenance expense in the fourth quarter of 'twenty two.
We expect continued momentum in our wealth and payment businesses as a result of organic growth, which we believe will be offset by the full year year over year impact of lower service charges, the reduction and bully income and a decline in factoring commissions, resulting from slower consumer demand.
The full year impact of NSF changes and the moly reduction when you project closer to mid single digit percentage growth in the <unk>.
Noninterest income.
Moving to noninterest expense, we expect mid single digit annualized growth in the first quarter, we expect a slight increase in our efficiency ratio during the quarter, primarily due to seasonal employee benefit increases.
Looking forward, we expect to continue to feel the pressures of inflation, especially as it relates to wages professional services and contract costs. Despite this we feel confident in our ability to maintain our efficiency ratio in the low to mid fifties in the coming quarters as we remove another estimated $50 million out of our COO.
Cost base, helping to neutralize natural noninterest expense growth we.
We expect the remaining cost saves to be stack towards the backend of 2023 and will have a more pronounced impact on 2020 for.
All said, we expect mid single digit percentage growth in adjusted noninterest expense in 2023.
<unk> growth will be led by inflationary factors and salaries and wages, increasing depreciation impact from the closeout of many strategic and optimization projects higher marketing costs are the direct bank the impact of the industry wide increase in FDIC assessment rate and higher marketing costs as a direct bank all partially being offset.
The cost saves.
The change in FDIC expense and the impact of a direct bank increase in marketing expense.
<unk> expense growth to be in the low single digits percentage range in 2023.
And finally on the income taxes, we expect our corporate tax rate to be in the range of $24, 525% for the first quarter and the full year 2003.
Which is a slight increase increase over previous guidance due to the surrender of the bowling policies.
In closing we are pleased with our fourth quarter and full year results in 2022 as Frank mentioned in his comments, we remain confident in our ability to grow profitably and deliver on our commitments.
We are positioned to perform well in a broad range of economic scenarios, given our capital and liquidity positions are talented associates focus on our customers our diverse business mix and strong risk management culture.
With that I will turn it over to the operator for instructions for the Q&A portion of the call.
Ladies and gentlemen, if you have a question or comment on please press. The Star then one on your current pipeline.
<unk> seen some others on the call. We ask that you limit yourself to one question and one follow up and then return the call queue. If you have any additional questions.
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Our first question today comes from Brady Gailey from <unk>. Your line is open.
Thank you good morning, guys.
So I wanted to start with the.
I wanted to start with the increase in the nonperforming loans can you just give us a little more color was that.
Just one or two loans or was that a lot of loans was that legacy first citizens or legacy <unk>.
<unk>.
And can you tell us what the total size of your office CRE loan portfolio at the end of the year.
The what.
Concentrated in <unk>.
Large loans I'm gonna, let Maurice I'll give a little color on all of that are you on the line.
I am good morning.
Yeah.
The increase in non accrual.
It was.
Specifically, a handful less than a handful of names. So a couple of large names.
Commercial bank.
Legacy <unk> portfolio.
Class B office to drill it down as close as I can the overall office portfolio.
On a non owner occupied or investor commercial real estate.
There's about 252 6 billion, it's equally split between the commercial bank and the General Bank.
The General Bank is not seeing any.
Deterioration in that office portfolio is a very a very granular portfolio much more community bank.
And the few larger loan.
That are in the general bank typically have a very strong investment grade credit tenant.
In the south of the office.
<unk> portfolio in commercial is about $1 3 billion.
Centered and reposition bridge that that means it's relatively short tenure.
And it is a it is in class B office.
I think in terms of geographies.
And we.
We obviously as things move into non accrual the credit and.
Our special assets team evaluate those for impairment and.
And we feel comfortable that we've done our job in terms of determining where we need specific reserve.
But it is obviously as Craig mentioned in our portfolio that we're watching closely we are not in.
That business originating new offer.
Okay, Alright, that's very helpful and just to be clear.
Two five to $2 6 billion that's the total.
<unk> created in both the convert that's right yeah.
That's correct alright, correct its about evenly split and as I said the $1 three as the commercial bank portfolio that has that.
The class B office that we've been referring to.
Okay.
Right and then just a question on guidance I know last quarter you guys gave some specific EPS guidance for the next quarter in the next year, specifically I know 2023 was guided to at 95 to 100 Bucks a share.
That was not in the slide deck. This time is that still the expectation for 'twenty three earnings to be 95 to 100 per share or is it hard to tell just given the uncertainty of what the provision line could be this year.
Yes, Brady I would say that range is still relevant that we would do.
Gear guide towards the lower end of that range.
Okay and then finally for me is there any scenario, where the share buyback could begin before the back half of this year. When you guys are.
Good morning, and you clearly have excess capital like is there any scenario that the buyback could come earlier than the back half of 'twenty three.
Okay.
That's not really our capital planning process.
Ongoing, but really comes to a head in the first quarter. So we will align the share repurchase with those that capital plan and our capital actions in our submission to to our regulators have that plan. So it's really that timing dictates that the ultimate timing of the share repurchase plan. So we do not anticipate.
Hey.
Starting that prior to the second half of the year.
Okay, alright, great. Thanks for the color guys.
Great.
Thank you.
We now plan to Stephen Scouten from Piper Sandler Your line is open.
Yeah. Thanks, everyone, maybe just following up on that share repurchase question and kind of the procedural.
Structure of that have there been any changes to who you would need to request from a regulatory perspective.
That repurchase authorization from from from your request last year would you foresee any incremental difficulty given any given.
The size changes and maybe any regulator changes.
Okay.
Steven we're not expecting any changes in the approval or the process that we'll go through and we're also assessing it the same way that we did last year. So no changes at all in any of that.
Okay, and when will be your first.
Our submission.
Okay.
Steven This is Tom that Glenn we believe our full suite will be subject to the capital plan rules, starting in 2024, and we believe our first CCAR submission.
In a category four bank will be in 2026.
Unless we are ask you participate sooner than that and it's obviously at the discretion of the regulatory bodies.
Okay got it that's helpful. Thank you.
And then I guess as I am.
Thinking about your net interest margin guidance.
A little surprised been encouraged to hear you think you can.
Move that potentially higher, especially in the second quarter. It sounds like Craig from your comments that maybe that due to your back book of loans repricing faster than the back book of deposits that kind of the main phenomenon.
That would lead that higher.
That is absolutely correct.
I would say modestly higher.
Okay, Great and then can you give us an idea of what youre seeing from a from a spread perspective today in terms of maybe new loan yields an incremental deposit costs and how that compares to your current margin.
<unk>.
Right now if you just look at new loan yields are coming on our new loans are coming on the books between five and a half and 6% the module the marginal cost of our deposits when you consider.
The various deposits that we have out there were savings money markets.
$3 50 range, so spreads $3 50 to four so spreads are.
200 basis points, Tom do you have any right.
<unk> to add to that.
I think that.
That's accurate I mean, obviously rates shifts just as the market shifts and we pay close attention to both fed hikes and also sort of how the curve behaves.
But in that dynamic the inversion of the yield curve is a challenge remains a challenge absolutely.
Yeah definitely okay, and maybe just one last thing for me is just on the noninterest bearing deposit growth. I know you said you think you could grow that mid single digits as well anything to note. There in particular in terms of customer acquisition plans or otherwise that would lead to that because I think that's industry wide, where we've been seeing the most pressure.
Specially this quarter or is that maybe negative mix shift away from the noninterest bearing deposits.
Yeah, I think if you look at just mix of deposits. We are forecasting noninterest bearing to remain consistent as a percentage of total deposits and I would just anchor back to our go to market strategy No loan alone strategy always emphasized growing noninterest.
Bearing deposits and we've been able to do that through various rate cycles.
Ill acknowledge that quantitative tightening and potential disintermediation could be headwinds there, but we feel like a 5%.
Growth goal, there is achievable and reasonable.
Okay, great well. Thank you all for all the color I appreciate it okay, great. Thank you.
Thank you.
As a reminder to ask any further questions. Please press star one on your telephone keypad now.
We now turn to Brian Foran from Autonomous your line is open.
Oh hi.
Just going back to the 95 to 100 of EPS and maybe.
Focusing more on the low end of the range.
I should be able to do the math, but I mean is that just because of the nudge is on the fee expense and.
Tax rate or is that also because of <unk>.
More uncertainty or higher potential <unk>.
Provisions that Youre contemplating.
If I look at it.
Just comparing the previous guidance.
When we gave in the third quarter to the current guidance.
<unk> increased our deposit growth.
From low to mid single digits to mid single digits Crows.
We have changed our noninterest income from low single digit growth to flat to low single digit growth.
We have increased our non interest expense guidance from low to mid single to mid single digit growth.
So with all that.
Total that up and run it through the model it.
It just puts us at the lower end it leaves us within that range of 95 to 100 that puts us on.
The lower end and it obviously does not incorporate share repurchases in the second half of the year.
So.
I would say all of that there's a lot of moving parts.
That's very helpful. And then the fed cuts you are incorporating.
Do those really affect NII at all or do they happen like in December of 2003, and the model and so theyre not really.
I guess do the 50 basis points of fed cuts.
Have been impacted.
Third and fourth quarter NII.
Okay.
Yes, Stephen this is.
Howard I would say one of the cuts are going to the back end of the third quarter and that has a marginal impact with the last one is <unk>.
Certainly at the very end of the year, so a very minimal impact on 'twenty three for that one.
Okay.
That does it for me thank you.
Alright.
Thank you.
Our next question comes from Christopher <unk> from Janney Montgomery Scott Your line is open.
Thanks, Good morning, I wanted to ask about the deposit beta and kind of a roadmap to 25%.
How much of that also spills over to kind of some business account activity it'd be hard to what youre doing with the CIP bank.
Okay.
Okay.
Sorry, what were you referring to business commercial business the commercial account activity there I didn't quite catch the question.
Yeah. It was business account activity as well as just.
Interplay between deposit raising at the.
Within your online channel as discussed earlier versus kind of business opportunities within your some of your core business accounts.
Yeah, I mean, the majority of debate as Craig covered sort of the debate on categories, where we see the highest beta is obviously in the direct channel, it's a lower fixed cost channels, but higher variable to higher interest expense. There. So that is really sort of the main driver.
From the overall data for us.
Yes that that represents 18% of our deposit base.
If you look at the branch network that has a mix of lower beta and moderate data that 71% of deposit so those two channels around 90%. So the branch network.
Smoothing that data out lowers it.
In total I'd say.
Overall, we're experiencing beta similar to historical experience out of the branch network.
It's really sort of the online in both deposit gathering channels that are driving the data.
So that 18% Craig would that stay constant over that.
Change over time.
You talked about 92% of the Hanmi Bank I think 18% of the policy 18%.
Increased Tom Yeah, I think it's.
But not not significantly if you look at sort of what sort of where we are projecting things to shake out I think that the direct bank might increase marginally maybe by a percentage point or two.
We anticipate that the branch network is going to be close to that 70%.
Ah level going forward.
Got it that's helpful. Thank you for that clarification.
And then just on the CET one ratio over time, what would be the lower bound that youre comfortable with is that at all changing from what you may have thought a few quarters ago.
No or low end of CET one.
Is 9%.
And that's consistent with prior quarters, and we don't anticipate a change there.
Okay very well thank you for all the background. This morning, it's very helpful. Thank you.
Right.
Okay.
Thank you.
We have a follow up question from Brian from Autonomous Your line is open.
Oh, Hi, just two quick ones I guess.
Maybe one has a couple of parts, but on capital just following up on that so.
So absent the buyback what you would accrete kind of 30 to 40 bps of CET, one a quarter does that sound about right.
Your clothes Yep, that's very close.
And then.
You said the low end is nine.
Is it 9% to 10 as per full through the cycle range or what's the.
Range of capital.
Yeah.
Just remind me what the capital target is.
99% to 10 as the range for CET one.
Okay.
And then I just wanted to come back to the front book back book New loan pricing.
So youre, saying its five five to six for new production.
And that was the message that's good because the existing portfolio yields five or was the message that <unk>.
Less good because it's 200 basis points above the marginal cost of funds or I, just didnt know, which to lean on in terms of the takeaway.
Yeah, Brian This is Alan Howard you know I think we would view it as positive when you look at the bottom half of 6% pricing specifically in the branch network, we're a lot more and more into food.
The current yield on our portfolio of less than 4%. So we've got a pretty favorable gap when we look at that.
The fixed repricing.
Of the women are back in the second half of 2020 group.
So thats just for the fixed rate piece of the loan portfolio.
That's right and that's where the pricing differential I mean variable pretty much prices to historical spreads moves up and down with the variable rate index.
And just remind me the fixed rate piece is half of the book or a little bit more than half of the book.
50.
55% fixed 45% variable.
Okay, so relative to like a lot of other banks I guess every bank dynamic, but it's a bigger piece of your loan book.
And so.
In terms of the puts and takes into next year. It has a little bit more of a tailwind for you because you've got a little bit less of the immediate fed funds benefit in 'twenty two than a typical regional bank, but next year, you get a little bit more of the trailing.
Front book back book kind of ratcheting up.
Then the average banquet.
Well said.
Yes, I realize that wasn't even a question just like making statements.
Okay. Thank you.
That's helpful because.
I was thinking you were comparing it to the entire loan book than the marginal cost. So that's helpful that clears it up.
Thank you very much.
Thank you Brian .
I'm not showing any further questions at this time I'd like to turn the call back over to our host for any closing remarks.
Thank you and thank you everyone for participating in our call today. We appreciate your ongoing interest in our company and if you have any further questions or need additional information. Please feel free to reach out to the Investor Relations team I hope everyone has a great rest of your day.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect have a wonderful day.
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