Q3 2023 Comerica Inc Earnings Call

Speaker 1: you

Speaker 2: Hello, and welcome to the Comerica third quarter 2023 earnings conference call-in webcast.

Hello, and welcome to the Comerica third quarter 2023 earnings conference call and webcast.

Speaker 2: If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the format presentation. You may be placed in question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Kelly Gage, Director of Investor Relations. Please go ahead, Kelly.

If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. He may be placing question queue at any time by pressing star one on your telephone keypad.

As a reminder, this conference is being recorded its now my pleasure to turn the call over to Kelly Gay Director of Investor Relations. Please go ahead Kelly.

Speaker 3: Thanks, Kevin. Good morning and welcome to Comerica's third quarter 2023 earnings conference call. Participating on this call will be our President, Chairman, and CEO , Kurt Farmer, Chief Financial Officer, Jen Herzog, Chief Credit Officer, Melinda Chafee, and Chief Banking Officer, Peter Cebzic. During this presentation, we will be referring to slides which will provide additional details.

Thanks, Kevin Good morning, and welcome to come back in third quarter 2023 earnings Conference call.

Participating on this call will be our president chairman and CEO , Curt Farmer, Chief Financial Officer, Jim Herzog, Chief Credit officer, knowing a choppy and she's thinking I'll start Peter.

During this presentation, we'll be referring to slides, which will provide additional detail.

Speaker 3: The presentation slides and our press release are available on the SEC's website as well as the investor relations section of our website, Comerica.com.

The presentation slides and our press release are available on the Sec's website, developing investor Relations section of our website American icon.

Speaker 3: This conference call contains forward-looking statements, and in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations.

This conference call contains forward looking statements and in that regard you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectation.

Speaker 3: Forward-looking statements seek only as of the date of this presentation, and we undertake no obligation to update any forward-looking statements.

Forward looking statements speak only as of the date of this presentation and we undertake no obligation to update any forward looking statements.

Speaker 3: Please refer to the Safe Harbor Statement in today's earnings presentation on slide two, which is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ.

Please refer to the Safe Harbor statement in today's earnings presentation on slide two which is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ.

Speaker 3: Also, this conference call will reference non-GAAP measures. In that regard, I direct you to the reconciliation of these measures and the earnings materials that are available on our website, camarica.com. With that, I'll turn the call over to court

Also the conference call will be non-GAAP measures and in that regard I direct you to the reconciliation of these measures in the earnings materials that are available on our website.

Com.

I'll turn the call over to Curt farmer.

Speaker 4: Well, thank you and good morning everyone. Thank you for joining our call.

Well, thank you and good morning, everyone and thank you for joining our call.

Speaker 4: Today we reported third quarter net income of $251 million or $1.84 per share.

Today, we reported third quarter net income of 251 million or $1.84 per share.

Moderation moderation per share exceeding moderate exceeding expectations deliver optimization and moderation in customer demand drove a decline in average loans to 54 billion.

Speaker 4: moderation, moderation, per share, exceeding expectations. Delivered optimization and moderation and customer demand drove it to climb leverage loans to 54 billion.

Speaker 4: This festival execution of our targeted deposit strategy grew customer balances, enabling us to repay 5B and maturing FHLB advance.

Successful execution of our targeted deposit strategy grew customer balances, enabling us to repay 5 billion maturing FH I'll be advances.

Speaker 4: Our continued focus on fee and can produce another robust quarter. And credit quarter remained very strong with modest net charge loss following three consecutive quarters of net recovery.

Our continued focus on fee income produced another robust quarter and credit quality remained very strong with modest net charge offs following three consecutive quarters of net recoveries.

Speaker 4: Completing our compelling financial results. We advance other strategic initiatives.

Complementing our compelling financial results, we advanced other strategic initiatives.

Speaker 4: Small business remains a priority and I'm excited to announce that we've seated our five billion dollar lending goal ahead of our three year commit

<unk> business remains a priority and I'm excited to announce that we exceeded our $5 billion lending go ahead of our three year commitment.

Speaker 4: Where their investments in talent, products and services for this important sector, we believe that small business will become a growth engine over time.

With our investments in talent products and services for this important sector. We believe small business will become a growth engine over time.

Speaker 4: Achievements such as publishing our first finance admissions report, making community development investments and recognition for our volunteer program, further underscore the value we place with supporting the communities we serve.

But she admits such as publishing our first financed emissions report.

In community development investments and recognition for our volunteer program further underscore the value we place of supporting the communities we serve.

Advancing our Ameriprise partnership and selected talent acquisition within wealth management position us to achieve our noninterest income objectives, while deepening customer relationships.

Speaker 4: Advancing our mayor-price partnership and selected town acquisition within wealth management, positioned us to achieve our non-interesting income objectives while deepening customer relationship.

Speaker 4: We continue modernizing our approach to technology to better enable agile product enhancements. As we leverage all premise platforms to run over three quarters of our business application.

We continue modernizing our approach to technology to better enable age agile product enhancements as we leverage off premise.

Platforms to run over three quarters of our business applications.

Speaker 4: Progress towards these initiatives allow us to balance the strength of our leg.

Progress towards these initiatives allow us to balance the strength of our legacy.

Speaker 4: For the future vision, to sustainably support our customers as a trusted banking partner.

For the future vision to sustainably support our customers as a trusted banking partner.

Moving to a summary of our results on slide four.

Speaker 4: Moving to the summary of a result from slide four, average of loans declined 1.4 billion.

Average loans declined $1 4 billion.

Speaker 4: With the largest reduction, resulting from our strategic exit of mortgage bank refinance.

We're the largest reduction resulting from our strategic exit of mortgage banker finance.

Success, winning new deposits and bringing back customer balances drove an increase in average deposits of $1 6 billion.

Speaker 4: Success, winning new deposits and bringing back customer balances drove an increase in average deposits of 1.6 billion.

Net interest income exceeded expectations for the quarter, even with the impact of competitive deposit pricing and loan trends.

Speaker 4: Net interest income exceeded expectations for the quarter even with the impact of competitive deposit pricing and long trend.

Speaker 4: Credit quad remains very strong despite continued expected migration.

Credit quality remains very strong despite continued expected migration.

Speaker 4: Outperformance to non-interest income partially offset higher than expected expense pressure.

Outperformance to noninterest income, partially offset higher than expected expense pressures.

Speaker 4: Finally, profitability and loans' activity further enhanced our capital position. As we generated an estimated CEP1 ratio of 10.79% above our 10% target.

Finally profitability and long haul activity further enhanced our capital position as we generated an estimated CET one ratio of 10.79% above our 10% target.

Speaker 4: Despite the disruptive industry events earlier this year, we have actually managed our balance sheet to create abundant liquidity and hands-free turns over time while taking care of our customers and exceeding the profitability expectations.

Despite the disruptive industry events earlier this year, we had thought.

We managed our balance sheet to create abundant liquidity enhanced returns over time, while taking care of our customers and exceeding profitability expectations.

Speaker 4: Now I'll tell the call of a gym who walked into quarter in more detail. Thanks.

Now I will turn the call over to Jim to walk through the quarter in more detail.

Thanks, Curt and good morning, everyone.

Speaker 5: Turning to slide five. Our strategic actions and shift optimization caused average loans and commitments to decline.

Turning to slide five our strategic actions and shift to optimization caused average loans and commitments to decline.

Speaker 5: The exit of mortgage bank refinances progressing as expected and contributed to almost half of the reduction in average balance.

We exited a mortgage banker finance is progressing as expected and contributed to almost half of the reduction in average balances.

Speaker 5: We still expect the exit to be substantially complete by year end.

We still expect the exit to be substantially complete by yearend.

Speaker 5: Declined connectively fund services were largely concentrated in non-relationship customers, but we remain committed to this important business.

Declines in equity fund services were largely concentrated in non relationship customers, but we remain committed to this important business.

Speaker 5: Lower utilization within general market reduced balances, reflecting softening loan demand and this elevated great environment.

Lower utilization within general middle market reduce balances, reflecting softening loan demand in this elevated rate environment.

Ongoing funding of multifamily and industrial construction projects continued to drive higher commercial real estate utilization, but we saw an inflection and commitment growth as we strategically managed pipeline and origination volume.

Speaker 5: ongoing funding of multi-family and industrial construction projects continue to drive higher commercial real estate utilization but we saw an inflection in commitment growth as we strategically manage pipeline and origination volume.

The floating nature of our commercial loan portfolio benefited from rising rates as loan yields continued to decline to $6 three 4% in the third quarter.

Speaker 5: The floating nature of our commercial loan portfolio benefited from rising rates as loan yields continued to climb to 6.34% in the third quarter. Slide six.

Slide six demonstrates our successful deposit generation.

Speaker 5: Average deposit balances increase 2.4% exceeding expectations and HAT trends as we added new deposits and one-back customer balances that diversified earlier in the year.

Average deposit balances increased two 4% exceeding expectations and trends as we added new deposits in won back customer balances the diversified earlier in the year.

Speaker 5: In fact, corporate banking and middle market California both closed the quarter in line with early March balances after experiencing more concentrated diversification in Q1.

In fact, corporate banking and middle market, California, both closed the quarter in line with their early March balances after experiencing more concentrated diversification in Q1.

Speaker 5: As expected, non-intersparing deposits trended down at a decelerating rate with a lowest balance decline in the last four quarters.

As expected noninterest bearing deposits trended down at a decelerating rate was the lowest balance declined in the last four quarters.

Speaker 5: Considering that modest reduction, our deposit mix was more impacted by growth in the denominator with success in winning interest-sparing deposits.

Considering that modest reduction our deposit mix was more impacted by growth in the denominator with success in winning interest bearing deposits.

Speaker 5: We continue to view our deposit and mix as a competitive advantage, providing a more stable and cost-effective funding source to outpair.

We continue to view, our deposit mix as a competitive advantage, providing a more stable and cost effective funding source that appears.

Speaker 5: Industry efforts to enhance liquidity drove competition, and when combined with a higher rate environment, the positive costs increased to 290 basis points, resulting in accumulative beta of 55%.

Industry efforts to enhance liquidity drove competition and when combined with a higher rate environment deposit costs increased to 290 basis points, resulting in a cumulative beta of 55%.

Speaker 5: In recent weeks, deposit data has been moderating, and we intend to remain nimble in our relationship pricing approach, so we are able to balance customer needs with profitability targets while closely monitoring the market.

In recent weeks deposit betas have been moderating and we intend to remain nimble in a relationship pricing approach. So we are able to balance customer needs with profitability targets, while closely monitoring the market.

Speaker 5: If you need to lower percentage of unsure deposits, the operating nature of our accounts, and an enviable customer base, we believe our strong deposit profile is now even more attractive.

With an even lower percentage of uninsured deposits the operating nature of our accounts and an enviable customer base. We believe our strong deposit profile is now even more attractive.

As shown on slide seven our effective liquidity strategy and strong deposit growth allowed us to absorb all of our contractual wholesale funding maturities this quarter.

Speaker 5: I showed in slide seven our effective liquidity strategy and strong deposit growth allowed us to absorb all of our contractual wholesale funding maturities this quarter.

Speaker 5: We expect to continue to utilize excess cash to further reduce wholesale funding in the coming quarters.

We expect to continue to utilize excess cash to further reduce wholesale funding in the coming quarters.

Speaker 5: Our loans to the deposit ratio continued to trend favorably, closing at 80% for the quarter.

Our loan to deposit ratio continued to trend favorably closing at 80% for the quarter.

Speaker 5: With significant liquidity capacity and very light remaining, unsecured funding maturities, we have flexibility to manage funding needs and are a better position to prioritize high return growth in 2024.

With significant liquidity capacity in very light remaining unsecured funding maturities, we have flexibility to manage funding needs and are better positioned to prioritize high return growth in 2024.

Speaker 5: Period and balances in our securities portfolio on slide eight and climbed $1.1 billion with pay downs, maturities and a $710 million negative mark to market adjustment.

Period end balances in our securities portfolio on slide eight declined $1 $1 billion with Paydowns maturities and a $710 million negative mark to market adjustment.

Speaker 5: Although we have nominal treasury maturities remaining in 2023, large rescheduled maturities and anticipated securities repayments over the next two years are projected to benefit net interest income and AOCI.

Although we have nominal treasury maturities remaining in 2023 larger scheduled maturities and anticipated securities repayments over the next two years are projected to benefit net interest income and a OCI.

Altogether, we projected 25% improvement in unrealized securities losses over the next two years.

Speaker 5: All together, we project a 25% improvement and unrealized securities losses over the next two years.

Speaker 5: The estimated burnoff is sensitive to the dynamic rate environment and lengthen the quarter S.

This estimated burn off is sensitive to the dynamic rate environment and linked into quarter end.

Speaker 5: However, since our portfolio is pledged with hands or a quid position, we do not anticipate any need to sell securities, and therefore unrelized losses should not impact.

However, since our portfolio has pledged to enhance our liquidity position, we do not anticipate any need to sell securities and therefore unrealized losses should not impact income.

Overall, our security strategy remains unchanged as we stop reinvesting over a year ago, and we maintain our entire portfolio as available for sale, providing full transparency and management flexibility.

Speaker 5: Overall, our security strategy remains unchanged as we stop reinvesting over a year ago, and we maintain our entire portfolio as available for sale, providing full transparency and management flexibility.

Speaker 5: We will continue to closely monitor final regulatory rules to consider the impact on our security strategy as we consider the need for future compliance.

We will continue to closely monitor final regulatory rules to consider the impact on our security strategy as we consider the need for future compliance.

Turning to slide nine net.

Speaker 5: Turning to slide 9, net interest income decreased $20 million to $601 million, but I'll perform the expectation.

Net interest income decreased $20 million to $601 million, but outperformed expectations.

Speaker 5: We were encouraged by the lower pace of decline and net interest income as we move closer to what we believe they soon be an inflection point.

We were encouraged by the lower pace of decline in net interest income as we move closer to what we believe may soon be an inflection point.

Speaker 5: Competitive deposit pricing and lower-bone balances offset the benefits of loan yields and reduce wholesale funding balance.

Competitive deposit pricing and lower loan balances offset the benefits of loan yields and reduced wholesale funding balances.

Speaker 5: With a strategic management of our interest rate sensitivity, rates are an anomaly impacted income, and we remain effectively assetting.

With the strategic management of our interest rate sensitivity rates only nominally impacted income and we've remained effectively asset neutral.

Speaker 5: As shown slide 10, successful execution of our interest rate strategy and the current composition of our balance sheet favorably positioned us with minimal negative exposure to a gradual 100 basis points for 50 basis points on average decline in interest rates.

As shown on slide 10 successful execution of our interest rate strategy in the current composition of our balance sheet favorably positioned us with minimal negative exposure to a gradual 100 basis points or 50 basis points on average decline in interest rates.

Speaker 5: By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time.

By strategically managing our swap and securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time.

Speaker 5: Credit quality remains very strong as highlighted on slide 11.

Credit quality remains very strong as highlighted on slide 11.

Speaker 5: Following three consecutive quarters of net recoveries, we observed modest net charge drops at $6 million.

Following three consecutive quarters of net recoveries, we observe modest net charge offs of $6 million.

Speaker 5: As expected, credit migration continued with greater concentration in businesses, with more relative exposure to elevated rates and inflationary pressures, including commercial real estate, leverage loans, and technology and life signs.

As expected credit migration continued with greater concentration in businesses with more relative exposure to elevated rates and inflationary pressures, including commercial real estate leveraged loans and technology and life Sciences.

Speaker 5: While the economic forecast improved slightly from the prior quarter, the outlook remained uncertain, which when coupled with lower loan balances, which impacted loan mix, contributed to an increase in our allowance for credit losses to 1.38% of total loans.

While the economic forecast improved slightly from the prior quarter the outlook remains uncertain, which when coupled with lower loan balances, which impacted loan mix contributed to an increase in our allowance for credit losses to 1.38% of total loans.

Speaker 5: Notably, non-accrual loans decline for the fixed consecutive quarter and then close to non-accruals of $14 million also decline.

Notably non accrual loans declined for the sixth consecutive quarter and inflows to non accruals of $14 billion also declined.

Speaker 5: consistent with our proven predisposition, we continue to closely monitor our portfolio and expect further migration to remain manageable.

Consistent with our proven credit discipline, we continue to closely monitor our portfolio and expect further migration to remain manageable.

Speaker 5: On slide 12, 9% come up to $295 million was a third highest quarter on record following or second highest quarter of 2Q.

On slide 12, noninterest income of $295 million was our third highest quarter on record following our second highest quarter in <unk>.

Speaker 5: The fur compensation, which was fully offset in expenses, reduced $7 million, contributing to most of the non-interess income decline.

Deferred compensation, which was fully offset in expenses reduced $7 billion contributing to most of the noninterest income declined.

Speaker 5: Software-driven activity more than offset increased loans and vacation fees, pressure and capital markets revenue.

Software derivative activity more than offset increased loan syndication fees pressuring capital markets revenue.

Fiduciary income was negatively impacted by annual fees received in the prior quarter.

Speaker 5: The Ducerian income was negatively impacted by annual fees received in the prior quarter.

Speaker 5: Moving on to the right curve, benefit of risk management hedging come, but we'll be right in the future based on the right environment and the position of our hedging portfolio.

Movement in the rate curve benefit or risk management hedge income, but will vary in the future based on the rate environment and the position of our hedging portfolio.

Speaker 5: Growth and nonatrous income continues to enhance our overall revenue profile and capital efficiency over time. Expenses on-

Growth in noninterest income continues to enhance our overall revenue profile and capital efficiency over time.

Expenses on slide 13 increased $20 million.

Speaker 5: Fowlers have benefits to up $9 million and $8 million that increase in temporary labor to a staff augmentation, advancing technology, involved management initiatives.

Salaries and benefits were up $9 million and $8 million of that increase was in temporary labor due to staff augmentation advancing technology involves management initiatives.

Speaker 5: Outside processing increased $7 million, driven by certain vendor terms that are sensitive to interest rates and are trust platform conversion.

Outside processing increased $7 million driven by certain vendor terms that are sensitive to interest rates and our trust platform conversion.

Other expenses benefited from large modernization credits from the sale of real estate offset by increased litigation and regulatory related expenses consulting fees and operational losses.

Speaker 5: Other expenses benefited from large modernization credits from the sale of real estate, offset by increased litigation and regulatory related expenses, consulting fees, and operational loss.

Speaker 5: We believe we in industry are in a period of calibration as we balance the profitability and risk management impacts from the first quarter disruption with strategic investments critical for future growth.

We believe we and the industry are in a period of calibration as we balance the profitability and risk management impacts from the first quarter disruption with strategic investments critical for future growth.

Speaker 5: We remain committed to managing an efficient organization and are assessing opportunities to offset some of these pressures so that we may continue to deliver stronger turns over time.

We remain committed to managing an efficient organization and are assessing opportunities to offset some of these pressures. So that we may continue to deliver strong returns over time.

Yeah.

Slide 14 highlights our solid capital position.

Speaker 5: Capital generation from profitability and lower loan balances to our CET-1 field further above our target to an estimated 10.79%.

Capital generation from profitability and lower loan balances drove our CET one ratio further above target to an estimated 10, 79%.

Speaker 5: Our third quarter tangible common equity ratio of 4.62% includes a negative 502 basis point impact from AOCI.

Our third quarter tangible common equity ratio of 462% includes a negative 502 basis point impact from a OCI.

Speaker 5: Higher rates increase bend realized losses in our securities and swap portfolios, driving a more negative impact on the United quarter.

Higher rates increase the unrealized losses in our securities and swap portfolios driving a more negative impact of the prior quarter.

Speaker 5: Based on the September 30th for-repear, we anticipate approximately a 37% reduction in our unrealized losses by the end of 2025.

Based on the September 30th forward curve, we anticipate approximately a 37% reduction in our unrealized losses by the end of 2025.

Unknown Executive: Hello, and welcome to the Comerica third quarter 2023 earnings conference colon webcast. If anyone wants to require operator assistance, please press star zero under telephone keypad. A question and answer session will follow the full presentation.

Unknown Executive: You may be placed in question to you at any time by pressing star one under telephone keypad. As a reminder, this conference is being recorded.

Speaker 5: Although the proposed capital changes do not apply to us based on our asset size, we favor a conservative approach to capital management and feel it is prudent to remain mindful of the regulations as they evolve.

Although the proposed capital changes do not apply to us based on our asset size, we favor a conservative approach to capital management and feel it is prudent to remain mindful of the regulations as they evolve.

Speaker 5: Our outlook for 2023 is on slide 15 and assumes no significant change in the economic environment.

Our outlook for 2020 threes on slide 15, and assumes no significant change in the economic environment.

Kelly Gage: It's not my pleasure to turn local over to Kelly Gage, director of investor relations. Please go ahead, Kelly. Thanks, Kevin.

Speaker 5: We project four year 2023 average loan growth of 7%, which would be our highest annual loan growth rate in a decade.

We project full year, 2023 average loan growth of 7%, which would be our highest annual loan growth rate in a decade.

Kurt Farmer: Good morning and welcome to Comerica's third quarter 2023 earnings conference call.

Kurt Farmer: Participating on this call will be our president, chairman and CEO, Kurt Farmer.

Speaker 5: The strategic action of mortgage banker finance and increased selectivity is expected to continue to impact fourth quarter balance.

The strategic exit of mortgage banker finance and increased selectivity is expected to continue to impact fourth quarter balances.

Jen Herzog: She's financial officer, Jen Herzog.

Peter Sefzik: She's credit officer, Melinda Chauke, and she's thanking officer Peter Sefzik. During this presentation, we will be referring aside which will provide additional details. The presentation slides and our press release are available on the SEC website as well as the investor relations section of our website, comerica.com.

Speaker 5: Our projected four-year average deposit decline of 13% improved over prior expectations with the success in running new deposits and bringing back customer balance.

Our projected full year average deposits declined 13% improved over prior expectations with the success in winning new deposits and bring back customer balances.

Speaker 5: with the exception of the impact from our mortgage banker finance exit and utilizing excess cash to modestly reduce the mature and broker deposits, we expect deposits to remain relatively flat in the fourth quarter.

With the exception of the impact from our mortgage banker finance exit and utilizing excess cash to modestly reduce the maturing broker deposits. We expect deposits remained relatively flat in the fourth quarter.

Kurt Farmer: This conference call contains forward-looking statements and in that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. For looking statements, seek only as of the date of this presentation and we undertake no obligation to update any forward-looking statements. Please refer to the safe harbor statement in today's earnings presentation on slide two, which is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ.

Speaker 5: Our outlook does not assume a significant benefit from seasonality, but if we did see a return to more normal fourth quarter seasonal patterns that may provide more upstides than projects.

Our outlook does not assume a significant benefit from seasonality, but if we did see a return to more normal fourth quarter seasonal patterns that may provide more upside than projected.

We still expect another record year of net interest income in 2023 growing 1% to 2% over last year's record results.

Speaker 5: We still expect another record year of net interest income in 2023, going one to two percent over last year's record result.

Kurt Farmer: Also, this conference call will reference non-gap measures. In that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on our website, comerica.com.

Speaker 5: Competitive deposit pricing, continued deposit of exchange, and a modest decline in loans are expected to drive a 5-6% reduction in fourth quarter net interest income.

Competitive deposit pricing continued deposit mix change and a modest decline in loans are expected to drive a 5% to 6% reduction in fourth quarter net interest income.

Kurt Farmer: With that, I'll turn the call over to Kurt Farmer. Well, thank you and good morning everyone. Thank you for joining our call. Today, we reported third-quarter net income of $251 million or $1.84 per share. Moderation per share, exceeding expectations, deliver optimization and moderation and customer demand, deliver the client and average loans to $54 billion. Successful execution of our targeted deposit strategy, group customer balances, enabling us to repay $5 billion in maturing FHLB advances.

Speaker 5: Although short-term rates are expected to remain high through year-end, the asset sensitivity position is designed to protect our profitability by minimizing the negative impact of rates when they decline.

Although short term rates are expected to remain high through year end, our asset sensitivity position is designed to protect our profitability by minimizing the negative impact of rates when they decline.

Speaker 5: Credit quality remained very strong and we expect continued migration to be manageable.

Credit quality remained very strong and we expect continued migration to be manageable.

Speaker 5: We forecast four year and fourth quarter annualized net charge loss to remain below our normal 20 to 40 basis point rate.

We forecast full year and fourth quarter annualized net charge offs to remain below our normal 20 to 40 basis point range.

Speaker 5: Non-interested income has exceeded expectations for the first three quarters, and we project four-year growth of 9% over 2022.

Noninterest income has exceeded expectations for the first three quarters, and we project full year growth of 9% over 2022.

Kurt Farmer: Our continued focus on fee income produced another robust quarter. And credit quarter remained very strong with modest net chargeoffs following three consecutive quarters of net recoveries. Completing our compelling financial results, we advanced other strategic initiatives. Small business remains a priority and I'm excited to announce that we've seated our $5 billion lending goal ahead of our three-year commitment. With our investments in talent, products and services for this important sector, we believe small business will become a growth engine over time.

Speaker 5: Benefits from non-customer income from FHLB dividends are expected to continue, but at declining rates as we repay maturing events.

Benefits from non customer income from S. Hlv dividends are expected to continue but at a declining rates as we repay maturing advances.

Speaker 5: This management income is expected to eventually reduce over time with rates and our swap positions.

Risk management income is expected to eventually reduce over time with rates and our swap position.

For the fourth quarter noninterest income is expected to decline, 3% to 4% largely driven by a reduction in capital markets income considering market dynamics and increased selectivity.

Speaker 5: For the fourth quarter, non-interference income is expected to decline three to four percent, largely driven by reduction in capital markets income, considering market dynamics and increased

Speaker 5: Non-interest expenses are expected to increase approximately 11% year over year, with 3% of that growth attributed to higher 2023 pension expense, and almost 2% due to higher FDIC.

Noninterest expenses are expected to increase approximately 11% year over year with 3% of that growth attributed to higher 2023 pension expense and almost 2% due to higher FDIC expense.

Kurt Farmer: Achievements such as publishing our first finance admissions report, making community development investments and recognition for our volunteer program further underscore the value we play so supporting the communities we serve. Advancing our merit-price partnership and selected talent acquisition within wealth management, position us to achieve our non-interesting income objectives while deepening customer relationships. We continue modernizing our approach to technology to better enable agile product enhancements as we leverage off-premise platforms to run over three quarters of our business applications.

Speaker 5: Fourth quarter expenses are projected to increase 3% as we observe pressures related to investments in technology and risk management in addition to third quarter modernization gains that are not expected to reach.

Fourth quarter expenses are projected to increase 3% as we observe pressures related to investments in technology and risk management. In addition to third quarter modernization gains that are not expected to repeat.

Speaker 5: While we are not offering 2024 guidance, we are mindful of the need to mitigate expense pressures as we recognize the new funding paradigm in the industry.

While we are not offering 2024 guidance, we are mindful of the need to mitigate expense pressures as we've recognized the new funding paradigm in the industry.

Speaker 5: These pressures are largely concentrated in the need for selective ongoing strategic investments in addition to investments to further enhance risk management and regulatory compliance.

These pressures are largely concentrated in the need for selective ongoing strategic investments. In addition to investments to further enhance risk management and regulatory compliance.

Jim Herzog: Editions. Progress towards these initiatives allow us to balance the strength of our legacy for the future vision to sustainably support our customers as a trusted banking partner. Moving to a summary of a result from 5.4, average of loans declined 1.4 billion, with the largest reduction resulting from our strategic exit of mortgage bank refinance. To access winning new deposits and bringing back customer balances to drive an increase in average deposits of 1.6 billion, net interest income exceeded expectations for the quarter, even with the impact of competitive deposit pricing and loan trends.

Speaker 5: We are on the process of evaluating cost reduction opportunities with the objective of keeping 2024 costs only modestly higher than 2023.

We are in the process of evaluating cost reduction opportunities with the objective of keeping 2024 costs only modestly higher in 2023.

Speaker 5: This assumes no change in pension expense, which will be determined largely by year end rates and market performance.

This assumes no change in pension expense, which will be determined largely by year end rates and market performance.

Speaker 5: Proof and expense management remains a priority as we work to balance our expense space, to commensurate with our earnings power.

Prudent expense management remains a priority as we work to balance our expense base commensurate with our earnings power.

Speaker 5: Strong profitability is expected to further grow our capital position in excess of our 10% target.

Strong profitability is expected to further grow our capital position in excess of our 10% target.

Share repurchases remain pause considering the ongoing volatility within unrealized a OCI losses and subject to further regulatory clarity.

Speaker 5: Chair, would you please remain paused considering the ongoing volatility within unrealized AOC I losses in subject to further regulatory clarity.

Jim Herzog: Credit quarter remains very strong despite continued expected migration. Outperformer to non-interest income partially offset higher than expected expense pressures. Finally, profitability and loans to activity further enhanced our capital position, as we generated an estimated CEP1 ratio of 10.79 percent above our 10 percent target. Despite the disruptive industry events earlier this year, we eventually managed our balance sheet to create abundant liquidity and hands returns over time while taking care of our customers and exceeding the profitability expectations.

Speaker 5: In all, it was a solid quarter of a strong deposit, liquidity, the income and credit. We believe we're in great shape. We looked at the finish out of the year and prepare for 2024. Now I'll turn the call back.

And all it was a solid quarter with strong deposits liquidity fee income and credit.

We believe we are in great shape, as we look to finish out the year and prepare for 2024.

Now I'll turn the call back to Kurt.

Thank you Jim.

Speaker 4: Slide 16 summarizes our differentiated value proposition.

Slide 16 summarizes our differentiated value proposition.

Speaker 4: As a leading bank for business with strong wealth management and retail capabilities, our tendered colleagues deliver value added industry expertise to our blue chip customer base.

As the leading bank for business with strong wealth management and retail capabilities are tenured colleagues deliver value added industry expertise to our blue chip customer base.

Speaker 4: While our highly regarded and pretty secretive has historically outperformed our peers.

While our highly regarded approach to credit has historically outperformed our peers.

Speaker 4: Completing our commercial loan expertise, our relationship model is exemplified by a product that tailored to meet our customer needs, enhancing revenue and retention.

Complementing our commercial loan expertise our relationship model as exemplified by our products tailored to meet our customer needs enhancing revenue and retention.

Jim Herzog: Now, I'll tell the call of a gym who walked into the quarter in more detail. Thanks, Kirk, and good morning, everyone. Turning to slide 5. Our strategic actions and shift optimization caused average loans and commitments to decline. The exit of mortgage bank refinances progressing as expected and contributed to almost half of the reduction in average balances. We still expect the exit to be substantially complete by year end. Declined connectively fund services were largely concentrated in non-relationship customers, but we remain committed to this important business.

Our deposit profile has long been a strength with a focus on commercial operating deposits and a consistent retail base.

Speaker 4: Our deposit profile has long been a strength with a focus on commercial operating deposits and a consistent retail base.

Speaker 4: With new products already in the market, an additional effort underway to expand small business and payments. We expect this core funding source to be even more compelling.

With new products already in the market and additional efforts underway to expand small business and payments. We expect this core funding source to be even more compelling.

Finally, we remain committed to running an efficient organization that will be taking steps to offset expense pressures, while leveraging investments designed to enhance productivity and optimize resources.

Speaker 4: Finally, we remain committed to running an efficient organization. We'll be taking steps to also expect pressures while leveraging the best of us designed to enhance productivity and optimize resource.

Jim Herzog: Lower utilization within general middle-market reduced balances, reflecting softening loan demand in this elevated rate environment. On-going funding, a multi-family and industrial construction projects continued to drive higher commercial real estate utilization that we saw in flexion and commitment growth as we strategically managed pipeline and origination volume. The floating nature of our commercial loan portfolio benefited from rising rates as loan yields continued to decline to 6.34 percent in the third quarter. Slide 6 demonstrates our successful deposit generation.

Speaker 4: Before we have any questions, I just want to comment on what the remarkable quarter we think this was for our company.

Before we open the line to questions I, just want to comment on what a remarkable quarter. We think this was for our company.

Speaker 4: After the significant industry disruption has passed spring, once again, our relationship based model has proved resilient.

After the significant industry disruption this past spring once again, our relationship based model has proved resilient.

We're very proud to see a return to deposit growth, especially when the H eight data shows declines across the industry.

Speaker 4: We're very proud to see a return to the piloting road, especially when the H8 data shows declines across the industry. All right.

Our liquidity is in great shape.

Speaker 4: We repaid significant IBHLB advances in our long and deposit ratio and puts us in a very favorable position.

We repaid significant <unk> advances and our loan to deposit ratio puts us in a very favorable position.

Jim Herzog: Average deposit balances increased 2.4 percent exceeding expectations and each acreence as we added new deposits and one-back customer balances that diversified earlier in the year. In fact, corporate banking and middle-market California both closed the quarter in line with early-march balances after experiencing more concentrated diversification in Q1. As expected, non-interests bearing deposits trended down at a de-celerating rate with the lowest balance decline in the last four quarters. Considering that modest reduction, our deposit mix was more impacted by growth in the denominator with success in winning interest bearing deposits.

Speaker 4: Credit remains strong. The income continues to perform at near record level.

Credit remains strong our fee income continues to perform at near record levels.

Speaker 4: During this destructive time, we have taken care of our customers, we've worn back the products, we've had new relationships, and still exceeded profitability expectations.

During this disruptive time, we are taking care of our customers. We've warned back deposits, we've added new relationships and still exceeded profitability expectations.

As I shared on prior calls throughout our almost 175 year history.

Speaker 4: This year, the prior call throughout our almost 175-year history

Speaker 4: We have made it to a number of challenges, and I'm confident in our ability to navigate this environment.

We have managed through a number of challenges and I am confident in our ability to navigate this environment.

Speaker 4: We remain focused on our core strategy, enhancing efficiency, managing risk, protecting returns, and positioning for organic growth.

We remain focused on our core strategy enhancing efficiency managing risk protecting returns and positioning for organic growth.

Speaker 4: With the uncertain economic landscape, and being just under $80,000,000 in assets, I felt very good about America's position. We're proud of our colleague to...

With the uncertain economic landscape and being just under 86 billion in assets I felt very good about America's position.

Jim Herzog: Jones. We continue to view our deposit and mix as a competitive advantage, providing a more stable and cost-effective funding source than our peers. Industry efforts to enhance liquidity drove competition, and when combined with a higher rate environment, deposit costs increased to 290 basis points, resulting in accumulative beta of 55%. In recent weeks, deposit betas have been moderating, and we intend to remain nimble in our relationship pricing approach, so we are able to balance customer needs with profitability targets while closely monitoring the market.

We're proud of our colleague to the performance we delivered.

Speaker 4: We appreciate your time this morning and now operator would be happy to take some questions.

We appreciate your time this morning, and now operator, we'd be happy to take some questions.

Speaker 2: Certainly, when I'll be conducting a question and answer session, if you'd like to be placed in the question queue, please press star one under telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. One moment please, we'll be pulled for questions.

It certainly will not be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from the Q1 moment. Please while we poll for questions. Our first question today is.

Jim Herzog: With an even lower percentage of uninsured deposits, the operating nature of our accounts, and an enviable customer base, we believe our strong deposit profile is now even more attractive. As shown in slide 7, our effective liquidity strategy and strong deposit growth allowed us to absorb all of our contractual wholesale funding maturities this quarter. We expect to continue to utilize excess cash to further reduce wholesale funding in the coming quarters. Our loans and deposit ratio continue to trend favorably, closing at 80% for the quarter.

Speaker 2: Our first question today is coming from John Arstrom from RBC Capital Markets, for light is that light.

Coming from Jon <unk> from RBC capital markets. Your line is that life.

Speaker 6: Thanks, good morning. Hey, good morning. Hey, good morning. Kurt, question for you just on one of the last comments you made about deposit growth. You mentioned that you're adding and bringing back customer deposits.

Thanks, Good morning, everyone. Thank.

Hey, good morning.

Quick question for you just on one of the last comments you made about deposit growth, you mentioned that you're adding and bringing back customer deposits.

Speaker 6: Can you talk about the extent of what you brought back and why these clients are coming back and the extent of it and what's less to bring back?

Can you talk about the extent of what you brought back.

And why are these clients are coming back and kind of the extent of it and what's left to bring back.

Hey, John this is Peter so.

Speaker 4: John , this is Peter. So, yeah, the bringing back clients, I would say a lot of that has occurred probably in our middle market and up businesses. So if you look back to...

Bringing back clients I would say a lot of that has occurred probably in our middle market businesses. So if you look back to.

Jim Herzog: With significant liquidity capacity and very light remaining unsecured funding maturities, we have flexibility to manage funding needs and our better position to prioritize high return growth in 2024. Period and balances, and our securities portfolio on slide 8, declined $1.1 billion, with pay downs, maturities, and a $710 million negative mark to market adjustment. Although we have nominal treasury maturities remaining in 2023, larger scheduled maturities and anticipated securities repayments over the next two years are projected to benefit net interest income and AOCI.

Speaker 7: pre-SVB and Jim mentioned this. For example, middle-mortar California, corporate banking, we're back to...

Pre FCB and Jim mentioned this for example, middle market, California, corporate banking were back to pre <unk> levels in those businesses, but that's true in a couple of other businesses as well environmental services has that sort of results in middle market. Overall, I think has performed really well a lot of our new deposit growth I would say would be in middle Mark.

Speaker 7: pre-SB levels in those businesses, but that's true in a couple of other businesses as well, environmental services, as that sort of results in middle market overall.

Speaker 7: really well. A lot of our new deposit growth I would say would be in middle-market small business, business-banking.

Small business business banking.

Speaker 7: and we're really being aggressive on trying to attract granular deposits, small business deposits. We're making a lot of investments there in people and product. So that's the success that we've had. I think the year has gone on. Our customer base and prospects have continued to have a lot of confidence in our name.

We're really being aggressive on trying to attract granular deposits small business deposits were making a lot of investments there.

And people and product and so and that's the success that we've had I think as the year has gone on.

Jim Herzog: All together, we project a 25% improvement and unrealized securities losses over the next two years. The estimated burn off is sensitive to the dynamic rate environment and length in the quarter end. However, since our portfolio is pledged to enhance our liquidity position, we do not anticipate any need to sell securities and therefore unrealized losses should not impact income. Overall, our security strategy remains unchanged as we stop reinvesting over a year ago and we maintain our entire portfolio as available for sale, providing full transparency and management flexibility.

You know the our customer base and prospects have continued to have a lot of confidence in our name and our success and while you know all the banks were challenged between March and April where I think we've proven to be pretty resilient through this.

Speaker 7: our success and while you know all the banks were challenged between March and April , we think we've proven to be pretty...

Speaker 6: How rate-sensitive are those depositors? Is this kind of, you know, call it relationship gathering?

All right sensitive or those deposits or is this.

You know call it relationship gathering.

I think it's a little bit of both I think some of it is providing.

Speaker 7: I think it's a little bit of both. I think some of it is providing...

Speaker 7: confidence overall that occurred early in the year, but certainly you're attracting some of it with interest-bearing rates that we're being competitive on. And I think we talk a little bit about what we're seeing on our deposit betas here today, but so there's a little bit of both. I think some of its product investment that we've made to make it easier for our customers to manage their liquidity. But we're certainly doing what we need to do to be competitive with other banks on the interest rate environment.

Confidence overall that occurred early in the year, but certainly youre attracting some of it with interest bearing rates that were being competitive on I mean, I think we talked a little bit about what we're seeing on our deposit betas here today, but yeah. So there's a little bit of both I think some of it's.

Jim Herzog: We will continue to closely monitor final regulatory rules to consider the impact on our security strategy as we consider the need for future compliance. Turning to slide 9, net interest income decreased $20 million to $601 million but outperformed expectations. We were encouraged by the lower pace of decline and net interest income as we move closer to what we believe may soon be an inflection point. Competitive deposit pricing and lower loan balances offset the benefits of loan yields and reduce wholesale funding balances.

Product investment that we've made to make it easier for our customers to manage their liquidity, but we're certainly doing what we need to do to be competitive with other banks on the interest rate environment.

Okay.

Speaker 6: Jim, one for you, you kind of dance around this in terms of you're talking about data's moderating.

Jim one for you.

You're kind of dancing around this in terms of you're talking about betas moderating.

Speaker 6: And we still have this down, that interest income sequentially and down margin. But the way things sit today if the Fed has done, what's your best guess on NII inflection for the company?

And we still have this down net interest income sequentially and down margin, but the way things sit today. If the fed is done what's your best guess on.

Jim Herzog: With the strategic management of our interest rate sensitivity, rates are an anomaly impacted income and we remain effectively asset neutral. As shown slide 10, successful execution of our interest rate strategy and the current composition of our balance sheet favorably positioned us with minimal negative exposure to a gradual 100 basis points. For 50 basis points on average decline in interest rates. Hi, strategically managing our Swap and Securities portfolios, while considering balance sheet dynamics, we intend to maintain our insulated position over time.

NII inflection for the company.

Yes, Thanks, John and good morning, I do feel like the pathway on that inflection point is becoming a little bit more on the focus even though there are still some degree of uncertainty I.

Speaker 5: Yeah, thanks, John , and good morning. I do feel like the pathway and that inflection point is becoming a little bit more in the focus, even though there is still some degree of uncertainty. And I would say right now our base case is that we'll probably hit a drop in Q1.

I would say right now our base case is that we will probably hit a trough in Q1.

Speaker 5: But whether or not that's the inflection point or again that is the base case.

But whether or not that's the inflection point and again that is the base case and more importantly, what that upward slope of the mine will be from there. It really depends on a lot of things as you know.

Speaker 5: And more importantly, one of that upward slope of the line will be from there. It really depends on a lot of things, as you know. A lot of uncertainty out there are deposit betas. The fed stays higher for longer, how do betas respond. And just as importantly, if rate cuts occur, how much is there in terms of a deposit pricing leg?

A lot of uncertainty out there of deposit betas as the fed stays higher for longer.

Jim Herzog: Credit quality remains very strong as highlighted on slide 11. Following three consecutive quarters of net recoveries, we observed modest net charge drops of six million dollars. As expected, credit migration continued with greater concentration and businesses with more relative exposure to elevated rates than inflationary pressures, including commercial real estate, leverage loans, and technology and life sciences. While economic forecasts improved slightly from the prior quarter, the outlook remained uncertain, which when coupled with lower loan balances, which impacted loan mix, contributed to an increase in our allowance for credit losses to 1.38 percent of total loans.

How the betas respond and just as importantly, if rate cuts occur how much is there in terms of deposit pricing like mommy.

Speaker 5: Modern territory policy, you know, loan volume we do anticipate Going at some point in 24 that's certainly a variable loan pricing is out there. It's a variable You know, we think that the new funding paradigm, you know commands, you know, wider spreads or higher yield But it remains to be seen at the market will accept that so a lot of variables out there But I'll just circle back and say at this point we think the trop is likely to be Q1 Then a little bit of a slope up from there

Monetary policy loan volume, we do anticipate growing at some point in 'twenty four that certainly variable loan pricing is out there as a variable we think that the new funding paradigm.

<unk> wider spreads or higher yield, but it remains to be seen as the market will accept that so a lot of variables out there, but I'll just circle back and say at this point, we think the trough was likely to be Q1, and then a little bit of a slope up from there.

Speaker 4: Okay. All right. Thank you. I appreciate it. Thanks, Sean.

Okay.

Alright, Thank you I appreciate it.

Thanks, Sean.

Jim Herzog: Notably, non accrual loans declined for the six consecutive quarter, and then closed the non accruals of $14 million also declined. Consistent with our proven credit discipline, we continued to closely monitor our portfolio and expect further migration to remain manageable. On slide 12, 9% come of $295 million was our third highest quarter on record following our second highest quarter of 2Q. The third compensation, which was fully offset in expenses, reduced $7 million, contributing to most of the non interest income decline.

Thank you next question is coming from Ebrahim <unk> from Bank of America. Your line is now live.

Speaker 2: Thank you. Next question is coming from Abraham Poonoalak from Bake of America. Your line is online.

Speaker 8: You were happy to morning. Maybe first for you looking at the slight 10 rates sensitivity, when we look at, so it looks like obviously you've not added any new swaps this year. When we look at the trajectory of the swaps and the outlook, the

Hey, good morning.

Maybe give them.

First for you looking at slide 10, the sensitivity.

We look at it so it looks like obviously, you've not added any new swaps this year.

Okay.

<unk> of the swaps and the outlook.

Okay.

Speaker 8: If they jacks on the swaps fully baked into, as we look into the third quarter of foot quarter outlook, incrementally does it get worse or does it just level off the face tone?

As Dayton, Jack on the swaps fully baked into as we look into the third quarter fourth quarter outlook incrementally does it get worse or does it just level off if rates don't change and just give us a sense do you expect any additional changes.

Jim Herzog: Software derivative activity, more than offset increased loans in occasion fees, pressure in capital markets revenue. The due sharing income was negatively impacted by annual fees received in the prior quarter. Movement in the rate curve benefited risk management hedging come, but will vary in the future based on the rate environment and the position of our hedging portfolio. Growth and non interest income continues to enhance our overall revenue profile and capital efficiency over time.

Speaker 8: and just give assistance to expect any additional changes around balance sheet makes.

Balance sheet mix.

Speaker 8: going next year and whether or not you're thinking about protecting eventually against rate cuts or not.

Next here.

And then Todd Youre thinking about protecting eventually against it cuts or not.

Speaker 5: Yeah, Abraham, you were cutting out a little bit, but I think I got the gist of the question. You know, we are relatively interested in the role of how I think of it right now. We do have some swaps that we'll share over the next five quarters, but we also have a number of forward starters that are coming on to the books over the next five quarters also. And so based on the amount of forward starters that are coming on, and I think we have more forward starters coming on than the cheering swaps.

Yeah, Ebrahim, you were cutting out a little bit, but I think I got the gist of the question.

We are relatively interest neutrals, how I think of it right now we do have some swaps that will mature over the next five quarters, but we also have a number of forward starters.

Jim Herzog: Expenses on slide 13 increased $20 million. Selleries and benefits were up $9 million and $8 million that increased in temporary labor due to staff augmentation, advancing technology, involved management initiatives. Outside processing increased $7 million, driven by certain vendor terms that are sensitive to interest rates and our trust platform conversion. Other expenses benefited from large modernization credits from the sale of real estate, offset by increased litigation and regulatory related expenses, consulting fees, and operational losses.

Coming onto the books over the next five quarters also and so based on the amount of forward charters that are coming on and I think we have more forward startups coming on then maturing swaps I don't see a need to go out and acquire any more swaps now we will continue to monitor all of the balance sheet responds in noninterest bearing deposits respond which have an impact in that sense.

Speaker 5: I don't see a need to go out and acquire any more swaps. Now we'll continue to monitor how the balance sheet responds and not as you're sparing a deposit response, which have an impact in that sensitivity equation. But for now, I feel really comfortable that we're well prepared for a drop in rates. Should they occur?

Different equation.

But for now I feel really comfortable that we're well prepared for a drop in rates should they occur.

Yeah.

Okay.

Speaker 8: And this may be just a separate question on credit quality. Maybe if we can unpack the three areas that you called out on Sphere, e-leveraged loans and tech, like how do you expect the losses to evolve within those three buckets? And any impact on your sort of auto exposure and you think about the UAW strike and if that gets prolonged, if we could see some negative migration a lot.

And maybe just maybe just a separate question on credit quality, maybe if you can unpack.

Jim Herzog: We believe we in industry are in a period of calibration as we balance the profitability and risk management impacts from the first quarter to disruption with strategic investments critical for future growth. We remain committed to managing an efficient organization and are assessing opportunities to offset some of these pressures so that we may continue to deliver strong returns over time. Slide 14 highlights our solid capital position. Capital generation from profitability and lower loan balances to our C-T-1 video further above our target to an estimated 10.79%.

The key areas that you called out on CRE leveraged loans and tech like how do you expect the losses people within those three buckets and any impact the New York Auto exposure and do you think about the UAW.

UAW strike and if that gets too long, if we could see some negative migration losses.

Speaker 9: Yeah, everyone, thank you to Smolinda. I'll just make some overarching comments around credit just to reiterate what both Kurt and Jim said. We're really proud of the quarter. Credit continues to hold up really, really well. As you can see on slide 11, we did have an increase in our criticized assets. We absolutely projected that we would continue to see normalization. That is exactly how it's playing out. The majority of the increase in criticized this quarter came from that commercial real estate book.

Yeah. Thank you this is melinda and I'll just make some overarching comments around credit just to reiterate what that both current and Jen said, we were really proud of the quarter. Our credit continues to hold up really really well as you can see on slide 11, we did have an increase in our criticized assets, we absolutely projected that they would continue.

Jim Herzog: Our third quarter tangible common equity ratio of 4.62% includes a negative 502 basis point impact from AOCI. Higher rates increase than real-life losses in our securities and swap portfolios, driving a more negative impact for the night of quarter. Based on the September 30th forward curve, we anticipate approximately a 37% reduction in our unrealized losses by the end of 2025. We project 4-year 2023 average loan growth of 7%, which would be our highest annual loan growth rate in a decade.

To see normalization that is exactly how it's playing out the majority of the increase in criticized this quarter came from that commercial real estate book.

Speaker 9: And as of right now, we do not really see a lot of loss content in that commercial real estate portfolio, just as a reminder.

And as of right now.

Do not really see a lot of lost content in that commercial real estate portfolio. Just as a reminder, we're very heavily concentrated in construction and financing with very strong borrowers and sponsors very low loan to cost is really how we underwrite.

Speaker 9: We're very heavily concentrated in construction financing with very strong borrowers and sponsors. Very low in the cost is really how we underwrite.

Speaker 9: and it's predominantly multi-family and industrial. So industrial segment is holding up incredibly well and we don't have any criticized assets and industrial. Multi-family is really where we're seeing some of the migration and that's, again, expected just to get to what the rate environment has done just as well as a bit of oversupply in certain markets. So there is some rent leveling out and starting to see a little bit of rent concession.

And it's predominantly multifamily and industrial our industrial segment is holding up incredibly well, we don't have any criticized assets and industrial multifamily is really where we're seeing some of the migration and that's again expected just given what the rate environment has done just as well as a bit of oversupply in certain markets. So there is.

Some rent leveling out and starting to see a little bit of rent concessions.

Speaker 9: We have no delinquencies, no past dues in this portfolio. Our sponsors are stepping up as we would have expected them to based on their historical performance and they are covering shortfall. So I do not expect to see.

No delinquencies no past dues in this portfolio our sponsors are stepping up as we would have expected them to based on their historical performance and they are covering shortfall. So I do not expect to see losses coming through in the commercial real estate portfolio.

Jim Herzog: The strategic exit of mortgage banker finance and increased selectivity is expected to continue to impact fourth quarter balances. Our projected 4-year average deposit decline of 13% improved over prior expectations, with the success in running new deposits and bringing back customer balances. With the exception of the impact from our mortgage banker finance exit and utilizing excess cash to modestly reduce the mature and broker deposits, we expect deposits remain relatively flat in the fourth quarter.

Speaker 9: Laws is coming through the commercial real estate portfolio, but cautionary, we are continuing to build a reserve there. So our coverage ratio leads up to 1.58 this quarter, which I think is up to our success basis points from last quarter.

Generic <unk>.

Continuing to build our reserve coverage ratio after Linda I hate this quarter I wish I didn't get that.

At this point from last quarter.

Speaker 9: The charge left that we did see this quarter, there is no concentration. It was very granular, business banking, TLS, and middle market, but they're very common nature. So I'm not really seeing any themes as of right now in terms of where a lost content would come from.

The charge off that we did see this quarter. There is no concentration at a very granular business banking tls in middle market, but they are very empowered nature I'm not really seeing any themes as of right now in terms of like what your loss content would come from.

Jim Herzog: Our outlook does not assume a significant benefit from seasonality, but if we did see a return to more normal fourth quarter seasonal patterns that may provide more upside than projected. We still expect another record year of net interest income 2023, growing 1-2% over last year's record results. Competitive deposit pricing continues to positive exchange and a modest decline in loans are expected to drive a 5-6% reduction in fourth quarter net interest income.

Speaker 9: Leather would be one that it would be very possible just again because the elevated rate environment and the cumulative impact of the 500 basis point interest burden on those borrowers automotive production. You know, we've got about a billion dollars and automotive production loans. Obviously we've been in this business for many, many decades and we've been through many cycles with this customer base. I would say overall they are very resilient.

Leverage would be one it would be very impossible.

Again, because of the elevated rate environment and the cumulative impact of the 500 basis points interest burden on those borrowers automotive production.

Got about $1 billion in automotive production levels, obviously, we've been in this business for many many decades.

Through many cycles with this customer base I would say overall they are very resilient.

Jim Herzog: Although short-term rates are expected to remain high through year end, our asset sensitivity position is designed to protect our profitability by minimizing the negative impact of rates when they decline. Credit quality remains very strong and we expect continued migration to be manageable. We forecast four-year and fourth quarter annualized net charge-offs to remain below our normal 20-40 basis point range. Non-interested income has exceeded expectations for the first three quarters and we project four-year growth of 9% over 2022.

Speaker 9: This particular pool has been relatively direct, honestly.

This particular pool.

<unk> has been relatively strict honestly from 2019, you had the 2019 terror and you've had COVID-19 and you had chip shortages in supply chain disruption.

Speaker 9: from 2019 on. You had the 2019 tariff, then you had COVID, then you had chip shortages and supply chain disruption, but we really have experienced losses in the sector, so we're watching the UAW strike very closely. The longer it goes on, there will be more impact to the portfolio for very well-reserved, but again, we have a lot of experience managing through this and we have a very, very strong customer base that knows how to do this. So hopefully I hit all of your questions, but happy to follow up.

Really haven't experienced losses in the sector. So we're watching the UAW strike very closely the longer it goes on there will be more impacted the portfolio, we're very well reserved but again, we have we have a lot of experience managing through this and we have a very very strong customer base that knows how to do that so hopefully I hit all of your questions, but happy.

Jim Herzog: Benefits from non-customer income from FHLB dividends are expected to continue but at declining rates as we repay maturing advances. First management income is expected to eventually reduce over time with rates and our swap position. For the fourth quarter, non-interested income is expected to decline 3-4% largely driven by reduction in capital markets income considering market dynamics and increased selectivity. Non-interested expenses are expected to increase approximately 11% year over year with 3% of that growth attributed to higher 2023 pension expense and almost 2% due to higher FDIC expense. Fourth quarter expenses are projected to increase 3% as we observe pressures related to investments in technology and risk management in addition to third quarter modernization gains that are not expected to reduce.

A follow up.

Speaker 8: No, that is comprehensive. Thank you so much.

It's going to be answered. Thank you so much.

Welcome.

Speaker 2: Bacon, next question is coming from John Pancarri from Evercore IS. I saw your line, is that live?

Thank you next question is coming from John Payne carrying from Evercore ISI. Your line is now live.

Good morning, John .

Speaker 10: On the expense growth.

On the expense growth commentary for 2024, I know you indicated.

Speaker 11: Commentary for 2024. I know you indicated the objective is for Keep Expects Growth Modestly higher versus 2023

The objective is for keep expense growth modestly higher versus 2023.

Speaker 11: Can you, um, it looks like the street is out there modeling maybe three three to four percent or so?

It looks like the street is out there modeling, maybe three 3% to 4% or so.

Speaker 11: Your year, can you maybe help us think about, you know, what modestly higher could mean? What's a reasonable piece of growth to assume is you're looking at the initiatives playing out that you're reviewing. Thanks.

Year over year can you maybe help us think about.

What modestly higher could mean, what's a reasonable piece of growth to assume as you're looking at the initiatives playing out that you're reviewing thanks.

Speaker 4: John , this is Kurt. I'll start in the NYS Jim to add in to more color commentary. First of all, maybe just from a backdrop standpoint as you and others on the call are aware 21 and 22 were really record years of performance for our company across the board. Revenue growth, long grade.

John This is Kurt I'll I'll start and then I'm going to ask Jim to add in some more color commentary.

Jim Herzog: Pete. While we are not offering 2024 guidance, we are mindful of the need to mitigate its best pressures as we recognize the new funding paradigm in the industry. These pressures are largely concentrated in the need for selective ongoing strategic investments in addition to investments to further enhance risk management and regulatory compliance. We are on the process of evaluating cost reduction opportunities with the objective of keeping 2024 costs only modestly higher than 2023.

First of all maybe just from a backdrop standpoint, as you and others on the call are aware.

'twenty, one and 'twenty two we're really record performance.

Performance for our company.

Across the board revenue growth loan growth.

Liquidity really great performance from a ROE standpoint in fact at the end of 2022 performed in the mid 20% range on ROE.

Speaker 4: really great performance from a R.O.E. standpoint. In fact, at the end of 2022, performed in the mid 20% range on R.O.E. And we were able to do all that and maintain a very low efficiency ratio. As Jim mentioned, and I think I did as well in my comments, I do think that we in the whole industry are in this period of transition and sort of recalibration as we're looking at lower N.I.I. really based on the funding dynamics.

Jim Herzog: This assumes no change in pension expense, which will be determined largely by year-end rates and market performance. Prood and expense management remains a priority as we work to balance our expense space, commensurate with our earnings power. Strong profitability is expected to further grow our capital position and excess of our 10% target. Share ongoing volatility within unrealized AOCI losses and subject to further regulatory clarity. In all, there was a solid quarter of a strong deposits, liquidity, fee income, and credit. We believe we are in great shape. We look to finish out the year and prepare for 2024.

And we were able to do all of that and maintain a very low efficiency ratio.

As Jim mentioned and I think I did as well in my comments I do think that we and the whole industry are in this period of transition and sort of a recalibration.

We're looking at lower NII really based on the funding dynamics.

Speaker 4: And then the second thing I'd say here is just that there are some anomalies in our 2023 numbers. We certainly have a pension impact that others maybe not do not have all everyone has the FDRC

And then the second thing I'd say here is just that there are some anomalies in our 2023 numbers, we certainly have a pension impact that others, maybe not do not have all everyone has the FERC.

Speaker 4: component. So when you factor that out, the rate of growth in 2023 over 22 is not quite as high as might appear. That said, we are committed to managing expenses and managing efficiently as a company. And as you just said, a more modest growth in expenses of 23 over

Component. So when you factor that out the rate of growth in 2023 over 'twenty two is not quite as high as Mike.

Kurt Farmer: Now I'll turn the call back to Kurt. Thanks, Jim. Slide 16 summarizes our differentiated value proposition as a leading bank for business with strong wealth management and retail capabilities. Our tenured colleagues deliver value added industry expertise to our blue-chift customer base while our highly-regarded pressure credit has historically outperformed our peers. Completing our commercial loan expertise, our relationship model is exemplified by a product tailored to meet our customer needs, enhancing revenue and retention.

Here that.

That said, we are committed to managing expenses and managing efficiently as a company.

And as you just said and more modest growth in expenses of 23 over 24, but I want to be careful here and just caution that we have been in a new investment or net investment focus as a company. We've been doing a lot of things. The last two years that we believe are driving revenue growth for us helping us.

Speaker 4: 24 but I want to be careful here and just caution that we have been in a new investment or net investment focus of the company. We've been doing a lot of things the last two years that we believe are driving revenue great for us helping us on the client acquisition.

On the client acquisition side, a lot of investment in payments Treasury management wealth management capital markets, we've expanded into some new markets the southeast and in Colorado.

Speaker 4: A lot of investment in payments, Treasury management, wealth management, capital markets. We've expanded into some new markets of the Southeast and Colorado. A lot of focus on small business. So we've got a lot of initiative underway and I want to keep our focus on those because we believe those are the right things for our company long term. And once we get beyond sort of the period of time that we're in right now, but.

Kurt Farmer: Our deposit profile has long been a strength with a focus on commercial operating deposits and a consistent retail base. With new products already in the market, the additional efforts underway to expand small business and payments. We expect this core funding source to be even more compelling.

A lot of focus on small business. So we've got a lot of initiatives underway and I want to keep our focus on those because we believe those are the right things for our company long term and once we get beyond sort of the period of time that we're in right now, but having said all that we are going to strike the right balance and we've proven over time.

Kurt Farmer: Finally, we remain committed to running an efficient organization. We'll be taking steps to also expense pressures while leveraging investments designed to enhance productivity and optimize resources.

Speaker 4: Having said all that, we are going to strike the right balance and we've proven over time in our history that we don't have a managed expense as well. And we are looking at sort of what levers we have. We typically provide some guidance at our fourth quarter call. You can go into some more details at that point. But we are working on some initiatives. We believe will help us reduce expenses and offset some of this. But I think it's really sort of more near-term pressure versus longer-term pressure.

History that we know how to manage expenses well and we're looking at sort of what levers. We are we have we typically provide some guidance at our fourth quarter call I can go into some more details at that point, but we are working on some initiatives. We believe will help us reduce expenses and offset.

Kurt Farmer: Before we open the line of questions, I just want to comment on what the remarkable quarter we think this was for our company. After the significant industry disruption this past spring, once again, our relationship base model has proved resilient. We're very proud to see a return to the positive growth, especially when the H8 data shows declines across the industry. Our liquidity is in great shape. We repay significant NHLV advances in our loan deposit ratio and puts us in a very favorable position.

What I think is really sort of more near term pressure versus longer term pressure.

Speaker 5: Jim, what would you add to that? You know, the only thing I would add is, you know, we re-emphasize Crow's comments, you know, I and we do recognize new funding, paradigm, and new profitability equation. And I do think there's a lot of work to be done and we're committed to getting that work done. And I think we're going to make significant progress for 2024.

And what would you add to that the only thing I would add is we reemphasize curt's comments you know I am.

I do recognize your funding paradigm to new profitability equation and I do think there's a lot of work to be done and we're committed to getting that work done and I think we're going to make significant progress for 2024, but I don't view it as a one and done deal either I think this is probably going to play out for some period of time, where we have to continue on the cost.

Kurt Farmer: Credit remains strong and the income continues to perform at near record levels. During this destructive time, we have taken care of our customers. We've worn back deposits. We've added new relationships and still exceeded profitability expectations. It's a sheer required call throughout our almost 175-year history. We have made it to a number of challenges and have confident in our ability to navigate this environment.

Speaker 5: But I don't view it as a one and done deal either. I think this is probably gonna play out for some period of time, but we have to continue on the cost reduction initiatives to make sure that we can fund the necessary investment. So...

Reduction initiatives to make sure that we can fund the necessary investments so something we've done before we know how to do we're committed to there was a pivot in the industry. That's occurred over the last few months and we're gonna have to adjust to that but we do recognize that so fully committed to getting it done and.

Speaker 5: Something we've done before, we know how to do, we're committed to. There was a pivot in the industry that's occurred over the last few months and we're going to have to adjust to that. But we do recognize that.

Speaker 5: fully committed to getting it done and we'll be sharing more at some later point of time and from now on and bitcoin

Kurt Farmer: Chairman. We remain focused on our core strategy, enhancing efficiency, managing risk, protecting returns, and positioning for organic growth. With the uncertain economic landscape, and being just under 86 billion assets, I felt very good about Comerica's position. We're proud of our colleague to the performance we delivered.

We will be sharing more at some later point in time for the site.

Speaker 11: Okay, now thank you appreciate all that detail. And then separately, I guess when it comes to capital or more specifically capital deployment, maybe you talk about what would you need to see to be willing to ramp up buybacks here, just want to get your updated thoughts on the potential for deployment.

Okay. Thank you I appreciate all the detail.

Then separately I guess when it comes to capital or more specifically capital deployment, maybe could you talk about what what would.

You need to see to sort of be willing to ramp up.

Buybacks here.

Here just.

Unknown Executive: We appreciate your time this morning and now operating, we'd be happy to take some questions. Certainly. When I'll be conducting a question and answer session, if you'd like to be placed in the question queue, please press star one under telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment please, what we pull for questions.

To get your updated thoughts on that.

The potential for deployment.

Speaker 5: Yeah, John , I would say the number one factor for me is the uncertainty. That would be the uncertainty in the general economy and geopolitical events and so on. But also, when certain days are related to interest rates and I will see, I, you know, we did take a step up. This quarter is the whole industry did. And I'd like to see a better line of sight in terms of where that's going before we turn on share repurchase.

Yes, John I would say the number one factor for me is the uncertainty that would be the uncertainty and the general economy and geopolitical events and so on but also uncertainty as it relates to interest rates and LCI. We did take a step up this quarter as the whole industry did and I would like to see.

Jon Arfstrom: Our first question today is coming from Jon Arfstrom, from RBC Capital Market for Lines.

A better line of sight in terms of where that's going before we turn on share repurchase.

Peter Sefzik: Is that live? Thanks, good morning, everyone. Kurt, question for you just on one of the last comments you made about deposit growth. You mentioned that you're adding and bringing back customer deposits. Can you talk about the extent of what you brought back and why these clients are coming back and the extent of it and what's left to bring back?

Speaker 5: I would say capital rules or something we're watching also. I would say that's more of a secondary factor, you know, a well-blow 100 billion.

I would say capital rules are something we're watching also I would say that's more of a secondary factor were well below a 100 billion.

Speaker 5: But we do want to be prepared in case, you know, things changed in the economy with

But we do want to be prepared in case, you know things changed in the economy with whether it be monetary policy or anything else that may catapult us towards 100 billing faster than were expecting but.

Speaker 5: whether it be monetary policy or anything else that may catapult us towards 100 billion faster than we're expecting. But being certain these really the key factor there, I will know that even without shared reports, we do have one of the stronger common dividends in the industry. So we do feel like we're returning capital to shareholders.

The uncertainty is really the key factor there I will note that even without share repurchase we do have one of the stronger common dividends in the industry. So we do think we do feel like we're returning capital to shareholders, but I would love to buy at these prices also we think the share prices are fantastic buy and a very attractive the idea of buying back those shares is very attractive.

Jim Herzog: Jon, this is Peter. The bringing back clients, I would say a lot of that has occurred probably in our middle market and up businesses. If you look back to pre-SVB and Jim mentioned this, for example, middle market California, corporate banking, we're back to pre-SVB levels in those businesses, but that's true in a couple of other businesses as well, environmental services, has that sort of results. The middle market overall, I think, performed really well.

Speaker 5: But I would love to buy at these prices also. We think your share price is a fantastic buy. And very attractive. The idea of buying back those shares is very attractive. But certainly for this year.

Active but certainly for this year.

Speaker 5: You know, we are on pause and then we'll assess the uncertainty factors we get into 2024.

We are on pause and then we'll assess the uncertainty factor as we get into 2024.

Speaker 4: Jim, I would add that while we have been cautious on RWA and managing down some aspects of our local process, the real sell-down and to keep an eye out for fashion needs. The real sell-down and to keep an eye out for fashion needs.

Jim and I would add that while we have been cautious on art MBA in managing down some aspects of our loan portfolio.

Jim Herzog: A lot of our new deposit growth, I would say, would be in middle market, small business, business banking. We're really being aggressive on trying to attract granular deposits, small business deposits. We're making a lot of investments there in people and product. That's the success that we've had. I think the year has gone on. Our customer base and prospects have continued to have a lot of confidence in our name and our success.

Speaker 4: That's not sort of our long-term perspective. Our long-term objective. We do want to grow, again, at the company, at Weecey Opportunities to Grow.

Sort of a long term perspective, our long term or long term objective, we do want to grow again at the company and we see opportunities to grow are really based on sort of how the economy plays out as we get into 2024 and that's always the first place we want to use our capital is around the loan growth equation and then secondly.

Speaker 4: uh... really based on sort of the economy plays out as we get into 2020 four and that's always the first place we want to use our capital is around uh... the long growth equation and secondly

Speaker 4: John , I thank you, are aware that we've done a good job over the course of the last three or four years of leveraging buybacks. And so we do think it's an important tool against where a balancing between the two will be really important.

John I think you are aware that we've done a good job over the course of the last three or four years of leveraging buybacks and so we do think it's an important tool begins with a balancing between the two will be a really important.

Jim Herzog: While all the banks were challenged between March and April, I think we've proven to be pretty resilient through this. How rate-sensitive are those deposits or is this kind of, call it relationship gathering? I think it's a little bit of both. I think some of it is providing confidence overall that occurred early in the year, but certainly you're attracting some of it with interest-baring rates that we're being competitive on. I think we talk a little bit about what we're seeing on our deposit betas here today, but so there's a little bit of both.

Makes sense. Thanks, so much Kurt.

Okay.

Speaker 12: Thank you. Next question is coming from Stephen O'Lock-Oppelis from J.P. Morgan. Your life is now live. Good morning, everyone. So, when I go back to your response to John Arshram, his question we...

Thank you next question is coming from Steven Alexopoulos from Jpmorgan. Your line is now live.

Good morning, everyone.

So I wanted to go back to your response to join or assume.

His question, where you said NII would likely bottom in the first quarter. It was Jim from a NIM view do you see NIM. Following the same trajectory maybe stepping down in <unk> than <unk> and then we bought them there.

Jim Herzog: I think some of its product investment that we've made to make it easier for our customers to manage their liquidity, but we're certainly doing what we need to do to be competitive with other banks on the interest environment.

Speaker 5: Good morning Steve, thanks for the question. I mean as always I'll put my disclaimer out there that we're not a number cent in shop, the lumpiness of our commercial business model off the results and a number cent each that doesn't necessarily correlate with income. So one that I am always hesitant to comment on.

Good morning, Steve. Thanks for the question I mean, as always I'll put my disclaimer out there that we're not the number Senate shop, the lumpiness of our commercial business model.

Jim Herzog: Jim, one for you, you kind of dance around this in terms of you're talking about betas moderating, and we still have this down-net interest income sequentially and down-margin, but the way things sit today, if the set is done, what's your best guess on NII and flexion for the company? Yeah, thanks, Jon, and good morning. I do feel like the pathway and that inflection point is becoming a little bit more into focus, even though there is still some degree of uncertainty.

Results in our NIM percentage that doesn't necessarily correlate with income so one that I am always hesitant to comment on I'll, just say in general that I do expect NIM percentage to improve as we bring down cash and purchase funds over the next quarter. So I do think we'll see some positive traction there and I do think it's fair to and a very.

Speaker 5: I'll just say in general that, you know, I do expect them percentage to

Speaker 5: Improves we bring down cash and purchase funds over the next quarter. So I do think we'll see some positive traction.

Speaker 12: And I do think it's fair to, in a very general way to say, if we see that interesting come dropping in Q1, that's likely to drop for them also. So we'll continue to keep an eye on that, but that's what I would say, big picture. Okay.

General way to say, if we see net interest income dropping in Q1, that's likely to trough for NIM also so we'll continue to keep an eye on that but that's what I would say big picture.

Jim Herzog: I would say right now our base case is that we'll probably hit a drop in Q1, but whether or not that's the inflection point, and again, that is the base case. And more importantly, what that upward slope of the line will be from there. It really depends on a lot of things, as you know, a lot of uncertainty out there. There are deposit betas, you know, the fed stays higher for longer, how do betas respond.

Okay.

Given the comments that you're fairly neutral now in terms of Alco positioning if if rates stayed higher for longer I know you don't want to comment.

Anyway, Directionally speaking, if we bought them in the first quarter.

Jim Herzog: And just importantly, rate cuts occur, you know, how much is there in terms of a deposit pricing like monetary policy, you know, loan volume, we do anticipate growing at some point in 24. That's certainly a variable loan pricing is out there. It's a variable, you know, we think that the new funding paradigm, you know, commands, you know, wider spreads or higher yield. But it remains to be seen at the market. It will accept that.

Do you think we trend through the year, assuming no cuts assuming the fed stays really on hold.

Directionally NIM trends favorably through the year.

Speaker 5: You know, that's going to depend on, you know, some of those variables that I mentioned early on, you know, loan growth, you know, loans bred pricing, you know, those are all big factors. But I do think that if we do say higher for longer and QT continues.

That's gonna depend on you know some of those variables that I mentioned early on loan growth.

Loan spread pricing those are all big factors.

But I do think that if we do stay higher for longer and Q T continues.

Jim Herzog: So a lot of variables out there, but I'll just circle back and say at this point, we think the drop is likely to be Q1, then a little bit of a slope up from there. Okay. All right. Thank you. I appreciate it. Thanks, John. Thank you.

Speaker 5: You know, that does have the potential to put pressure on them. It's not our base case. It's not with the forward curve of saying, higher for longer, but, you know, we haven't been in the situation in a long time as an economy and an industry. So it's really hard to say, but we will see some of the continued deposit pressures if we do stay higher for longer, actually.

You know that does have the potential to put pressure on NIM.

It's not our base case is not what the forward curve is saying higher for longer but.

We haven't been in this situation in a long time, it's been economies and an industry. So it's really hard to say.

Abraham Poonawala: Next question is coming from Abraham Poonlewala from Bank of America. Your line is online.

But we will see some continued deposit pressures if we do stay higher for longer I believe.

Melinda Chauke: Abraham, good morning. Maybe Jim, first for you looking at the slight 10 rates and stability, when we look at, so it looks like obviously not added any new swaps this year, when we look at the trajectory of the swaps and the outlook. If they jacks on the swaps fully baked into as we look into the third quarter, fourth quarter outlook, incrementally, does it get worse or does it just level off its rates don't change and just give us a sense to expect any additional changes around balance sheet makes going in the next year and whether or not you're thinking about protecting eventually against rate cuts or not.

Speaker 4: I do think that we have been very successful on the overall pricing side, on the lending side, obviously taking into account sort of four relationships.

But I do think that we had been very successful on the overall pricing side on the lending side, obviously, taking into account sort of full relationships in.

Speaker 5: doing the right thing by our customers and so I think there's a chance for us to offset some of that just by pricing discipline and Infotentially longer than 2000 in 24. Yeah, as I mentioned earlier, thanks Kerr. I mean we do feel like we have the right to ask for the proper pricing relative to our cost of funds and to the extent There is less Equator even honey The father pricing cost of funding goes up and I would expect to recover

Doing the right thing by our customers and so I think there's a chance for us to offset some of that just by our pricing discipline and potentially long growth in 2024, yeah. As I mentioned earlier. Thanks, Curt I mean, we do feel like we have the right to ask for the proper pricing relative to our cost of funds and to the extent there is less.

Quarter evening economy.

While the pricing cost of funding goes up and I would expect to recover a piece of that or perhaps all of it.

Speaker 12: piece of that or perhaps all that pricing equation, but again, we'll see what the market allows and what we can demand from it. I know one of the factors is not at your sparing levels.

Pricing equation, but again, we will see what the market allows and what we can demand from it.

Melinda Chauke: Yeah, Abraham, you're cutting out a little bit, but I think I got the just to the question. You know, we are relatively interest neutral, how I think of it right now. We do have some swaps that we'll ensure over the next five quarters, but we also have a number of forward starters that are coming on to the books over the next five quarters also. And so based on the amount of forward starters that are coming on and I think we have more forward starters coming on than maturing swaps.

I know one of the factors is noninterest bearing levels right.

Which were down again this quarter, but I'm curious are you seeing customers still optimize it balances out and search for higher yield or is it just back to spend the cash.

Stephen This is actually one of the areas of encouragement to me you know I mentioned the deposit betas have really moderated.

Speaker 5: Stephen, that's actually one of the areas of encouragement to me. You know, I mentioned the deposit data. It's really moderated in recent weeks.

Weeks I would also say the same is true of noninterest bearing deposits if I look month by month since the disruption in the spring.

Speaker 5: I would also say the same as true of non-intersparing deposits. You know, if I look month by month since the disruption in the spring, do the decline in non-intersparing deposits has slowed up every month?

Melinda Chauke: I don't see a need to go out and acquire any more swaps. Now we'll continue to monitor how the balance sheet responds and not inspiring deposits respond, which have an impact and that sensitive equation. But for now, I feel really comfortable that we're well prepared for a drop in rates. Should they occur.

Klein in noninterest bearing deposits has slowed up every month and it was essentially flat from August September I'm, not saying it will always continue to be flat, but I do think that his corporate treasurers manage their own cash levels, they're starting to hit that floor, where they need a certain amount of cash to run their businesses and we're really seeing.

Speaker 5: And it was essentially flat from August , September . I'm not saying it will always continue to be flat.

Speaker 5: But I do think that his corporate creditors managed their own cash levels. They're starting to hit that floor where they need to turn it on a cash to run their businesses. And we're really seeing a slow up as a result. We think they've squeezed that orange about as much as they can. Now, could there be a little bit more to go?

Melinda Chauke: And I guess maybe just a separate question on credit quality.

Melinda Chauke: Maybe if we can unpack the three areas that you called out on theory leverage loans and tech. Like how do you expect the losses to evolve within those three buckets and any impact on your sort of auto exposure and we think about the UAW strike and if that gets prolonged if we could see some negative migration losses.

A slow up as a result, we think they can squeeze set that orange about as much as they can now could there be a little bit more to go yes, it's possible, but we do think that the trend is our friend in this case and we're really seeing a flattening out of the noninterest bearing decline. So I don't see a lot of decline.

Speaker 5: Yes, it's possible, but we do think that the trend is our friend in this case and we're always seeing a flattening out of the non-frasperine decline. So I don't see a lot of decline occurring at this point in time, probably a little bit more, but I've seen, I think we're well past the worst of it.

Melinda Chauke: Yeah, everyone, thank you just Melinda. I'll just make some overarching comments around credit just to reiterate what both Kurt and Jim said we were really proud of the quarter. Credit continues to hold up really, really well.

At this point in time, probably a little bit more but I've seen I think we're well past the worst of it.

If I could squeeze one final one and I hear all the comments around.

Melinda Chauke: As you can see on slide 11, we did have an increase in our criticize assets. We absolutely projected that we would continue to see normalization. That is exactly how it's playing out. The majority of the increase in criticize this quarter came from that commercial real estate book. And as of right now, we do not really see a lot of lost content in that commercial real estate portfolio, just as a reminder, we're very heavily concentrated in construction financing with very strong borrowers and sponsors.

Moderating expense growth in 2024, but if we step out you know if we look at this quarter revenues down 9% year over year expenses were up 11% year over year, we know why but earnings are down 30%.

Speaker 12: Step out, if we look at this quarter, revenues down 9% year over year, expenses are up 11%. Year over year, we know why, but earnings are down.

As you guys think about the next year or are there levers to pull to start generating more meaningful operating leverage or is it just a tough environment.

You have to just wait for the old curve to improve it other things here or do you. You said you know we need to do more here and there's other levers we can pull to get at least earnings heading into a more favorable direction. Thanks.

Speaker 12: real curve to improve other things. Or do you sense, you know, we need to do more here and there's other levers. We...

Melinda Chauke: Very low loan to cost is really how we underwrite and it's predominantly multi-family and industrial. The industrial segment is holding up incredibly well. We don't have any criticized assets and industrial multi-family is really where we're seeing some of the migration. And that's again expected, just get a what the rate environment has done just as well as a bit of oversupply in certain markets. So there is some rent leveling out and starting to be a little bit of rent concessions.

Speaker 4: Well, Steven, I would just say in general, as a company, we are always committed to delivering positive, operating leverage short-term that's a bit more challenging as you just outlined for all the reasons that we know.

Well, let's see.

Stephen I would just say in general as a company. We are always committed to delivering positive operating leverage in the short term that's a bit more challenging as you just outlined for us for all the reasons that we know.

Speaker 4: But two things there, one, first and foremost, we are focused on top line revenue growth. And we believe we've got great momentum there with the things outlined to you previously, whether it's product expansion and capabilities, trade management, capital markets, et cetera.

But two things there one first and foremost we are focused on top line revenue growth and we believe we've got great momentum there with the things I outlined to you previously whether it's product expansion.

Melinda Chauke: We have no delinquencies, no past views in this portfolio. Our sponsors are stepping up as we would have expected them to based on their historical performance and they are covering shortfall. So I do not expect to see losses coming through the commercial real estate portfolio, but cautionary, you know, we are continuing to build a reserve there. So our coverage ratio leads up to 1.58, this quarter, which I think is about five or six basis points from last quarter.

Capabilities Treasury management capital markets et cetera.

Speaker 4: We continue to add talent in many of our areas.

We continue to add talent in many of our areas. We just had a very successful lift out of a wealth management team in southern California, and the expansion into.

Speaker 4: has very successful lift out of a wealth management team and Southern California and the expansion into.

Speaker 4: The Southeast, but also just adding depth in the existing markets that we operate in. And I do believe that we will continue to drive fee income and that long growth will return for us in 2024. We'll provide more guidance at our fourth quarter earnings call. So we're focused there on the revenue side.

The South east, but also just adding depth in the existing markets that we operate in and I do believe that we will continue to drive.

Melinda Chauke: The charge left that we did see this quarter, there is no concentration. It was very granular, business banking, TLS, middle market, but they're very common nature. So I'm not really seeing any themes as of right now in terms of like where lost content would come from, members would be one that it would be very possible just again because the elevated rate environment and the cumulative impact of the 500 basis point interest burden on those borrowers.

The income.

That loan growth will return for us in 2024, we'll provide more guidance at our fourth quarter earnings calls. So we're focused there on the on the revenue side.

Speaker 4: And then secondly, we are going to be focused on the expenses. And we've done that historically well as the company. And we're going to be careful to strike the right balance between sort of short-term expense management and sort of the longer-term investment in the company. So I can't promise, sort of, when does that sort of positive operating leverage equation tilt? But it's our objective and we are very focused on delivering positive operating leverage for the company and for our investors long-term.

And then secondly, we are going to be focused on the expenses and we've done that historically as well as a company and we're gonna be careful to strike the right balance between sort of short term expense management and sort of the longer term investment in the company. So I can't promise sort of when does that sort of positive operating leverage equation tilt.

Melinda Chauke: Automotive production, you know, we've got about a billion dollars in automotive production loans. Obviously we've been in this business for many, many decades and we've been through many cycles with this customer base. I would say overall they are very resilient. This particular pool has been relatively strict, honestly, from 2019 on. You had the 2019 tariff, then you had COVID, then you had chip shortages and supply chain disruption, but we really haven't experienced losses in the sector.

But it is our objective and we are very focused on delivering positive operating leverage.

Leverage for the company and for our investors long term.

Thanks for taking my questions.

Speaker 2: Back in next question is coming from Chris McRattie from KBW. Your line is how live. Good morning Chris. So great morning.

Thank you next question is coming from Chris Mcgratty from <unk>. Your line is now live.

Good morning, Chris So great months, Hey, good morning.

Speaker 13: Jim, or maybe on the 100 billion going back to that, you are about 15% below that.

Melinda Chauke: So we're watching the UAW strike very closely. The longer it goes on, there will be more impact to the portfolio. We're very well reserved. But again, we have we have a lot of experience managing through this and we have a very, very strong customer base that knows how to do this. So hopefully I hit all of your questions, but happy to follow up.

Jim or Chris maybe on the 100 billion coming back to that you're you are about 15% below that.

Melinda Chauke: You know, that was comprehensive. Thank you so much.

Speaker 13: How are you thinking, I guess, within the budget for expenses? Like, what needs to be spent to be compliant for a hundred? I guess what's already been spent that you could kind of grandfather in? And then also, can you remind us on the pension expense? I think it's tied to the 10 year and just remind us the magnitude of how you're thinking about it. You know, this year was a big year.

How are you thinking I guess within the budget for expenses like what needs to be spent to be compliant for 100, I guess, what's already been spent that you could kind of grandfather in.

And then also can you remind us on the on the pension expense I think I think it's tied to the 10 year and just remind us of the magnitude of how you're thinking about it you know this year was a big year.

John Pancari: Backing next question is coming from John Pancarri from Evercore, I saw your line. Is that live? What are you on? On the expense growth commentary for 2024, I know you indicated the objective is for to keep the expense growth modestly higher versus 2023. Can you, it looks like the street is out there modeling, maybe three, three to four percent or so year of a year. Can you maybe help us think about what modestly higher could mean? What's a reasonable piece of growth to assume as you're looking at the initiatives playing out that you're reviewing?

Kurt Farmer: Thanks.

Speaker 4: Chris, I'm going to take the beginning of that question on the $100 billion target and I'll let Jim address the pension issue. We obviously with the significant build up

Chris I'm going to say at the beginning of that question on the 100 billion dollar target and I'll, let Jim address the pension issue, we obviously with the significant build up.

Speaker 4: In deposits, we were getting closer to the $100 billion mark, which we really never thought was maybe a sustainable situation that we had a lot of build up in liquidity because of sort of stimulus and monetary policy overall. So that has pulled down as we've moderated some on the RWH side of the equation. We're very comfortably right now below that $100 billion mark at $86 billion.

In deposits, we were getting closer to the $100 billion, Mark, which we really never thought was maybe a sustainable.

Situation that we had a lot of buildup in liquidity because the.

Sort of stimulus and.

Monetary policy overall, so as that has pulled down as we've moderated some on the <unk> side of the equation.

Comfortably right now below that $100 billion, Mark at $86 billion and if you just look at organic growth, which has always been our focus as a company.

Jim Herzog: John, this is Kurt. I'll start an M.W.S. Jim to add in to more color commentary.

Speaker 4: And if you just look at organic grays, which has always been our focus as a company.

Jim Herzog: First of all, maybe just from a backdrop standpoint as you and others on the call or where 21 and 22 were really record years of performance for our company across the board, revenue growth, long growth, liquidity, really great performance from a R.O.E. At that point, in fact, at the end of 2022, performed in the mid 20 percent range on R.O.E., and we were able to do all that and maintain a very low efficiency ratio.

Speaker 4: It would take us some time we think to get back over the $100 billion mark. So it's important that we have positioned to be over a hundred billion in terms of regulatory compliance and what would be required to be a category four bank.

It would take us some time, we think to get back over the $100 billion Mark George It's important that we are positioned to be over 100 billion in terms of regulatory compliance of what would be required to be a category four bank.

Speaker 4: We've had a project in an issue underway for some time. We're probably, you know, 40-50% through sort of what would be necessary for us to comply in terms of the technology and sort of infrastructure to support that. But we've got some time to sort of make that happen, but it is one of the expenses.

We've had a project and initiatives underway for some time, we're probably 40, 50% through.

Sort of what would be necessary for us to comply in terms of.

The technology and sort of infrastructure to support that but we've got some time to sort of make that happen, but it is one of the expenses that is applied to the additional expense.

Jim Herzog: As Jim mentioned, and I think I did as well in my comments, I do think that we in the whole industry are in this period of transition and sort of recalibration as we're looking at lower NII, really based on funding dynamics. And then the second thing I'd say here is just that there are some anomalies in our 2023 numbers. We certainly have a pension impact that others maybe do not have. Everyone has the FDRC component.

Speaker 4: That has applied to additional expense pressure for us. It's a longer term.

Pressure for us sort of longer term.

Speaker 4: I made some comments previously that I think at one of the investor conferences is just around M&A and just maybe just to be clear there. Nothing has changed for us in that equation, getting close to $100 billion really does not change whether we would do M&A or not.

I made some comments previously.

If.

One of the Investor Conference is just around M&A.

And just maybe just to be clear there and nothing has changed for us in that equation are getting close to $100 billion really does not change, whether we would do M&A or not.

Speaker 4: We were focused first in four months, that's it earlier, organic grade.

We're focused first and foremost as I said earlier on organic growth.

Speaker 4: It's the deal came along. We still have to make great strategic sense for us.

The deal came along they still have to make great strategic sense for us and again, we think we can sort of manage where we are today. We've got some time to sort of evaluate the landscape longer term, but I don't anticipate any sort of pressure on the $100 billion level.

Jim Herzog: So when you factor that out, the rate of growth in 2023 over 22 is not quite as high as might appear. That said, we are committed to managing expenses and managing efficiently as a company. And as you just said, a more modest growth in expenses 23 over 24. But I want to be careful here and just caution that we have been in a new investment or net investment focus of the company.

Speaker 4: And again, we think we can sort of manage where we are today. We've got some time to sort of evaluate the landscape longer term, but I don't anticipate any sort of pressure on the $100 billion level, at least for the foreseeable next couple of years.

Least for the foreseeable next couple of years.

Yeah, and I I might take that even a step further Chris you mentioned, 15% below we do plan on it.

Speaker 5: Yeah, and I might take that even a step further. Curse you mentioned 15% below. We do plan on, you know, repaying more debt in the fourth quarter. We'll get the full quarter effect of what we did in the third quarter. So we do see cash and purchase funds coming down another $4 billion. And the fourth quarter on average on an ending basis, you know, more like probably a billion or going in a half.

Pain more debt in the fourth quarter, we'll get the full quarter effect of what we did in the third quarter. So we do see cash and purchased funds coming down another $4 billion in the fourth quarter on average on a menu.

Jim Herzog: We've been doing a lot of things the last two years that we believe are driving revenue growth for us, helping us on the client acquisition side, a lot of investment in payments, trust management, wealth management, capital markets. We've expanded into some new markets of the Southeast and Colorado, a lot of focus on small business. So we've got a lot of initiative underway and I want to keep our focus on those because we believe those are the right things for our company long term.

Basis, more like probably a billion or billing and a half.

Speaker 5: So we are well below the 100 billion. Now as ALCI comes back and we make, you know, we have long growth. We'll start moving back towards 100, but as Kurt said, we're probably a few years away from that. And I'll just say that in terms of what we're built on, in terms of complying with 100 billion as it might impact expense.

So we are well below the 100 billion now Jose OCI comes back and we make we have loan growth will start moving back towards 100, but as Curt said, we're probably a few years away from that and I'll just say that in terms of what we're focused on in terms of complying with 100 billion as it might impact expenses.

Speaker 5: We're only focused on that subsection of the requirements that

We're only focused on that subsection of the requirements that are potentially take more than a couple of years to make sure you're comfortable with so those things that have a longer tail to them. We are focused on working on and that will be one of the expense pressures we have to offset.

Jim Herzog: And once we get beyond sort of the period of time that we're in right now, but having said all that, we are going to strike the right balance. And we've proven over time in our history that we know how to manage expenses well. And we are looking at sort of what levers we have. We typically provide some guidance at our fourth quarter call. You can go into some more details at that point. But we are working on some initiatives. We believe will help us reduce expenses and offset some of what we have. I think it's really sort of more near term pressure versus longer term pressure.

Speaker 5: potentially take more than a couple years to make sure you're comfortable with. So those things that have a longer tail to them, we are focused on working on and that will be one of the expense pressures we have to offset. But we don't feel like we need to jump into it entirely in terms of getting ready at this point in time. A lot of the requirements we can wait until we're a little bit closer to 100 billion.

But we don't feel like we need to jump into it entirely in terms of getting ready at this point in time a lot of the requirements. We can wait until we're a little bit closer to $100 billion in terms of the pension question pension accounting is one of our favorite topics and a great one to waddle through a lot of variables there but interest rates.

Speaker 5: In terms of the pension question, pension counting is one of our favorite topics, and a great one to waddle through. A lot of variables there.

Jim Herzog: Jim, what would you add to that? You know, the only thing I would add is, you know, we, to reemphasize Curtis comments, you know, I and we do recognize new funding, paradigm, new profitability equation, and I do think there's a lot of work to be done and we're committed to getting that work done, and I think we're going to make significant progress for 2024, but I don't do it as a one and done deal either.

Speaker 5: But interest rates are the key one, you know, market performance in general, but interest rates most specifically, you know, if you go back to our K, we do have a sensitivity in there that shows that for every 25 dips, a rate change, the 10 years are pretty good proxy for reliability. And yes, that's we have offsetting that. Every 25 dips translates to about 11 million dollars of expense.

The key one market performance in general, but interest rates. Most specifically if you go back to our K. We do have a sensitivity in there that shows that for every 25 bps of rate change the 10 years, a pretty good proxy for our liability and the assets. We have offsetting that every 25 bps translates to about $11 billion of expense.

Jim Herzog: I think this is probably going to play out for some period of time, but we have to continue on the cost reduction initiatives to make sure that we can fund the necessary investments. So, something we've done before, we know how to do, we're committed to. There was a pivot in the industry that's occurred over the last few months, and we're going to have to adjust to that, but we do recognize that. So, fully committed to getting it done, and, you know, we'll be sharing more at some later point times, Curtis said.

Speaker 5: So obviously we striked that in 1231. There's been a big step up since then. But I would also say there are other variables that are likely to make us come in below what that sensitivity would suggest. And most importantly, we have a number of amortized credits from past actual oral assumptions that we all performed on. And so we will perform that sensitivity, but a lot of variables involve there. So that's something we'll work clearly on as we approach the end of the year.

Obviously, we strike that in 12 31, there's been a big step up since then.

But I would also say there are other variables that are likely to make has come in below what that sensitivity would suggest most importantly, we have a number of amortized credits from past.

Actuarial assumptions that we outperformed on and so we will perform that sensitivity, but a lot of variables involved there. So that's something we'll have more clarity on as we approach the end of the year.

Kurt Farmer: Okay, now thank you, appreciate all that detail. And then, separately, I guess when it comes to capital or more specifically capital deployment, maybe you talk about what would you need to see to be willing to ramp up buybacks here, just want to get your updated thoughts on the potential for deployment. Thanks. Yeah, John, I would say the number one factor for me is the uncertainty. That would be the uncertainty in the general economy, and, you know, geopolitical events and so on, but also when certain days relates to interest rates and I'll see, I, you know, we did take a step up this quarter as the whole industry did.

Speaker 13: That's really helpful, thanks Jim. The just one final one in terms of the targeted, I guess, level of cash and bonds on the balance sheet. You haven't reinvested the bonds in the last year. Remind us that either as a percentage of our assets or maybe an absolute level where you could ultimately see those levels shrinking down to.

That's really helpful. Thanks, Jim.

Just one final one in terms of the targeted I guess level of cash and bonds on the balance sheet, we haven't reinvested the bonds in the last year remind us of the either as a percentage of earning assets or maybe an absolute level, where you could ultimately see those those level of shrinking down too.

Speaker 5: Yeah, that's going to depend on just the overall composition of the balance sheet. How close we are to 100 billion, as it might relate to liquidity rules and debt requirements. But you know, I would see us moving closer towards, you know, 14, $15 billion securities, you know, probably closer to 14. So we have a ways to go and what that might suggest is we're likely not going to be buying securities, you know, at least for the next couple of years.

Yes, that's going to depend on just the overall composition of the balance sheet. How close we are to a 100 billion as it might relate to liquidity rules and debt requirements, but you know I would see us moving.

Closer towards 14 $15 billion of securities probably closer to 2014. So we have a ways to go and what that might suggest as we're likely not going to be buying securities.

Kurt Farmer: And, you know, I'd like to see a better line of sight in terms of where that's going before we turn on sharey purchase. I would say capital rules or something we're watching also. I would say that's more of a secondary factor, you know, we'll well blow 100 billion, but we do want to be prepared in case, you know, things changed in the economy with whether it be monetary policy or anything else that may catapult us towards 100 billion faster than we're expecting.

At least for the next couple of years.

Great. Thank you.

Thank you Chris.

Speaker 2: Thank you next question is coming from La Gosalya from Morgan Stanley . Your line is now live.

Thank you next question is coming from <unk> <unk> from Morgan Stanley . Your line is now live.

Good morning, Hey, good morning.

I wanted to follow up on your comments on the OCI.

Speaker 14: I wanted to follow up on your comments on AOC. I mean, I think you noted that you haven't added any swaps in the book this year. Given that the 10 years up and other 50 basis points this quarter, how are you thinking about managing AOC?

Kurt Farmer: But the uncertainty is really the key factor there. I will know that even without sharey purchase, we do have one of the stronger common dividends in the industry. So we do feel like we're returning capital shareholders, but I would love to buy at these prices also. We think your share price is a fantastic buy and very attractive. The idea of buying back those shares is very attractive, but certainly for this year, you know, we are on pause and then we'll assess the uncertainty factors we get into 2024.

Thank you you noted that you haven't added any swaps on the books. This here.

Given that the tenure is up another 50 basis points this quarter.

How are you thinking about managing OCI risk here.

Speaker 5: Well, at this point, we don't feel like we have to do anything synthetically to manage it. We're OK with where we're at based on the burn off that we see.

Well at this point, we don't feel like we have to do anything synthetically to manage it we're okay with where we're at based on the burn off that we see.

Speaker 5: over the next couple years and really more importantly the burn off over the next five years as we potentially become a category for bank.

Over the next couple of years and really more importantly, the burn off over the next five years as we potentially become a category four bank and so at this point in time, we are comfortable with.

Kurt Farmer: Jim, I would add that, you know, while we have been cautious on RWA and managing down some aspects of our loan portfolio, that's not sort of our long-term perspective, our long-term objective. We do want to grow again at the company. We see opportunities to grow really based on sort of how the economy plays out as we get into 2024. And that's always the first place we want to use. Our capital is around the long-growth equation.

Speaker 5: And so at this point in time, we are comfortable with where we're at. We do think that as we look closer towards category four.

Where we're at we do think that as we move closer towards category for we want to consider modifying our strategy is to maybe shorten the duration of the securities whether that be with what we purchase or doing something synthetically, but for the time being we don't feel compelled to do anything we're comfortable for now.

Speaker 5: You know, we will consider modifying our strategies to maybe shorten the duration of the securities.

Speaker 5: Whether that be with what we purchase or doing something synthetically.

Speaker 5: But for the time being we don't feel compelled to do anything. We're comfortable to burn out, but we see over the next few years.

Kurt Farmer: And then secondly, John, I think you are aware that we've done a good job over, of course, the last three or four years of leveraging buybacks. And so we do think it's an important tool against what a balancing between the two will be really important.

See over the next few years.

Speaker 14: Got it. So, you know, as the, there's clearly some volatility on long enough to curve. Does it make sense to use the same DVO-1 for AOCI that you saw this quarter and then apply to changes in the 10-year in future quarters to figure out the AOCI RISTA?

Got it so.

Kurt Farmer: That makes sense. Thanks so much, Kurt.

There's clearly some volatility on the long into the curve does it make sense to use the same D V O. One for a OCI that you saw this quarter and then apply to changes in the tenure of our.

Kurt Farmer: Thank you.

And in future quarters to figure out the Aoc I missed that.

Unknown Executive: Next question is coming from Steven Alcabalus from JPMorgan. Your life is now live. Good morning, David. So I want to go back to your response to Jon Arfstrom, his question where you said, NII, I would likely bottom in the first quarter. Maybe Jim, from a NIM view, do you see NIM following the same trajectory, maybe stepping down in 4Q, then 1Q, and then we bottom there? Yeah, good morning Steve, thanks for the question.

Speaker 5: I think that's a pretty good proxy. Yeah, you can see a little bit of movement one way or the other, but I think it's a good proxy for future ray changes.

I think thats, a pretty good proxy yeah, you can see a little bit of movement, one way or the other but I think it's a good proxy for future rate changes.

Got it and then maybe finally just on the I think you mentioned that 37% both a bar on unrealized losses over the next couple of years.

Speaker 14: got it and then and finally just on the i think you mentioned it thirty seven percent both of our on on realized losses of the next couple of years uh... how is that impacted by the rate environment

How is that impacted by the rate environment.

Well that 37% considers the curve as it stands today, so not just spot rates, but where the curve is so you know to the extent the entire curve shifts up or down that will have an impact on that burn off but for now you know.

Speaker 5: Well, that 37% considers the curb as it stands today. So not just spot rates, but where the curb is. So did extend the entire curb should suffer down. You know, that will have an impact on that burn off. But for now, you know, this obviously contemplates the entire spectrum of the curb.

Unknown Executive: I mean as always, I'll put my disclaimer out there that we're not at the number set in shop, the lumpiness of our commercial business model. You know, offer results in a NIM percentage that doesn't necessarily correlate with income. So one that I am always hesitant to comment on, I'll just say in general that, you know, I do expect NIM percentage to improve as we bring down cash and purchase funds over the next quarter.

This obviously contemplates the entire spectrum of the curve.

Speaker 14: If the government moves higher than the Bolta Bar will be longer and if it moves lower than the Bolta Bar will be sooner.

And is that sort of if the curve moves higher than the pull to par will be longer and as it moves more than the pull to par will be sooner.

Unknown Executive: So I do think we'll see some positive traction there. And I do think it's fair to, in a very general way to say if we see that interesting income dropping Q1, that's likely to drop for NIM also. So we'll continue to keep an eye on that, but that's what I would say, big picture. Okay, and then Jim, given the comments that you're fairly neutral now in terms of alcohol positioning, if, if Rachel says stay higher for longer.

Speaker 5: That's right. And we do have a sensitivity on that on slide 14 and the bottom right so you can see what 100 bit movement would do when we were the other. Got it. All right.

That's right and we do have a sensitivity on that on slide 14 in the bottom right. So you can see.

You know what 100 Bip movement would do one way or the other.

Got it alright, thank you.

Thank you.

Speaker 2: Thank you. Next question today is coming from Brody Preston from UBS. Your line is out live. Morning, Brody. Hey, good morning, everyone. I just wanted to ask, could you give us a reminder, I think it was the gear up initiative that you had in the past. Could you remind me what the, if you, if you happen to know what the total kind of

Thank you next question today is coming from Brody Preston from UBS. Your line is now live.

Good morning Brady.

Hey, good morning, everyone and I just wanted to ask.

As a reminder, our I think it was the gear up initiatives that you had in the past could you remind me what the.

Unknown Executive: I know you don't like comment, they got better than that anyway. Directly speaking, if we bottom in the first quarter, how do you think we trend through the year, assuming no cuts, assuming to the Fed just days, really unholes? I think they're actually NIM trends favorably through the year. You know, that's going to depend on, you know, some of those variables that I mentioned early on, you know, loan growth, you know, loans bread pricing, you know, those are all big factors.

If you if you happen to know what the total kind of.

<unk> expense.

Speaker 15: You kind of took out of the run rate or kind of, you know, like, I'm just trying to remember what you did in the past.

Fences, you kind of took out of the run rate or kind of you know like I'm just trying I'm trying to remember what you did in the past.

Speaker 4: Hey, buddy, I would not go back through all that detail with you. I might just say that in general that Europe was a combination of expenses.

Yeah, Brady I would not go back through all of that.

Detailed with you I might just say that in general that Europe was a combination of expenses, but also some revenue enhancement opportunities that we focused on some of that was around capability. Some of it was around our pricing strategies et cetera, and it was not just a single year impact.

Unknown Executive: But I do think that if we do say higher for longer and QT continues, you know, that does have the potential to put pressure on NIM. It's not our base case. It's not with the forward curve of saying higher for longer, but, you know, we haven't been in the situation in a long time as an economy and an industry. So it's really hard to say, but we will see some of the continued deposit pressures if we do stay higher for longer, I believe.

Speaker 4: but also some revenue enhancement opportunities that we focused on. Some of that was around capability. Some of it was around pricing strategies, et cetera.

Speaker 4: And it was not just a single year impact. It was an impact that we, apparently put in place to improve overall efficiency. What was at that point a very low rate environment? So if you're looking at sort of applicability to today, I mean we're a bigger company in terms of our overall revenue base.

He was an impact that would be a program we put in place to improve overall efficiency and what was it at that point, a very low rate environment. So if you're looking at sort of applicability to today I mean, we're a bigger company in terms of our overall revenue base as an organization and our expense base as well and so.

Unknown Executive: I do think that we have been very successful on the overall pricing side, on the lending side, obviously taking into account sort of full relationships and doing the right thing by our customers. And so I think there's a chance for us to offset some of that just by pricing discipline and infotainfully long growth in 2024. Yeah, as I mentioned earlier, thanks Kurt. I mean, we do feel like we have the right to ask for the proper pricing relative to our cost of funds.

Speaker 4: as an organization in our expense base as well. And so we're going to think about this in a thoughtful way on a good forward if you're kind of driving to sort of our expense reductions we might look at.

We're going to think about this in a thoughtful way on a go forward. If you are kind of driving to sort of what expense reductions we might look at and look at things that really minimize anything associated with revenue and customers and really try to focus on areas.

Speaker 4: and look at things that really minimize anything associated with revenue and customers and really try to focus on areas, you know, real estate, for our technology stand that we might be more careful with.

Real estate for our technology spend that we might be more careful with.

Unknown Executive: And to the extent there is less equity in economy or the father pricing cost of funding goes up. You know, I would expect to recover a piece of that or perhaps all that in our pricing equation. But again, we'll see what the market allows and what we can demand from it. I know one of the factors is not interest bearing levels, right, which were down again this quarter, but I'm curious. Are you seeing customers still optimize and move balances out and search for higher yield or is it just back to spending cash?

Speaker 4: vacancy rates in terms of headcount, et cetera. And we'll have more to potentially share as we get into the outlook for 2024.

No vacancy rates in terms of head count et cetera, and we'll have more of a potentially share as we get into the outlook for 2024.

Got it okay. Thank you for that.

Speaker 15: Got it. Okay. Thank you for that. I wanted to ask a couple of questions to Melinda. Melinda, you said, you talked a little bit about the multi-family and the migration there, but the sponsors have kind of stepped up to cover any shortfalls. When you say shortfalls, do you mean like their multi-family properties that are following below one debt service coverage ratio?

I wanted to ask a couple questions to Melinda Melinda you said.

You talked a little bit about the multifamily and the migration there, but the sponsors have kind of stepped up to cover any.

Shortfalls as when you say shortfalls do you mean do you mean like the multifamily properties and are falling below one debt service coverage ratio.

Unknown Executive: Stephen, that's actually one of the areas of encouragement to me. You know, I mentioned the deposit ban, as it really moderated in recent weeks. I would also say the same is true of non interest bearing deposits. You know, if I look month by month since the disruption in the spring, the decline in non interest bearing deposits has slowed up every month. And it was essentially flat from August to September. I'm not saying it will always continue to be flat.

Speaker 9: It could be they are in the process of being leased up and so they're behind schedule. But the biggest driver right now in the multi-family space in terms of any kind of a shortfall is really because of the rising rate environment. The majority of the loans are floating rates, so they've been absorbing the rate increase of 500 basis points, you know, over the last, you know, four or five quarters.

It could be that they are in the process of being leased up and so they are behind schedule, but.

But the biggest driver right now with the multifamily space in terms of any kind of a shortfall is really because of the rising rate environment. The majority of the loans are floating rate and they've been absorbing the rate increase of 500 basis points, you know over the last four or five quarters.

Speaker 9: And so there could be a shortfall in an interest reserve that we require during the construction phase or a debt service coverage during the lease phase as those are going into stabilization.

Unknown Executive: But I do think that his corporate creditors managed their own cash levels. They're starting to hit that floor where they need to turn it on a cash to run their businesses. And we're really seeing a slow up as a result. We think they'd squeeze that orange about as much as they can. Now, could there be a little bit more to go? Yes, it's possible. But we do think that the trend is our friend in this case and we're really seeing a flattening out of the non interest bearing decline.

And so there could be a shortfall in an interest reserve that we require during the construction phase or a debt service coverage during the lease up phase and so they're going into stabilization.

Speaker 15: Got it? Are there any markets that you look at across your footprint and say, maybe there's new supply coming on that might exacerbate any of these issues? Like any that come to mind in particular.

Got it are there are there any markets you know you look at across your footprint.

You know maybe there is new supply coming on that you know might exacerbate any of these issues like any of that come to mind in particular, yes.

Speaker 9: Yeah, I think the market where we've seen the most challenge and the most migration, again, the reminder though that the migration has been very manageable and criticized longs in the commercial real estate book are still relatively low. But the migration is really concentrated in the California, some of the sub-market northern California being the most.

Yeah, I think the market, where we've seen the most.

Unknown Executive: So, I don't see a lot of decline occurring at this point in time. Probably a little bit more, but I think we're well past the worst of. If I could squeeze one final one in, I hear all the comments around moderating expense growth in 2024. But if we step out, you know, if we look at this quarter, revenues down 9% year over year, expenses are up 11% year over year, we know why, but earnings are down 30%.

And the bulk of the migration again remind them that the migration has been very manageable and criticized loans in the commercial real estate book are still relatively low.

But the migration is really concentrated in the California some of the Submarkets in Northern California being the most impacted at this point and then southern California. So.

Speaker 9: impact at this point and then Southern California. So, um, you know, we're watching those really, really closely. And again, the customer base fare and sponsor base, I would consider, you know,

We're watching those really really closely and again the customer base, there and sponsor base I would consider it.

Unknown Executive: As you think about the next year, are there levers to pull to start generating more meaningful, operating leverage, or is it just a tough environment? You have to just wait for the old curve to improve the other things, or do you sense, you know, we need to do more here, and there's other levers we could pull to get at least earnings heading in a more favorable direction. Thanks. Well, Steven, I would just say in general as a company, we are always committed to delivering positive, operating leverage short term that's a bit more challenging as you just outlined for all the reasons that we know.

Speaker 9: exceptionally strong, and we have 10 year colleagues that know how to manage through this. So, you know, we feel really good about our strategy there. We feel really good about the product set, but multi-family, you know, has had a tremendous amount of supply come to market, and there's more to come. So I expect that we'll continue to see some modest level of migration in that portfolio.

Exceptionally strong.

And we have tenured colleagues that know how to manage through that so.

You know, we feel really good about our strategy. There we feel really good about the product set that multifamily you know has had a tremendous amount of supply coming to market and theres more to come. So I expect that we'll continue to see some modest level of migration in that portfolio.

Speaker 15: Got it. Okay, and I know it's a very small portfolio for you guys. Do you happen to have what the reserve is on the office portfolio?

Got it okay and I know, it's a it's a very small portfolio for you guys. I mean do you happen to have what the reserve is on the office portfolio at this point.

Speaker 9: We don't have a reserve specifically on the asset classes that we do have coverage ratio for the commercial real estate book as a whole and it's 1.5-8.

We don't have a reserve specifically on the asset classes that we do have coverage ratio for the commercial real estate book as a whole and it's one that I D.

Unknown Executive: But two things there, one, first and foremost, we are focused on top line revenue growth, and we believe we've got great momentum there with the things outlined to you previously, whether it's product expansion and capabilities. Trade management, capital markets, et cetera. We continue to add talent in many of our areas. We just have a very successful list out of the wealth management team and Southern California and the expansion into the southeast, but also just adding depth in the existing markets that we operate in and I do believe that, you know, we will continue to drive fee income.

Okay got it.

Speaker 5: Okay, I got it. And Jim, I just wanted to follow up on the swap question, the swap that you said you've got forward starting coming on that'll outpace anything that's ensuring that's all reflected in the 24, you know, kind of walk up on the Swaps book. The absolutely it is for. So."

And Jim I, just wanted to follow up on the swap question to swap that you said, you've got foreign starting coming on at all.

Pes anything that's maturing that that's all reflected in the 24, you know kind of walk up on the swaps book that absolutely. It is.

Okay, Great I just wanted to make sure then just last one for you.

Speaker 15: Okay, great. I just wanted to make sure then just last one for you.

Speaker 15: know for I know it's a small portion of the book but for the you know true fixed portion you know not the swapped floating portion. Can you walk us through with the maturity. providing quality scripts.

You know for I know, it's a smaller portion of the book, but for the true fixed portion not the swapped the floating portion can you walk us through what the maturity schedule looks like over the next 12.

Unknown Executive: And that long growth will return for us in 2024 will provide more guidance at our fourth quarter earnings call. So we're focused there on the revenue side. And then secondly, we are going to be focused on the expenses and we've done that historically well as the company. And we're going to be careful to strike the right balance between sort of short term expense management and sort of the longer term investment in the company.

Speaker 15: 12 months and kind of what the what the yields are that are rolling off versus what parent origination hubs are.

12 months and kind of what the what the yields are that are rolling off or smart parent origination yields are right now.

Speaker 5: Yeah, it's really a relatively small part of our book and I don't see it having a big impact on yields next year. I think somewhere in the appendix you'd try my fix rate loans organically speaking or about 8% of our book.

Yes, it's really a relatively small part of our book and I don't see it having a big impact on yields next year.

I think somewhere in the appendix you can surmise fixed rate loans organically speaking or about 8% of our book.

Unknown Executive: So I can't promise I sort of wondered that sort of positive operating leverage equation tilt, but it's our objective and we are very focused on delivering positive operating leverage for the company and for our investors long term.

Speaker 5: And they have pretty long maturities, you know, to 12 years on average. So you don't see a lot come up for repricing every year. We might see $300 million from up this in 24 to use a kind of an average. And they are price blow or current loan yields. So there is some opportunity there, but I wouldn't see fixed rate repricing have in more than a couple of pips of impact on our loan yields next year. There is a little bit of, you know, there's a.

And they have a pretty long maturities.

12 years on average so you don't see a lot come up for repricing every year, we might see $300 million.

And 24 are to use a kind of an average and they are priced below our current loan yields. So there is some opportunity there.

Steven Alexopoulos: Thanks for taking my questions.

Chris Mcgratty: Thank you. Next question is coming from Chris McGrady from KBW. Your line is how live.

But I wouldnt see fixed rates with pricing has been more than a couple of bps of impact on our loan yields next year.

Chris Mcgratty: Good morning, Chris. So great morning. Thank you, morning. Jim, or maybe on the 100 billion going back to that, you are about 15% below that. How are you thinking, I guess, within the budget for expenses, like what needs to be spent to be compliant for a hundred. I guess what's already been spent that you could kind of grandfather in. And then also, can you remind us on the pension expense? I think I think it's tied to the 10 year and just remind us that the magnitude of how you're thinking about it, you know, this year was a big year.

But there is a little bit stretched.

Such a favorable impact.

Speaker 15: Do you have any security, maturities that are lumpy and lower yielding at any point in the next 12 months?

Do you have any security maturities that are lumpy in lower yielding at any point in the next 12 months.

We have a normal what I'll consider to be smooth roll off of MBS is and we do have some treasuries maturing over the next 15 months, but I would say those aren't necessarily lumpy, we see a little bit in most quarters. So we obviously are going to benefit in 2024 from securities maturing as we redeploy that either.

Speaker 5: You know, we have a normal, what I'll consider to be smooth, row-off of MDSs, and we do have some treasuries from cheering over the next 15 months, but I would say those aren't necessary lumpy. We see a little bit.

Speaker 5: in most quarters. So we obviously are going to benefit in 2024 from securities maturing as we redeploy that either in the cash or any much higher yields or avoid purchase funds. So, you know, the net, you know, we will see a benefit from fixed asset and pricing next year, tiny bit from loans. You'll certainly get a nice lift up from securities.

Chris Mcgratty: Thanks. Chris, I want to take the beginning of that question on the 100 billion dollar target and I'll let Jim address the pension issue. We obviously with the significant build up in deposits, we were getting closer to the 100 billion dollar mark, which we really never thought was maybe a sustainable situation that we had a lot of build up and liquidity because of sort of stimulus and monetary policy overall. So that has pulled down as we've moderated some on the RWA side of the equation, we were very comfortably right now below that 100 billion dollar mark at 86 billion dollars.

The cash, earning much higher yields or avoid purchase fun. So.

Net net we will see a benefit from fixed asset repricing next year [noise] tied.

Tiny bit for loans, you'll certainly get a nice lift up from securities fixed rate swaps actually go the other direction, but the net benefit will be favorable in 2024.

Speaker 5: Fix rate swaps actually go the other direction, but the net benefit will be favorable in 2024. Thank you.

Got it. Thank you very much for taking my questions everyone.

Thanks Brody.

Speaker 2: Thank you. Next question is coming from Ken Uzum from Jeffries. Your line is now live.

Thank you. The next question is coming from Ken <unk> from Jefferies. Your line is now live.

Speaker 16: Morning, kid. Hi. Hi. Thanks. Good morning. It's just I want to ask a question on the loan book, you know, on the business line basis. Um, you're not you're not under any kind of like

Good morning, Ken Hi Tech Hi.

Hi, Thanks, Good morning, I wanted to ask a question on the loan book on the on the business line basis.

Chris Mcgratty: And if you just look at organic growth, which has always been our focus as a company, it would take us sometime we think to get back over the 100 billion dollar mark. So it's important that we are positioned to be over 100 billion in terms of regulatory compliance and what would be required to be a category for bank that we've had a project and issues underway for some time. We're probably, you know, 40, 50% through sort of what would be necessary for us to comply in terms of the technology and sort of infrastructure to support that, but we've got some time to sort of make that happen.

And you're not under any kind of like dieting, so to speak but after you got out of mortgage banker. This year Theres. A couple of these lines that are getting a little smaller over time like Tech and life Sciences and equity fund just wanted to ask like how much of that is environmental and and do you envision taking a harder look at any of the loan categories that you have in terms of what youre.

Speaker 16: dieting so to speak but um you know after you got out of mortgage banker this year just there's a couple of these lines that are getting a little smaller over time like tech and life sciences and equity fund just wanted to ask like how much of that is environmental and and you envision taking a harder look at any of the the lone categories that that you have in terms of what you're thinking about in terms of future growth opportunities.

Thinking about in terms of future growth opportunities.

Speaker 7: It can, this is Peter. Yeah, we've got some of our businesses that have kind of continued to drift down this quarter. And...

Hey, Ken This is Peter Yeah, we we've got some of our businesses that have kind of continued to drift down this quarter and.

Speaker 7: quite candidly probably will into the fourth quarter and maybe even the first quarter, but we don't really see any additional changes to the lines of business that we're in. You know, we do feel really good about the portfolio on a go-forward basis. I do think that in the environment with increased expectations around profitability and pricing and...

Chris Mcgratty: But it is one of the expenses that has applied to additional expense pressure for us sort of longer term. I made some comments previously that I think of one of the investor conferences just around M&A and just maybe just to be clear there, nothing has changed for us in that equation. Getting close to 100 billion dollars really does not change whether we would do M&A or not. We were focused first and foremost that's it earlier organic growth.

Quite candidly, probably well into the fourth quarter and maybe even in the first quarter, but we don't really see any additional changes to the lines of business that we're in.

We do feel really good about the portfolio on a go forward basis I do think that in the environment with increased expectations around profitability and pricing and I'm, just sort of managing our balance sheet. Some businesses are impacted more than others, but.

Speaker 7: I'm just sort of managing our balance sheet. Some businesses are impacted more than others, but as we get into next year, we'll try to give a little more guidance on what we think loan out looks like for 24. But I suspect a few of these businesses that you've kind of seen creep down here as of late, probably be another quarter or two before we start to go the other direction. Overall, with our general portfolio, middle market business banking small business, our pipelines there are still.

As we get into next year, we'll try to give a little more guidance on what we think loan outlook looks like for 'twenty, four but I suspect a few of these businesses that you've kind of seen creep down here as of late probably be another quarter or two before we start to go the other direction overall with our general portfolio of middle market business banking small business.

Chris Mcgratty: It's if the deal came along, we still have to make great strategic sense for us. And again, we think we can sort of manage where we are today. We've got some time to sort of evaluate the landscape longer term, but I don't anticipate any sort of pressure on the 100 billion dollar level, you know, at least for the foreseeable next couple of years. Yeah, and I might take that even a step further, Curtis, you mentioned 15 percent below.

Pipelines there still.

Speaker 7: Pretty good, relatively. It depends on the geography a little bit. And we're trying to add customers and add new business in that space as we get into the end of the year and into that.

Good relatively it depends on the geography, a little bit and you know, we're we're trying to add customers and add new business in that space as we get into our into the end of the year and into next.

Chris Mcgratty: We do plan on, you know, repaying more debt in the fourth quarter. We'll get the full quarter effect of what we did in the third quarter. So we do see cash and purchase funds coming down another four billion dollars in the fourth quarter on average, on an ending basis, you know, more like probably a billion or billion and a half. So we are well below the hundred billion. Now as AOC, I comes back and we make, you know, we have long growth.

Speaker 16: Got it, great, thanks. And my follow-up is just on the expenses, can you just explain like the kind of the right back on the modernization, this quarter, what, you know, how did that mechanically work? And then just making sure they understand that the fourth quarter guide is built on the all-in 3Q number. Thank you. Thank you.

Got it great. Thanks, and my follow up is just on the expenses can you just explain like the kind of the right back on the modernization this quarter, what was that and how does that mechanically work and then just making sure. They understand that the fourth quarter guide is built on the all in <unk> number. Thank you.

Chris Mcgratty: We'll start moving back towards a hundred billion dollars. But as Kurt said, we're probably a few years away from that. And I'll just say that in terms of what we're focused on in terms of compliance with 100 billion as it might impact expenses. We're only focused on that subsection of the requirements that potentially take more than a couple years to make sure you're comfortable with. So those things that have a longer tail to them, we are focused on working on and that will be one of the expense pressures.

Speaker 5: Yeah, Kennedy modernization expenses were actually a net credit because of the real estate gain that you saw in third quarter that we noted on the expense slide. Yeah. You know that will go off that by some expenses, but modernization expenses were at that negative $14 million or $14 million credit for the quarter. You know, we would expect that to be a little closer to zero for the fourth quarter. We may have an additional real estate sale that could give us something in the low single digits of millions.

Yes, Kennedy modernization expenses were actually a net credit because of the real estate gain that you saw in the third quarter that we noted on the expense slides that will be offset by some expenses, but modernization.

Expenses were a net negative $14 million or $14 million credit for the quarter.

We would expect that to be a little closer to zero for the fourth quarter. We may have an additional real estate sale that could give us something in the low single digits of millions.

Chris Mcgratty: We have to offset. But we don't feel like we need to jump into it entirely in terms of getting ready at this point in time. A lot of the requirements we can wait until we're a little bit closer to a hundred billion.

Speaker 5: But overall, I don't expect modernization to be a big driver of the fourth quarter expenses.

But overall I don't expect modernization to be a big driver of fourth quarter expenses.

Speaker 16: Okay, got it right. So that okay. And then the fourth quarter guide is built on the aside from the deferred comp that you don't expect to repeat the fourth quarter expense guide is built off of the the 555. That's right. Yeah.

Okay got it right. So that okay. So and then the fourth quarter guide is built on the aside from the deferred comp that you don't expect to.

Jim Herzog: In terms of the pension question, pension counting is one of our favorite topics and a great one to waddle through a lot of variables there. But interest rates are the key one, you know, market performance in general, but interest rates most specifically, you know, if you go back to our K, we do have a sensitivity in there that shows that for every 25 bits of rate change, the ten years are pretty good proxy for reliability and the assets we have offsetting that.

Repeat the fourth quarter expense guidance built off of the $5 55.

That's right.

Yeah, Okay got it thank you.

Thank you Dan.

Speaker 2: Thank you. Next question today, is something from Brandon King from Trua Securities or Light? Is not live. One in Brandon Day.

Thank you next question today is coming from Brandon King from true Securities. Your line is now live.

Good morning, Brandon.

Hey, good morning.

Speaker 17: Just putting the pieces together, how are you thinking about balance sheet growth next year, cheaply returning assets? Are you kind of looking to keep things stable or could we see something coming up?

Jim Herzog: Every 25 bits translates to about 11 million dollars of expense. So obviously we strike that in 1231. There's been a big step up since then. But I would also say there are other variables that are likely to make us come in below what that sensitivity would suggest. And most importantly, we have a number of amortized credits from past actuarial assumptions that we all performed on. And so we will perform that sensitivity, but a lot of variables involved there. So that's something we're clearly on as we approach the end of the year. That's really helpful. Thanks Jim.

Just putting the pieces together how are you thinking about balance sheet growth next year, particularly with earning assets. So you're kind of looking to keep them stable or could we see some incremental growth.

Speaker 5: Brandon, it's Jim. I'll start off and Peter may want to try men here. But we've been very focused on stabilizing the funding base and the liquidity base in recent months, as you know. We've had a lot of success there. We're actually in better shape than we actually thought we would be back in the spring with the moment the deposit ratio of 80%.

Brandon, It's Jim I'll start off and Peter May want to chime in here, but we've been very focused on stabilizing the funding base and the liquidity base and reach.

Just months as you know we got a lot of success there we're actually in better shape than we actually thought we would be back in the spring with the loan to deposit ratio of 80%.

Speaker 5: I think it was right now, it's being an up period of retaliation. We're focused on getting the right mix of customers, right mix of businesses, getting the right pricing. And then we've set this, at some point in 2024, at a point where we start growing loans that are more normal pace again.

I think it was right now it's been a period of Recalibration, we're focused on getting the right mix of customers right mix of businesses getting the right pricing.

Jim Herzog: The just one final one in terms of the targeted, I guess, level of cash and bonds on the balance sheet. You haven't reinvested the bonds in the last year. Remind us that either as a percentage of our assets or maybe an absolute level where you could ultimately see those levels shrinking down to. Yeah, that's good to depend on just the overall composition of the balance sheet. How close we are to 100 billion as it might relate to liquidity rules and debt requirements.

And then we expect this to be at some point in 2024 to be at a point, where we start growing loans at a more normal pace again.

Speaker 5: We're not quite there yet, but we expect to be there at some point in 2024 with loan growth. But right now, we're still going through that period of recalibration, whether it be getting more certainty around our deposit base, getting the right mix in terms of business.

We're not quite there yet, but we expect to be there at some point in 2024 with loan growth.

But right now we're still going through that period of recalibration, whether it be getting more certainty around our deposit base are getting the right mix in terms of business lines.

Jim Herzog: But you know, I would see us moving, you know, closer towards, you know, 14, 15 billion dollar securities, you know, probably closer to 14. So we have a ways to go. And what that might suggest is we're likely not going to be buying securities, you know, at least for the next couple of years.

Speaker 5: But we do anticipate some type of balance you grow at some point in 2024.

But we do anticipate some type of balance sheet growth at some point in 2024.

Speaker 7: Yeah, Brandon, I might just add to what zoom said. I mean, we're also, you know, seeing a lot of, I would say caution in our customer base. You know, there's a lot of headline risks, I think you might say, as we go into next year and...

Yeah, Brennan I might just add to what Jim said I mean, we're also seeing a lot of I would say caution in our customer base. You know there is a law.

Jim Herzog: Great. Thank you. Thank you, Chris. Thank you.

Lot of headline risk I think you might see as we go into next year.

Speaker 7: you know, Melinda's talked a lot about credit, but you know, we're prepared that it could be a tougher economic environment that will just navigate successfully. We always have as a company really well. So what that looks like for loan demand per se.

Malone has talked a lot about credit, but we're prepared that it could be a tougher economic environment and we'll just navigate successfully we always have as a company really well so what that looks like for loan demand per se is probably to be determined.

Salia: Next question is coming from Salia from Morgan Stanley. Your line is now live.

Salia: Good morning. I wanted to follow up on your comments on AOC. I mean, I think you noted that you haven't added any swaps in the book this year, given that the 10 years up and other 50 basis points this quarter. How are you thinking about managing AOC? Well, at this point, we don't feel like we have to do anything synthetically to manage it. We're okay with where we're at based on the burn off that we see over the next couple years.

Speaker 7: probably to be determined. I mean, we'll get some more guidance as we've mentioned on loans when we get into the fourth quarter call for next year, but we do think we'll get back to the loan growth next year. I think we just don't know necessarily what that looks like just yet with the environment, with interest rates where they are and to the extent that...

Well, we'll give some more guidance as we've mentioned on loans when we get into the fourth quarter call for next year, but we do think we'll get back to loan growth next year. I think we just don't know necessarily what that looks like just yet with the environment with interest rates, where they are and you know to the extent that we enter a more challenging economic environment and we'll have to navigate that.

Speaker 7: We enter a more challenging economic environment, we'll have to navigate that. And again, it also depends on business by business, what that may look like in geography by geography.

And again it also depends on business by business, what that May look like in geography by geography.

Salia: And really, more importantly, the burn off over the next five years is we potentially become a category for bank. And so at this point in time, we are comfortable with where we're at. But we do think that as we move closer towards category four, we will consider modifying our strategies to maybe shorten the duration of the securities, whether that be with what we purchase or doing something synthetically. But for the time being, we don't feel compelled to do anything. We're comfortable with the burn off that we see over the next few years.

Speaker 17: Got it, got it. And then could you speak to the positive seasonality flows?

Got it got it.

And then could you speak to deposit seasonality flows.

Speaker 17: what are your kind of expectations near-term? And just how close PIC VR to maybe a normal seasonality trend?

What are your kind of expectations from near term and just how close you are to maybe a normal seasonality trends.

Yes, Brandon seasonality, it's really been a tough one in the last couple of years. The typical seasonal trends that we see amongst different business units, whether it be loans or deposits.

Speaker 5: Yeah Brandon, seasonality has really been a tough one the last couple years. The typical seasonal trends that we see amongst different business units, whether it be loans or deposit.

Speaker 5: It's kind of gone out of windows. We're waiting to see whether or not those returned back to normal seasonality patterns.

Gone out the window, so we're waiting to see whether or not those returned back to normal seasonality patterns.

Jim Herzog: Got it, so there's clearly some volatility on the long end of the curve. Does it make sense to use the same DVO-1 for AOCI that you saw this quarter and then applied to changes in the 10-year in future quarters to figure out the AOCI RISTA? I think that's a pretty good proxy. Yeah, you can see a little bit of movement one way or the other, but I think it's a good proxy for future rate changes. Got it.

Speaker 5: We're in a higher interest rate environment and to what extent, a different liquidity environment too in terms of overall, you know, liquidity and the economy. So it remains to be seen if we do return back to those typical patterns that we've seen in the past. You know, as I mentioned, we may have a very small bit of seasonality assumed in our outlook, but not a lot. So we do see some potential for upside there. But frankly, it just feels like,

In a higher interest rate environment and to what extent have different liquidity environment to in terms of overall.

Liquidity in the economy. So it remains to be seen if we do return back to those typical patterns that we've seen in the past and as I mentioned, we made a very small bit of seasonality assumed in our outlook, but not a lot. So we do see some potential for upside there, but frankly, it just feels like.

Jim Herzog: And then maybe finally just on the, I think you mentioned it, 37% bull to bar on realized losses over the next couple of years. How is that impacted by the rate environment? Well, that 37% considers the curve as it stands today, so not just spot rates, but where the curve is. So did extent the entire curve should suffer down, that will have an impact on that burn off. But for now, you know, this obviously contemplates the entire spectrum of the curve.

Speaker 5: and the positive seasonality, much like many other patterns, remains to be seen in this new paradigm as to whether or not we return back to the old normal or not. All right.

Deposit seasonality much like many other patterns remains to be seen in this new paradigm as to whether or not we returned back to the old normal or not.

That's all that I had thanks for taking my questions.

Thank you.

Speaker 2: Thank you next question coming from Peter Winter from David's in your line is now live.

Thank you next question coming from Peter Winter from D. A Davidson your line is now live.

Speaker 18: Morning, Peter. Good morning. Morning. I'm just going back to the 24-expert outlook. Does that already contemplate some expense phase initiatives or as you go through the budgeting process, though there's opportunities for maybe some additional expenses versus back guidance?

Hey, good morning, good morning.

Just going back to the 24.

Outlook does that already contemplate some expenses initiatives or as you go through the budgeting process.

Jim Herzog: If the curve moves higher than the bull to bar will be longer, and if it moves lower than the bull to bar will be sooner. That's right. And we do have a sensitivity on that on slide 14 in the bottom right, so you can see what 100-bit movement would do one way or the other. Got it.

There is opportunities for maybe some additional expenses versus that guidance.

Peter it's it's a bit of both.

Speaker 4: It's a bit of both. You know, we haven't been sitting on our hands, so to speak, and have been looking at opportunities to slow expense growth and to be more prudent. We have some other things that are still in process. As we think about, sort of the planning process for 2020 24, so we'll again have more to share, potentially as we get into the fourth quarter earnings call.

They haven't been sitting on our hands so to speak and have been looking at opportunities to slow expense growth then to be more more prudent we have some other things that are still in process as we think about where the planning process for 202024, we will again have more to share.

Salia: All right. Thank you. Thank you, Monon.

Salia: Thank you.

Broderick Preston: Next question today is coming from Brody Preston from UBS. Your line is out live. Good morning, Brody. Hey. Good morning, everyone. I just wanted to ask, could you give us a reminder? I think it was the gear up initiative that you had in the past. Could you remind me what the, if you, if you happen to know what the total kind of, I guess, expenses, expenses you kind of took out of the run rate or kind of, you know, like, I'm trying to remember what you did in the past.

Potentially as we get into the fourth quarter earnings call.

Okay, and then just one housekeeping just.

Speaker 18: And I just want to housekeeping. Just what was the end of period balance on the mortgage banker loans? Just curious how much is left to run off?

What was the end of period balance on the mortgage banker loans just curious how much is left to run off.

[noise], yeah mortgage banker I mean for the quarter, we were at 900 million.

Speaker 7: Yeah, more to Spain for the quarter, you know, we were at 900 million, a little bit lower than that for ending. I don't know. I think period N was around 650. Yeah. Yeah. So, but we, we, we were, we were, we were predicated there, Peter, is that we expect the balances to be pretty minimal by the end of the year. Period N might be a couple hundred.

Broderick Preston: Yeah, Brody, you know, would not go back through all that detail with you. I might just say that in general that gear up was a combination of the expenses, but also some revenue enhancement opportunities that we focused on, some of that was around capability. Some of it was around pricing strategies, et cetera. And it was not just a single year impact. It was an impact that we, apparently, put in place to improve overall efficiency.

A little bit lower than that for ending I don't know at period end was around 650 <unk> yeah.

So but we.

And we've communicated there Peter is that we expect the balances to be.

Pretty minimal by the end of the year.

It might be couple of hundred million dollars.

Speaker 18: No. Okay. Thanks.

Yeah.

Okay.

<unk>.

Thank you we reached end of our question and answer session I'd like to turn the floor back over to President Chairman and Chief Executive Officer, Curt Farmer. Please go ahead.

Speaker 2: Thank you. We reach into our question and answer session. I'd like to turn the floor back over to President Chairman and Chief Executive Officer Kurt Farmer. Please go ahead.

Broderick Preston: And what was, at that point, a very low rate environment. So if you're looking at sort of applicability today, I mean, we're a bigger company in terms of our overall revenue base as an organization in our expense base as well. And so we're going to think about this in a thoughtful way on a good forward if you're kind of driving to sort of our expense reductions we might look at and look at things that really minimize anything associated with revenue and customers and really try to focus on areas real estate for our technology stand that we might be more careful with vacancy rates in terms of headcount, et cetera. And we'll have more to potentially share as we get into the outlook for 2024. Thank you for that.

Speaker 4: Again, I just would say I'm very proud of our performance for the quarter. I'm always proud of our colleagues and how they're delivering for our customers every day. And thank you again for your interest in our company. And I hope you all have a great day. Thank you.

Again, I, just would say I'm very proud of our performance for the quarter always proud of our colleagues and how they are delivering for our customers every day and thank you again for your interest in our company and I Hope you all have a great day. Thank you.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.

Speaker 2: Thank you for your participation today.

Melinda Chauke: I want to ask a couple of questions to Melinda. Melinda, you talked a little bit about the multi-family and the migration there, but the sponsors have stepped up to cover any shortfalls. When you say shortfalls, do you mean like their multi-family properties that are falling below one debt service coverage ratio? It could be that they are in the process of being leased up and so they're behind schedule. But the biggest driver right now in the multi-family space in terms of any kind of a shortfall is really because of the rising rate environment.

Melinda Chauke: The majority of the loans are floating rate, so they've been absorbing the rate increase of 500 basis points over the last four or five quarters. And so there could be a shortfall in an interest reserve that we require during the construction phase or a debt service coverage during the leased phase as those are going into stabilization.

Melinda Chauke: Got it. Are there any markets that you look at across your footprint and say maybe there's new supply coming on that might exacerbate any of these issues like any that come to mind in particular? Yeah, I think the market where we've seen the most challenge and the most migration, again, reminds us of that the migration has been very manageable and criticized loans and commercial real estate book are still relatively low. But the migration is really concentrated in the California, some of the sub-market northern California being the most impact at this point and then southern California.

Melinda Chauke: So, you know, we're watching those really, really closely. And again, the customer base fair and sponsor base, I would consider, you know, exceptionally strong and we have tenured colleagues that know how to manage through this. And so, you know, we feel really good about our strategy there. We feel really good about the product set, but multi-family, you know, has had a tremendous amount of supply come to market and there's more to come. So I expect that we'll continue to see some modest level of migration in that portfolio.

Melinda Chauke: Got it. Okay, and I know it's a very small portfolio for you guys. Do you happen to have what the reserve is on the office portfolio at this point? We don't have a reserve specifically on the asset classes that we do have coverage ratio for the commercial real estate book as a whole and it's one dot five eight.

Jim Herzog: Okay, got it. And Jim, I just wanted to follow up on the swap question to swap that you said you've got forward starting coming on that'll, you know, outpace anything that's ensuring that that's all reflected in the 24, you know, kind of walk up on the swaps book that it is for.

Jim Herzog: Okay, great. I just want to make sure. Then just last one for you. You know, for, I know it's a smaller portion of the book, but for the, you know, true fixed portion, you know, not the swapped floating portion. Can you walk us through what the maturity schedule looks like over the next 12 months and kind of what the what the yields are that are rolling off versus what current origination jobs are right now.

Jim Herzog: Yeah, it's really a relatively small part of our book and I don't see it having a big impact on yields next year. I think somewhere in the appendix used to my fix rate loans organically speaking or about 8% of our book. And they have pretty long maturities, you know, 12 years on average. So you don't see a lot come up for a price in every year. We might see 300 million dollars from up this in 24 to use a kind of an average.

Jim Herzog: And they are price below our current loan yields. So there is some opportunity there. But I wouldn't see fixed rate for pricing having more than a couple of bits of impact on our loan yields next year. There is a little bit of, you know, there's a such a favorable impact. Do you have any security materities that are, you know, lumpy and lower yielding at any point in the next 12 months? You know, we have a normal, what I'll consider to be smooth, row-off event DSs and we do have some treasuries from cheering over the next, you know, 15 months, but I would say those aren't necessary lumpy.

Jim Herzog: We see a little bit in most quarters. So we obviously are going to benefit in 2024 from securities insuring as we redeploy that either in the cash, earning much higher yields or avoid purchase funds. So, you know, the net net, you know, we will see a benefit from fixed asset and pricing next year, a tiny bit from loans. You'll certainly get a nice lift up from securities, fixed rates, swaps actually go the other direction, but the net benefit will be favorable in 2024.

Jim Herzog: Got it.

Jim Herzog: Thank you very much.

Broderick Preston: Take my questions overall.

Broderick Preston: Thanks, Brody.

Kent Usdin: Thank you.

Kent Usdin: Next question is coming from Kent. Who's then? From Jeffries. Your line is now live. Good morning, Kent. Hi. Thanks. Good morning.

Peter Sefzik: It's, I want to ask a question on an alone book on the, on the business line basis. You're not, you're not under any kind of like dieting, so to speak, but you know, after you got out of mortgage banker this year, just, there's a couple of these lines that are getting a little smaller over time, like tech and life sciences and equity fund. Just wanted to ask like how much of that is environmental and, and do you envision taking a harder look at any of the, the, the loan categories that, that you have in terms of what you're thinking about in terms of future growth opportunities?

Peter Sefzik: Hey, Ken, this is Peter. Yeah, we, we've got some of our businesses that have kind of continued to drift down this quarter and quite candidly probably will into the fourth quarter and maybe even the first quarter, but, you know, we don't really see any additional changes to the, to the lines of business that we're in. You know, we do feel really good about the portfolio on a go forward basis. I do think that in the environment with increased expectations around profitability and pricing and I'm just sort of managing our balance sheet.

Peter Sefzik: Some businesses are impacted more than others, but you know, as we get into next year, we'll, we'll try to give a little more guidance on what we think loan outlook looks like for 24, but I suspect a few of these businesses that you've kind of seen creep down here as of late probably be another quarter or two before we start to go the other direction. Overall, with our general portfolio, middle market business banking, small business, our pipelines there are still pretty good relatively.

Peter Sefzik: It depends on the geography a little bit and, you know, we're, we're trying to add customers and add new business in that space as we get into into the end of the year and into next. Got it. Great. Thanks.

Jim Herzog: And my follow-up is just on on the expenses. Can you just explain like the, the, the kind of the right back on the modernization this quarter? What, you know, how to, how does that mechanically work? And then just making sure they understand that the fourth quarter guide is built on the, the all in three cube number. Thank you. Yeah. Kennedy, modernization expenses were actually a nut credit because of the real estate gain that you saw in third quarter that we noted on the expense slide.

Jim Herzog: You know that will go off that by some expenses, but modernization expenses were in that negative $14 million or $14 million credit for the quarter. You know, we would expect that to be a little closer to zero for the fourth quarter. We may have an additional real estate sale that could give us something in the low single digits of millions, but overall, I don't expect modernization to be a big driver of fourth quarter expenses, and then the fourth quarter guide is built on the, aside from the deferred comp that you don't expect to repeat, the fourth quarter expense guide is built off of the 555. That's right. Yeah. Okay. Got it. Thank you. Thank you again. Thank you.

Brandon King: Next question. Today is coming from Brandon King from Truest Securities. Your line is not live.

Brandon King: Want to Brandon? Hey, good morning. I'm just just putting the pieces together. How are you thinking about balance sheet growth next year, keep me we're earning assets. Are you kind of looking to keep things stable? Or could we see something from our growth. At Brandon, it's Jim. I'll start off and Peter may want to try men here. But we've been very focused on stabilizing the funding base and the quarter base. You know, in recent months, as you know, we've had a lot of success there.

Brandon King: We're actually in better shape than we actually thought we would be back in the spring with the moment deposit ratio of 80%. You know, I think it was right now. It's being in a period of retaliation. You know, we're focused on getting the right mix of customers, right mix of businesses, getting the right pricing. And then we expect this to be at some point in 2024 to be at a point where we start growing loans that are more normal pace again.

Brandon King: We're not quite there yet, but we expect to be there at some point in 2024 with loan growth. But right now, we're still going through that period of recalibration, whether it be getting more certainty around our deposit base, getting the right mix in terms of business lines. But we do anticipate some type of balance sheet growth at some point in 2024. Yeah, Brandon, I might just add to what Jim said. I mean, we're also, you know, seeing a lot of, I would say caution in our customer base.

Brandon King: You know, there's a lot of headline risk. I think you might say as we go into next year and you know, Melinda's talked a lot about credit, but you know, we're prepared that it could be a tougher economic environment that will just navigate successfully. We always have as a company really well. So what that looks like for loan demand per say is probably to be determined. I mean, we'll give some more guidance as we've mentioned on loans when we get into the fourth quarter call for next year, but we do think we'll get back to loan growth next year.

Brandon King: I think we just don't know necessarily what that looks like just yet with the environment with interest rates where they are. And, you know, to the extent that we enter a more challenging economic environment, we'll have to navigate that. And again, it also depends on business by business what that may look like in geography by geography.

Brandon King: Got it.

Brandon King: And then could you speak to the positive seasonality flows? What are your kind of expectations near term and just how close you think we are to maybe a normal seasonality trend? Yeah, Brandon, you know, seasonality has really been a tough one the last couple years, the typical seasonal trends that we see amongst different business units, whether it be loans or deposits. It's kind of gone out the window. So we're waiting to see whether or not those returned back to normal seasonality patterns.

Brandon King: You know, we're in a higher interest rate environment and to what extent and a different liquidity environment too in terms of overall, you know, liquidity and the economy. So it remains to be seen if we do return back to those typical patterns that we've seen in the past. You know, as I mentioned, we may have a very small bit of seasonality assumed in our outlook, but not a lot. So we do see some potential throughout side there. But frankly, it just feels like the positive seasonality much like many other patterns remains to be seen in this new paradigm as to whether or not we return back to the old normal or not.

Brandon King: I thought I had to take my questions. Thank you.

Peter Winter: Next question coming from Peter Winter from David Sinderlite, is that live? Morning, Peter. Good morning.

Jim Herzog: I'm just going back to the 24-hour outlook. Does that already contemplate some expense phase initiatives, or as you go through the budgeting process, there's opportunities for maybe from additional expenses versus back items? Peter, it's a bit of both. We haven't been sitting on our hand, so to speak, and have been looking at opportunities to slow expense growth and to be more prudent.

Jim Herzog: We have some other things that are still in process, as we think about where the planning process for 2000 and 2024, so we'll, again, have more to share potentially as we get into the fourth quarter on ease call. Okay.

Jim Herzog: And then just one housekeeping. Just what was the end of period balance on the mortgage banker loans? Just curious how much is left to run off? Yeah, mortgage banker, I mean, for the quarter, you know, we were at 900 billion, a little bit lower than that for ending. I don't know. I think period N was around 650. Yeah. So, yeah. But, well, we would communicate with our Peter is that we expect the balances to be pretty minimal by the end of the year.

Jim Herzog: Period N might be a couple hundred million. Okay. Thanks. Thank you.

Kurt Farmer: We reach into our question and answer session. I'd like to turn the floor back over to President Chairman and Chief Executive Officer Kurt Farmer. Please go ahead. Again, I just would say I'm very proud of our performance for the quarter. I'm always proud of our colleagues and how they're delivering for our customers every day. And thank you again for your interest in our company.

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