Regions Financial Corporation Q1 2024 Earnings Call

Christine: Good morning, and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Christine, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen only. At the end of the call, there will be a question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. I will now turn the call over to Dana Nolan.

Good morning, and welcome to the regions financial Corporation's quarterly earnings call.

Christine: My name is Christine and I'll be your operator for today's call.

Christine: I would like to remind everyone that all participant phone lines have been placed on listen only.

Christine: At the end of the call there'll be a question and answer session.

Christine: If you wish to ask a question. Please press star one on your telephone keypad.

Christine: I will now turn the call over to Dana Nolan to begin.

Dana Nolan: Thank you, Christine. Welcome to Regions' first quarter 2024 earnings call. John and David will provide high-level commentary regarding our results. Earnings documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the investor relations section of our website. These disclosures cover our presentation materials, prepared comments, and Q&A. I will now turn the call over to John.

Dana Nolan: Thank you Chris welcome to regions first quarter 'twenty 'twenty four earnings call you on anything that will provide high level commentary regarding ourselves, earning documents, which include our forward looking statement disclaimer and non-GAAP information are available on the industrial relations section of our website.

Glen insurers cover our presentation materials prepared comments and Q&A I will now turn the call over to John.

John: Thank you, Dana, and good morning, everyone. We appreciate you joining us on our call today.

John: Thank you Dana and good morning, everyone. We appreciate you joining our call today.

John: This morning, we reported first quarter earnings of $343 million, resulting in earnings per share of 37 cents. However, adjusted items reconciled within our earnings supplement and press release represent an approximate 7 cent negative impact on our reported results. For the first quarter, total revenue was $1.7 billion on a reported basis and $1.8 billion on an adjusted basis, as both net interest income and fee revenue demonstrated resilience in the face of lingering macroeconomic and political uncertainty.

John: Morning, We reported first quarter earnings of $343 million, resulting in earnings per share of 37.

John: However, adjusted items reconciled with our earning supplement and press release, representing an approximate 7% negative impact on our reported results.

John: The first quarter total revenue was $1 $7 billion on a reported basis.

John: And $1 $8 billion on an adjusted basis as both net interest income and fee revenue demonstrated resiliency in the face of lingering macroeconomic and political uncertainty.

John: Adjusted non-interest expenses increased quarter-over-quarter and is expected to represent the high-water mark for the year as seasonal impacts offset our ongoing expense management action. Average loans were lower quarter-over-quarter, reflecting limited client demand, client selectivity, paydowns, and an increase in the debt capital market sector.

John: Adjusted noninterest expenses increased quarter over quarter and is expected to represent the high watermark for the year is seasonal impacts offset our ongoing expense management actions.

John: Average loans were lower quarter over quarter, reflecting limited part demand client selectivity paydowns and an increase in debt capital markets activities.

John: Average and ending deposits continued to grow during the quarter, consistent with seasonal patterns, and credit continues to perform in line with our expectations. While pressure remains within pockets of business lending, our consumers remain strong and healthy. We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic. In closing, we feel good about the successful execution of our strategic plan as evidenced by our solid top-line revenue, which allows us to continue delivering consistent, sustainable, long-term performance while focused on soundness, profitability, and growth. Now, David will provide some highlights regarding the quarter.

John: Average and ending deposits continued to grow during the quarter consistent with seasonal patterns.

John: Credit continues to perform in line with our expectations, while pressure remains within pockets of business lending our consumers remains strong and healthy.

John: We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic.

Speaker Change: In closing we feel good about the successful execution of our strategic plan is there.

Speaker Change: Evidenced by our solid top line revenue, which allows us to continue delivering consistent sustainable long term performance, while focused on soundness profitability and growth.

David will provide some highlights regarding the quarter. Thank.

David: Thank you, John. Let's start with the balance sheet. Average and ending loans decreased modestly on a sequential quarter basis. Within the business portfolio, average loans declined 1% as modest increases associated with funding previously approved for investor real estate construction loans were offset by declines in C&I lending. Approximately $870 million of C&I loans were refinanced off balance sheet through the debt capital markets during the quarter.

David: Thank you John let's start with the balance sheet average in ending loans decreased modestly on a sequential quarter basis within the business portfolio average loans declined 1% as modest increases associated with funding previously approved in Investor Real estate construction loans were offset by declines in C&I lending.

David: Approximately $870 million of C&I loans were refinanced off balance sheet through the debt capital markets during the quarter.

David: Average consumer loans remained relatively stable as growth in residential mortgage, interbank, and consumer credit cards was offset by declines in home equity and runoff portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023, from a deposit standpoint. Deposits increased on average and ending basis, which is typical for the first quarter tax refund season. In the second quarter, we expect to see declines in overall balance. Reflecting the Impact Tax Payment.

David: Average consumer loans remained relatively stable as growth in residential mortgage interbank and consumer credit card were offset by declines in home equity and run off portfolios.

David: We expect 2024 average loans to be stable to down modestly compared to 2023.

David: From a deposit standpoint.

David: Posits increased on average an ending basis, which is typical for the first quarter tax refund season.

David: In the second quarter, we expect to see declines in overall balances reflecting impact of tax payments.

David: The mix of deposits continues to shift from non-interest bearing to interest-bearing products, though the pace of remixing has continued to slow. Our analysis of the trends and overall customer spending behavior gives us confidence that by mid-year, we will have a non-interest-bearing mix in the low 30% area, which corresponds to approximately $1 to $2 billion of potential further decline in low-interest savings and checking balances. So let's shift to net interest income. As expected, net interest income declined by approximately 4% last quarter, and the net interest margin declined 5 basis points.

David: Deposits continue to shift from noninterest bearing to interest bearing products, though the pace of Remixing has continued to slow.

David: Our analysis of the trends and overall customer spending behavior.

David: Gives us confidence that by midyear, we will have a noninterest bearing mix in the low 30% area, which corresponds to approximately $1 billion to $2 billion of potential further decline in low interest savings and checking balances.

David: So let's shift to net interest income.

David: As expected net interest income declined by approximately 4% linked quarter and the net interest margin declined five basis points.

David: Deposit remixing and cost increases continue to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect a peak in the mid 40% range. Offsetting this pressure, asset yields continue to benefit from higher rates through the maturity and replacement of lower-yielding fixed-rate loans and securities. We expect net interest income to reach a bottom in the second quarter, followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed-rate asset turnover persist.

David: Deposit Remixing and cost increases continued to pressure net interest income.

David: Before rising rate cycle interest bearing deposit beta is now 43% and we continue to expect a peak in the mid 40% range.

David: Offsetting this pressure asset yields continue to benefit from higher rates through the maturity and replacement of lower yielding fixed rate loans and securities.

We expect net interest income to reach a bottom in the second quarter, followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist.

David: The narrow 2024 net interest income range between $4.7 and $4.8 billion portrays a well-protected profile under a wide array of possible economic outcomes. However, performance in the range will be driven mostly by our ability to reprice deposits. A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit costs increased this cycle, mostly index deposits and CDs. We have taken steps to increase flexibility, such as shortening promotional CD maturities and reducing promotional rates.

David: The narrow 2024 net interest income range between four seven and $4 $8 billion portrays a well protected profile under a wide array of possible economic outcomes.

David: Performance in the range will be driven mostly by our ability to reprice deposits.

David: A relatively small portion of interest bearing deposit balances is responsible for the majority of the deposit cost increase the cycle, mostly indexed deposits and Cds.

David: We have taken steps to increase flexibility such as shortening promotional CD maturities and reducing promotional rates.

David: If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure. So let's take a look at fee revenue, which experienced strong performance this quarter. Adjusted non-interest income increased 6% during the quarter, as most categories experienced growth, particularly capital markets, where improvement in capital markets was driven by increased real estate. Debt Capital Markets, and M&A Activity. A portion of both real estate and M&A activities were pushed into the first quarter from year end as clients delayed transactions.

David: If the fed remains on hold net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure.

David: So, let's take a look at fee revenue, which experienced strong performance this quarter.

David: Adjusted noninterest income increased 6% during the quarter as most categories experienced growth, particularly capital markets improvement in capital markets was driven by increased real estate.

David: Capital markets and M&A activity.

David: A portion of both real estate and M&A activities were pushed into the first quarter from year end as clients delayed transactions.

David: Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model, so you'll see us continue to look for additional opportunities. We continue to expect full-year 2024 adjusted non-interest income to be between $2.3 and $2.4 billion. Now, let's move on to non-interest expense. Adjusted non-interest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. However, operational losses also ticked up during the quarter. The increase is attributable to check-related warranty claims from deposits that occurred last year.

David: Late in the first quarter, we also closed on the bulk purchase.

David: Of the rights to service $8 billion of residential mortgage loans.

David: We have a low cost servicing model so you'll see us continue to look for additional opportunities.

David: We continue to expect full year 2024, adjusted noninterest income to be between two three and $2 $4 billion.

David: Let's move on to noninterest expense.

David: Adjusted noninterest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR related expenses and production based incentive payments operational losses also ticked up during the quarter.

David: The increase is attributable to check related warranty claims from deposits that occurred last year.

David: Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy, and vendor spend. We continue to expect full year 2024 adjusted non-interest expenses to be approximately $4.1 billion, with the first quarter representing the high watermark for the year.

David: Despite this increase current activity has normalized to expected levels and we continue to expect full year 2024 operational losses to be approximately $100 million.

David: We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits occupancy and vendor spend.

David: We continue to expect full year 2024, adjusted noninterest expenses to be approximately $4 $1 billion with first quarter, representing the high watermark for the year.

David: From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points, driven primarily by a large legacy restaurant credit and one commercial manufacturing credit. As a reminder, we exited our fast-casual restaurant vertical in 2019, and the remaining portfolio is relatively small. Total non-performing loans and business services criticized loans increased during the quarter and continued to normalize towards historical averages. Total Delinquencies improved 11%.

David: From an asset quality standpoint, overall credit performance continues to normalize as expected.

Adjusted net charge offs increased 11 basis points, driven primarily by a large legacy restaurant credit and one commercial manufacturing credit.

David: As a reminder, we exited our fast casual restaurant vertical in 2019 and the remaining portfolio is relatively small.

David: Total nonperforming loans and business services criticized loans increased during the quarter and continued to normalize towards historical averages while total delinquencies improved 11%.

David: Non-performing loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize towards historical averages. Provision expense was $152 million, or $31 million in excess of net charge-offs, resulting in a six-basis point increase in the allowance for credit loss ratio to 1.79 percent. The increase in our allowance was primarily due to adverse risk migration and continued credit quality normalization, and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress.

David: Nonperforming loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified is under stress.

David: We expect npls to continue to normalize towards historical averages.

David: Provision expense was $152 million or $31 million in excess of net charge offs, resulting in a six basis point increase in the allowance for credit loss ratio to 179% the increase to our allowance was primarily due to adverse risk migration and continued credit.

David: Quality normalization.

David: And incrementally higher qualitative adjustments for risk in certain portfolios previously identified is under stress.

David: We continue to expect our full-year 2024 net charge-off ratio to be between 40 and 50 basis points. Now, let's turn to capital and liquidity. We expect to maintain our common equity tier one ratio consistent with current levels over the near term. This level will provide sufficient flexibility to make proposed changes, along with the implementation timeline, while supporting strategic growth objectives and allowing us to continue to increase the dividend commensurate with earnings. We ended the quarter with an estimated common equity Tier 1 ratio of 10.3% while executing $102 million in share repurchases and $220 million in common dividends during the quarter. With that, we'll move to the Q&A portion of the call.

David: We continue to expect our full year 2024, net charge off ratio to be between 40 and 50 basis points.

Speaker Change: Let's turn to capital and liquidity.

Speaker Change: We expect to maintain our common equity tier one ratio consistent with current levels over the near term. This level will provide sufficient flexibility to make proposed changes along with the implementation timeline, while supporting strategic growth objectives, and allowing us to continue to increase the dividend commensurate.

Speaker Change: With our earnings.

Speaker Change: We ended the quarter with an estimated common equity tier one ratio of 10, 3%, while executing $102 million in share repurchases and $220 million in common dividends during the quarter.

Speaker Change: With that we'll move to the Q&A portion of the call.

Christine: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. You may press star 2 if you would like to remove your question from the queue. Please hold while we compile the Q&A roster. Thank you. Our first question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your question.

Thank you.

Speaker Change: I'll now be conducting a question and answer session.

Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.

Speaker Change: You May press star two if he would like to remove your question from the queue.

Speaker Change: Please hold while we compile the Q&A roster.

Speaker Change: Yes.

Speaker Change: Thank you. Our first question comes from the line of Ebrahim <unk> with <unk>.

Ebrahim: Bank of America. Please proceed with your question.

Ebrahim Huseini Poonawala: Thank you. Good morning, John and David.

Ebrahim: Hey, Thank you good morning, John David.

Ebrahim: Morning.

David: David, just following up on your comment around non-interest-bearing deposits sitting at mid, I guess, low 30% by mid-2024; just give us a sense of if we don't get any rate cuts, do you see that dipping below 30% based on what you're seeing? In terms of customer behavior and just use of balances, I'm assuming there's some attrition on consumer balances that's at play here So where do you see that mix bottoming out, and what's the latest that you are seeing in terms of pricing competition across the markets? Thank you.

Ebrahim: David just following up on your.

Ebrahim: You commented on non interest bearing deposits sitting Mig I guess low 30% by mid 2024.

Speaker Change: Give us a sense of if we don't get the needed cuts do you see that dipping below 30% based on what you are seeing.

Speaker Change: In terms of customer behavior, and just use our balance sheet I'm, assuming there's some accretion when consumer balances. That's at play here, So like where do you see that bottoming out and what's the latest that you're seeing in terms of pricing competition across the markets.

Speaker Change: Yeah. So from a balance standpoint, we still feel pretty confident based on flows that we have seen and expect that we'd be in that low 30% range.

David: From a balance standpoint, we still feel pretty confident based on the flows that we have seen and expect that we'd be in that low 30% range. You know, we continue to look to grow non-interest bearing balances through new checking accounts and new operating accounts. That's what's important to us. That's what fuels our profitability. So, being in favorable places, in particular in the southeast, where there's migration of businesses and people, gives us some comfort that we can grow there. We talked about deposits bottoming out in the first half of the year and then maybe growing a little bit from there. So, I think that the low 30% range is a good, still a good level.

Speaker Change: We continue to.

Speaker Change: To grow noninterest bearing balances through new checking accounts, new operating accounts.

Speaker Change: That's what's important to us that's what fuels, our profitability and so being in.

Speaker Change: The favorable places.

Speaker Change: In particular in the southeast where there's migration of businesses and people that gives us some comfort that we can grow.

Speaker Change: There, we talked about deposits bottoming out.

Speaker Change: First half of the year and then maybe.

Speaker Change: Growing a little bit from there. So I think that low 30% range is a good still a good level with regards to competition on pricing I think at the end of the day, we haven't seen across the industry.

David: Regarding competition on pricing, I think, at the end of the day, we haven't seen a lot of loan growth across the industry. And as a result of that, competition for deposits is not as strong as it could have been had we had a lot of loan demand. We always have competition. We have to be fair and balanced with our customers and make sure that we are creating value. And so, we look at what our competitors are doing from a price standpoint, and we adjust accordingly. But there's nothing unusual that's happening there, and I think the biggest driver of that is the lack of loan growth.

Speaker Change: A lot of.

A lot of loan growth and as a result of that competition for deposits is not as.

As strong as it could have been had we had a lot of loan demand.

Speaker Change: We always have competition, we have to be fair balance with our customers and making sure that we are creating value and so we look at what our competitors are doing from a price standpoint, we adjust accordingly.

Speaker Change: There's nothing unusual that's happening there and I think the biggest driver of that is because of the lack of loan growth.

Speaker Change: That's helpful.

Speaker Change: Your specific question as you think about capital deployment that you outlined on slide 10.

David: Yeah, so, you know, we consistently challenge ourselves on what's the best use of our capital that we generate. Obviously, we're at a robust 10.3% common equity Tier 1. We think we're close enough to be in striking distance of whatever the regime changes with regard to capital. And again, with loan growth being muted in the industry, you know, we want to pay a fair dividend. So we're generating capital that needs to be put to work.

Speaker Change: The regime changes with regards to capital and again with loan growth being muted in the industry.

Speaker Change: We want to pay a fair dividend, so we're generating capital that needs to be put to work, we either buy the shares back or when we do things like securities repositioning we did the $50 million in the first quarter, we will continue to look for opportunities.

David: We either buy the shares back, or we do things like securities repositioning. You know, we did $50 million in the first quarter. We'll continue to look for opportunities. I would say that is not as close to the ground as it was because we want to keep our payback less than three years and, frankly, closer to two and a half if we can get it. Our payback on this last trade was about 2.1, and so we think that was a great use of capital for us. And so we'll look to do that, but we're not commited to it.

Speaker Change: I would say that perhaps not as close to the ground as it was because we want to keep our payback less than three years and frankly closer to $2. Five if we can get our payback in this last trade was about $2 one.

Speaker Change: So we think that was a great use of capital for us and so we will look to do that but we're not committing to it.

Unknown Executive: Our next question comes from the line of Scott Sievers with Piper Sandler. Please proceed with your question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Scott <unk> with Piper Sandler. Please proceed with your question.

unknown: Good morning. Thank you for taking the question. Good morning.

Good morning, Thank you for taking the question good morning.

Scott: I was hoping good morning, I was hoping you could please flush out some of the rationale behind the soften the loan growth outlook I certainly understand it given the backdrop and what we're seeing in the H eight data, but it didnt waste contrasts with some peers, who might be expecting more of an acceleration in the second half. So just curious to hear your updated thoughts on customer demand.

David: I was hoping you could please flesh out some of the rationale behind the softened loan growth outlook. I certainly understand it given the backdrop and what we're seeing in the H-8 data, but it contrasts with some peers who might be expecting more of an acceleration in the second half. So just curious to hear your updated thoughts on customer demand and how they're thinking.

Scott: And how they are thinking.

David: Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing interbank, growing card, but it was offset by declines in home equity, which made consumers flat. Consumers are actually in really good shape. We feel good about that.

Speaker Change: Well on the consumer side as we mentioned, we did a pretty good job growing.

Speaker Change: Mortgage growing interbank growing card, but it was offset by declines in home equity.

Speaker Change: Which made consumer.

Consumers flat consumers are actually in really good shape.

David: We just don't see a lot of loan growth, net-net loan growth. To commercial, depending on the industry, some industries are blowing up and down, and others are being careful at this point. You know, we've had nice production, but we've had payoffs, paydowns, and, of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint but obviously hurt us from a balance standpoint.

Speaker Change: We feel good about that we just don't see a lot of loan growth net net loan growth relative to two.

Commercial.

Speaker Change: Depending on the industry, some industries are blowing and going and others.

Speaker Change: We are being careful at.

Speaker Change: At this point.

Speaker Change: We've had nice production, but we've had payoffs paydowns and of course this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NII standpoint, but obviously hurt us from a balance standpoint.

David: You know, if we start seeing rates actually decline, that activity will pick up. And so, net-net, it's going to be hard to grow meaningfully through all that activity. And we're fine with that. We don't need to push. In this environment, there's still uncertainty. We don't need to push for loan growth. We need to be careful with client selectivity. John's talked about that numerous times, and we want to be careful. We clearly have the capital and liquidity to do so, and if we see opportunities, we'll grow, but we're not going to force it.

Speaker Change: If we start seeing rates actually decline that activity will pick up and so net net it's going to be hard to grow meaningfully through all of that activity and we're fine with that we don't need to push in this in this environment. There is still uncertainty we don't need to push for loan growth, we need to be careful on client selectivity John's talked about.

Speaker Change: That numerous times and and we want to be careful we clearly have the capital and liquidity to do so.

Speaker Change: If we see opportunities will grow but were not going to force it.

John: Okay, perfect. Thank you. And then separately, I was hoping you could discuss the additional operational losses. I was definitely glad to see no change to the full year expectation, though they were elevated in the first quarter. Maybe just some additional color. Were there new instances of the issues that had cropped up last year, or were these just sort of hiccups? And what gives you confidence that all the issues are still resolved?

Speaker Change: Okay perfect. Thank you and then separately I was hoping you could discuss the additional operational losses was definitely glad to see no change to the full year expectation.

Speaker Change: They were elevated in the first quarter, maybe just additional color was there new instances of the issues that have cropped up last year, where these just sort of true ups in and what gives you confidence that albeit shoes are still resolved and everything.

John: Yeah, this is John. So, there were no new events. The tail was a little bit longer with respect to the breach of warranty claims, a little longer than we anticipated, and as a result, we did incur some additional losses in the quarter. What gives us confidence that we can meet our expectations is the exit rate for the quarter was significantly reduced, which implies that the countermeasures we put in place the talent that we've recruited for our fraud prevention activities. All that is working and gives us confidence that we can, in fact, meet our $100 million target for the year. Perfect.

John M. Turner: Yes. This is John.

John M. Turner: There were no new events the tail was with respect to the breach warranty claims was a little longer than we anticipated and as a result, we did incur some additional losses in the quarter what gives us confidence that we can meet our expectations as the exit rate for the quarter was significantly reduced which implies that the counter.

Measures, we put in place the talent that we've recruited for.

John M. Turner: For our fraud prevention activities all of that is working and gives us confidence that we can in fact meet our $100 million target for the year.

Unknown Executive: Perfect. Okay, good. Thank you very much for taking the questions.

Speaker Change: Perfect. Okay. Good. Thank you very much for taking the questions.

Speaker Change: Thank you.

Betsy Graseck: Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.

Speaker Change: Our next question comes from the line of Betsy <unk> with Morgan Stanley. Please proceed with your question.

David: Hi, good morning. So one question just on how we're thinking about NII for the full year in relation to loan growth being a little slower. So I just wanted to understand, you know, your NII guide obviously is the same as it was before, loan growth expectations a little slower, understandably so. How do I square those things?

Betsy: Hi, good morning.

Betsy: Wanted to ask.

Betsy: So.

Betsy: One question just on how we're thinking about NII for the full year.

Betsy: In relation to loan growth being a little slower.

Betsy: I just wanted to understand.

Betsy: NII guide obviously the same as it was before loan growth expectations, a little slower understandably, so how do I square those things well.

David: Well, loan growth, we talked about being in the back half of the year, so you weren't going to get a lot of carry from loan growth in our guidance. And really, what we want to see loan growth for in the back half of the year is setting us up for 2025, not for 2024. So that was never factored into the guidance that we gave you on NII.

Betsy: Loan growth, we had talked about being in the back half of the year. So you werent going to get a lot of carry from loan growth and our guidance.

Betsy: And so really what we want to see loan growth for the back half of the year setting us up for 2025 not for 2024, so that was never factored into the guidance that we gave you on NII.

David: You know, we feel good about where we're positioned from a balance sheet standpoint with basically neutral to short-term rates. And, you know, we have a little bit of shape to the curve where we reinvest our securities book, and we're picking up, you know, a little over 200 basis points, 235 basis points on that front book, back book. So that gives us confidence there that we're going to do pretty well with regard to the NII.

Betsy: We feel good about where we're positioned from a balance sheet standpoint with.

Betsy: Basically neutral to short term rates.

Betsy: <unk>.

Betsy: We have a little bit of shape to the curve, where we reinvest our securities book and we're picking up a little.

Over 200 basis points 35 basis points on that front book back book, So that gives us confidence there that we're going to do pretty well with regards to.

David: And if you look at the input cost, so our deposit cost, it's also started to flatten. If we look at the months of February and March, there was little change in our deposit cost. So our cumulative beta, which is at 43 today, we said would be in the mid-40s. We have a lot of confidence in that. That's why we didn't change our NII guide.

Betsy: To the NII and if you look at the input cost so our deposit cost. They have also started to flatten if we look at the months of February and March there was little little change in our deposit cost so our COO.

Betsy: Our cumulative beta which is at 43 today, we said it would be in the mid <unk>, we have a lot of a lot of confidence in that.

Betsy: That's why we didn't change our NII guide.

David: Okay, got it. That makes a lot of sense. And then just on the securities repositioning that you talked about on slide five, I just wanted to understand how you're thinking about the go-forward here. You added some duration, which again, makes sense, but wanted to know if you're thinking of leaning in even more, like how long are you comfortable extending the duration of the security?

Okay got it that makes a lot of sense and then just on the securities repositioning.

Betsy: Talked about on slide five is it.

Speaker Change: Just wanted to understand how youre thinking about it.

Speaker Change: Go forward here.

Speaker Change: <unk> added some duration again makes sense, but wanted to know.

Speaker Change: If youre thinking I believe it's leaning in even more like how long are you comfortable extending the duration of the securities bucket basically the question. Thanks.

David: Well, our extension duration was only like 0.1 to 0.12 basis points over a year, so it was negligible. And, you know, from our standpoint, especially if you believe the risk of rates going up is very low, you believe they're either flat or down, then perhaps taking a little duration risk where we can get compensated for it makes some sense today. You know, our duration is naturally declining, so doing a trade to kind of keep it flat to modestly higher than where we are right now seems to make sense.

Speaker Change: Our extension of duration was only like one two.

Speaker Change: 12 basis points of the year, so negligible and fair from a from our standpoint.

Especially if you believe the risk of rates going up.

Speaker Change: <unk> is very low.

Speaker Change: Believe they're either flat to down than perhaps taken a little duration risk, where we get compensated for it make some sense today.

Speaker Change: Our duration naturally is declining so doing a trade to kind of keep it flat to modestly higher than where we are right now seems to make sense and it's a good use of capital. If we can get a payback like I said the one we just did our payback two one years, we'd like it to be less than three closer to two and a half if we can and so.

David: And it's a good use of capital if we can get a payback. Like I said, the one we just did, our payback is 2.1 years. We'd like it to be less than 3, closer to 2.5 if we can. While we won't commit to doing that, we would look at it, and if we did it, it would be no more than what you just experienced. We want to keep it at a fairly small percentage of our pre-tax income.

Speaker Change: While we won't commit to doing that we would look at it and if we did it it would be no more than what you just experienced we want to keep it at.

Speaker Change: A fairly small percentage of our pretax income.

Betsy Graseck: I got it. Thanks so much. I really appreciate it.

Speaker Change: Okay got it thanks, so much really appreciate it.

Speaker Change: Sure.

John G. Pancari: Our next question comes from the line of John Pancari with Evercore ISI. Please proceed with your question.

Speaker Change: Our next question comes from the line of John <unk> with Evercore ISI. Please proceed with your question.

John G. Pancari: Morning, John. Good morning.

John M. Turner: Good morning, John.

John M. Turner: Good morning.

John M. Turner: On the credit front, I saw about a, you know, moderate increase in non-performers in the quarter. However, your room loss reserve was, you know, pretty stable despite the move in reserves, I mean, in non-performers. I just want to see if you can get a little bit of color on how you're thinking about the reserve here, and also, maybe you can give a little more color on the non-performers.

John M. Turner: On the credit front.

Speaker Change: All about our.

John M. Turner: A moderate increase in non performers in the quarter.

However.

John M. Turner: Your loan loss reserve.

John M. Turner: No.

John M. Turner: Pretty stable.

John M. Turner: Despite.

Move in reserves.

John M. Turner: Non performers. So just wondering if you can give a little bit of color on how youre thinking about.

John M. Turner: The reserves here and.

John M. Turner: And also maybe you can give a little more color behind the non performers.

John M. Turner: Yeah, John, I'll maybe I'll start this John Turner interview. First of all, let's say we began signaling stress in a couple specific portfolios or industries a couple quarters ago. Senior Housing, Transportation, Healthcare, specifically Goods and Services, and Technology. And the increases that we are seeing in non-accrual loans and Classified Loans are largely consistent with the indication that there is stress in those particular industries. In fact, when you look at our non-accruals, Twenty-one of our non-accruals, excuse me, twenty-one credits make up seventy-two percent of our non-accruals, and eighteen of those twenty-one credits are in those five sectors that I mentioned.

Yes, John maybe I'll start this is John Turner.

John M. Turner: First of all I'd say, we began signaling now a couple of quarters ago stress.

John M. Turner: Couple of specifics portfolios or industries office senior housing transportation health care, specifically goods and services and technology and the increases that we are seeing in non accrual loans and classified loans are largely consistent with.

John M. Turner: The indication that there is stress in those particular industries in fact, when you look at our non accruals two.

John M. Turner: 21% of our non 21 of our non accruals excuse me 21 credits make up 72% of our non accruals and 18 of those 21 credits are in those five sectors that I mentioned so.

John M. Turner: So we did anticipate that we would see some deterioration, and that's been consistent with our expectations. The second thing I'd point to is that several quarters ago, we began to set the expectation that we would return to pre-pandemic historical levels of credit metrics, and specifically, that would be an average charge-off ratio of about forty-six basis points and non-accruals of a hundred and five basis points. And again, we have trended back to those ranges, which is consistent with our expectations.

John M. Turner: We did anticipate that we would see some deterioration and thats been consistent with our expectations.

The thing I would point to is several quarters ago, we began to set the expectation that we would return to pre pandemic historical levels of credit metrics and specifically that would be in <unk>.

John M. Turner: Our average charge off ratio of about 46 basis points and non accruals of 105 basis points and again.

John M. Turner: We have trended back to those ranges, which is consistent with our expectations with regard to the allowance. We go through the process every quarter to ensure that we are properly reserved against expectation for loss in those portfolios given that we have a very high degree of visibility.

John M. Turner: With regard to the allowance, we go through the process every quarter to ensure that we are properly reserved against expectation for loss in those portfolios given that we have a very high degree of visibility into the twenty-one credits that make up seventy-two percent of our non-accruals. You can expect that we feel very good about our reserve position.

John M. Turner: City into the 'twenty, one credits that make up 72% of our non accruals.

John M. Turner: You can expect that we feel very good about about our reserve position.

Jonathan: Okay, great. Thank you. Thanks for that. And then separately, on the expense front, you mentioned that the first quarter should represent the high watermark for expenses. Is that primarily because of the elevated operating losses, or do you expect some, you know, building efficiency through the remainder of the year, you know, either given the backdrop or given the revenue trend?

Okay, great. Thank you. Thanks for that and then separately on the expense front, you mentioned that the first quarter should represent the high watermark on expenses is that primarily because of the elevated operating losses or do you expect.

John M. Turner: Some building efficiency through the <unk>.

John M. Turner: Major year, either given the backdrop, where given the revenue picture.

David: Jonathan, several things, and we have probably $75 million worth of expenses we can point to on different fronts, so part of it is operational losses that we don't think will repeat. We obviously have the first quarter issues with regard to payroll taxes and things of that nature. We had an HR asset valuation that's offset in NIR that's a part of that, too. We have some things in occupancy and professional fees.

Jonathan it's several things.

John M. Turner: We have probably $75 million worth of expense, we can point to on different fronts. So part of it is the operational losses that we don't think will repeat.

John M. Turner: We obviously have the first quarter issues with regards to payroll taxes and things of that nature.

John M. Turner: We had.

John M. Turner: Our asset valuation that's offset in NAR.

John M. Turner: As part of that too.

John M. Turner: We have some things in occupancy professional fees. If you add all that up it's about $75 million and we have pretty good confidence that that will repeat we tried to signal that the first quarter was going to be the high watermark in that you Couldnt take the $4 1 billion and divide by four.

David: If you add all that up, it's about $75 million, and we have pretty good confidence that that won't repeat. We tried to signal that the first quarter was going to be the high watermark and that you couldn't take the $4.1 billion and divide it by four, and we're sticking to that. We're sticking to our guidance that we have, and we have pretty good confidence. We did take some actions this quarter like we did in the fourth quarter from a severance standpoint. Now, the first quarter has the normal expense of payroll for those folks in addition to the severance, so that won't repeat, so all that, like I said, adds up to right around $75 million.

John M. Turner: And we're sticking to that and we're sticking to our guidance, we have and we have pretty good confidence we did take some actions this quarter like we did in the fourth quarter from a severance standpoint.

John M. Turner: Now the first quarter has the normal expense payroll for those folks in addition to the severance.

John M. Turner: So that won't repeat so that all of that like I said it adds up to right at right around 75 million.

David: And that's just, we have other opportunities to reduce expenses as well. That's just an indicator of what we can pretty quickly identify that won't repeat.

John M. Turner: And that's just.

John M. Turner: Other.

John M. Turner: <unk> to reduce expenses as well that's just an indicator of what we can pretty quickly identify won't repeat.

unknown: And if I could ask just one follow-up related to that, is the status of your core systems conversion still progressing as expected in terms of timing and cost? Yes, it is.

Speaker Change: And if I could ask just one follow up related to that.

Speaker Change: The status of your core systems conversion is that still trending as expected in terms of timing and costs.

unknown: It is. Yeah, we actually just had a board meeting this week and went through all that with our board. We feel good about the project and the progress that we're making and our ability to stay on budget on time.

Speaker Change: Yes.

Speaker Change: In fact, just had a board meeting this week and went through all that with the board we feel good about the project and the progress that we're making.

Speaker Change: And our ability to stay on budget on time.

John G. Pancari: Okay, great. Thanks for taking my questions.

Speaker Change: Okay, great. Thanks for taking my questions.

Speaker Change: Thank you.

Kenneth Michael Usdin: Our next question comes from a line from Kenneth Usdin with Jeffries. Please proceed with your question.

Speaker Change: Our next question comes from the line of Ken <unk> with Jefferies. Please proceed with your question.

Ken: Good morning, Thank you good morning.

David: Good morning. Thanks. I wonder if, David, you could talk a little bit about that bullet you put in on slide 5 about stable deposit costs, February to March, and what our takeaways should be in terms of, you know, mix shift pricing, movement, etc. And I know you talked about still mid-40s Q-peak deposit betas, but just, you know, what's changing underneath in terms of that stability that you're starting to see

Ken: I was wondering if we've got David you could talk a little bit about that.

But what you put in on slide five about stable deposit cost February to March and what our takeaway should be in terms of mix shift pricing movement et cetera, and I know you talked about still mid Forty's cube peak deposit betas, but.

Ken: Just whats changing underneath in terms of that stability that you're starting to see.

David: Part of one of the big reasons we put that in there is because our deposit cost change was higher than what you're seeing from peers, but that's because of what we did in the fourth quarter, and you had a full quarter effect of that. Now that we've kind of got that baked into the base and we start seeing offers and things of that nature on the deposit offerings coming down, the exit in February and March gives us a lot of confidence that those deposit costs are stabilizing, and therefore, we have a lot of confidence in our cumulative beta being in the mid-40s, so a couple more points from where we are today.

Part of.

Ken: One of the big reasons, we put that in there because our deposit cost change was higher than what youre seeing from peers, but that's because of what we did in the fourth quarter.

Ken: And you had a full quarter effect of that.

Ken: Now that we've kind of got that baked into the base.

Ken: And we start seeing offers and things of that nature.

Posit offerings coming down.

Ken: The exit in February and March gives us a lot of confidence that those deposit costs are stabilizing and therefore, we have a lot of confidence that our cumulative beta being in the mid 40. So a couple more points from where we are today.

David: Okay, and I guess as a follow-up question, are you starting to change pricing, change offers, or bring in duration? What are you doing in terms of trying to take that point further?

Speaker Change: Okay, and I guess as a follow up are you starting to change pricing change offers bring in.

Speaker Change: Bringing duration what are you doing in terms of trying to pick that point further yes. That's a good point Ken. So yes, we started that last quarter actually we had some CD maturities coming that were longer dated 12, 13 month Cds and we weren't shorter than the 5% to seven month range that to be able to.

David: Yeah, that's a good point, Ken. So, yes, we started that last quarter actually. We had some CD maturities coming that were longer-dated, 12-, 13-month CDs, and we went shorter in the 5- to 7-month range to be able to reprice those this year with the original expectation that rates would be coming down sooner than they probably are now. And so, yeah, and we can see from a competitive standpoint that we want to be competitive. We don't have to lead with price, but we do need to be fair and balanced, and so you're starting to see the benefit of having the promotional rates come down a hair.

Speaker Change: <unk> prices this year.

Ken: With the original expectation that rates would be coming down sooner than they probably are now and so yes, and we can see from a competitive standpoint, we want to be competitive we don't have to lead with price.

Ken: But we do need to be fair balanced and so.

Ken: That youre starting to see the benefit of having the promotional rates coming down a hair.

David: Okay, and on that last point about the hire for longer, you've talked about the 12 to 14 billion of fixed rate production for a while now, and you say that's per year. Has the benefit from that also, does that get better in the hire for longer, or and does that, how does that differ when you think about this year versus next year? Thanks, David.

Speaker Change: Okay and on that last point about the higher for longer you've talked about the $12 billion to $14 billion of fixed rate production for a while now and you say thats per year has the benefit from that also does that get better and higher for longer or does that how does that differ when you think about like this year versus next year. Thanks, David.

David: Yeah, I would say marginally hire for longer because

David: Yeah, I would say marginally higher for longer because you have a lot of securities that are repricing that, you know, we're picking up about 235 basis points today. We're picking up, you know, call it 125 basis points on the loan side. So if you get, and we expect to get the deposit cost stabilized, then you don't, then the repricing can actually start overwhelming the cost that you have on the deposit side. That has not been the case thus far. It's been just the opposite. So you're going to see that turn, which is why we're calling it the bottom for us in the second quarter.

David: Yes, I would say marginally higher for longer because you have a lot of securities that are repricing.

Speaker Change: We're picking up about 235 basis points today.

Speaker Change: We're picking up call it 125 basis points on the loan side.

So if you get and we expect to get the deposit cost stabilized then you don't then the repricing can actually start overwhelming.

Speaker Change: The cost that you had on the deposit side that has not been the case, thus far it's been just the opposite so youre going to see that turn which is why we are calling the bottom for us in the second quarter.

Speaker Change: Got it thanks David.

Speaker Change: Yes.

David Patrick Rochester: Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question. Hey, good morning, guys.

Speaker Change: Our next question comes from the line of my successor.

Speaker Change: Investor with Compass point. Please proceed with your question.

Speaker Change: Hey, good morning, guys.

David Patrick Rochester: Hey, good morning, guys. On credit, regarding the large restaurant credit and the commercial manufacturing credit, could you guys quantify the impact on net charge-offs and provision this quarter? And if you could just give some additional background on where you are on the resolution process there, that'd be great.

Investor: On credit regarding the large restaurant credit in the commercial manufacturing credit could you guys quantify the impact on net charge offs and provision this quarter and if you could just.

Speaker Change: It gives some additional background on where you are in the resolution process, there that'd be great.

Speaker Change: Yes.

David: Yeah, so if you were to look at those two added together, just those two made about seven basis points of charge off. So if we didn't have those two, our 50 would have been 43. Rounding up.

Speaker Change: Yes. So if you were to look at those two added together just those two made about seven basis points.

Speaker Change: Charge offs. So if we didn't have those two are 50 would've been 43.

Speaker Change: Okay.

David: Great. And then where are you guys in the process of resolving this? Where are you in the process of resolving those credits?

Speaker Change: Great and then where are you guys in the process of.

Speaker Change: Resolving this.

Say that again.

Speaker Change: Are you in the process of resolving those credits.

unknown: They're both still being worked out.

Speaker Change: They are both still being worked out.

David Patrick Rochester: Okay, and I guess just the bigger picture with you reiterating the net charge-off guy here for the year of 40 to 50 bips. You're at the high end of that right now, so you're expecting that to either remain stable here or decline through the end of the year, and you have confidence around that? And we do. Great.

Speaker Change: Okay.

Speaker Change: I guess, just bigger picture with you reiterating the net charge off guy here for the year of 40 to 50 bps.

Speaker Change: Youre at the high end of that right now so you're expecting that to either remain stable here or decline through the end of the year and you have confidence around that.

Speaker Change: Yes.

David: And then just switching to deposits, with the recent inflation data that's been elevated and the shift expectations to fewer rate cuts this year, are you noticing any impact from any of that on your corporate deposit customers' behavior at all? Are you seeing any change in activity there? And does that impact your expected range of NIB remix at all for the year? No, you know, our

Speaker Change: Great.

Speaker Change: And then just switching to deposits with the recent inflation data.

Speaker Change: There have been elevated in the shift to expectations. A few rate cuts. This year are you noticing any impact from any of that on your corporate deposit customers behavior. At all are you seeing any change in activity there and does that impact your expected range of Niv remix at all for the year.

Speaker Change: No.

David: No, you know, our NIB largely comes from our consumer base, although we do obviously have a big NIB on the commercial side. I think folks that we're going to move out of NIB to seek rates have done so. And we think that that's why we're calling for our NIB to decline a little bit but still stay in a low 30% range. And they all just want to maintain a little bit more liquidity going into a cycle that still has uncertainty, geopolitical risk, and our own elections this year. But no, I don't think from an inflation standpoint, we're going to see a huge change from NIB.

Speaker Change: Our our niv largely comes from our consumer base, we do obviously have a big enough to be on the commercial side.

Speaker Change: I think folks that we're going to move out of niv to seek rate have done so and we think that.

Speaker Change: That's why we're calling for our niv to decline a little bit.

Speaker Change: But still stay in the low 30% range.

Speaker Change: I'll just want to maintain a little bit more liquidity going into.

Speaker Change: Cycle is still has uncertainty geopolitical risk our own elections this year.

Speaker Change: But no I don't think from an inflation standpoint, we're going to see a huge change from an IV.

Speaker Change: Alright, great. Thanks, guys.

Speaker Change: Okay.

Unknown Executive: Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please repeat your question.

Matt O'connor: Our next question comes from the line of Matt O'connor with Deutsche Bank. Please proceed with your question.

David: Morning, I was just wondering if you could elaborate a little bit on some of the fee trends. The deposit service charges were up nicely. And I know treasury management is a big part of that and a positive driver, but there is retail seasonality. So I'm wondering if you could flesh that out.

Matt O'connor: Good morning.

Matt O'connor: <unk>.

Matt O'connor: Good morning.

Matt O'connor: Just wondering if you could elaborate a little bit on some of the fee trends the deposit service charges.

Speaker Change: The fleet.

Speaker Change: And I know, it's Treasury management is a big part of that as a positive driver, but there is a weaker seasonality.

Speaker Change: If you take that out yes.

David: Yeah, so if you look at, just talk about fee revenue across different parts of the business. Treasury management's up 7% year-over-year, and that's a reflection both of increases in fees and increases in relationships and activities. So, there's been nice growth in that business. Similarly, wealth management's up over 6% year-over-year, which is both reflective of increases in asset valuations and increases in assets held for customers, and increased relationships.

Speaker Change: So if you look at.

Speaker Change: Talk about fee revenue across the across.

Speaker Change: Different parts of the business.

Speaker Change: Treasury management up 7% year over year, and that's a reflection both increases in fees and increases in relationships and activities. So the nice growth in that.

Speaker Change: Business, Similarly, wealth management's up over 6% year over year, which is both reflective.

Speaker Change: Increases in asset valuations and increases in assets held for customers increasing relationships. We also saw really nice increase in mortgage activity during the quarter and we would expect that to continue consumer fees are down modestly and thats a reflection.

David: We also saw a really nice increase in mortgage activity during the quarter, and we would expect that to continue. Consumer fees are down modestly, and that's a reflection, really, of the implementation of all the changes we've made to benefit customers with respect to overdrafts. And more specifically, as a result of the implementation of overdraft grace, we've seen about a 25% reduction in the number of customers who are actually overdrawn. So that is resulting in some decline in fee revenue offset by our current interchange activity and customers' use of their debit cards. So generally, fee income is solid. We're seeing good growth in the wholesale parts of our business and in wealth management that reflect growth in relationships and growth in activity.

Speaker Change: <unk> really of the implementation of all the changes we've made to benefit customers with respect to overdrafts.

Speaker Change: And more specifically as a result of.

Speaker Change: The implementation of overdraft Grace, we've seen about a 25% reduction in the number of customers who are actually overdrawn. So that is resulting in some decline in fee revenue offset by.

Speaker Change: <unk> currently by interchange activity and customers use of their.

Speaker Change: Debit card so.

Speaker Change: Generally.

Speaker Change: Fee income is solid we're seeing good growth in the wholesale parts of our business in wealth management that reflect growth in relationships and growth and activities.

David: Okay, and then in capital markets, that also came in strong. And I think you've had this 60 to 80 million range in the past with Wind for Upside, and just talk about, were there any deals that were... Yeah, just talk about how sustainable you think that is. Obviously, it's somewhat market dependent, but a little more color on the one key driver there and the thoughts going forward. Thanks.

Speaker Change: Okay, and then in capital markets not also came in strong and I think you've had this like $60 million to $80 million range in the past.

Speaker Change: With room for upside and there is a clock to were there any deals that.

Speaker Change: Yes, just talk to how sustainable you think that is obviously, it's somewhat market dependent but a little more color on the <unk> driver, there and thoughts going forward. Thanks.

David: Yeah. We still stick to that range generally and incorporate our expectations for capital markets into the broader guidance of around $2.3 to $2.4 billion in adjusted NIR. But we do see good pipelines. Capital Marks activity is picking up. There's more M&A activity. We're seeing more customers go to the institutional market to raise debt, which has been helpful. Our M&A activity was pretty diverse during the quarter. And then real estate capital markets, which is a really important business for us, were also very active. And so we feel pretty good about the $60 million to $80 million range for the quarter.

Speaker Change: I think.

Speaker Change: We still stick to that range generally and incorporate our expectations for capital markets and the broader.

Speaker Change: Guidance around two three to $2 four.

Speaker Change: $4 billion in adjusted in our but.

Speaker Change: But we do see good pipelines capital market activity is picking up there is more M&A activity, we're seeing more customers go to the institutional market to raise debt which has been helpful.

Speaker Change: Our M&A.

Speaker Change: <unk> was pretty diverse during the quarter and then real estate capital markets, which is.

Speaker Change: Really important business for us.

Speaker Change: Also very active and so we feel pretty good about the $60 million to $80 million range for the quarter.

Gerard Sean Cassidy: Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your question.

Speaker Change: Yeah.

Speaker Change: Okay. Thank you.

Speaker Change: Our next question comes from the line of Gerard Cassidy with RBC. Please proceed with your question.

Gerard Sean Cassidy: Good morning, John. Good morning, David. Hey guys,

Gerard Sean Cassidy: Hey, good morning, John Good morning, David Thanks, Hey.

David: Hey, Gerard, before you ask your question, let me clean something up from a question that just came up in terms of the... What the charge-off percentage would have been had we not had those two large credits? I said seven basis points, but it's 13 basis points actually, so we would have been at 37 had we not had those two. I didn't do the math correctly.

Gerard Sean Cassidy: Hey, guys, Hey, Gerard before you before you ask your question, let me clean something up from a question that just came up in terms of the.

Gerard Sean Cassidy: What the charge off percentage would have been had we not had those two large credits I said seven basis points 13 basis points actually so we would've been at 37% had we not had those too.

Speaker Change: Do the math correctly.

Speaker Change: I just want to make sure that gets fixed in the transcript.

David: I just want to make sure that gets fixed in the transcript. Very good. All set? Good morning, Gerard.

Speaker Change: Very good.

What was that.

Speaker Change: Good morning Gerard.

Great. Thank you.

Speaker Change: Can you guys excuse me and give us an update.

Sure.

Gerard Sean Cassidy: Proposals going for the long term debt.

Gerard Sean Cassidy: Fire away. Okay. Thank you. Can you guys, excuse me, give us an update on where the proposal is going for the long-term debt and when do you think that will be finalized in, you know, the NPR that's out there? And second, as part of that, what your latest estimates are?

Speaker Change: When do you think that will be finalized.

Speaker Change: The NPR that's out there and second as part of that what your latest estimate as I know you've given us some color on this in the past, but what are your latest estimate on what it might cost you. Once you have two and your peers of course have the issue that carry higher levels of debt.

David: Yeah, Gerard, you know, the whole Basel III and long-term debt has kind of gone into a little bit of a hole at the moment. We're not sure when that will get taken care of. We suspect it will be this year at some point.

Gerard Sean Cassidy: Yes, so gerard.

Gerard Sean Cassidy: As a whole Basel III in long term debt.

Gerard Sean Cassidy: <unk>.

Gerard Sean Cassidy: Kind of going into a little bit of a hole at.

Gerard Sean Cassidy: At the time.

Gerard Sean Cassidy: We're not sure when that will get taken care of we suspect it will be this year at some point.

David: The proposal on debt was to have 6% of RWA, which is about $7 billion for us, give you credit for what you have outstanding, which is a couple of billion, so you're talking about raising $5 billion. You know, we can leverage that and put it to work. And it wasn't a terrible drag on NII, less than 1 percent drag on NII for us if it was fully implemented, and this was going to take time to do that.

Gerard Sean Cassidy: The proposal on that was to have 6% of <unk>.

Gerard Sean Cassidy: Which is about $7 billion for us.

Gerard Sean Cassidy: To give you credit for what you would have outstanding which is a couple of billion. So you're talking about raise of $5 billion.

Gerard Sean Cassidy: We can leverage that and put it to work.

Gerard Sean Cassidy: And.

Gerard Sean Cassidy: It wasn't.

Gerard Sean Cassidy: It wasn't a terrible drag on NII and less than 1% drag on NII for us it fully implemented and this was going to take time to do that.

David: You know, we need to have some, our $2 billion of existing long-term debt is something we were going to address just in the natural order of things, but with loan growth being muted, there's no need to go out and raise debt if you don't have to have it. We're hoping that the proposal, though, comes down from the 6% number that's been taught, and it maybe being in the 2-3% range of RWA. We don't know for sure. We'll just have to adapt and overcome when the new rule gets put out.

We need to have some.

Gerard Sean Cassidy: Our $2 billion of existing long term debt.

Gerard Sean Cassidy: It's something we were going to address just the natural order of things, but with loan growth being muted. There is no need to go out and raise debt. If you don't have to have it.

Gerard Sean Cassidy: We're hoping that the proposal, though comes down from the 6% number there's been talk of it maybe being in the 2% to 3% range for <unk>.

Gerard Sean Cassidy: We don't know, we'll just have to adapt and overcome within the rule gets put out.

Gerard Sean Cassidy: Very good. And then, as a follow-up, you were very clear about the identification of the stress portfolios with credit. In your prepared comments, David, you mentioned that some of the increase in non-performers was due to, I think you said, yeah, some of it was due to the downgrades in certain, you know, those industries that you've identified. Can you share with us what, within those downgrades, what process, or not the process, but what caused the downgrades? Was it debt service coverage? Was it, you know, the business, the borrower's business, is deteriorating for some reason? Can you give a little more color on the downgrade part of that?

Speaker Change: Very good and then as a follow up you've been very clear about the identification of the stressed portfolios.

Speaker Change: With credit.

Speaker Change: In your prepared comments, David you mentioned that some of the increase in the non performers was due to.

Speaker Change: I think you said some of it was due to the downgrades in certain industries that you've identified can you share with us what.

Speaker Change: Within those downgrades, what process or not the process, but what caused the downgrades was a debt service coverage was it.

Speaker Change: The business the borrower's business is deteriorating for some reason can you give a little more color on the downgrade as part of that.

David: Gerard, usually, so we're seeing strength in consumers and businesses in general. However, there are pockets of stressed industries that John mentioned earlier. I think at the end of the day, they seem to be more idiosyncratic to the business model of that borrower, and these are valuation charges that are being taken. And so you don't have any. When you kind of cut to the chase, you think about credit. As I just mentioned, just two credits for us. It's a big deal in terms of the effect on the charge-off percentage, as a contagion as much as we see it as an idiosyncratic business issue.

Speaker Change: Gerard usually so we're seeing strength then.

Speaker Change: Consumers and businesses in general there are pockets of stressed industries that John mentioned earlier.

Gerard Sean Cassidy: I think at the end of the day there they seem to be more idiosyncratic to the business model of that borrower.

Gerard Sean Cassidy: And these are valuation charges that are being taken.

Gerard Sean Cassidy: And so you don't have any one when you kind of cut to the chase you think about credit risk actually being fairly good right now, but youre going to have these pockets. These one off pockets use.

Gerard Sean Cassidy: And then just mentioned just two credits for US it's a big deal.

Gerard Sean Cassidy: The effect on the charge off percentage so.

Speaker Change: We don't see it as a.

As a contagion as much as we see it as an idiosyncratic business issue.

David: I see. So it wasn't really like an across-the-board effect; the higher rate environment for these downgrades really affected it, but it was more idiosyncratic for each one of the borrowers. I think the one exception to that was that

Speaker Change: So it wasn't really like an across the board the higher rate environment for these downgrades were really affected it but it was more idiosyncratic for each one of the borrowers.

John M. Turner: I think the one exception to that, Gerard, would be transportation, where we are seeing that the industry, particularly the truckload industry and smaller borrowers, is under some stress, and valuations, equipment valuations, are also under stress. I mean, obviously, when you think about real estate-related portfolios, office, and Senior Housing in particular, you can understand why those are also under stress, but transportation would be the one area where I would say it feels like, across that industry, for the truckload-related businesses, the less-in-truckload businesses are still doing okay, but truckload-related carriers are having challenges.

Speaker Change: I think the one exception to that draw would be transportation, where we are seeing that industry, particularly.

Speaker Change: The truckload industry.

Speaker Change: And smaller borrowers is under some stress and valuations equipment valuations are also under stress I mean, obviously, you think about real estate related portfolios office.

Speaker Change: Senior housing in particular.

Speaker Change: I can understand why those are also under stress, but transportation would be the one area, where I would say it feels like across that industry for the truck truck load related and less than truckload businesses are still doing okay, but truckload related carriers or <unk>.

Speaker Change: Having challenges.

Thank you.

Christopher James Spahr: Our next question comes from Christopher Sparr with Wells Fargo. Please proceed with your question.

Speaker Change: Our next question comes from the line of Christopher <unk> with Wells Fargo. Please proceed with your question.

Christopher: Alright. Good morning. So my question is.

David: My question is just relating the shift in loan debt over the last few years, especially with Interbank, and comparing it to the average pre-pandemic charge-offs, and just kind of your thoughts on where you think the mix would have shifted a little bit and might have impacted the comparisons, and then just thoughts about the Interbank kind of portfolio itself. It seems to be holding up a little bit better than expected. Thank you.

Christopher: My question is just relating the shift in loan mix over the last few years.

Christopher: Your bank and comparing it to the average.

Charge offs, and just kind of your thoughts on where you think the mix.

Christopher: Would it has shifted a little bit he might have impacted the comparison, then and then just thoughts about the interbank kind of portfolio itself. It seems to be holding up a little bit better than expected.

David: Well, let me couch it in terms of just our overall portfolio from a CECL standpoint. So if you go back to pre-pandemic, so the fourth quarter of 2019 when we all implemented CECL, our CECL reserve at that time was 1.71%. If you adjust that for the portfolio we have today, so there are pluses and minuses, just a completely different mix, and applied those same loss rates to our current portfolio, that would imply a seasonal reserve of $162,000. I think that's on one of our slides.

Christopher: Well, let me couch it in terms of just our overall portfolio from a.

Christopher: From a seasonal standpoint, so if you go back to pre pandemic. So the fourth quarter of 2019, when we all implemented Cecil.

Christopher: Our seasonal.

Christopher: Reserve at that time was 171%.

Christopher: If you adjust that for the portfolio. We have today, so there's pluses and minuses, just a completely different mix and and apply those same loss rates to our current portfolio that would imply a seasonal reserve of 162, I think thats on one of our slides and so I think it.

David: And so I think at the end of the day, we have pretty robust reserves to cover expected losses. The stress portfolios that we've talked about are a driver. The lower FICO bands of consumers have more pressure on them than the rest of the consumer base. And some of the portfolios that we've added, whether it be Interbank or Accentium, those are higher yield portfolios, and they have higher loss content. In both cases, we had those two portfolios, Interbank and Accentium, call it two, two and a half percent expectation.

Christopher: At the end of the day, we have pretty robust reserves.

Christopher: To cover expected losses distressed portfolios that we've talked about our driver the lower FICO bands of consumer have more pressure on it than the rest of the consumer base and.

Christopher: Some of the portfolios that we've added whether it be interbank or SMT them. Those are those are higher yield portfolios and they have higher loss content in both cases, we had those two portfolios interbank and Cynthia MA call it 2% to 5% expectation and.

David: And they're performing in line with that. And I think it gets back to the fact that businesses and consumers, generally speaking, are in pretty good shape. So, you know, we've been real careful making sure we don't grow too fast in those portfolios. And so far, everything's worked according to plan.

Christopher: They are performing in line with that so.

Christopher: And I think it gets back to the fact that.

Christopher: Businesses and consumers generally speaking are in pretty good shape. So.

Christopher: We've been a real careful making sure we don't grow too fast in those portfolios and so far everything has worked according to plan.

Peter J. Winter: Transcribed by https://otter.ai Our final question comes from the line of Peter Winter with D.A. Davidson. Please proceed with your question.

Speaker Change: Thank you.

Speaker Change: Our final question comes from the line of Peter Winter with D. A Davidson. Please proceed with your question.

Peter J. Winter: Good morning.

Peter J. Winter: Just one one quick question.

Peter J. Winter: Last quarter, you mentioned, an exit rate for the NIM around 360, I am just wondering if youre still comfortable with that just on the one hand, you're building more liquidity, but then you did the securities restructuring.

Peter J. Winter: Hi, good morning; just one, one.

David: Yeah, you know, I think whether we get it right or not, we should get pretty close to that number still. Again, we're not counting on rates being a huge driver. Incrementally, though, if we have the long end that stays higher, then our reinvestment yields are a little bit better. If short rates come down, then our negative carry on our swap book will be helped, and that could propel us.

Peter J. Winter: Yes.

Peter J. Winter: Yes.

Speaker Change: Thank you.

Speaker Change: When we get we should get pretty close to that number still.

Speaker Change: We're not counting on.

Speaker Change: <unk> been a huge driver.

Speaker Change: Incrementally, though if we have the the long in that stays higher than our reinvestment yields are a little bit better.

Speaker Change: If short rates come down then our negative carry on our swap book will be helped.

David: So, you know, I would say the upper, upper 350s to 360. We are carrying a bit more cash, you probably saw that just out of an abundance of caution given the events of last quarter. And while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint. And so, you know, we still should have one of the leading margins regardless because we have a lot of confidence in our funding costs kind of settling down.

Speaker Change: And that could propel us so.

Speaker Change: I would say the upper upper $3 <unk>.

Speaker Change: To $3 60, we are carrying a bit more cash you probably saw that.

Speaker Change: Just out of an abundance of caution given the events of last last quarter and while that cash doesn't really hurt us from an NII standpoint, it does hurt us from a margin standpoint and so.

Speaker Change: Sure.

Speaker Change: We still should have one of the leading margins, regardless, because we have a lot of confidence in our in our funding cost.

Speaker Change: Settling settling down.

Speaker Change: Got it how much benefit you get from the securities restructuring on the margin.

David: How much benefit do you get from the securities restructuring on the margin? Well, the cost, the round number is $50 million, and it's a payback of 2.1 years. You can do the quick math. What do you mean by "on the margin?" There's a couple basis points of a positive.

Speaker Change: Well cost is round numbers $50 million and were in its a payback of two one years.

Speaker Change: No.

Speaker Change: You can do quick math.

Okay.

Speaker Change: You mean on margin is a couple of basis points of positive.

John M. Turner: Thank you. Mr. Turner, I would now like to turn the floor back over to you for closing comments.

Speaker Change: Okay.

Thanks, David.

David: Thank you Mr. Turner I would now like to turn the floor back over to you for closing comments.

John M. Turner: Okay, well, thank you all for your participation today. We appreciate your interest in our company. That concludes the call.

David Turner: Okay well. Thank you all for your participation today, we appreciate your interest in our company that concludes the call.

unknown: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.

Speaker Change: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.