Good morning, welcome to the Regions Financial Corporation's quarterly earnings call. My name is Christine, 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 one on your telephone keypad. I will now turn the call over to Dana Nolan to begin.
Thank you, Christine. Welcome to Regions fourth 1/4 2022 earnings call. John and David will provide high-level commentary regarding the 1/4. 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. With that, I'll now turn the call over to John.
Thank you, Dana. Good morning, everyone. We appreciate you joining our call today. Let me begin by saying that we're very pleased with our fourth 1/4 and full year results. Earlier this morning, we reported full year earnings of $2.1 billion, reflecting record Pre-tax Pre-provision income of $3.1 billion, adjusted positive operating leverage of 7% and industry-leading returns on both average tangible common equity and total shareholder return.
Our results speak to and underscore the comprehensive work that's taken place over the past decade to position the company to generate consistent, sustainable long-term performance. We have enhanced our credit, interest rate and operational risk management processes and platforms while sharpening our focus on risk-adjusted returns and capital allocation. We made investments in markets, technology, talent and capabilities to diversify our revenue base and enhance our offerings to customers.
For example, investments in our Treasury Management products and services led to record revenue this year. Similarly, our wealth management segment also generated record revenue despite volatile market conditions. Now we're seeing positive results of our comprehensive strategy. Over the course of the year, we grew revenue and average loans while prudently managing expenses, further illustrating the successful execution of our strategic plan.
As we enter 2023, it is from a position of strength. Our business customers have strong balance sheets. They have benefited from population migration, and many continue to carry more liquidity than in the past. Our consumer customer base remains healthy. Deposit balances remain strong and credit card payments remain elevated. The job market continues to be solid with approximately 2 open jobs available for each unemployed person across the Regions' footprint.
We have a robust credit risk management framework and a disciplined and dynamic approach to managing concentration risk. Our portfolios are more balanced and diverse than at any point in the past. We have a strong balance sheet that's Well-Positioned to perform in an array of economic conditions.
We have solid capital and liquidity positions to support balance sheet growth and strategic investments. Most importantly, we have a solid strategic plan, an outstanding team and a proven track record of successful execution. As we look ahead, although there is uncertainty, we feel good about how we're positioned. Now David will provide some highlights regarding the 1/4.
Thank you, John. Let's start with the balance sheet. Average loans increased 1% sequentially or 9% year-over-year. Average business loans increased 2% compared to the prior 1/4, reflecting high quality broad-based growth. Average consumer loans declined 1% as growth in mortgage, inerBank and credit card was offset by the strategic sale of consumer loans late in the third 1/4 and continued runoff of exit portfolios.
Looking forward, we expect 2023 ending loan growth of approximately 4%. From a deposit standpoint, as expected, deposits continued to normalize during the 1/4, consistent with a rapidly rising rate environment. Average total consumer balances were modestly lower, primarily driven by higher balance customers seeking marginal investment alternatives. Meanwhile, the median consumer balance remains relatively stable, still about 50% above Pre-pandemic levels.
Normalization was more pronounced in average corporate and commercial deposits, which were down 2% during the 1/4. As anticipated, our business clients continued to optimize the level and structure of their liquidity position. We experienced remixing away from non-interest bearing deposits to other options, both on and off balance sheet, including those offered through our Treasury Management platform.
Ending deposit balances have declined approximately $7 billion year over year, in line with our previously provided 2022 expectations. Looking forward, we do anticipate further deposit declines of approximately $3 billion-$5 billion in the first 1/2 of 2023, reflecting continued Federal Reserve balance sheet normalization, seasonal trends and late cycle rate-seeking behavior.
We expect to experience stabilization of deposit balances mid-year, with the potential for modest growth in the second 1/2 of the year. Our deliberate approach to managing liquidity allows for deposit normalization and growth in the balance sheet without the need for material wholesale borrowings in the near term.
Let's shift to Net Interest Income and margin. Reflecting our asset sensitive profile, Net Interest Income grew to a record $1.4 billion this 1/4, representing an 11% increase, while reported Net Interest Margin increased 46 basis points to 3.99%, its highest level in the last 15 years. While deposit repricing continues to accelerate, the cycle-to-date beta remains low at 14%. Importantly, our guidance for 2023 assumes a 35% full cycle beta by year end. There is uncertainty regarding full cycle deposit betas for the industry.
We remain confident that our deposit composition will provide a meaningful competitive advantage. Growth in Net Interest Income is expected to continue until the Federal Reserve reaches the end of its tightening cycle. Once the Fed pauses, we would expect deposit costs to continue increasing for a couple of more 1/4s.
This equates to 1%-3% Net Interest Income growth in the first 1/4 and 13%-15% growth in 2023, assuming the December 31st forward rate curve. Earlier in 2022, we added a meaningful amount of hedges focused on protecting 2024 and 2025. The swaps become effective in the latter 1/2 of 2023 and 2024 and generally have a term of 3 years.
Activity in the 4th 1/4 focused on extending that protection beyond 2025. We will look for attractive opportunities to continue to expand this protection. We have constructed the balance sheet to support a Net Interest Margin range of 3.6%-4% over the coming years, even if interest rates move back towards 1%. If rates remain elevated, our reported Net Interest Margin is projected to surpass the high end of the range until deposits fully reprice.
Let's take a look at fee revenue and expense. Reported non-interest income includes $50 million of insurance proceeds related to a 3rd 1/4 regulatory settlement. Excluding that, adjusted non-interest income declined 9% from the prior 1/4 as stability and wealth management income and a modest increase in card and ATM fees were offset by declines in other categories, mainly mortgage and capital markets.
Service charges declined 3% due primarily to 3 fewer days in the fourth 1/4 versus the third. We expect to offer a grace period feature to cover overdrafts around mid-year 2023, when combined with our previously implemented enhancements, will result in full-year service charges of approximately $550 million. Within capital markets, increases in M&A fees were offset by declines in all other categories, including a negative $11 million CVA and DVA adjustment.
Despite an increase in servicing income, elevated interest rates and seasonally lower production drove total mortgage income lower during the 1/4. With respect to outlook, we expect full year 2023 adjusted total revenue to be up 8%-10% compared to 2022. Let's move on to non-interest expense.
Reported professional and legal expenses declined significantly, driven by charges related to the settlement of a regulatory matter in the third 1/4. Excluding this and other adjusted items, adjusted non-interest expenses increased 2% compared to the prior 1/4. Salaries and benefits increased 2%, primarily due to an increase in associate headcount during the fourth 1/4 and higher benefits expense. Equipment and software expenses increased 4%, reflecting increased technology investments.
The fourth 1/4 level does provide a reasonable quarterly run rate for 2023. We expect full year 2023 adjusted non-interest expenses to be up 4.5%-5.5%, and we expect to generate positive adjusted operating leverage of approximately 4%. From an asset quality standpoint, overall credit performance remains broadly stable while experiencing expected normalization. Net charge-offs were 29 basis points in the 1/4.
Excluding the impact of the third 1/4 consumer loan sale, adjusted full-year net charge-offs were 22 basis points. Non-performing loans remained relatively stable 1/4-over-quarter and were below Pre-pandemic levels.
Provision expense was $112 million this 1/4. While the Allowance for Credit Loss ratio remained unchanged at 1.63%, the increase to the Allowance was due primarily to economic conditions, normalizing credit from historically low levels and loan growth. These increases were partially offset by the elimination of the hurricane-related reserves established last 1/4. Just to remind you, we believe our normalized charge-offs based on our current book of business should range from 35-45 basis points on an annual basis.
Due to the strength of the consumer and to businesses, we expect our full year 2023 net charge-off ratio to be in the range of 25-35 basis points. From a capital standpoint, we ended the 1/4 with a Common Equity Tier 1 ratio at an estimated 9.6%, reflecting solid capital generation through earnings, partially offset by continued loan growth.
Given the uncertain economic outlook, we plan to manage capital levels near the upper end of our 9.25%-9.75% operating range over the near term. In closing, we delivered strong results in 2022 despite volatile economic conditions. We are in some of the strongest markets in the country, while we remain vigilant to indicators of potential market contraction, we will continue to be a source of stability to our customers.
Pre-tax Pre-provision income remains strong. Expenses are well controlled. Credit remains broadly stable, and capital and liquidity are solid. With that, we'll move to the Q&A portion of the call.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. 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 John Pancari with Evercore ISI. Please proceed with your question.
Morning.
Good morning. In terms of your deposit beta, regarding that 35% beta assumption by year-end 2023, maybe help us think about what your assumption is around non-interest-bearing mix as a percentage of total deposits. How do you see that trending through the year? What's underlying that assumption? Thanks.
Yeah, John, this is David. What we did, we're at 39% non-interest-bearing right now. We've always had more non-interest-bearing than most everybody. That's just the nature of our deposit base. We said we would continue to see deposit runoff this year somewhere in the $3 billion-$5 billion range. For our guidance, we've taken all that out of NIB. You should expect that percentage of NIB to decline somewhat during the year.
Now, that's just what we put in the guide. We could see some mixed changes from that NIB and maybe not. That's the most harsh it could be, so that's why we put it in the guide. So, I don't know if there's a follow-up there, but...
Okay. No, that's helpful, and I think the other color on the beta provides some of the additional detail. Just separately, if I could just hop over to credit for my follow-up. Can you give us a little bit of color around what drove the increase in charge-offs in the 1/4? It looks like that may have been in C&I, but want to get a little bit of color around what you're seeing there.
Are you seeing any stresses in certain pockets of your loan categories that you're watching that are starting to generate some losses? And then also, what drove the 14% increase in the criticized loans? Thanks.
Yeah, John, this is John. We did see a little uptick in business services charge-offs in the 1/4 related to a handful of credits. We've identified a couple areas or a couple segments of the portfolio where we see elevated stress at the office, healthcare, consumer discretionary, senior housing, and transportation on the small end of trucking in particular. We're seeing elevating levels, I should say, of classified loans in particular.
To the second part of your question, we are seeing some normalization in the portfolio. Classified loans are increasing toward levels that we would expect to be more, quote, "normalized." The categories in which that, and we're seeing that change, are the 5 identified. There are some odds and ends in the portfolio as well as inflationary impacts and rising rates affect isolated customers.
In general, we still feel very good about credit quality, and as Dave said, we're guiding to 25-35 basis points of charge-offs in 2023.
John, I'll add, if you look at page 19, we tried to help you with the areas that John just mentioned in terms of the higher risk segments. You can see on that page the strength of the allowance to cover those increases in the criticized level that we have listed in the supplement. You know, we don't necessarily have loss in every one of those that migrated into criticize, but what we do see, we have already embedded in the reserve, and it's factored in, as John mentioned, in our guidance of 25-35 in charge-offs for 2023.
Yeah. Thanks, Dave. I appreciate that. If I could just ask one more on that. On the reserve, you pretty much kept it stable this 1/4. You know, can you maybe discuss the likelihood of incremental builds here, or do you think it fairly represents the scenarios of outlooks that you're looking at here?
We certainly believe it represents what we think is the loss content that exists today. Obviously, every 1/4 we have to reassess the economy, the quality of the portfolio at those times. We think we have it covered. The only bill that you would see from this standpoint that we know of would be related to new loan growth. We're gonna have some of that. We said we would grow loans about 4% end to end during the year, we'll need to provide for that. We think at 163, 1.63%, is a good coverage ratio for the risk that we have in the portfolio.
Based on our current economic assumptions.
Yep. Yep.
Got it. Okay, great. Thank you.
Mm-hmm.
Our next question comes from line of Ken Usdin with Jefferies. Please proceed with your question.
Morning, Ken.
Hey, good morning, guys. I just wanted to follow up on the, on the funding side of the balance sheet. You talked a little bit about, you know, you guys have had that ability to just keep your loan-to-deposit ratio in a good spot. Just wondering if you'd kinda help us understand what do you expect to do over time in terms of your wholesale debt footprint, including long-term debt, and what that would imply then for what you expect to do with the securities book over time as well. Thank you.
Yeah. We continue to have one of the lowest loan deposit ratios. I think you were leading to that. You know, we're in great markets. We continue to work on growing accounts, whether it be checking accounts or operating accounts. That's the hallmark of our whole franchise, is the strength of that deposit base. We will continue to leverage that deposit base in terms of our funding mix. At least for the first 1/2 of the year, we don't see the need to go into any wholesale borrowings. We have plenty of access to that should we need it. Most of our peers, I think, have all tapped wholesale funding already.
We're being able to leverage that, and that's where we give you the, you know, pretty strong guide in terms of our NII growth for the year of 13%-15%. We'll see what the deposit flows are. As we mentioned to John earlier, the deposit outflows we see that we put in our guide is $3 billion-$5 billion. Now remember we said $5 billion-$10 billion this past year, we were at $7 billion.
We've been estimating it pretty well. And we're taking off for our guide, all of that out of NIB. We'll see what happens during the year, but you don't expect us to be looking for wholesale funding until at least the second 1/2 of the year.
Just to follow up, you're gonna do that grace period, and we saw you reiterate the $550 of service charges. Can you just kinda give an update on the state of the consumer there and behavioral changes, and any other learnings and findings that kinda continue to, you know, continue to make you confident in upholding that $550 zone of service charges? Thanks.
Yeah. Well, Ken, we continue to see consumers maintaining good deposit balance levels. Spending is up modestly, but we think being managed very carefully by our consumer customer base, we feel good about the health of the consumer overall. With respect to overdrafts and the changes that we've made to benefit customers, we've seen about a 20% decline in the number of customers who are overdrawing their accounts on a month-to-month basis, which we're happy about.
That's ultimately the objective is to help customers better manage their finances. I would say all in all, we feel good about our guide and good about the impact that the changes that we've made have had on our consumer customer base.
Yeah. Ken, let me add that, embedded in the service charges is Treasury Management, and Treasury Management has had a fantastic year. If you look at the fourth 1/4 for Treasury Management, we were up 7% fourth 1/4 of 2022 to fourth 1/4 of 2021. If you look at the entire year, we were up 9% TM. That's been a positive to us. It's helped bolster that downward trend of service charges due to all the account changes that we've made, and will be a strength for us going into 2023, and gives us confidence, as John mentioned, that we can meet the $550 in service charges for the year.
Okay, thank you.
Our next question comes from line of Matt O'Connor with Deutsche Bank. Please proceed with your question.
Morning, Matt.
Good morning. Just a big picture strategic question. Obviously, you've done an amazing job growing the interest income and getting the rate call right. It seems like 3 for 3 here. You know, I guess the flip side is the kind of revenue mix has become more dependent on rates and the balance sheet, right? As you think about the fee composition. Anyway, long story short, the question is, you know, what strategic opportunities do you have to grow the fee revenues and maybe something that's, you know, more from an acquisition point of view to accelerate that?
Well, as you know, we've been active making non-bank acquisitions, particularly adding to our capital markets capabilities. We're pleased with, despite the fact that we had a bit of a soft 1/4 in the fourth 1/4, really pleased with the contribution that those capital markets investments are making to help us continue to strengthen relationships with customers and grow non-interest revenues up pretty dramatically over the last 6 or seven years.
likewise, we are excited about the investments we've made on the consumer side, whether it be the acquisition of Ascentium Capital, which is part of our corporate banking group, EnerBank USA, which gives us a chance to grow loans to homeowners, mortgage servicing rights that we've acquired, which have been helpful.
In the wealth space, we've made some acquisitions that have been modestly incremental, helpful to us, and we continue to look for opportunities there as well. We are, I think, positioning ourselves as we continue to accrete capital to make additional investments as we see those opportunities arise. We're consistently looking, and, I think you can look for us to continue to try to build on the investments that we've already made.
Matt, let me add that. The fact that we've been able to grow NII is actually a positive thing. We recognize it does lower the percentage of non-interest revenue as a total. We're very proud of the fact that we've been able to manage our balance sheet this, in this manner. More importantly, we're trying to take the volatility out of that line item.
If you look at our ability to hedge, we're locking in what we believe to be a very strong margin range of 3.60%-3.90% over time, regardless of what the rate environment does. That gives us a lot of stability there. If that means we have higher NII and the percentage of NIR is a bit lower than it historically has been, we're okay with that.
To John's point, we are going to look to use our capital for some non-bank acquisitions like you have seen us do. Nothing too big, but just to bolster the NIR stream to make us more resilient in just about any environment that we have.
Understood. That's helpful. Just somewhat related, you know, I've been asking a lot of your peers the same question, but y'all seem to be building capital kind of well beyond what I would have thought that you would need.
You talked about kind of the upper end to 9.25%, 9.75% CET1, and that's not new. I guess the question is, you know, why are you and others potentially, you know, all building what seems to be well in excess of what you need for CCAR? Are you anticipating something from CCAR changing? Is there kind of pressure behind the scenes from rating agencies, regulators, or are just all the banks deciding on their own to be a little more conservative given the cycle where we are? Thank you.
Yeah. Well, Matt, we can't speak for the other banks. I would say for us it's, it is a bit of an uncertain time. We think there potentially are opportunities to continue to make non-bank acquisitions that will arise. We were fortunate enough to make 3 in a short period of time at the end of 2021. Just, operating at the upper end of our range gives us some flexibility, and we'd like to continue to maintain that, given the uncertain environment that we're operating in.
If you look at CCAR degradation in capital was one of the lowest of the peer groups. We, we don't need capital to take care of the risk embedded in our balance sheet. It's really opportunistic opportunities we're looking for. Frankly, having a little bit more capital, Matt, doesn't hurt us from a return standpoint. You know, we generated over 30% return on tangible common equity. Having, you know, upper end of the 9.75% won't impact any meaningful way.
Yep, agreed. All right. Thank you very much.
Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.
Morning, Betsy.
Hey. Couple questions. One, just on the loan growth outlook. I know you indicated, you know, expect ending balance to be about 4% up year-on-year. Could you just give us a sense as to how you're thinking, through the dynamics of, you know, which pieces of the loan growth are likely to accelerate, you know, be on the high side, lower side? You know, how much longer that runoff portfolio is going to impact the numbers? Thanks.
Yeah. We expect loan growth to slow just with general economy slowing. I think our growth opportunities will manifest itself in the corporate banking group, commercial and corporate banking, as line utilization likely goes up a bit. I think there will be some opportunities in the real estate. We did have some growth of real estate, primarily multifamily.
Still happy with that. We do have one of the lowest concentrations of investor real estate compared to the peer group. We look at utilizing our capital selectively with the right customers doing the right things, in particular, like I said, multifamily. On the consumer side, our EnerBank acquisition we had in the end of 21, as John mentioned, is doing well for us.
We look for that to have opportunities to continue to grow. Mortgage, while it's going to be challenging again in 2023 because of the rate environment, although it's settled back a bit, it will give us some opportunity to grow a bit in the consumer side. As you mentioned, we do have some runoff portfolios. Our last one, By the time we get to the end of this year, we're probably not having a discussion about exit portfolios anymore.
Yeah, I would just add, despite the fact that we expect the small business customer to be under some pressure in a more challenged economy, we're seeing real opportunity through the Ascentium Capital platform, making loans to businesses on business essential equipment.
We're able to leverage that platform, which is very specialized in nature, through our branch system in our existing customer base. Over 35%+ of our branches in 2022 originated a loan through Ascentium Capital. We'll see more of that grow, I think, and again, another opportunity to leverage an acquisition into our existing customer base.
Yeah, that was going to be one of my follow-ups, just trying to understand Ascentium and the dynamic and the driver that it is for you. I guess the underlying question here is, what's the average size of this loan, an Ascentium loan? Is it more of a small business size or medium? Maybe give us some color around that.
It is a small business. It's loans originated on equipment that is, as I said, business essentials. The thesis is that that business owner is likely to pay that loan first because he or she has to have the equipment to operate the business. The average size of the loan is about $75,000, and the term would be 3 to four years on average.
Okay, great. Just lastly, follow up on the funding question that came up earlier. I mean, we're hearing from others that borrowing from Federal Home Loan Banks is interesting. You know, you obviously get some dividend back from the FHLB. You also get, you know, the fact that you don't have to pay the FDIC. I'm just wondering, is it at all attractive to you at some point to lean in more there or not?
I think we'll need to evaluate with that closer when we get to the point where we need it. We still have opportunities. We, we've had $2 billion-$3 billion worth of corporate deposits that have moved off our balance sheet to seek higher rates that we weren't willing to pay. Those are our customers. We still have their operating account.
They've just moved their excess cash elsewhere. There's an opportunity to go back to those customers first before we need to seek other wholesale funding. I think, you know, we have all avenues. We have term debt too that can help us with the FDIC as well. We'll just have to evaluate the total cost of all of our opportunities at that time.
far-
Which I said earlier, is really gonna be in the second 1/2 of the year.
Right. You haven't needed that at this stage. Got it. Okay, thanks so much. Appreciate it.
You bet.
Our next question comes from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.
Good morning, Steven.
Good morning. It's hard to pick apart anything in this 1/4. Results were fantastic. I guess the one question I get from people is, as we start to see, you know, maybe some normalization in credit is how do you really highlight for folks how much different your franchise is today versus Pre-cycle? I know you've laid some of that out in mid-1/4 presentations, the shift to investment grade and so forth. How would you combat that pushback from some folks?
Yeah, I think balance and diversity is the first thing I would point to. You look at for Pre-Great Recession, our balance sheet, whether it be on the right side or the left side, assets or liabilities, we had concentrations in certain asset classes, we were very dependent on interest-bearing deposits for funding. If you look at the reshaping of our balance sheet over time, the liability side of our balance sheet, I think, is really strong and provides, as we've talked about, to this point, the foundation for our outperformance, we expect that will continue.
On the asset side of the balance sheet, we have only less than 10% of our outstandings are in investor real estate. That's down significantly from Pre-crisis levels. We also, I think, have been very committed to concentration risk management.
We have a very active and ongoing credit risk management process, which we believe will produce much better results than we have previously delivered. We're committed to consistent sustainable long-term performance, and that requires that we manage credit risk well. At the end of the day, I know we've got to deliver, and we intend to do that, but we think we're well-positioned.
I would add that we also developed not too long ago, a new tool. We call it rClick, which doesn't mean anything to you, but what it does is it analyzes the cash flows of each of our customers. We developed that tool to give us an idea of product and service that a customer may need from us that they don't have.
What we found is it gave us such good information on cash flows every month that it gave us an earlier indicator of potential credit stress. That's part of what you're seeing when you see us move things into criticized category. We can be more proactive because we have better information to manage credit risk management through that tool.
Got it. That's extremely helpful. Maybe just one other question for me there is, you know, loan growth to 4% guide, I completely respect all the shifts and concerns in the environment that may take that down there, but, you know, you put up 11% growth this 1/4, you know, utilizations continue to increase.
Where could you outperform that 4%, I guess, if the environment maybe wasn't as bad as we might fear? How do you think about that shift you've talked about into capital markets and what could really drive that, you know, pushing some of those customers back into that space?
We're currently modeling about $2 billion, I think, in credit outstanding that could move off the balance sheet if capital markets open. That's a rough number, but that's, give you some indication of a quote, headwind if the capital markets do open. That could be a plus or minus to answer your question, and I think would be the one area where we probably would see more growth than we anticipated if that did not happen.
Our line utilization is still below historical levels. You know, every 1 point increase is about $600 million in outstanding. Get people drawing on their lines, perhaps that could be helpful. We'll see what the rate environment looks like with regards to mortgage.
We'll see what the economy looks like for consumers to improve their home and leverage interbank. There are some opportunities for us to outperform those numbers. If the economy kind of continues along its current path, it's still fairly healthy and, you know, inflation's coming down. I think we have some opportunity to outperform there.
Great. Appreciate it, uncertain. Thanks.
Our next question comes from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your question.
Morning, Gerard.
Hey, John. How are you? Hi, David.
Hey, Gerard.
Can you guys share with us, you give an interesting slide in your deck about how your deposit customers have more deposits in their accounts than Pre-pandemic? I think it's slide 17. Have you reached out, what's driving these numbers? Because obviously you hear about the savings rate nationally is down, but you and your peers are showing numbers like this. I was just wondering if you could share with us some of the trends that you're seeing here that keeps these balances the way they are.
Yeah. The specific page on 17, on the right-hand side, we're talking about those customers that had less than $1,000 in their account. That, you know, compared to, you know, the end of 2019, they have 6 times the balances. A big driver is that cohort was the recipient of a lot of stimulus. That stimulus could have come in the form of absolute transfer payments.
It could have come in the form of minimum wage increases. Those are permanent. What we've seen is that our customers actually are making more money, and they're keeping their spending under control even though we have inflationary pressures. You know, that cohort has had more wage growth than most everybody else, and we don't see it going away.
We're a bit surprised, we're watching it every month to see if there's a change. I think the slide was fairly consistent with what we showed you last 1/4 as well. you know, you're really talking about just the consumer on page 17, business customers continue to have more liquidity as well.
I got it. They're having better wage growth than most people on this call then, right, David?
Yes, sir.
Moving on to slide 19. In the high-risk industry segments, a couple of questions. One, can you share with us maybe you addressed this already in the earlier comments on this slide. In the office space, is it mostly the class B and C or class B that you're more focused on than class A? Second, could there be other industry segments that could show up in this slide 6 months from now or 12 months from now?
Yeah, Gerard, I'd say with respect to your question about office, that would be accurate. We're focused on, let's say, the non-Class A. 82% of our portfolio is Class A. 63% is in the Sun Belt. About 36% of our portfolio is single tenant.
The portion that we are concerned about would be Class B space. A good percentage of it is also in suburban markets, of 74%, I think, in suburban markets. In terms of industries or segments that we have some concern about, would say that we're still watching senior housing closely. I think it's performed okay post-pandemic, but it's an area that we had some concern about rising cost, availability of labor, things that impact that particular segment. Then consumer discretionary.
As people continue to feel the pressure of rising costs and/or the uncertainty of the environment, and as unemployment begins to moderate a bit, we think that consumer discretionary is an area that could be impacted.
Very good. Thank you.
Our next question comes from the line of Terry McEvoy with Stephens. Please proceed with your question.
Morning.
Hi. Hi, good morning. Thanks for taking my questions. Maybe first one, I was hoping you could provide a little bit more details on, I guess, it's slide seven in one of those footnotes, specifically how the $40 million security hedge benefit in the fourth 1/4 will, and I'll put in quotes there, migrate to loan yields, as those hedges on loans mature. I guess from a high level, trying to make sure I understand the impact of that $6+ billion hedge on securities that matured last 1/4.
Yeah, sure. what we did at the end of December of 2021 is we wanted to add some more sensitivity to the fourth 1/4. We had some hedges that were maturing in that fourth 1/4 that receive-fixed swaps, but we wanted to move that and have those effectively terminate a 1/4 earlier.
We could have torn those up, but it would have taken a lot of effort to do so because there were a bunch of small notionals in there, and the cost and time to do that, really, there's an easier way to do it, which is we purchased a pay-fixed swap for that 1/4. When that sensitivity came back, it generated about $40 million in the 1/4.
Our sensitivity naturally comes back in the first 1/4 because we have receive-fixed swaps that are maturing, right at the end of, right at the end of the year. That sensitivity came back naturally in the first 1/4, and that's why you won't see a decline due to this $40 million that we had in the fourth 1/4. That is also why we've been able to give you guidance that we're gonna grow NII in the first 1/4 somewhere between 1% and 3%. It's not a cliff. You don't need to worry about, having a cliff effect for it. That make sense?
It does, yeah. As a Follow-Up, and I don't mean to be too cute, but I've had a few people ask me, if I look at your 1Q and full year 2023 NII guide, is the fourth 1/4 appears lower than the first 1/4. Maybe could you just talk about kind of the trajectory of NII as you think about it today?
Well, we, you know, we've given you a guide for the year of 13%-15% up. We've also given you a guide from the fourth 1/4 to the first 1/4 growth of 1%-3%. Obviously, there's more pressure as after the Fed stops raising rates. For a 1/4 or 2, you're going to see deposit costs continue. They lag, you're gonna continue to see pressure after that.
It's gonna affect everybody in the industry that way. You'll see that decline at some point, 1/4-over-quarter, during the year. That's why it's harder just to extrapolate the fourth 1/4. But, you know, we'll see where the Fed goes. You know, our guidance is predicated on the December forwards. If that changes, then, you know, we'll come back and update our outlook.
That gives you enough information to be able to model and do your sensitivities. Yeah, there will be some declines in NII based on the forwards, sometime during 2023.
Thanks for all the color. Have a nice weekend.
You too.
Thank you. You too.
Our next question comes from the line of Dave Rochester with Compass Point. Please proceed with your question.
Good morning.
Hey, good morning, guys. Nice 1/4. Had a Follow-Up on capital. You guys had a nice bump up in ratios this 1/4, just given the loan growth outlook you're talking about, it seems like you'll be at the top end of that target range for CET1 by the end of 1Q. I know the buyback hasn't been a big priority for you recently. At what point do you think that it might make sense to turn it back on?
You know, as we think of capital allocation, before I get there, let me point out one thing. We do have the impact of the regulatory change that'll hit us in this first 1/4, as everybody. That's about 10 basis points working the other way.
Your question is broader. How do we think about capital allocation, including repurchases? First off, we wanna use our capital to support our loan growth. We wanna pay a dividend in the 35%-45% range. We've been at the low end of that, we would like to operate over time, and at least in the middle of that. We wanna use some of our capital for non-bank acquisitions, in particular to bolster our non-interest revenue as we discussed. I forgot who asked that question.
You know, we use the share repurchases to toggle to keep our capital where we want it to be, which we said would be at the upper end of our range of 9.75%. We just think that's prudent with uncertainty. Doesn't overly negatively affect our return. If we go meaningfully over that, we could turn on share repurchases, we'll just have to see. The capital generation should be very strong in 2023. We should have enough to do all things I mentioned. You know, if we can't put our capital to work, you know, doing a non-bank acquisition, then we'll give it back to the shareholders.
Okay. Appreciate the color there. Back on the $3 billion-$5 billion deposit runoff outlook you talked about earlier. Was glad to hear you seem to go conservative with assuming all that runoff was in non-interest bearing deposits.
Was curious regarding the big picture, what you're seeing in the book that gets you to that $3 billion-$5 billion range, and how sensitive is that to a stronger move up in Fed funds if we end up seeing that? Then how are you thinking about funding that runoff? Where if that's gonna come from the securities book, which is lower rate, or if you're assuming some of that or most of that comes out of cash at this point in your NII outlook?
Yeah, we have plenty of cash right now to take care of that runoff, that's not big deal. That $3 billion-$5 billion, there's some corporate changes in there that'll be seeking rates. There's some consumer changes that are seeking rates. Historically, movements like this. Late cycle. We're getting there. We all think that we're getting towards the end of the cycle, people will look to capture that upside so they can lock in the best rate before rates start going the other way.
You know, how much conservatism we have in there? We'll see. You know, we had a pretty big run-up in deposits, $40 billion during the pandemic, and we're holding on to quite a bit of that, more so than we originally thought.
We think it's prudent to put in this runoff of 3 to 5, and again, conservatively all in NIB.
Great. Thanks, guys.
Our next question comes from the line of Bill Carcache with Wolfe Research. Please proceed with your question.
Morning. Good morning. Morning. Could you speak to concerns that we could see the mix of time deposits and non-interest-bearing deposits return, potentially not just to Pre-COVID levels, but back to Pre-GFC levels in this environment?
You know, you've given a lot of great detail on the strength of your deposit franchise, but it'd be great to hear your thoughts on sort of that risk, both broadly at the industry level and more specifically for Regions as we look ahead from here.
Yeah, you're breaking up a little bit, but I think what your question was is how do we think about time deposits versus non-interest-bearing deposits and where will we settle out over time. We're sitting here today at 39% non-interest-bearing. There have been some movements out of that to, because we were over 40%, into CDs.
We do believe there's going to be some remixing, that's built into our beta assumption of 35% through the end of the year. We still think we'll have more NIB than most everybody because that's the nature of our deposit book. you know, very granular deposits, in particular on the consumer side, where we have leading primacy. That makes a difference. Money goes in, money goes out. They're not seeking rate. They use it as that's their operating account.
We believe that we will continue to see some decline in the NIB. Again, conservatively, we put $4 billion out of that. We think there's probably a chance that there'll be. It won't all come out of NIB, but we thought that was the best thing to do from a guidance standpoint.
That's very helpful. Thank you. Then separately, I wanted to follow up on your comments around the NIM protection that you've put in place. How would you respond to the view that the downside protection that banks are putting on in this environment doesn't make a lot of sense because of the negative carry associated with it? Since the forward curve discounts everything that we see in the current environment, you're effectively just investing at whatever, you know, the yield curve is, wherever the yield curve is at the moment.
The most important thing to remember is our hedging strategy is not meant to generate increases in NII. It is a risk reduction measure. It's a hedge. It's to protect us in low rates. When you have a deposit franchise like we do that has lower costs than our peers, and that's the way it's been historically, as rates come down, we don't have a mechanism to protect our Net Interest Margin because we can't lower deposit costs much as low as our peers can.
Therefore, we have to do it synthetically, and that's what the hedge program does. We set these up generally forward starting, so we don't have negative carry until they start, or the risk of negative carry until they start.
Frankly, if we do at that time, that means rates are higher and the rest of our book is earning that much more, and we're okay with that. What it means is, yes, it costs us a little bit in NII, but we have a leading margin, so we're okay. You can't think of it as a trade, as some people talk about it as being a trade. That's not what it is. It's a hedge to protect us in low rate.
That's very helpful. Thank you for taking my questions.
Okay.
Thank you. Your final question comes from the line of Jennifer Demba with Truist Securities. Please proceed with your question.
Good morning, Jennifer.
Good morning. Question on loan growth. I'm just curious how much competitive retrenchment you're seeing from the banks you compete with most often, and how offensive are you willing to get for credits that, you know, look really attractive right here?
I would say, first of all, plenty of competition out there. While there are certain segments, particularly real estate, where there are some competitors who are not as active today for a variety of reasons. In general, the market is very competitive, whether it be large banks, regional banks, smaller banks that we compete with.
We've got to be actively calling on our customers and our prospects and being very diligent in our activities, making sure that we're in the market in front of customers. When we're doing that, we get opportunities. With respect to how aggressive we wanna be, we don't change our approach to how we think about credit risk management, how we think about pricing and structure. We wanna win because we have expertise, because we provide really good ideas and solutions to customers.
We think that resonates, as a result, has helped us continue to build on growth in our portfolios.
Great. Thanks a lot.
That's all the calls, I think. I'd just end by saying we're awfully proud of our 2022 results and the momentum that we're carrying into 2023. We've worked hard over the last 10 years to remake our business and to build a balance sheet, an income statement, and importantly, a culture of risk management that will allow us to deliver consistent, sustainable performance, and we think we're seeing that now.
We're gonna continue to focus on organic growth and investing in our business, and we believe that we'll continue to deliver the kinds of results that you've seen in 2022. Thank you for your interest in our company, and have a great weekend.
This concludes today's teleconference. You may disconnect your lines at this time.