WBS
#Given today's curve and if there is more downward pressure on the long end, you would see more pressure on NIM going forward, beginning even in the second quarter.
I mean, we haven't seen it all flow through yet.
So the first quarter we feel pretty good about.
But there is still ---+ the impact of the current curve is not fully impacted or is not fully factored into Q2 to Q3 and Q4.
So floating rate assets, which we have talked about a lot.
So C&I, CRE, home equity, those are a big part of the expansion.
Growth in our consumer personal portfolio is another component.
No lift in deposits.
We have seen some pressure on only the government side.
But, for the most part, all our retail deposits are still at the same costs.
We do have slightly higher borrowing costs.
And, the wild card, Mark, as you know, is always going to be the betas on the retail side and how the market reacts to it.
But what is encouraging is, no one is moving right now.
So the bigger driver, the biggest driver comes from our floating rate assets.
So if we are 5 to 7 basis points, that is the bulk of that expansion.
And then, obviously, it assumes no move on the retail deposits.
Yeah, sure, Mark.
This is <UNK>.
First of all, we are sort of underweight when you look at our commercial real estate exposure against our capital base.
And I think you know our portfolio on the commercial real estate side tends to skew institutional, so we have sort of larger higher-quality buildings with strong sponsors, and that has always been our modus operandi.
And our portfolio credit asset quality is in pretty good shape.
If you talk to Bill Wrang, who runs our CRE group, and you try and get out of him a comparison to pre-Great Recession to now, he still thinks that the underlying fundamentals, as long as you are dealing with good real estate and strong sponsors, are much stronger than they were heading into the last cycle.
So I think we are cautious, but we are bullish and optimistic that we are not on the precipice of another bubble in real estate.
And we underwrite ---+ for instance, we love apartments, we love multifamily, but we are not a participant in a lot of the broad metro multifamily programs.
So we look at specific sponsors, specific properties, and specific real estate, and underwrite to those circumstances.
So I would say we are aware.
We are cautious.
We kind of are aware of where we are in the credit cycle, but we are not too nervous about the underlying fundamentals in real estate right now.
That is a loaded question, Mark.
You know, I think competition is fierce, and so I think when you go from the very top in the sort of corporate space and the institutional space all the way down to community banking real estate and where values have been, a lot of people are putting a lot of money to work in the real estate space.
And, obviously, I just think you have to be careful about the quality of the portfolio, where rents are going, what the tenancy looks like.
So I am sure people are being more aggressive than we are, but I can't really comment on seeing significant trends in the market.
I think from a deposit standpoint, it is probably about $600 million ---+ $650 million.
And then there is corresponding loans with that as well.
So we are saying ---+ for example, <UNK>, we are saying, if you get $1 billion over five years, you are going to front-end a lot of that.
So you would be halfway or more by the end of the second year, and that is the way to look at it.
And then you are going to find loan support coming along.
Private banking is going to be in there generating some revenue.
This is a great opportunity for all of our businesses.
So it is going to be deposits and loans and fee income as well that will get us to breakeven in 2017.
I think it would be good with Q1.
It would impact Q2 more.
That is why we give them a range.
Yes.
And we give you a range, and I think it generally takes about 90 days to move through.
I think we feel pretty confident in Q1 right now, but Q2 would obviously be the one.
I think as far as the level, we will probably be flat on the securities.
I mean, our capital ratio suggests that we should be growing more 100% risk-weighted assets as opposed to zero or 20% risk-weighted assets.
From a reinvestment standpoint, generally, what we are buying is NBS, say, a term of four to five years at [250].
Munis to some smaller extent, a term of eight to nine years at kind of [450].
And then floating rates at CLOs and CNBS, which has which has been more of a challenge lately, but those reprice basically one month ---+ they are about LIBOR plus 200.
And then, some agency MBS, which is ---+ we've been generally by fixed rate and with a duration of four years at, say, a rate of [275].
That is kind of what we are doing going forward.
Sure.
I will just say we can't speak for why they have made their choices, but we have said before, this is a business of scale.
Unless you have significant scale, it is hard to really make a go of it.
So that is a significant advantage that we have at our size.
We also think that there is lots of institutions that have decided it isn't a strategic focus for them and they are not going to devote the resources that are required to get people into it.
So in some cases, they are an offloading.
We have looked at a couple of transactions.
And we also always keep our eyes open and try to stay on the pulse of the market.
At least one of those recent transactions was based on a long-standing relationship that already existed, whether it was sort of a joint operation there.
And then, in other cases, banks are just saying that that is not their primary strategy, nor can they make it profitable to the extent that we can, and that is what is driving their decisions.
And we think that does represent opportunity for us going forward.
I want to reiterate that ---+ and we have said this over and over, that our number one responsibility is to make sure that we have a smooth and orderly transition of the JPM acquisition, and that is what is occupying 99.9% of our time.
Now that we are getting through that, we are going to be looking outward more than we were before, and we will be taking a hard look at some of those opportunities.
I mean, in terms of what we would see is when, obviously, proceeds get aggressive or amortization schedules or tenors, and we try not to obviously chase out of our underwriting box.
And I think, right now, I think if you look at it ---+ as I said earlier, if you look at the underlying fundamentals, as long as you are picking the right real estate with the right borrowers, we are not into that red flag warning zone yet.
But I just think you have to really stay disciplined, and that has been our mantra.
And, right now, if you look at the profile of our commercial real estate portfolio under any metric, whether it be LTV, whether it be proceeds, the way we are underwriting and sensitizing our underwriting, we are not stretching the bounds, and I think when you have to do that to compete in the market, that is when you start to raise the red flags.
And then I just want to say one more thing.
When you look at the radar screen here and what the regulators are primarily focused on, they are looking at the growth rate in the portfolio, and they are looking at the portfolio as a percentage of capital.
And we are well under the target ranges that were included in some of that guidance.
And so that gives us a lot of comfort.
But mostly what we are comfortable about is the quality of our underwriting standards.
And when they get in there and say, well, how much I/Os are you doing I/O and what are you doing with your tenors and the like, that we are going to come out in a very strong position.
So however you look at it, we are highly confident in the quality of our CRE operations.
And one last point to put a finer point on that, Matt, is we size our loans using a higher interest rate than actual rates because we understand that that is some risk.
And so we are willing to walk away from deals if we don't have that amortization cushion and that cash flow cushion, and that would be another red flag.
If you are fully sizing the loan to today's interest rates, you are ---+ potentially could be asking for trouble.
So I hope that is helpful.
Yes.
I mean I would say, the good news is, in terms of our expansion and significant originations in the fourth quarter, the percentage of share national credits in our portfolio actually went down period over period.
So it evidences a lot of direct underwriting and bilateral underwriting.
We don't have a concentration in any of those sectors you are talking about, the broader industrials, chemicals, commodities.
Our strategy in shared national credits is really in our footprint to the local companies that we can cross-sell HSA Bank, cash management, private banking to, or in some of our industry specialties, and our industry specialties right now are things like TMT, environmental services, healthcare.
So that is where you would see them.
And, fortunately, in those service companies, they are not being impacted from an industry perspective like some of the ones you are mentioning.
So I would say that it is not an issue for us right now.
Yes.
No.
Maybe I wasn't as clear as I could have been, but that is the primary driver of the NIM expansion.
So it is dropping down.
I don't think it has been evident yet.
I mean we have been saying it all along that not only is distributor remediation in that market not impacting us because we don't have a lot of credit exposure, but it surely must benefit most of our other commercial customers.
We really haven't seen changes in behavior or any specific information that indicate that benefits flowed through their P&Ls or that they are investing in other ---+ those savings in other areas.
We have seen our retail deposits go up, so that could be one offshoot of this.
We haven't seen ---+ and it might be early.
We haven't seen much of an increase in interchange transaction volume besides the normal seasonality.
It is hard to sort of pull that out because the fourth quarter has holiday shopping and things like that as well.
So we may see it, Bernie, going into Q1 or more of it going into Q1.
Our debit card transactions, if you were to just look at it quarter over quarter or year over year, they are up 4%.
So that may be an early indicator of some ---+ maybe some additional volume.
But it is too early to tell.
One thing we know they are doing with it is they are buying more cars, but we do think they are saving more.
I want to thank you all for joining us, again, today.
We think we have produced a sound report here for the quarter as well as for the year.
It is a tough operating environment, but we are very positive about our position and our potential to generate economic profits.
Thank you all very much.
