Comerica Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 19, 2023

There are 7 speakers on the call.

Operator

Welcome to the Comerica 4th Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. Please press 1 then 0 again. I would now like to turn the conference over to Kelly Gage, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks, Greg. Good morning, and welcome to Comerica's Q4 2022 earnings conference call. Participating on this call will be our President, Chairman and CEO, Curt Farmer Chief Financial Officer, Jim Herzog Chief Credit Officer, Melinda Chasse and Executive Director of our Commercial Bank, Peter Sepsik. During this presentation, we will be referring to slides, which provide additional details. The presentation slides and our press release are available on the SEC's website as well as in the Investor Relations section of our website, comerica.com.

Speaker 1

This conference call contains forward looking statements. In that regard, you should be mindful of the risks and uncertainties that can cause actual results to vary materially from expectations. Forward looking statements speak only as of the date of this presentation, and we undertake no obligation to update any forward looking statements. Also, this conference call will reference non GAAP measures. And in that regard, I direct you to the reconciliation of these measures on our website, comerica.com.

Speaker 1

Please refer to the Safe Harbor statement in today's earnings release on Slide 2, which is incorporated into this call as well as our SEC filings for factors that can cause actual results to differ. Now, I'll turn the call over to Kirk, who will begin on Slide 3.

Speaker 2

Thank you, Kelly. Good morning, everyone, and thank you for joining our call. In 2022, we generated another year of record earnings. And in many ways, it has been an inflection point for our company. Colleagues return to the office, reinvigorated, ready to support our customers and reimagine the way we work, and we delivered results.

Speaker 2

Strong broad based loan growth and management of loan and deposit pricing in a rising rate environment drove revenue to an all time high of 3,500,000,000 Frudent expense discipline generated an efficiency ratio of 56% and earnings per share increased to $8.47 Our strategic investments and balance sheet management help produce superior returns and position us to maintain a high level of performance. Our refreshed logo and core values reinforce our commitment to being a leading bank for business complemented by strong retail and wealth management solutions. Investments in more collaborative workspace, digital tools, enhanced products and streamlined processes better enable our colleagues to put our customers 1st, and create a more elevated experience. Striving to be a force for good in our communities, we have achieved approximately 85% of our 3 year goal to to provide $5,000,000,000 in small business loans and deploy unique solutions such as our Latin American Business HQ, which provides collaborative space in the southern sector of Dallas. Publishing our inaugural TCFD report was an important milestone in our corporate responsibility journey and highlights our long term commitment to sustainable business.

Speaker 2

The report outlines our climate strategy, including supporting our customers, integrating climate issues into our business and reduction of our environmental footprint. As of year end, green loans were 2,700,000,000 A 60% increase over 2021, assisted by our Renewable Energy business, which has already exceeded expectations with almost $350,000,000 in Our commitment to corporate responsibility was once again recognized as we were included for our 4th consecutive year and Newsweek's 2023 list of America's Most Responsible Companies

Speaker 3

and also included as one of

Speaker 2

the greatest workplaces for diversity. Volunteerism remains a priority, and I'm incredibly proud of the over 66,000 hours our colleagues committed to positively impacting their communities. Slide 4 provides further detail on our full year results. Relative to 2021, Average loans increased $1,400,000,000 or 3 percent to over $50,000,000,000 Putting aside PPP activity, loans were up $4,000,000,000 or 8%, our highest organic growth rate in well over a decade with contributions from most businesses. Following growth of almost $13,000,000,000 in 2021 driven by government stimulus, deposits decreased $2,200,000,000 in 2022 as customers utilize excess cash and we executed strategic pricing actions.

Speaker 2

Revenue increased 19%, driven by higher interest rates and strong loan growth. Non interest expenses reflected strategic investments, higher compensation in conjunction with favorable performance and modernization initiatives totaling $38,000,000 Credit metrics were excellent as driven by net charge offs of only 3 basis points and problem assets remain well below our historical norms. In summary, a strong performance with an ROE of 18.6% at an RMA of 1.32%. In the 4th quarter, we generated earnings of $350,000,000 or $2.58 per share as outlined on Slide 5. Our financial results were excellent with all time high revenue of over $1,000,000,000 up 4% over the Q3.

Speaker 2

Average loans grew almost $1,300,000,000 which includes a $329,000,000 decrease in Mortgage Banker where volume has been impacted by higher rates. Average deposits declined $2,600,000,000 However, balances stabilized Quarter end, we began to see some positive trends. Credit quality was exceptional with net recoveries and our percentage of criticized loans remains well below our historical average. We built reserves in conjunction with growth and a slightly more negative economic outlook. Expenses reflected investments in our business and support our revenue generating activities.

Speaker 2

It was a record quarter and a record year. We are excited about the investments

Speaker 3

we are making and not only to support

Speaker 2

our colleagues and customers, but also to sustain our strong performance as we move forward. And now I'll turn the call over to Jim, who will review the quarter in more detail.

Speaker 3

Thanks, Kurt, and good morning, everyone. Turning to Slide 6. Broad based loan growth continued and exceeded expectations with average balances increasing $1,300,000,000 or 2.5%. Commitments, which can be a good indicator of future loan growth, increased 5% with contributions from most businesses. Utilization remained stable at 45% and remained below historical averages as commitment growth outperformed the increase in borrowings.

Speaker 3

Loans in our commercial real estate business increased nearly $880,000,000 as the pace of payoffs slowed and we fund the construction projects already in the pipeline. Consistent with our selective strategy, nearly all of the growth was in Class A multifamily or industrial projects built by large developers that we know well, providing significant equity Credit quality in this portfolio continues to be excellent. Criticized loans remain extremely low and we see no meaningful signs of negative migration. With our bankers that average 20 years of experience, A proven operational process, stringent underwriting and consistent credit monitoring, we believe our approach results in a conservative portfolio appropriately positioned to navigate the current environment. National Dealer Services loans grew over $300,000,000 as a result of new relationships and Continued M and A activity by our customers.

Speaker 3

We continue to see a slow rebound in inventory levels and with consumer auto demand dampening and Supply chain improving, the industry anticipates inventory levels to continue increasing throughout 2023. Corporate Banking, Wealth Management and Entertainment also contributed significantly to our strong loan growth. Elevated interest rates, lack of housing inventory and normal seasonality continue to pressure mortgage banker as average loans declined $329,000,000 for the quarter. MBA forecast show volumes remaining at depressed levels through the Q1 before potentially increasing. Loan yields increased 81 basis points to 5.45 percent, primarily reflecting the benefit from higher rates.

Speaker 3

On Slide 7, average deposits declined as customers continued to utilize funds in their business and seek higher yield. However, balances ended the quarter better than we expected as we adjusted pricing in conjunction with aggressive Fed rate hikes. The strategy worked as period end interest bearing deposits increased to $31,500,000,000 While we did see a modest uptick in non interest bearing deposits We attribute it largely to traditional seasonality with elevated business activities such as customers preparing to make tax payments and distributions in the Q1. We continue to believe future FOMC monetary actions are key to the timing of Deposit Stabilization. Our overall mix remained favorable with 56% of average non interest bearing deposits, largely in operational accounts reflecting our commercial orientation.

Speaker 3

Our liquidity position was strong with a loan to deposit ratio of 75% below our historical average. Beyond deposits, we have significant capacity to support loan growth, including repayments in our securities portfolio and efficient borrowing channels such as broker deposits and federal home loan bank lines. Interest bearing deposit costs averaged 97 basis points and reflected the pricing actions taken in the 4th quarter. Our dynamic pricing strategy will continue to balance our funding needs with customers' objectives and the rate environment. Average balances in our securities portfolio on Slide 8 declined $1,400,000,000 primarily reflecting the full quarter effect in the 3rd quarter's mark to market adjustments.

Speaker 3

In addition, we are not reinvesting pay downs and are instead repurposing those funds for loan growth. Relatively stable long term rates resulted in a positive mark to market adjustment of $73,000,000 at period end. Our total net unrealized pretax loss of $3,000,000,000 affects our book value, but not our regulatory capital ratios. While we maintain the portfolio as available for sale mostly for liquidity purposes, we typically hold these securities to maturity, in which case the unrealized losses should not impact income. Despite a reduction in the overall portfolio size, securities income remained relatively stable due to higher yielding MBS purchases in the 3rd quarter replacing the pay down of lower yielding securities.

Speaker 3

Turning to Slide 9. Net interest income increased $35,000,000 to

Speaker 2

a record

Speaker 3

$742,000,000 and the net interest margin increased 24 basis points. The benefit from higher rates lifted loan income $102,000,000 and added 52 basis points to the margin. Loan growth added $19,000,000,000 and 3 basis points. Other portfolio dynamics added $1,000,000,000 or 1 basis point. And while the market remains competitive, we have successfully maintained our pricing discipline.

Speaker 3

As I mentioned, securities income was relatively stable. As far as deposits of the Fed, higher rates partly offset by lower balances added $5,000,000 11 basis points to the margin. Adjustments to deposit pricing reduced income by $63,000,000 while lower balances added 1 basis point. Higher rates on our floating rate wholesale debt in addition to our August subordinated debt offering had a $29,000,000 impact. Altogether, the rise in rates provided a net benefit of $53,000,000 to net interest income.

Speaker 3

Credit quality remained excellent as outlined on Slide 10 with $4,000,000 of net recoveries along with a reduction in our already low criticized and non accrual loans. In fact, inflows to non accrual loans were only $16,000,000 one of the lowest levels in recent history. Loan growth and weakening economic forecast drove the provision expense up to $33,000,000 and the allowance for credit losses increased modestly to 1.24 With our consistent disciplined approach as well as our relationship model and diverse customer base, we believe we are well positioned to manage Through a recessionary environment. Non interest income on Slide 11 was robust at $278,000,000 and was impacted by volatility in the rate environment and equity markets. Deferred comp, which is offset in expenses increased $9,000,000 generating a $6,000,000 return for the quarter.

Speaker 3

Higher rates earned on funds associated with settling our internal derivative portfolio drove risk management income up $8,000,000 The quarterly variance in the Visa Class B total return swap along with the increase in card and brokerage, all contributed positively to the quarter. As expected, customer derivative volumes slowed from recent strong activity and there was a $1,000,000 favorable CVA adjustment, which is a $4,000,000 reduction from the 3rd quarter. Deposit service charges reflected positive momentum in treasury management, but they were more than offset by higher earnings credit and lower fees associated with deposit balances. Biduciary income was negatively impacted by fees related to equity returns and BOLI had a seasonal decline of $2,000,000 Despite this quarter's fluctuations, we have a solid core product set delivering a strong level of non capital consuming fee income with promising growth potential. Turning to expenses on Slide 12.

Speaker 3

We've made significant progress towards our modernization objectives, consolidating banking centers, enhancing corporate facilities and achieving an important milestone in migrating our technology. In all, we incurred $18,000,000 in expenses for the quarter, which slowed the estimate we previously provided due to better than expected severance and asset write downs. Excluding modernization and deferred compensation, which is fully offset, non interest expenses increased $19,000,000 In support of our growth initiatives, we successfully attracted talent and continued to invest in products, further elevating our customer experience. Increases in T and E, Legal and Marketing were correlated with the strong business activity in the Q4 and driving future revenue with initiatives such as Retail Reimagined. Foundational investments in our infrastructure enhance controls and compliance in this evolving landscape as well as making us more nimble with regards to technology development.

Speaker 3

We have some inflationary pressures, including salaries for new staff and recent merit increases and saw seasonal increases in occupancy, marketing and other related expenses. Overall, we successfully balanced investments and other pressures with accelerated revenue growth, resulting in a solid efficiency ratio of 53%. Slide 13 provides details on capital management. With record earnings, our strong capital generation outpaced Capital needed for loan growth, increasing our CET1 ratio to an estimated 10.02%. As always, our priority is to use our capital to support our customers and drive growth, while providing an attractive return to our shareholders.

Speaker 3

We closely monitor loan growth, profitability and credit trends as we balance maintaining our CET1 target of approximately 10% with our dividend and share repurchase strategy. Our common equity increased 2% benefiting from strong profitability and the impact from OCI losses was minor. Excluding the AOCI losses, our common equity per share increased over 3%. Also note that our tangible common equity ratio was 4.89%. However, excluding AOCI, it increased to 9.30%.

Speaker 3

Our outlook for 2023 is on Slide 14 and assumes no significant change in economic environment. We expect loan momentum to continue and produce another year of strong growth across all of our business lines, resulting in average loans increasing 7% to 8%. The pace of growth should be relatively consistent at 1% to 2% each quarter. We expect average deposits Decline 7% to 8% as customers continue deploying operational deposits or seek higher yielding options. We anticipate a seasonal decline in the Q1 followed by a partial rebound and then stabilization as we move through the year.

Speaker 3

Comparing Q4 year over year, deposits are projected to be down only 1% to 2%. As Previously mentioned, we continue to believe the timing and scale of deposit activity will be influenced by FOMC monetary policy and economic activity. With this uncertainty, forecasting deposit levels is very challenging. As we look at mix, we project interest bearing growth driven by strategic pricing actions. By year end, we expect to be closer to our historical fifty-fifty deposit mix, still very favorable.

Speaker 3

As far as pricing, we expect the Q1 to reflect the full quarter impact from rate actions we took in the Q4. And after that, rate adjustments should be more modest as we continue to focus on customer relationships, competitive dynamics and our funding needs. We project strong net interest income up 17% to 20% over our record 2022 level, which reflects the full year benefit from higher rates, We are assuming rates follow the twelvethirty one forward curve. 1st quarter will be impacted by 2 fewer days, Seasonal deposit outflows and continued deposit pricing actions. We expect net interest income to increase through the year as we continue to benefit from rising rates and loan growth in conjunction with expanding relationships and acquiring new customers.

Speaker 3

Credit quality has been excellent and we expect it to remain strong. Therefore, we forecast net charge offs at the lower end of our normal range of and our reserve level. We expect non interest income to grow 5%. Customer related income is projected to increase, particularly in card due to our payment strategy and fiduciary income, which benefits from investments in our wealth management platform. Also, we forecast an increase in risk management income related to our internal hedging position.

Speaker 3

Note, this income will vary over time as rates move. Deferred comp was an $18,000,000 drag in 2022, which we assume will not repeat. On the other hand, Elevated volumes of customer derivatives that we saw in 2022 are not expected to continue. However, we believe they have stabilized at strong level and are poised to grow over time. A reduction in our deposit service charges is expected due to an increase in commercial account ECA rates and adjustments to our retail NSF fees.

Speaker 3

We also assume BOLI returns to a historical run rate of approximately $9,000,000 to $10,000,000 a quarter and the $7,000,000 CVA benefit does not repeat. 1st quarter is expected to be impacted by seasonality and syndication fees and we assume deferred comp of $6,000,000 in the 4th quarter will not repeat. The second half of the year is expected to be stronger than the first as loan syndication activity, card fees, derivatives and other products trend up. Our 2023 expenses are expected to grow 7% or 4% on an adjusted basis, excluding the $64,000,000 increase in pension, a $19,000,000 reduction in modernization charges and assuming the $18,000,000 in deferred comp benefit does not repeat. Drivers of the 4% include the annual merit increase and other inflationary pressures as well as additional growth in costs tied to revenue generating activity such as higher staff levels and outside processing related to card.

Speaker 3

Further, we estimate a $15,000,000 increase in FDIC expenses and higher software We expect these headwinds to be partly offset by resetting performance comp to normal levels. 1st quarter expenses are expected to be lower with the decline in performance comp, seasonal declines in advertising and staff insurance, as well as other items that are expected to decline from an elevated 4th quarter level such as modernization expenses, deferred comp and legal costs. Annual stock compensation is expected to partly offset these reductions. Remaining modernization expenses are expected to be weighted more towards the second half of We remain committed to prudent expense management, including investments we are making to increase revenue and enhanced efficiency evidenced by an efficiency ratio forecasted below 55% for 2023. In summary, we drove robust loan growth and fee generation in 2022.

Speaker 3

In addition, we benefited from higher rates while executing our hedging strategy And manage deposits, credit and expenses. We generated record revenue and EPS, reduced our efficiency ratio and delivered strong returns. Our Q4 has positioned us well for a strong 2023. Now I'll turn the call back to Curt.

Speaker 2

Thank you, Jim. By leveraging our more predictable earnings stream, we are better able to strategically invest in our business. Slide 15 illustrates our roadmap. Aligned with our long term strategy, these initiatives enhanced our ability to continue to exceed our customers' expectations. Modernizing our operations and further securing our foundation creates a stable but agile platform, enabling us to better address evolving needs.

Speaker 2

Enhancing our capabilities based on the voice of our customers allows us to invest efficiently driving fee income, Retention and new acquisition. Selectively exporting our business model to high growth markets, capitalizing on our expertise and relationships to broaden our reach as we strive to grow at a faster pace in the economy. The calibration of our products, markets and delivery is critical to sustaining our legacy while achieving our vision for the future. Slide 16 highlights our compelling story. Our business demonstrated ability to deliver broad based revenue growth and our pipeline, commitments and product innovation creates further momentum.

Speaker 2

As a leading bank for business, complemented by strong retail and wealth management capabilities, We've got our size, business mix and market strategy to create a unique relationship banking model. Tenure of our colleagues and customer relationships is evident to success of that Credit expertise allows us to not only minimize risk, but also serves as a customer acquisition tool, demonstrating our understanding of the business and needs. Looking into 2023, we expect another year of exceptional results. While we continue to make critical investments, which project positive operating leverage, maintaining strong profitability metrics. We feel our unique position in growth markets with a proven reputation for credit, expense and interest rate management combined to create a powerful investment thesis for our shareholders.

Speaker 2

Thank you for your time. And now we'd be happy to take some questions.

Operator

Please press 1 then 0. You may withdraw your question at any time by repeating the one zero command. Your first question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.

Speaker 2

Good morning. Good morning.

Speaker 4

Hi, good morning. Thanks for taking my questions. I was just wondering for 2023, can you help us with how you expect your funding mix to evolve through the year? And as you mentioned, I mean, it's difficult to forecast deposit growth given the Fed actions in the overall environment. So If you could help us with any updated thoughts on where you might be okay with your loan to debott ratio going and how much flexibility you have there?

Speaker 4

Thanks.

Speaker 3

Good morning, Manon. It's Jim. I will answer that question. Starting with the funding mix, it's really important to us to stay diversified

Speaker 2

So we're using a variety

Speaker 3

of efficient funding mechanisms while keeping some dry powder for future loan growth. And so when we look at what we plan to do in 2023, 1st and foremost, we are funding much of the loan growth. And to the extent we have deposit runoff, we're funding that with securities that we are allowing to mature. That includes both MBS securities that mature at a somewhat predictable rate as well as some lumpy treasury maturities that we have. Beyond that, we are getting a little bit more competitive with our deposit pricing, both in terms of retaining deposits and attracting deposits that might not be currently on our balance And then beyond that, we do have efficient lines of the FHLB, which we plan on using to some extent.

Speaker 3

We do plan on adding some broker deposits, not a lot, but we will add a modest amount likely at some point during the year. And so we will use a variety of We will keep a lot of dry powder on the sidelines to make sure that we can fund ourselves very efficiently going forward. In terms of loan to deposit ratio, It is currently well below historical levels at 75%. We expect it to continue to be below historical levels as we look out in Certainly, for 2023. So no concerns from that standpoint, and we feel really solid In terms of our ability to fund this loan growth and fund any deposits that might run off.

Speaker 4

That's really helpful. So for the securities pay downs, I know you mentioned about $1,000,000,000 a little bit over $1,000,000,000 for next quarter. Can you help us with how that evolves through the year? Are there any other billet maturities coming through in the second half.

Speaker 3

Yes. We would expect the MBS securities to continue to mature at a rate of about $450,000,000 Quarter, we do have the $700,000,000 of treasuries that mature in the Q1 and then we have another $300,000,000 in the Q2 of this year. And then we have a very small tranche, I believe, in December that won't be a big factor for 2023. But we should get somewhat of a boost from those maturing securities as they occur through the year.

Speaker 4

Great. Thanks so much.

Speaker 2

Thank

Operator

you. Next, we'll go to the line of Steven Alexopoulos from JPMorgan. Please go ahead.

Speaker 2

Good morning, Steve.

Speaker 5

Good morning. I wanted to start, so the guidance implies NIM expansion on tap again For the Q1 and we know it's a very fluid situation, but from a big picture view as we sit here today, how do you guys see the NIM

Speaker 3

Good morning, Steve. It's Jim. As you know, we typically don't like to focused on them just because of our business model, and it does tend to be a little bit more lumpy than other banks. We like to focus on net interest income. But to answer your question, we do expect them to be relatively stable in the range that it was in the Q4.

Speaker 3

It may tick up by a few bps As we see securities run off with those lower yielding securities. But I think where we're at right now in the Q4 is kind of the area that we will likely hover in.

Speaker 5

Okay. A couple. Ajit, what's the deposit beta you're assuming in this guidance by year end 2023?

Speaker 3

Yes. Deposit beta is moving as well as of course Overall rate environment, we were at about 26% beta in the 4th quarter. Rates did continue to move through the Q4, so I would say we were approaching 30% beta by

Speaker 2

the time you got

Speaker 3

to the month of December. We do think in the Q1, we will start moving and eventually reach about a 35% beta. And for the full quarter average in the Q1, I do think it will be in that low to mid-30s pushing up to 35%. And Then as we move through the Q2, I do have us moving into the upper 30s. That does include going after some higher price deposits to make sure that we can fund our loan growth in an efficient way.

Speaker 3

And then once we get through the 2nd quarter, as we hover in that upper 30s, if we had some broker deposits, it could push towards about 40. I would then expect it to kind of hold there and that's about the time that rates peak also. So that's kind of the trajectory we're assuming that I see for deposit betas.

Speaker 5

Okay. That's very helpful. And then maybe for my final question, just diving a bit deeper into the decline in non interest bearing you guys are citing customers investing in their business. But I'm curious how much is your Investing in their business, but I'm curious how much is your customers chasing higher rate alternatives? And along those lines, up until this quarter, What we had heard from many of the regional banks was that treasuries were the key competitor.

Speaker 5

But what's coming up this quarter is that the regional banks themselves are really stepping up competition So how much are your customers chasing? And can you talk about the competitive environment right now, particularly from peer regionals? Thanks.

Speaker 3

Yes. I mean, if I understood the question, you were dipping a little bit out in terms of volume there. But our customers, when they do look at the higher yielding options, they are looking at off balance sheet money market funds. And we are increasingly becoming competitive to make sure we can compete That standpoint, and we think that's an efficient way to go. It's certainly better than wholesale borrowings for us.

Speaker 3

In terms of Where the leakage is occurring, we do some surge deposits still in the DDA. And as we talk to customers and look at what's happening in the flows, It does seem like probably 40% of them to the extent 40% of the deposits that have gone off the balance sheet are due to rate. And then the remainder is kind of due to funding CapEx, operations and maybe a variety of other things. So certainly a mixture. We do think to the extent customers are using deposits to fund their operations.

Speaker 3

We view that as a very positive sign. It is consistent with the loan story when you look at Strong loan growth that we've seen and we forecasted, but we are increasingly becoming competitive with money market funds where we feel we need to.

Speaker 5

Okay, great. Thanks for all the

Speaker 3

color. Thanks, Steve. Thanks, Steve.

Operator

Your next question comes from the line of Jon Aftaram from RBC Capital Markets. Please go ahead.

Speaker 6

Hey, good morning, everyone. Hey, good morning. Just kind of a follow-up there, Jim, are you seeing any cresting in deposit pricing pressures? Is it decelerating at all?

Speaker 3

I wouldn't say it's decelerating. I wouldn't say it's accelerating either. It kind of feels like it hit a certain pace in November, December. And The more price sensitive customers have already asked to be repriced. So from that standpoint, you could see the pressure start to step back a little bit.

Speaker 3

And some of these things some of these are discussions that go on for several weeks. So it's really hard to pinpoint exactly when it's cresting, but It's certainly not accelerating, but I do see that momentum continuing probably through the Q1 in terms of exception pricing. In terms of what we need to do with standard pricing, it does feel like that maybe is abating a little bit. But there are always those exception customers that are out there, and I don't expect those to take Big step back over the next quarter. And we'll likely get more competitive intentionally so in terms of just going after Customers that perhaps have moved their balances off balance sheet over the course of the last 9 months.

Speaker 6

Okay. I know you just said you don't like to talk about the NIM, but I'll ask you about it anyway. You're up 170 basis points year over year And you're talking about stability. What kind of threats do you see to that NIM level? I know you've done a lot of hedging, but do you feel like that's Sustainable NIM level in kind of varying up and down rate environments?

Speaker 3

I think the key to that is going to be DDA. That is really the wildcard. It really has the ability to move net interest income a lot. You think about just $1,000,000,000 of DDA movement could Create a $55,000,000 drag in this forward curve environment. So that is going to be the wildcard.

Speaker 3

So we think we can hover Kind of in the upper threes, call the low to upper threes or I'm sorry, mid to upper threes, but more weighted towards the upper threes. But I do The DDA is going to be the key to that assumption and that outcome.

Speaker 6

Okay, good. And then just one quick one to Melinda, expected reserve build, how would you like us to think about that? It seems like credit is very clean and obviously you're talking about the lower end of charge offs. So how do you want

Speaker 1

At least stable. You're going to see continued loan or reserve build that's really consistent with our loan growth. So the reserve right now, we feel is conservatively positioned, we feel really good about it. And assuming no material deterioration in the economic Yes, I think that reserve build will approximate what we have going on from a balance sheet growth perspective. And the current assumptions on The reserve build is for our baseline is a mild recession.

Speaker 1

So I think we've adequately factored in what the current economic forecast is, looks like.

Speaker 6

Okay, okay. That's helpful. Thank you very much.

Operator

And at this time, there are no further questions. I would now like to turn the conference Back to Curt Farmer, President, Chairman and Chief Executive Officer.

Speaker 2

Let me again say that I'm very, very proud of our record quarter. Thank you to all my colleagues for all they do every day to take care of our customers and

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.

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