Brendan Coughlin : I think you nailed that pretty well. I’d say well for the year, we’re projecting slow and steady, continued progress, and it’s a bit of a hopeful coiled spring when the equity markets really come back. But as long as they’re stable, we should see some growth. I’d say the other bright spot is debt and ATM fees that continue to hit records both through customer engagement and primacy and all the investments we made in the health of the franchise that’s also translating into our deposit quality, also some restructure on vendor relations and such that’s giving us a bit of a boost there, too. So that should be a continued area of slow and steady progress. On the other side, there will continue to be a little bit of pressure still on overdraft income and service charges, but we’re sort of near the — that’s in the run rate.
Most of that’s in the run rate. So we’re sort of near the bottom, which is good that we’ll move away from being a headwind for us, real soon.
Operator: Your next question comes from the line of Peter Winter with D.A. Davidson.
Peter Winter : I wanted to ask on credit. John, you mentioned that most of the increase in nonperforming loans was commercial real estate. I was just wondering, was that office related? And if you can just give a little bit more color on what your outlook is for office?
John Woods : Yes. Maybe I’ll just talk about the coverage levels. Just broadly, as you may have seen in our materials that the CRE coverage from an allowance standpoint is around 186 basis points. But when you carve out some of the really high-quality stuff in multifamily and credit tenant lease and life sciences, you get to our general office segment, where we have very healthy coverage of around 5%. So there are some — we are seeing some trends there that are telling us that we should be putting away some reserves to deal with the back-to-office trends that are a headwind in that space. So you got good healthy coverage of around 5%. We are seeing some of that tick into the nonaccrual space. I would say more broadly, that will — even though that goes into nonaccrual, our overall pre-LTVs are typically around 60%.
And so you got to distinguish from non-accruals for actual loss content. And so even though we’re putting some allowance away, we feel like that’s commensurate with the loss content that we see in the book. And I’ll just stop there and
Bruce Van Saun : Hey, Don, do you want to add?
Don McCree : I’ll just say for the office portfolio, but CRE in general, it’s first and foremost, who’s the sponsor and who’s the investor, and we have a very high-quality group of investors that we do business with, which are largely institutional. Second is what MSAs are you in and where are you? And we think suburban will do better than urban. As we said in the comments, we’re heavily weighted to suburban. So we’re going through every single property in the office portfolio. We’ll restructure a lot of them with the sponsors. We restructured one already this year where the sponsor-contributed equity. So we’re comfortable around where we are with the coverage ratios right now, but we’ll be active in restructuring the portfolio. But we kind of like the contours of what we’ve got.
Peter Winter : Got it. And then just as a follow-up, can you just talk about what changed in the updated margin guidance of towards 3.40 versus the prior guidance of 3.50? Is it just the higher deposit beta outlook?
John Woods : Yes. I’ll go ahead and cover that. I mean I think more broadly, it’s two overall comments, really the — just given the pace and speed of rate changes and the impact on the migration of the deposit mix that we expect as you get into 2023 is really most and the majority of what we’re looking at. So — and that migration manifests itself in two ways. It’s really the amount of DDA migration that we see as well as the cost of our relatively low cost deposits that we’re seeing not only within our platform but across the industry. So from that perspective, just kind of marking that to market with respect to what we’re seeing in the trends in the fourth quarter and the rate and curve outlook that we see going throughout the rest of ’23, I would hasten to add the — what’s embedded in there nevertheless, is a transformed deposit platform that back — prior to the pandemic, we would have had DDA percentages that would be in the low 20s compared with a majority of the portfolio being outside of DDA, of course.
But you fast forward to where we are in the fourth quarter, and we’re at 28% of our deposit franchise is sitting in DDA. That’s a significant increase versus pre-pandemic. And we expect to end the year in the sort of the mid- to high 20s in the DDA space, down a little bit from where we are today, but nevertheless, still very high quality. When you add in consumer CRE and consumer savings, which is other low cost, you end up with still about or more of our deposit portfolio sitting in low-cost categories. That’s up from the low 40s prior to the pandemic. So this has been a multi-multiyear transformation of the deposit franchise. So I think we’re basically just calibrating what we expect in 2023, which is with the majority of what we saw in terms of the decline from 3.50 to 3.40.
I think you could also add in what’s going on with the curve and front-book, back-book as well. When you look at it just how quickly rates are rising, the front book originations take a longer time to contribute. And from that perspective, we’re seeing that being a driver as well. And then not only the speed of — I guess, the last point I’ll make is not only the speed of rates rising, but the inversion of the yield curve is something that is also pretty — is a headwind to front-book, back-book. Just to end it with nevertheless, front-book, back-book is a positive tailwind over time. We’re seeing 300 basis point of positive front-book, back-book across securities and our fixed rate lending businesses, that’s still a tailwind. And that’s going to be a driver into 2023 with net interest margins rising just not by quite as much as we thought last quarter.
Operator: Your next question comes from the line of Ken Usdin with Jefferies.
