Jerry Salinas: I think that for 2023, I think probably the bigger unknown in my mind, is more what happens on the deposit side than what happens on the loan side. I think Phil given some good color of what we’re seeing in loans. I think without knowing exactly what happens in the economy, there might be a little uncertainty there. But I think we feel pretty confident, I think it’s that deposit side. So you could because we’ve always said the loan-to-deposit ratio from our standpoint is really a results in fact, right, because we’re really out to grow both deposits from a relationship standpoint and loans. So I think that given that I don’t project that we’ll have the sort of increase in deposits that we’ve had the last couple of years, I expect that to be much more muted in 2023. You may get some improvement in that ratio just simply because the denominator decreases.
Steven Alexopoulos: Got it. Okay. And then, finally, on the expense side, so you reported mid-teens expense growth in 2022, basically in line with what you had guided for the year, now guiding mid-teens for 2023, more investments that you’ll have to make. When you guys take a longer-term view, do you think for a period of time, beyond 2023, we stay in this mid-teens range? Or do you see this as sort of a 2-year scenario, and then we get back to something more normal after that? Thanks.
Phil Green: Steve, it’s a good question. I think the simple answer is 2023 is an unusual year for us. I expect to see our run rate on expense growth to go down in 2024. And Jerry mentioned the IT investments mentioned marketing. As I’ve talked to investors over the last couple of years, I’ve been pretty open that there are some things we are going to invest in. We’re going to invest in physical distribution, and I hope by now we’ve proved to everyone that’s a payoff for shareholders are going to continue to be. We’re going to continue to do that. We sort of set that aside. Okay? But we’re also going to invest in people, and you saw those numbers on salaries, I mean, they are pretty sobering, but we were competing in the marketplace.
I think we’re being successful there. I think we’ve reached a place where we’re touching bottom. And I was looking at our turnover rates. Last year, it was in 2021, our turnover was 23%, this year. In 2022, it was 14%. It was down from 23% in ’21. So that tells me that we are hitting the right balance on what we need to be paying people. We’ve done a lot on benefits, making sure that we have comparative and really top-quality benefits in areas of health care and retirement and those kind of things. So we’re really focused on that. We said that we’re going to invest in marketing that was one area that we really hadn’t done, one of the key areas that we hadn’t done, we needed to. And we’ve hired some great talent there. We did that last year.
So we’ve got those costs, but we’ve also got some additional media that we’re going to be investing in and we need to. And look, I think we’ve been winning on account growth and growing the business. And I think we’ve done it without kind of — we’ll sort of with the marketing hand tied behind our back. I think we get that out from behind our back. It’s going to really help us. So I’m optimistic about that. And then, the fourth one that we said we’re going to be investing in IT and cyber. And that’s the big number that Jerry is talking about because as we looked at this and did our planning for this year, we really call this a generational investment in IT. And it’s really, I’d say, around if you’re interested, I’d break it down into three areas.
One is customer experiences and growth which really revolved a lot around digital, mobile, for the consumer and commercial businesses. We are almost doubling our number of digital agile teams. We’re going from 6 to 11, 2 of them in the commercial area. We’re speeding up modernization on certain core systems. There are 3 of them. We need a new loan system. We need to invest in real-time payments, which is a developing competitive issue, and we need to take care of our check processing system, which is at end of life. We’re a big correspondent bank providers. So check yes, checks are going away, but they’re not gone, and we process a lot of them. So that’s probably 35% in terms of that core modernization. And then we need to continue to expand our efforts on, I’ll call it, information security and fraud mitigation, that’s probably the other 15%.
And that’s a big percentage increase. We’ve increased IT, we’ve been 11% for ’19 and ’20 and ’22, it was up 8% in ’21. We really backed down expenses all over the bank that year, but in 2023, we’re looking for a 24% increase in IT-related expenses. And that’s a generational investment in necessary IT. And I say it’s necessary because remember, our success at competing and I believe we’re winning at the organic growth competition is from an empathetic customer service experience and from great technology, and we can’t sleep on that technology piece. Now having said all that, I don’t believe those are investments that we’re going to have to make at the same level as we look into next year in 2024. So it’s a big number. We hate spending money.
We hate wasting and even worse and so we don’t think we’re doing that. We do need to do this to compete where we are, and I think we’ll see that run rate go down as we hit 2024 and beyond.
Steven Alexopoulos: Got it. Thanks for all that color. Really appreciate it.
Operator: Thank you. The next question is coming from Dave Rochester of Compass Point. Please go ahead.
Dave Rochester: Just a quick one on the NII guide. I was curious what the impact is you see for the rate hike in February and then the rate cut in July, what the NIM sensitivity is for those moves that you’re baking in? And it sounded like you’re assuming a positive, but maybe more muted deposit growth trend for the year. I was just wondering if you could give an update on the total deposit beta assumption, you’re not baking into that? Thanks.
Jerry Salinas: Right. I guess I’ll just start with the deposit betas. I mean, I think we ended up a year kind of where we expected we would be. We had said that we’d be about 30% on interest-bearing at about 20%, 20% to 25% on total. And that’s really kind of where we ended up. So I think for — we were higher in the fourth quarter. I think I said in the third quarter that I thought we have to be a little bit more aggressive than we were. But we ended up cumulatively exactly where we expected. As far as betas for next year or for this year, excuse me. And I think basically what we’re assuming is that we would have the same sort of increase that we had in the first quarter in February is kind of where we go back. I think we’re assuming a little bit more aggressive betas, say, where we were at about 30% on interest-bearing, I think we’re probably assuming right now that we’d be somewhere closer to the 33% to 35%, and then our assumptions are that we take all that back in July.
And we’ll just have to see, I think we said all along is, we want to see kind of where the market is, but those are our current assumptions today. And I think you had one other question on.
Dave Rochester: The sensitivity to the right moves that you guys are looking at, the hike in February, and then the cut in July, how much of that we think will move the NIM?
Jerry Salinas: Yes. From a NIM standpoint, I don’t think it’s going to have a significant impact on the percentage itself. Like I said, we want to be careful. We don’t really give all that sort of level detailed guidance. But what I have said is, I do think the percentage will peak in the third quarter just right before our projected decrease. And I think that we’re feeling good about where we’re at. A lot of it will be dependent on what happens on those deposits. As I’ve said, yes, do I feel like it’s a little bit more muted in 2023 than it was in 2022? Yes, most certainly. I mean, I think we saw some of that just in the linked quarter movement, although a lot of it was moving into repo. And so we had certain customers coming out of the money market account and choosing to move into the repo account because of some sort of operational processes and money flow issues that they liked more in the repo.
And also the fact that, that product is collateralized. So we did see some movement there. So I tend to have less concerns, although it’s still going to be relatively soft, it’s going to be softer than we saw this year on the interest-bearing side, but most of the risk is on the commercial DDA in my opinion. As far as what we think a 25 basis point hike gives us, it gives us about on a pretax basis, a little over $3 million a quarter.
