Truist Financial Corporation (TFC) — Q1 2016 Earnings Call Transcript

Thank you, Ebony, and good morning everyone. Thanks to all of our listeners for joining us today. We have with us today Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the first quarter of 2016. We also have with us other members of executive management who are with us to participate in the Q&A session: Chris Henson, our Chief Operating Officer; Clarke Starnes, Chief Risk Officer; and Ricky Brown, Community Banking President. We will be referencing a slide presentation during our comments. A copy of the presentation, as well as our earnings release and supplemental financial information, are available on the BB&T website. Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs, or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary statements regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non-GAAP disclosures. Please refer to page two in the appendix of our presentation for the appropriate reconciliations to GAAP. And now, I'll turn it over to Kelly.

Thank you, Alan. Good morning everybody, and thank you very much for taking the time to join our call. Overall, we had what I'd call a solid quarter with a nice increase in net income and record net interest income. Net income was $527 million, up 8% versus first quarter and 20% annualized versus the fourth, so solid performance. Diluted EPS was $0.67, which was flat to the first quarter of 2015 but was up an annualized 18.9% versus the first quarter. Capital ROA was 1.09%, GAAP ROTCE was 13.87%. Now, if you adjust for merger charges only, adjusted ROA was 1.12% and adjusted return on tangible common was 14.2%, so solid returns there. In terms of revenues, we had strong revenue growth despite some challenges in mortgage banking income and service charges on deposits. So revenues totaled $2.6 billion, which was up 10.2% versus the first quarter and 4.2% annualized versus the fourth. We did have record net interest income as I indicated at $1.6 billion, up 16.4% versus the first and 6.8% annualized versus the fourth. I'm really happy about the fact that net interest margin grew to 3.43%, up 8 basis points. Daryl will give more color on that. We had a small but nice improvement in efficiency to 58.3% from 58.8%. Non-interest expenses were very well managed, decreased by $52 million or 13.1% annualized, and we did have positive operating leverage. Our average loans were down slightly versus the fourth quarter. But keep in mind, we continued to adjust our mix by letting our lower spread mortgage balances and sales finance portfolios decline. We are improving our profitability in those areas, so that strategy is working, but it's just not producing loan volume increases. Our average loans and leases for the quarter were $134.4 billion. And if you exclude our mortgage run-off and sales finance run-off, loans held for investment grew 2.2%, which is kind of the number that we look at. That was led by good performance in income-producing properties, direct retail, other lending subsidiaries, and our dealer floor plan. In terms of our strategic highlights, I would point out we converted Susquehanna in November. We've seen reductions in FTEs and other cost savings. Overall, it is going very well. We completed our acquisition of National Penn on April 1. We'll be converting that in most likely mid-July. That's going very well. Scott Fainor, the CEO of National Penn, is now our group president for our northern region. He's off to a fast start. I feel really good about his leadership and the teams that we have in that area. We completed our acquisition of Swett & Crawford on April 1. This is an outstanding company, a 100-year-old company with a great brand, that has $200 million in revenue. Last year, very importantly from a strategic point of view, we sold American Coastal because it was outside our risk appetite. Now we've effectively completed that process by replacing it with Swett & Crawford. So we got the revenue back and a virtually no-risk basis. The key now, of course, in the insurance business, in particular at Swett & Crawford, is to get cost savings and overall improvement in margins. I want to make a few important strategic points. With regard to M&A, as I said, things are going well. After we announced National Penn, we said we would take a pause. All of the deals we have, we're really excited about. Texas, for example, where we acquired branches from Citigroup. Rick and I were down there a couple of weeks ago in Dallas and Houston, and we could not be more pleased with how we are being received and how well things are going. The overall Texas market is still very vibrant notwithstanding questions around energy. It's a fantastic market of about 29 million people, growing 1,000 people a day. We are excited about what's going on in Northern Kentucky and Cincinnati. Susquehanna is off to a good start. National Penn is just getting started, but it has enormous synergies with Susquehanna and overall revenue opportunities in Pennsylvania. I feel really good about our merger strategy, but now is the time for us to focus on the enormous opportunities that we have to improve performance in the areas of investment we have made over the last several years. Our focus is not on strategic deals, but on improving our profitability through two areas: expense management and revenue enhancement. In expense management, we will focus on cost synergies in the community bank, particularly in Pennsylvania, where we think we can rationalize the huge investments we've made in back-office processes and procedures. In terms of digital transformation, while we will increase our investment in digital transformation, there's a lot of opportunities to overall become more efficient as we link the front room and the back room. I feel that will combine revenue enhancement and expense reduction. We expect huge revenue enhancements from our community bank. The rate of momentum improvement there, particularly in our new markets, is exponential. Given our intense focus on realizing new benefits from our previous strategic investments, stock repurchases or buybacks move up in priority as we think about CCAR 2016 versus strategic initiatives. If you turn to page 4, I'll mention a couple of unusual items this quarter. We had merger-related expenses that resulted in about $23 million or $0.02 negative effect on EPS. We took security gains of about $45 million, which is part of our strategy in terms of matching all security gains and credit issues, resulting in a $0.04 positive. There was an energy-related provision in excess of charge-offs of $28 million or $0.02. Regarding energy credits, the provision exceeded charge-offs by $30 million or $0.02. Daryl's going to provide more detail on this, but the charge we took reflects the new regulatory guidance and the recent SNC exam results. Overall, we feel good about loan growth relative to the economy. A couple of comments about the economy: it's what I would call good but not great. It seems to be hovering around 2% to 2.5%. The U.S. economy is on a sustained growth pattern, and we see no practical possibilities of recession. There's a solid pent-up need for continued investment, and when I talk to business people, they're investing in what I call passive investment; they're not making major expansions but have older equipment that needs replacing. That creates a floor on the economy. There is an upside potential if we were to receive better positive leadership in D.C. to change taxes and regulations, but we think there’s a solid 2% to 2.5% growth ahead. I believe many of our markets in the Mid-Atlantic and Southeast will be growing 1 to 1.5 points faster than the national average. We focus on profitability in our portfolio; we believe profitable loan growth is crucial. Our C&I loans were down slightly, mostly due to a decline in commercial loans in the branch network and mortgage warehouse. However, end-of-period loans were better, with C&I up 2.5% annualized. C&I spreads are stable compared to last quarter. Growth is affected by our strategy of restricted growth in multifamily and REITs; we remain conservative. We're currently expecting C&I to grow at a faster pace in the second quarter, probably in the mid-single digits. Daryl's going to provide more detail on energy, but I will reiterate that we have built our reserves and we're confident that our exposures are manageable. CRE growth was essentially flat, with a decline in construction but growth in income-producing properties. The net increase in income-producing properties was 7% annualized; we feel really good about that, particularly in the office and hospitality sectors. The good news is that market fundamentals generally continue to improve, and all the spreads remain tight. We expect CRE construction and development to continue to decline somewhat in the second quarter, while income-producing properties will grow at a similar pace as in the first quarter. The dealer floor plan had a solid quarter, up $76 million or 26% annualized, driven by expansion in our new markets and new lines we've introduced. Overall, the average loans are expected to increase by 1% to 3% on a core basis next quarter. Considering National Penn, growth will be closer to 20%. We like to distinguish between organic and core growth. Average loans in the second quarter are expected to be about $141 billion. Our deposit program is going well. Our deposit mix continues to improve; we are effectively managing the cost of interest-bearing deposits, which is up only 1 basis point despite the rate increase at the end of last year. Average total deposits increased $1.4 billion or 3.7% annualized, which we believe is a strong growth rate given our focus on cost management.

Thank you, Kelly, and good morning everyone. Today, I'm going to talk about credit quality, net interest margins, fee income, non-interest expense, capital, and our segment results. Overall credit quality outside the energy portfolio remains stable. Net charge-offs totaled $154 million or 46 basis points. Excluding energy-related losses of $30 million, net charge-offs improved from the prior quarter to 37 basis points. Loans 90 days or more past due declined $26 million, mostly driven by loans acquired from the FDIC, impaired loans, and a decrease in residential mortgage loans. Loans 30 to 89 days past due decreased $205 million or 20%, mostly due to seasonality in Regional Acceptance, as well as decreases in residential mortgage, sales finance, C&I, and CRE. NPAs increased 27% to 42 basis points, driven by $206 million in energy-related credits moved to non-accrual. If you exclude energy, NPAs totaled 33 basis points, a modest improvement compared to fourth quarter levels. We are about halfway through our spring redeterminations. We expect NPAs to remain in a similar range in the second quarter, assuming no unexpected impact from that process. We expect net charge-offs to range from 35 basis points to 45 basis points. Our energy portfolio consists of 100 clients with $1.6 billion in outstandings, comprised of 65% upstream, 27% midstream, and 8% in support services. The coal portfolio totals $215 million in outstandings. We take a very conservative approach to energy lending and do not lend to offshore producers, mezzanine, and second lien facilities, or take equity positions. During the quarter, we fully implemented the regulatory guidance from the SNC exam. The allocated reserves totaled 8.5%, and 44% of the energy portfolio was criticized and classified. Importantly, all borrowers are paying consistently with their agreements, which leads us to believe our energy portfolio is manageable. Our allowance coverage ratios remain strong at 2.4 times for net charge-offs and 1.89 times for non-performing loans. The allowance to loans ratio improved to 1.10% compared to 1.07% last quarter. Excluding the acquired portfolios, the allowance to loan ratio is 1.17%, showing higher effective allowance coverage. Our acquired loans have a combined mark of about $636 million. We recorded a provision of $184 million for the quarter, compared to net charge-offs of $154 million, including $30 million in net charge-offs related to the energy portfolio and an additional provision of $30 million to build the allowance to 8.5%. Looking forward, our provision is expected to match net charge-offs plus loan growth and should be much lower than this quarter's numbers unless we see large deterioration in credit quality. Compared to last quarter, net interest margin was 3.43%, up 8 basis points; core margin was 3.18%, up 6 basis points. The margin increase resulted from seasonal interest income on assets related to post-employment benefits, duration adjustments in acquired securities, and higher repricing of variable rate assets compared to stable deposit rates. For the second quarter, assuming no Fed rate increases, we expect GAAP margin to decline a few basis points due to the runoff of PCI loans and the loss of a positive seasonal impact of interest income on benefit plans, offset by National Penn. Non-interest income totaled $1 million, relatively flat compared to last quarter, with a fee income ratio of 40.6%. Looking at a few components, insurance income increased $39 million or 41% annualized due to seasonal factors, higher employee benefits, and property casualty commissions, but this was offset by lower life insurance commissions. Excluding acquisitions, insurance income grew 1.9% compared to last year. Mortgage banking income totaled $91 million, down $13 million driven by lower commercial mortgage production. Other income decreased $58 million due to a $43 million decrease in income related to assets of certain post-employment benefits and a $14 million decline in client derivative income. Looking ahead to the second quarter, including both acquisitions, our total non-interest income is expected to increase by 9% to 11% versus second quarter GAAP of $1.016 billion. Non-interest expenses totaled $1.5 billion, down 13% compared to last quarter. Personnel expenses increased $22 million, driven by a $34 million increase in social security and unemployment taxes, along with equity-based compensation for retirement-eligible associates, and a $10 million increase in higher pension expense, offset by a $30 million decrease in post-employment benefits expense. Our average FTEs declined by 311. Merger-related and restructuring charges declined by $27 million due to Susquehanna conversion costs. Moreover, other expenses decreased by $34 million, primarily due to lower operating charge-offs and charitable contributions. Our effective tax rate was 30%, and we expect the second quarter effective tax rate to be about 31%. We expect expenses to total $1.75 billion next quarter, this includes the initial expense base for National Penn and Swett & Crawford, alongside $40 million to $50 million in merger-related costs. We anticipate cost savings to accelerate after the third quarter systems conversion of National Penn and the first quarter of 2017 conversion of Swett & Crawford. However, in the second quarter, we may see a slight uptick in the efficiency ratio due to the timing of our acquisitions and the delayed timing of related cost savings and synergies. We are confident we will achieve cost savings related to both acquisitions and expect efficiency to improve later in the year.

Thank you, Daryl. Overall, we feel like our M&A strategy is executing very well. Loan growth is good, particularly in the environment. Credit quality is very good outside of energy, and energy-related metrics compared to the marketplace are extremely good. We recognize that we have a wonderful opportunity ahead to focus on realizing the advantages of our investments over the past years. We are optimistic about our ability to improve efficiencies and operating profits as we move forward, and we believe our best days are ahead. Now, we will turn it over to Alan.

Thank you, Kelly. At this time, we'll begin our Q&A session. Ebony, if you could please come back on the line and explain how our listeners can participate and ask questions.

Matt? Matt, we can't hear you. You're on mute.

Can you guys hear me?

We can hear you.

Yeah, Matt.

All right. Great. Okay. Just starting on the cost savings, could you remind us how much is still to come from all the deals that have closed, and then will these fall to the bottom line or are there some offsets as we think about, call it core BB&T or legacy BB&T?

So Matt, if you go back a year-plus ago, the Citi branches and Bank of Kentucky, all those have basically come in, both the cost savings and revenues and all that. From Susquehanna's perspective, we are probably 85% to 90% through the cost savings from that. So the rest of the cost savings will probably bleed into our run rate over the next couple of quarters, or out of the community bank area. But that's where we stand there. As far as the two deals that we just closed on April 1, there's really no cost savings in those transactions. We expect National Penn to have systems conversion in the third quarter, so you might see a little bit in the third quarter but more of that in the fourth quarter and first quarter next year. And Swett & Crawford may provide a little on revenue synergies this year, but their systems conversion is the first part of 2017, and their cost savings and efficiencies will come in probably in the first half of 2017.

Okay. That's helpful. And then just on the revenue side, bigger picture, how should we think about what areas you're trying to cross-sell into, just the broader Mid-Atlantic franchise? Obviously, there are scale benefits, but what other product sets do you think can get ramped up in that franchise, and when do we start seeing some of those benefits in a more meaningful manner?

So, Matt, we think the standout areas are continuing to expand the benefits from our corporate banking relationships. Recall that over the last several years, we've been starting those relationships on the credit side, and then the follow-on residual benefits in terms of deposits and other fee services come. Our wealth management also continues to integrate very well in terms of loan balances and other fee balances that are coming in. Our retail banking is coming on strong, and there's huge benefit from the insurance area as we integrate Swett & Crawford and continue to integrate Crump, while leveraging Crump's cross-sell abilities throughout the entire community bank in terms of selling life insurance. All of these are significant opportunities.

Okay. Thank you very much.

Hey. Thanks for taking my questions. Kelly, I wanted to touch on the efficiency ratio. You may not hit your target this year, but that's okay. You obviously announced another insurance acquisition. Can you just give us your thoughts in light of the environment regarding what we could expect for the efficiency ratio both in the near term and longer term, if there are any changes?

I think we will end up this year with improvement; it may be in the 57%-ish range. I'm confident that over the next two to three years, we'll reach the mid-50s%. I know some people talk about the low 50s%; that's unlikely unless we see a substantial ramp-up in the yield curve. Remember, this is a numerator/denominator problem. Assuming the economy grows at 2% to 2.5% and a slow ramp-up in the yield curve, it makes it harder to grind out efficiency improvements. Still, we have opportunities to generate additional revenues from our investments and to achieve efficiencies from those investments, so we think we will be able to meet those targets.

Okay. That's helpful. And then just as a follow-up. How should we think about the dividend payout ratio going forward? You guys are trending a little higher than you have historically. You mentioned in the prepared remarks about CCAR being more focused on buybacks this year. Should we actually expect a dividend increase this year?

Our strategies regarding capital deployment remain the same, but they adjust from time to time. We've always said to use capital investment for organic growth. The dividend remains a constant. The swing is between buybacks and M&A. There is potential for a dividend increase this year, as even though our payout seems somewhat high, it’s not extreme by traditional standards or relative to the stable revenue streams we have.

Okay. And then maybe just one final one for me. Just on your coal portfolio, it seems like the criticized number of 15% seems a little low from what I would expect. Are there any trends that give you confidence that this portfolio won't have a lot of losses?

Yes, Michael. This is Clarke Starnes. Fair question. We have been methodically reducing our exposure in the coal space for a long time, and we believe many of the residual borrowers are bankable. While we expect exposure to decline from here, we also took the opportunity to exit one of our larger, long-standing watchlist coal credits completely. Therefore, we feel that the remaining exposure is manageable, although the watchlist may increase.

Okay. That's helpful. Thanks for the color. Appreciate it.

Hi. Good morning.

Good morning.

Hey, Betsy.

So a question, just one follow-up to the question on energy, is you did indicate – and I appreciate the color around the percentage of the portfolio that's criticized and classified. Is that against a denominator that is both funded and unfunded? Or is that just a denominator that is funded?

Betsy, that's based on funded balances.

Right. Okay. Got it. That's great. And then separately as you're thinking about how the industry progresses from here, can you give us a sense as to how you work with your clients? And how you're making the decisions to either continue to reinvest with them or potentially help them shrink, sell, exit, or reduce your exposure with them? Or is it too late for that, and what you have is what you have?

Betsy, are you talking about primarily in the energy area?

Correct.

We made a decision some time ago to be a long-term player in the energy market. We are not going to change that long-term strategy. Energy is an important business for the country, the world, and for us. We enter into relationships on a very conservative selection and underwriting basis. Despite the current concerns around energy, we are proceeding carefully and marking our book aggressively. We believe oil prices will recover, and we will continue to support our good clients in the industry.

And do I have it correct that if oil were to be at $30 for a while, that you've already done almost all of the reserving that you need to do? Or at least the vast majority of the reserving you need to do, in which case we should expect the provision could come down a bit next quarter?

Absolutely, Betsy. We believe the provision expense, unless we encounter something unforeseen, would be significantly lower than last quarter. To remind you, our net charge-off guidance is 35 basis points to 45 basis points. We would assume we will be in the low to midrange of that unless we experience an energy surprise. If there is more energy deterioration, we might be mid to high.

Okay. Great. That's helpful. Thank you.

Hi. Good morning. Two follow-up questions. One, on the CCAR ask for 2016 and prioritizing buybacks and dividends, is that just for the second half of this year or does that extend into 2017?

Yeah. That would be for the entire CCAR period, which extends into 2017.

Okay. Thank you. And Daryl, could you help me understand how we get from the first quarter expense level to the $1.75 billion in the second quarter? It just seems a bit higher than what I would have modeled in with the additions. I know you mentioned the Swett inclusion, but what else increases that step up and what's coming from National Penn?

If you look at National Penn and Swett & Crawford, those two add approximately $100 to $110 million in expenses into the second quarter off their base. Adding in an additional $30 million more in expense savings leaves about $60 million. The second quarter usually sees higher revenues, so commissions go up as a percentage due to compensations. The biggest increase overall is probably just in technology and IT, where we've been continuously investing and those areas have increased some. However, I feel that we are very focused on our expenses and may actually exceed what we’re saying. But right now we are just providing conservative numbers for the expense base. As Kelly said, we will focus on improving efficiency throughout the year, especially with acquisitions closing early this quarter, making it complex to integrate everything.

Okay. And then that really starts stepping down in the fourth quarter?

Yes. Correct.

Good morning, Kelly. Good morning, Daryl.

Hey, Gerard.

Morning.

This question may be more for Clarke. BB&T has done a very good job in improving its credit quality post the financial crisis. BB&T, along with many other banks, have built up reserves this quarter for the energy NL exam that took place recently. What did the regulators do differently that none of the banks anticipated back in the fourth quarter? I know energy prices fell to below $30 in February, but were they doing things that were unusual and that we haven't seen before which forced everybody to build up these reserves?

I think Gerard, the fundamental change in guidance revolves around reserve-based lending, asset classifications, accrual status, and impairment views; they were based more on a senior secured collateral asset base coverage against that primary bank debt. This boom in shale production has led to a lot more secondary bond financing behind the bank loans. The new regulatory guidance is very explicit about the need for sufficient cash flow coverage and asset coverage for the total debt, including the secondary debt. The plunge in prices that no one could have predicted put enormous pressure on those ratios. Overall, we have to prudently reserve in the meantime, but given sufficient time, we believe we can achieve better recoveries.

Thank you. Speaking of the Shared National Credit exams, obviously, we have the national one going on right now for all loan categories. Clarke, are you hearing of any major changes in how different loan categories are being viewed?

We are not hearing anything yet. No sort of chatter like we had with the first exam around energy. So at this point, we are not.

No, Gerard, I think this is more temporary. I think that we've had a range of 41%, 42% to 40% has been kind of high, frankly. But we think in terms of 42%, 43% as kind of normal. We don't want to get too far out of balance one way or the other. It depends on, again, the interest rate environment. If interest rates go down, then non-interest income goes up as a percentage. On a normalized basis I’m comfortable with our non-interest income, meaning we're in the 40%, 42%, 43% kind of level. Right now the net interest income being down drives the ratio up. On the other hand, insurance is not at the level that it would be due to the pace of business. The temporary impact has been the removal of American Coastal last year, which of course will come right back now with the addition of Swett & Crawford. It’s not a change from a long-term perspective at all.

Hey, thank you very much. Can you talk a little bit more about the comments regarding your focus on less M&A going forward? Does that mean a reduced focus on both the insurance side and the banking side as well? Are you focusing more on capital management through buybacks?

Yes, Paul. That's exactly right. I'm not saying we wouldn't dare do any tiny little thing, but as a practical matter, we are just not focusing on M&A now in insurance or banking, which are our two primary areas. The truth is we have a lot going on in both of them. There's a time to buy and a time to run. The last 24 months was a time to buy, as the conditions were right. We had really good opportunities and we are very happy with what we did. Now is the time to take the time and adjust what we've done to run it effectively to benefit our shareholders. Our strategy revolves around gearing up our profitability and reaping benefits from previous investments, which applies to insurance, banking, and everything else.

So should we be modeling a higher buyback level? Or do we need to wait to see what the Fed comes out with on their tests to see what gets approved?

All of us have to wait to see what the Fed approves, but if I were modeling, I’d anticipate higher buybacks.

Hey, guys. Thanks. I had a question for you on the forward loan growth expectations. I see you put 1% to 3% guidance for 2Q. Is that an expectation of slower residential runoff and sales finance runoff? Or is that just higher overall originations? What's going to drive that delta quarter over quarter?

Yeah, the residential runoff is easing up if you will, and then you get the seasonal activity buildup in the second.

From an organic basis, I would say we’d have a little bit more loan growth from second to third, how we sit now. Visibility out a couple quarters is not perfect. But if we’re 1% to 3%, you might add another 1% or 2% to that from second to third.

Okay. Great. And then one follow-up just on the uses of capital, buyback versus M&A. Is this a hard and fast decision at this point through the next CCAR request? Or will you still have flexibility as you did this year to either do repurchases or M&A depending on opportunities?

No, our request has the same flexibility that we've always maintained. But the guidance I'm giving you regarding our focus on profitability management versus M&A is very firm.

Good morning, guys.

Morning, John.

On the buyback topic, can you help us size it up? If it is something we can have much greater confidence in now, how should we consider its magnitude? You're at a 40% payout on the dividend, and you indicated that it could go up a bit. Where could we go on the buyback? Are we approaching somewhere in the 80s% or 90s% in terms of a combined payout when factoring in buyback activity?

From a CCAR perspective, obviously nothing is approved yet. We have typically focused on a higher payout ratio on dividends. However, we hope this aligns with CCAR 2016. As for the total payout ratio, we appreciate where our capital ratios are today. So, we are likely to use around 25% plus for capital for organic growth, with the remaining percentage likely going to buybacks.

Okay. And then separately, Kelly, I want to better understand the change in tone for looking at more buyback opportunities with capital deployment versus M&A. Was there anything in particular that prompted this change, be it in the regulatory environment and/or your trend in efficiency that you're trying to get ahead of here?

John, it really boils down to reviewing the number of deals. Ideally, we wouldn't have completed as many deals in such a short time. However, when opportunities arise, we must act. We took quite a bit on in the last year and a half, and it’s now time to pause and focus on adjusting our operations to run very smoothly and efficiently, maximizing shareholder value. This strategy allows for improved profitability and results from previous investments made. Once we achieve this efficacy, we’ll consider M&A again, but right now our priority is leveraging our past achievements.

Got it. Thanks, Daryl.

Thank you for taking my questions. Regarding net interest income and future expectations, you’re modeling a rate hike; how are you looking at the long end of the yield curve at the same time?

Good question, Kevin. The rate hike is in November; it doesn't have a major impact on net interest income. Our balance sheet is balanced, with half of our assets being floating rate and half fixed. The early decline in the yield curve affected both revenues and interests. We are effectively managing the funding costs, with significant growth leading to wider margins in our deposit franchise right now.

Regional Acceptance's losses are up year-over-year, about 50 to 75 basis points. Our prime portfolio is about 16 basis points, and it has remained steady quarter-to-quarter and year-over-year. Although manageable, Regional Acceptance has experienced higher loss severities in recent times. We have adjusted our approach to lending into lower advance rates, and we foresee being in a better position moving forward.

Thank you for your insights. I appreciate it.

Thank you, Kelly. Thanks to all of our listeners for joining. This concludes our call for the day. If you have further questions, please don't hesitate to call Investor Relations, and we hope that you have a good day.