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spk12: Good morning, everyone, and welcome to the FMB fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw yourself, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Lisa Hajdu, Manager of Investor Relations. Ma'am, please go ahead.
spk00: Thank you. Good morning and welcome to our earnings call. This conference call of F&B Corporation and the report it files with the Securities and Exchange Commission contains forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation material and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Tuesday, January 31st. And the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince DeLee, Chairman, President, and CEO.
spk03: Thank you, and welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. F&P closed strong in 2022, continuing our streak of outstanding performance. and is positioned to capitalize on our momentum as we navigate a complex economic landscape in 2020. F&B's fourth quarter operating earnings per share totaled a record 44%, increasing 13% on a linked quarter basis and bringing the full year operating earnings per share to $1.40. The success of this quarter was further highlighted by record revenue, continued strong loan growth, disciplined deposit cost management, and the closing and conversion of the UB Bancorp acquisition in December. The fourth quarter's exceptional performance is captured in its strong profitability metrics, with operating return on average tangible common equity totaling 22%, and the quarterly efficiency ratio below 46%. In the fourth quarter, total revenue grew 10% in the fourth quarter to $416 million, with net interest income as the primary driver, contributing 13% growth. In addition to benefiting from the Fed rate hikes, our net interest income reflects strong loan growth, favorable funding costs, and the strategic steps our team has taken with the asset-sensitive position of our balance sheet. Net interest margins significantly expanded quarter over quarter, from 3.19% to 3.53%. Operating expenses were well managed, increasing 1.5% linked quarter. The revenue growth and disciplined expense management resulted in strong positive operating leverage and an 18% linked quarter increase in pre-provisioned net revenue. FMB ended the year with nearly $44 billion in total assets and $30 billion in loans and leases, a 5% increase linked quarter. On an annualized basis excluding UB Bancorp, period-end commercial and consumer loans grew 14% and 6% respectively. Continuing a trend we have upheld throughout the entire year, we saw strong loan growth in markets spanning our full footprint, once again demonstrating the importance of our diverse geographic coverage and presence in both mature and high-growth markets. The acquisition of UB Bancorp closed on December 9, 2022, with the systems conversion successfully completed and integrated. With the addition of UB Bancorp's rich deposit mix, which includes 43% non-interest-bearing deposits, we ended the year with a total non-interest-bearing deposit mix at 34%. This result was in line with the end of 2021, despite Fed funds increasing 425 basis points. demonstrating the strength of our deposit franchise. We are pleased with the financial benefits and dedicated employees the UB Bank Corp acquisition has brought to us and expect to generate additional revenue as these customers are introduced to FMB's more robust product set. FMB's impressive fourth quarter and four-year results demonstrate our significant success driving value for our clients, communities, employees, and shareholders. I'd like to call out a few of our many accomplishments. FMB achieved operating earnings per share of $1.40, one of the highest levels in company history, led by record revenue of $1.4 billion. Total loans grew by $5.3 billion year-over-year, or 21%, through strategic combination of footprint-wide organic growth and the completion of two accretive acquisitions, bringing total assets to $44 billion. Despite the challenging economic environment, we grew total deposits to an all-time record of $35 billion and reported average balance growth in all four quarters of 2022, while also maintaining a favorable deposit mix comprised of 34% noninterest-bearing deposits. We currently hold the top five deposit market share in nearly 50% of our MSAs, according to data provided by the FDIC. We generated over $1.1 billion in net interest income, up 24% year-over-year, driven by solid loan growth, the favorable deposit mix, and the asset-sensitive portion of our balance sheet. Our team controls expenses in a high inflationary period. It's contributed to FMB's full-year efficiency ratio of 52%. FMB reported total shareholders' equity at $5.7 billion, and a CET1 ratio of 9.8%. Our growing capital base provided our company with unprecedented flexibility, even after returning $220 million to shareholders through common dividends and our active share repurchase program, which has $175 million remaining. Our strong earnings also resulted in a 40% dividend payout ratio and 34% on an operating basis. providing our company more internal capital to support future growth and capital action. Credit quality remains solid with consistent and prudent underwriting standards throughout the footprint, with total delinquencies ending the year at 71 basis points, net charge-offs at six basis points for the full year, and a reserve position of 1.33%. We will maintain our steadfast focus on our disciplined credit culture as we continue to navigate changing economic cycles. We closed and converted two acquisitions, Howard Bancorp in January and UB Bancorp in December, which have enhanced our market position in Maryland, Washington, D.C., and North Carolina. Driven by our continued investment in FMV's digital delivery channel and our dedicated mortgage employees, the Physicians First program comprised 25% of retail mortgage production in 2022, and grew those high-value households significantly. We continued to expand our e-store platform, which received over 500,000 interactions in 2022, up 104% year-over-year, and introduced online applications for multiple consumer loan and small business deposit products. The success of our digital strategy will have increased adoption across our expanding customer base, including a 17 percent increase in online applications. Our consistent performance does not happen without the right culture and the commitment of exceptional people. We focus on fostering a positive, productive workplace where engaged employees provide superior service for our clients and attractive returns for our shareholders. Our success in this regard has led to extensive third-party recognition. Since 2011, FMB has received more than 80 prestigious Greenwich Excellence and Best Brand awards, with 17 in 2022 alone. These results are based on direct feedback from our commercial, middle market, and small business banking funds. Additionally, FMB received approximately 50 awards as an employer of choice, including multiple national and regional honors in 2022, earning a place as one of Newsweek's America's Top Workplaces for Diversity in 2023, and most recently named to Just Capital's list of America's Most Just Companies for the sixth consecutive year, with exceptionally high marks for community development, employee benefits, and work-life balance. Our board and leadership team are proud of this year's achievements, and we are confident in our company's continued ability to execute on our strategic plan in 2023. Even in times of economic uncertainty, we are well positioned given our diversified loan portfolio, investments in technology, strong liquidity position, capital flexibility, and strong historical credit performance. I will now turn the call over to Gary to provide additional detail on our asset quality.
spk04: Thank you, Vince, and good morning, everyone. We ended the year with our credit portfolio well-positioned and our asset quality metrics remaining near historically low levels. Our performance for the period reflects total delinquency at end of the year at 71 basis points, NPLs and Oreo at 39 basis points, rated asset levels remaining essentially flat quarter over quarter, excluding UB Bancorp, and full year net charge-offs at six basis points. I will cover these GAAP asset quality highlights for the quarter and full year in more detail, followed by some insight into our credit strategy we use to manage the loan portfolio throughout economic cycles. And finally, we'll provide a brief update on the UB Bancorp acquisition that closed during December. Let's now walk through our credit results. Total delinquency ended December at 71 basis points, reflecting a 12 basis point linked quarter increase, coming off of historically low past due levels in the Trellin quarters. NPLs and OREO at 39 basis points were up 7 bps in the quarter, with nearly 60% of our NPLs in a contractually current payment state. Net charge-offs for Q4 totaled 11.9 million or 16 basis points on an annualized basis, with full-year net charge-offs for 2022 totaling 16.2 million to stand at a very solid six basis points for the year, consistent with 2021 levels also at six basis points. Total provision expense for the quarter stood at $28.5 million and includes $9.4 million of initial provision for non-TCD loans that were acquired from UB Bancorp, with the remainder providing for loan growth, charge-offs, and updated economic forecasts that reflected a softer macroeconomic environment requiring additional reserves. Inclusive of the additional day one PCD growth up of $1.8 million, our ending funded reserve stands at $402 million, or a solid 1.33% of loans at year end, reflecting our strong position relative to our peers, with the funded reserve ticking down one basis point compared to the prior quarter. our NPL coverage position remains strong at 354%. I'd now like to briefly update you on our recently closed UB Bank Club acquisition and the successful conversion of this $650 million portfolio during the fourth quarter. Our credit and lending teams continue to diligently review their loan portfolios as part of our standard post-conversion process following an acquisition. The book remains in line with our expectations from due diligence with no material impact to our overall credit, loan risk profile, or portfolio concentrations at the close of the year. I would like to congratulate the team on closing another successful transaction that will bring additional opportunities to expand our customer base and support our corporate growth objectives in the desirable Carolina markets. We welcome our new UB Bancorp customers, and we look forward to the opportunity to provide our expansive set of banking products and services to them as we deepen these relationships. In closing, we had another successful year marked by the continued strength and favorable positioning of our credit portfolio moving into 2023, as well as closing two acquisitions to enhance our presence in attractive markets that will further support our loan growth objectives. Consistent with our proactive and aggressive approach to managing risk, rating credits, and positioning potential problem assets, we continue to closely track emerging macroeconomic trends and signs of stress heading into a softer environment. We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced, well-positioned portfolio throughout the economic cycle. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk10: Thanks, Gary. Good morning, everyone. Today I will focus on the fourth quarter financial results and offer guidance for 2023. The reported fourth quarter net income available to common shareholders totaled $137.5 million, or $0.38 per share. After adjusting for 21.9 million of merger-related expenses and 2.8 million of branch consolidation costs, net income reached record levels of 157 million, or 44 cents per share. Full year 2022 operating earnings per share also represented one of the company's highest levels, coming in at $1.40. The growth in the balance sheet brought assets to $44 billion, with earning assets nearly $39 billion at the end of the year. This was largely driven by the $1.5 billion linked quarter increase in spot loans and leases, which included organic growth of $824 million, or 11.4% annualized, and the $651 million of UB Bank Corp. acquired loans as of the December 9th acquisition date. Spot, CNI, and commercial real estate each grew 6.3% linked quarter. Consumer loans increased 3.4%, reflecting portfolio growth in adjustable rate mortgages and the continued success of the Physicians First mortgage program. Full-year total loan growth was a robust 5.3 billion, or 21.2%, on a year-over-year spot basis. Roughly half of this growth was related to the previously discussed Howard and UB Bancorp acquisitions, with the remaining half due to strong organic growth capping off three sequential quarters of double-digit organic growth across the footprint. Average deposits totaled $33.9 billion for the fourth quarter, increasing $301 million, or 1%, including UB Bancorp-acquired deposits for the last three weeks of the year. When excluding UB Bancorp deposits, average non-interest-bearing deposits declined only 1% late quarter to $11.7 billion, and we maintained a favorable deposit mix at year-end with 34% non-interest-bearing deposits, demonstrating the strength and granularity of FME's deposit base. Record quarterly revenue of $415.5 million was driven by record net interest income totaling $334.9 million, a linked quarter increase of $37.8 million, or 12.7%. The net interest margin increased 34 basis points to 353 as the earning asset yield increased 62 basis points while the cost of funds increased 30. The largest driver was the increase in yields on loans and leases, which increased 68 basis points. In fact, the December loan origination yield was over 6%, the highest since 2009, and approximately 100 basis points higher than the spot portfolio rate at quarter end. With 59% of the loan portfolio repricing, we expect the portfolio rate to continue to increase given the December Federal Reserve rate hike and the expected 25 basis point increases in February and March. The fourth quarter also had record positive operating leverage of 29.1%, which we expect to rank in the upper quartile of our peers. On the other side of the balance sheet, deposit costs continue to be a significant focus for our team. The total cumulative deposit data ended the year at 16.3%, below the forecasted 20%, by maintaining the previously mentioned favorable non-interest-bearing deposit mix and actively managing interest-bearing deposit costs. We were able to keep the average interest-bearing deposit costs below 1% for the fourth quarter, again demonstrating the strength of our customer relationships. We have been able to effectively manage deposit costs strategic pricing campaigns supported by our data analytics platform. While competitive pressures on deposit pricing continue to rise, we are forecasting a cumulative total deposit data to be in the low 20s at the end of the first quarter of 2023. Turning to non-interest income and expense. Non-interest income totaled $80.6 million, a decrease of $1.9 million or 2.2% compared to the prior quarter. Mortgage banking operations income decreased $2.4 million with a decline in mortgages sold in the secondary market and lower gain-on-sale margins. Insurance commissions and fees decreased $1.3 million, reflecting seasonality in the fourth quarter. Capital markets income totaled $10 million, with this strong level supported by an increase in syndications and solid contributions from swap fees and international banking. On a full-year basis, non-interest income totaled $323.6 million, a 2.1% decrease from 2021, primarily reflecting the significantly lower mortgage banking operations income, which was partially offset by several other fee-based businesses, again demonstrating the importance of our diversified business strategy. On an operating basis, non-interest expense totaled $195.8 million, a 1.5% increase from the third quarter and an increase of 8.3% from the year-ago quarter, which is primarily driven by the acquired Howard and Union expense bases in occupancy and equipment and outside services. Other non-interest expense increased linked quarter primarily from charitable contributions during the quarter to qualify for Pennsylvania Bank Shares Tax Credits. Salaries and employee benefits decreased from the third quarter due to lower medical costs and seasonally lower production and performance-related incentives. Excluding significant items totaling $52.3 million in 2022 and $4.4 million in 2021, full-year operating non-interest expense increased $45.4 million, or 6.2 percent. Fourth quarter's operating pre-provision net revenue totaled a record $219 million, representing an 81 percent increase from the year-ago quarter. On a full-year basis, operating pre-provision net revenue was $669.2 million, an increase of 31.7 percent in 2021. Our capital ratios ended the year at levels that are expected to be at or above peer median. Tangible book value for common share was $8.27 at December 31st, an increase of 25 cents per share from September 30th, largely from the higher level of earnings and the decreased impact of AOCI by $0.09 per share. CET1 ended the year at a solid 9.8%, and the TCE ratio totaled 7.24%. Let's now look at the 2023 financial objectives, starting with the balance sheet. We expect loans to increase mid-single digits on a year-over-year spot basis. Total deposits are projected to end 2023 at a similar level as of December 31, 2022 spot balances as customer growth continues alongside active management of deposit rates in an environment with rising deposit betas. Full year net interest income is expected to be between $1.34 and $1.4 billion with the first quarter of 2023 between $335 and $345 million. Our guidance currently assumes 25 basis point rate increases in both February and March with no additional rate actions projected for the remainder of the year. Full-year non-interest income is expected to be between $300 and $320 million, worth the first quarter in the mid $70 million range. Full-year guidance for non-interest expense on an operating basis is $830 to $850 million, which assumes an additional $8 million in FDIC deposit insurance costs, reflecting higher assessment rates It may remain in effect until the deposit insurance fund reserve ratio meets the FDIC's long-term goal of 2%. This expense guidance range implies growth of 7% to 10% in full-year 2022 operating expense figures. At the midpoint of our guidance, the efficiency ratio would be below 50% in full-year 2023. When excluding the FDIC increase in the union acquired expense base, the 2023 expense range would be 4% to 7% on a year-over-year basis. The first quarter non-interest expense is expected to be between $210 to $215 million, as the compensation expense is higher in the first quarter, largely due to normal seasonal long-term stock compensation and higher payroll taxes at the start of a new year. Full-year provision guidance is $65 to $85 million and is dependent on net loan growth and CISO model-related bills from a softer macroeconomic environment. Lastly, the effective tax rate should be between 20% and 21% for the full year, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.
spk03: Thanks, Vince. As we start the new year, we remain focused on executing our strategy and serving our stakeholders. We will do this by staying true to our values-based culture and delivering on the financial guidance fence provided with a focus on generating positive operating leverage and efficiently deploying capital in the most effective way to optimize risk-adjusted returns for our shareholders. Before we close today, I want to recognize our dedicated team who made our performance possible. Every employee contributes to the success of the company. And I strongly believe that we will continue to win at F&B because of our outstanding employees and the excellent culture we have developed together. With that, I'll turn the call over to the operator for questions. Operator?
spk12: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speaker phone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Frank Chiraldi from Piper Sandler. Please go ahead with your question.
spk08: Good morning. Just curious, you guys talked in the release a little bit about where you saw the strongest growth geographically. And just curious if you can give a little more color there, specifically on what percentage of the commercial growth you're seeing coming out of the Carolina footprint.
spk03: You know, I don't know that we have a specific footprint. to get. The Carolinas had an exceptional year. They contributed throughout the year in Raleigh, Charlotte, the Piedmont Triad. All of those areas were big contributors to loan growth. They all exceeded their planned objectives for the year and had a tremendous year in cross selling. So in addition to throughout that footprint. So they were a significant driver. Pittsburgh has always been a solid market for us, given our market share here. The groups in Pittsburgh were big contributors this year. And I also want to include our expansion market in Charleston. The team down there has done an exceptional job over the last two years, and they really need to be the last two years. Those areas have been huge contributors. In the past, the mid-Atlantic region had been a fairly substantial contributor, but we were able to, through various takeouts, reduce the size of the CRE portfolio in that market. They had a little bit more of a headwind coming into the year. I will tell you that as we move into next year, the pipelines have softened a little bit, kind of globally, but we had two consecutive quarters of pretty solid growth. We're down about 15% year-over-year through the pipeline, typically a seasonal low point. We're being a little more careful as we move into next year. There's quite a bit of economic uncertainty and we'll play it on the conservative side. Very excited about where we sit, though, Frank, in terms of originations, because it was fairly geographically spread out. We got some assistance from the Midwest and the Northeast and some of the slower growth markets because they have a heavier industrial base and there seemed to be a little more activity there to offset some of the declines in CRE opportunities in the mid-Atlantic region. So it all kind of balanced out, and I think You know, as we've said all along, that has been our strategy to have a very balanced approach to growth. Okay, great. Sorry, I didn't have actual on the portfolio.
spk08: That's great. Thanks for all the calls. And then just wanted to follow up on the guy specifically on fee income. You know, it seems like, I don't know, even if I sort of normalize the other line item this quarter maybe and get to the mid-70s number, you're still sort of at already at sort of the midpoint of that, you know, run rate guide for next year. And so just kind of curious if you can provide any puts and takes in terms of where you might see some growth in fees and where we could see some further weakness in 2023. Yeah.
spk10: I could comment, Brian. Just, I guess, high level, you know, an interest income was solid again at $80.6 million for the quarter. You know, down slightly from the third quarter, mortgage banking income coming down $2.4 million, just kind of normal seasonality there. One thing I did want to point out, too, is that it's important, the growth in the balance sheet of adjustable rate mortgages, you know, has been higher. We've been portfolioing more loans that we might otherwise have been selling in the past. So the P11 is a little bit lower. on the mortgage banking side. Capital markets for the quarter were very solid at $10 million. We had a higher contribution compared to the third quarter, partially offsetting that reduced contribution from mortgage. And second consecutive quarter was strong syndication fees. As you look ahead, some of that revenue sources are lumpy. The syndication fees aren't always consistently at the same level. They kind of come in lumpy. The swap fees also can be a little bit lumpy. You know, us guiding to mid-70s again, which is what we guided to for the fourth quarter, is really just kind of a function of that, as well as we made some changes to consumer deposit fees that we had announced in November. So that's also kind of rolling through the numbers. So it's kind of a conservative look, I would say, based on kind of what we know today. But the lumpiness, you can't predict with certainty as far as some of the kind of capital markets components. So that's why the guys at that kind of mid-70s level.
spk03: Hey, Frank. that on the Carolinas. Over the last three years, the Carolina markets, both North and South Carolina, produced roughly 40% of our net loan growth. Okay, great. I appreciate that. And then if I could just lastly, just
spk08: you know, you're getting closer and closer to that 10% CET1 ratio. And just wondering if, you know, any sort of strategic changes we can expect when you do reach that level and pass through it. And guess, you know, specifically wondering about additional capital return, if this could trigger greater buyback activity, you know, as we go, as we move through 2023. Thanks.
spk10: Yeah, I would just say, you know, We expect to build to 10 in the near term here, given the level of earnings that we've been generating, really creating capital flexibility we've never had in the past. So regarding buybacks, I mean, our first and best use of capital, as we've said all along, the strategy is the same, is to deploy it into loan growth. So depending on how strong the loan growth is or how much it slows down, we'll have more opportunity to do buybacks. So it's clearly on the table for 2023. As you know, we remain committed to managing capital in a way to just fully optimize shareholder value, fully align with shareholder interest. So we will be looking at that. We'll be opportunistic if we go through the year. I think in total we have about 175 million or so of capacity remaining in our former program. So clearly, as we expect to build past that 10% level, the share buybacks are definitely something we'll be pursuing and evaluating on a daily basis.
spk08: Great. Okay, thanks for all the color, guys.
spk12: And our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.
spk11: Hey, guys. Good morning. How are you? Good morning. Maybe starting with Vince, your comments on utilizing analytics to help drive the deposit base. Can you give us some examples of how you're doing that? Your deposit performance has been really strong, your beta among the best in the group so far. How are you getting that and is that going to be a sustainable level or a sustainable avenue of growth as we go forward?
spk03: This is Vince DeLee actually. Vince, Steve mentioned his comments. I will tell you we've made a significant investment in our ability to analyze large quantities of data. We've talked about that before. We have a data hub. We have an entire team that manages governance and systems. We've invested early and heavily in that area over the last five or six years. We use that team to basically give us a better understanding of the types of clients that we have and to really drill into client behavior, expectation, and it enabled us to be able to provide them with better solutions. And the answer on the deposit stability and growth, I think we're an outstanding deposit franchise. I think if you look at the mix, the mix is very strong relative to the peers. The stability of the demand deposit base is very strong. The granularity is strong. So there's quite a bit that goes into managing a deposit portfolio that size. There's not just one silver bullet. So we use analytics to focus on treasury management opportunities within our customer base. We use the analytics to view customers that are single source or single product customers that may have a loan product that don't depository relationship with us. We use the analytics tool to tier the clients based upon need. That helps us direct our resources more effectively to drive growth. We also use the analytics tool with our digital offering so that we can present products and services to clients as they engage the e-store online. I mentioned in my comments we had 500,000 views online. on the website and on the mobile app because our e-store is embedded into our mobile application. So it's right there for the customers to engage with. All of that helps us manage the betas and the deposit outflows and deposit growth and the mix of the deposits. So it's a pretty complex set of strategies that we deploy and the tactics that underlie the strategy in each segment. you know, really are geared towards driving better performance in that deposit portfolio. Hopefully that answers your question. That's pretty flawed, but point of visit goes on.
spk11: That was great, Keller. Yeah, maybe, you know, looking at margin, you know, you project or you expect a couple more 25 basis point hikes. What's your expectation for DDA diminishment in that scenario, and are you taking any steps to protect margin if we start shifting to, you know, more of an expectation for lower rates in the future?
spk10: Yeah, I would start with just the non-interest-bearing deposits again for a big focus in the company. So, you know, our ability, as you can see here in my prepared remarks, I mean, DDAs were down 1% or so in the last for the quarter, that takes a lot of effort. All the tools that Vince talked about analytically, as well as our team on the front line and our relationships with customers that are very strong. We've created a lot of goodwill going through Triple P during that process with existing customers and new customers that we've been broadening relationships with. Those relationships and our customers' willingness to talk to us and you know, they're looking to move money instead of just moving money is very valuable. And our team on the front line, you know, has been very active throughout the fourth quarter, talking to customers. You know, we have a large corporate initiative that's been on the lending side as well as the deposit side that has been bearing fruit during the quarter. So, you know, our goal is to sustain the DDAs and continue to grow them from here. You know, we have a slide in there that shows percent of full deposits from 16 up to 34. You know, our team is incentive. you know, to work hard to grow those non-express deposits.
spk03: We have a lot of tools in place, but why don't you mention also, you know, our active asset liability strategy focus on preserving the market, right?
spk10: Yeah, I would say, you know, we, as you would expect, I mean, our treasury team studies it daily. I mean, we've been looking at hedging opportunities really for the last year, and, you know, we did some small amounts of hedging I don't know, six months or so ago, but decided not to put more on because of where levels were and what was expected to happen with rates. You know, you don't have to go back that far when everybody was locked in that rates are just going to fall off a cliff one quarter or two quarters into the year and then, you know, we're going to put on protection. And that became very expensive. So, you know, we put some on. You know, our, naturally, our asset sensitivity has been kind of approaching neutral. You look at the asset sensitive your interest rate risk position, you're down to like 1% or so for plus 100, minus 100. So organically, it's been kind of coming down as we've been deploying cash, which is kind of the natural movement of the balance sheet. So we'll continue to monitor it, Jared. But at this point, the price points haven't made sense to us to load up on hedges for the balance sheet. But we'll continue to look at it, and we'll be smart about it when it makes sense. And if it does make sense to us, we'll put something up. You know, we've done about a billion or so of received fixed swaps, you know, over the recent period. So, you know, we have that component there. But the natural asset sensitivity coming down, and as you know, net interest income is at a much higher base, so it's kind of coming off of that. So, you know, having that lower interest rate risk, a more neutral interest rate risk position, you know, is a positive and is moving forward. So we'll continue to monitor as we have, and and evaluate any hedging opportunities that make sense. But demand deposits are always valuable, and in this environment, they're even more valuable. So our team's success in growing those non-interesting deposits is just key for us, and that will always be a focus.
spk11: Okay, thanks. And just finally for me, just on the capital management side, what's the appetite for M&A here? And maybe, Vince, what's your view of sort of the current state of bank mergers overall?
spk03: Well... I think I wouldn't want to be an investment banker in the short run here. I think it's been a pretty challenging environment. Investment banking fees, in general, is down 40%. Given what's happened with AFCI at the level, it becomes very challenging to do a deal that's accretive, that doesn't have substantial elements to it. We've stated repeatedly that we're not interested in diluting tangible book value. As Vince said, we have capital flexibility that we've never had before, which could mean a number of things. We could become more aggressive in buying shares back if loan growth slows. If you look at the dividend payout ratio on an operating basis, we're down to 34%, unheard of. I mean, we took the reins here. We were at like 80%, 70%, 80% payout ratio. So we have incredible flexibility moving forward that we want to make sure benefits our shareholders. So our focus is just driving shareholder returns and, you know, making sure that we're making smart decisions with capital so that we can move the stock price up and repatriate appropriate levels of capital at some point. That's the strategy moving forward. Great. Thanks.
spk10: Gary, just to go back on the interest rate risk, on slide 11, we did add a chart there that shows the interest rate risk sensitivity over time, and you can see kind of how it's moved down. We have a plus 200, plus 100 chart, and you can see how it organically has come down, you know, close to the neutral by the end of the year. Point that out to you.
spk12: And our next question comes from Casey Hare from Jefferies. Please go ahead with your question.
spk07: Yeah, thanks. Good morning, everyone. Question on the funding strategy. So the guide outlines about a billion and a half of loan growth with deposits flat. Just want to understand what's the outlook for funding that loan growth, be it bond book or borrowings?
spk10: We still have some excess cash, Casey, to put to work, so we'll deploy that as we go through the year. I think if you look at the loan-to-deposit ratio, what's in our guidance and kind of in our plan, we get down to maybe up to 90%, 91% by the end of the year, which is still a very comfortable level for us. So a combination of deploying the cash, and we might have some small level of borrowing as we get towards the end of the year, but overall loan-to-deposit ratio, you know, very comfortable at those levels.
spk07: Okay, very good. And just, I guess, as a follow-up to that is, what is a comfortable min-cash position for you guys, as well as, you know, what is too high a loan-to-deposit ratio?
spk10: Well, I mean, you know, in the past, I remember when we got up to about 97%, we started to get uncomfortable, and You know, we took some actions at that point, some promotional CD programs and those types of things to kind of bring it down. So I'm not saying that's the level, but, you know, our prior history, that was when we decided to start doing things. So I think if you got up to 95-ish, 97, then, you know, we would look at other options or strategies we should deploy at that point.
spk03: We have many tools at our disposal to drive deposit. The question is, you know, how much margin do you want to give up in this environment?
spk10: Okay, very good. Thank you, Casey. Just to clarify, Casey, too, I didn't have a figure in front of me. So there's a billion, too, if you look at our balance sheet at the end of the year of no interest-bearing deposits. So that cash being deployed to support the loan growth would be the first place we would go.
spk07: Yep, understood. Okay. And then apologies if I missed it. Any update? The QM beta is coming in very nice, surprised positively versus what – what you were expecting this year. Any updated thoughts on where QM Beta ends up?
spk10: Yeah, in my prepared remarks, Casey, I mentioned kind of low 20s at the end of the first quarter. And if we look at kind of overall, I would say, well, a few comments on betas, right? You know, I think our team has done an admirable job in the field strategically managing interest-bearing deposit costs. while we're building on it. It's a lot of effort, as you would expect. It's daily effort, talking to customers, managing the relationships, being smart about raising rates for customers that have kind of full relationships. So it's been a very active process. It will continue to be an active process for us. We ended the year, as you saw on the slide, at 16.3, getting down into the low 20s by the end of the first quarter. And then if you look at kind of the midpoint of our guidance, By the end of the year, kind of cumulative total data would be in the high 20s is what we're kind of projecting as we sit here today, you know, versus about 24% in the last hiking cycle.
spk07: Okay, gotcha. Apologies, I missed that. So high 20s through the cycle is what you're thinking?
spk09: At the end of the year, yeah.
spk10: Okay.
spk07: All right, just last one for me, maybe one for Gary. So the provision guide of 65 to 85, you guys do mention a softer macro economic environment. We're all kind of struggling with CECL modeling, just wondering if any color you can provide on how softer that macro is, be it unemployment rates, GDP, etc.? ?
spk04: Yeah, it's pretty much across the board, Casey. And during the quarter, we also saw some softer economic forecasting in our CECL models, which impacted the provision to the tune of about $8 million. So we've got that built in through 2023. So that is, you know, a pretty good portion of, you know, where we've guided to across the year. The other naturally is loan growth as far as the drops are there. And loan growth will, you know, will move those numbers a little bit within that range, as we've talked in the past.
spk03: Thank you.
spk12: And our next question comes from Daniel Tomeo from Raymond James. Please go ahead with your question.
spk01: Thank you. Good morning, everyone. Sorry, first, I just wanted to clarify that last comment, Gary. Did you say that $8 million reserve bill is what was built into your assumptions for the 2023 provision?
spk04: No, I'm sorry. The $8 million was CECL macroeconomic forecast changes in Q4.
spk01: Okay, okay. I apologize. All right. Terrific. Do you have a thought on kind of how much reserve build is in the guidance relative to what would be just loan growth or... uh charge off activity yeah cecil impact is about a third uh loan growth is about half of it okay all right thank you um and then maybe we could just talk a little bit more about the margin um i know we've talked a lot about deposit betas but Just interested in your thoughts on actually the pace of the margin. We can kind of back into what the rest of the 2023 would look like based on your guidance, but just interested in terms of if you do continue to get expansion in the first quarter and how accelerated the contraction you're expecting after that point would be.
spk10: Yeah, I can comment on that, Danny. You know, the outlook, just to restate again, includes an additional 50 basis points of hikes in February and March, and then no additional Fed actions for the rest of the year. You know, our guidance would imply a slight increase in margin from the 353 level that we were at in the fourth quarter, you know, peaking in maybe the second quarter, kind of based on what's in our plan. But we're talking single digits of basis point movement here. So there's still some upside to that level. And then similarly, on the other side, it comes down a little bit from that peak, but we're talking in the single basis point type level.
spk09: So that's what's baked into it.
spk01: Okay, great. I appreciate it. Okay, terrific. And then I just wanted to, again, clarify an earlier comment. I think you said the midpoint of your expense guidance would assume that you or would be under 50% efficiency ratio in 2023. I just want to make sure that that's what I heard. And if there was kind of a, I had an original question, like how likely you think it is that you do stay under 50%. So I guess assuming your expenses come in about where you expect, you would expect that to be under 50% is an accurate statement.
spk10: Yeah, using the midpoint of our guidance kind of across all the different categories. You heard it right. That's an accurate statement.
spk01: Okay. And is that kind of becoming a longer-term goal for the bank to stay under 50% efficiency ratio? Or if we get into a lower rate environment, do you think that might drift back over?
spk03: I would say our goal would be to continue to reinvest in the company. And, you know, with the changes in the margin based upon macroeconomic factors, it could swing back and forth over 50, under 50.
spk10: Yeah, low 50s, I would say, would be a reasonable longer-term kind of momentum.
spk03: But I will tell you that there will be capital investment required as we move forward, particularly in technology, for us to stay competitive, for us to maintain margins in the future, and to keep doing what we're doing with the betas and It's not a free pass forever. So we have to keep watching what we do, and we're going to have to manage the margin. We're in a very good period for our organization. We plan for this time. We're benefiting. But obviously, the world's going to change. So we're diligent on expense control, and we continue to reinvest in the company.
spk10: Sorry, I didn't want to... No, no, no. That's good. I would just add to that, I didn't mention the kind of cost savings target for 23, which is $9 million. You know, as you know, we're a discipline manager of expenses. We continue to invest, as Vince said, in a variety of initiatives on the digital side and Bonobos and some of our kind of digital infrastructure. And then one other thing I would add, you know, in the past I've talked about kind of, you know, project improvement, process improvement, I should say. You know, we've always had a focus on that, renegotiating with vendors, facility space optimization. But the process improvement side of it, you know, we've recently reorganized a little bit internally, adding some additional resources to drive the corporate-wide focus on process improvement. I think there's a lot of opportunity deploying RPA-type technology to really drive further efficiency as we go forward. We're still in the early stages of that, but that also will contribute to, you know, I think allowing us to have sustainably in the low 50s as you move forward. you know, given all those efforts.
spk01: Terrific. Thanks for all the color. That's all for me. Thank you.
spk12: Our next question comes from Michael Perito from KVW. Please go ahead with your question.
spk06: Hey, good morning. Thanks for taking my questions. Obviously, you guys covered most of it. Just a couple quick ones to wrap us up here. Just, Vince, in terms of the kind of geographic footprint, You mentioned a little bit about some pipeline and some stuff like the Carolinas, et cetera. But just as we look at kind of the spread of the bank today, any opportunities or areas of focus for you guys in 2023 that we should be mindful of? Maybe something like Philadelphia where there's been a lot of mid-caps taken out over the last couple of years. Just anything kind of like that that's on your radar that you would convey to us at this point?
spk03: Yeah, I mean, I will tell you that we have studied Philadelphia From a commercial lending perspective, we do have an office there. Our plan is to continue to expand it. We think there's some opportunity there in the middle market, large corporate space. I also think Philadelphia, when we ran our model with the MSAs, because of the number of companies domiciled there and the competitive climate, it scored out pretty high. The dynamic keeps changing. There are fewer competitors. Basically, We're seeing it as an opportunistic area to expand. And there are several other markets that we've launched into that we'll continue to bolt onto. We've had tremendous success in Charleston. Our plan is to continue to grow there. We are looking at de novo expansion in Richmond. We've studied opening a loan production office, commercial only, in Atlanta. And, you know, those are pretty much the areas that, you know, we're focusing on. But nothing earth-shattering or there's no great, you know, movement retail de novo expansion. But I think there are opportunities for us to extract additional high-quality growth in our existing footprint. You know, we may not have the density. And then the other thing that we've done strategically was substantially increase our ATM rollout. What we've found is that that's helped us immensely with the retention of customers, growing VBA balances, expanding small business opportunities. So we've done that through both branding opportunities and direct placement of ATMs and ITMs. So our ATM network grew more than 30% across our footprint. So we have 1,200 ATM locations. So 250 of those were rolled out in North and South Carolina. And then another 250 in Maryland, Virginia, and Baltimore, Washington, DC. Northern Virginia, Washington, DC. So we're trying to supplement our physical delivery channel in former branches with other channels to distribute cash. And then we're marketing our e-store, which enables individuals and small businesses to open accounts online. Anyway, that's the strategy. And I think from a geographic perspective, there's plenty of opportunity within our existing footprint for us to continue to grow.
spk06: Yeah, I mean, that makes sense. From the outside looking in, it would seem like, especially around, you know, the 95 corridor, like Virginia, like you mentioned, Philadelphia, like there are a lot of the competitors there, though, are much more loaned up, right? Probably a lot less willingness to lend. Deposit payers are a lot higher. You know, the balance sheets are a lot smaller. It would seem like you guys have a pretty attractive value proposition for some lending talent in those markets, you know, coming from the west and south, as opposed to coming from the New York area where, you know, there's just more balance sheet constraints.
spk03: Yeah, and I think our treasury management offering, you know, at least as it scores out through Greenwich and other surveys, is pretty well-respected. So that enables us to go in and garner deposits as well. We go in, we become the principal bank, we get the operating accounts, we sell treasury management services. And I think we've proven moving into the southeast that our products stand pretty well. If you look at the non-interest income growth of the company, a lot of that was driven from our expansion into the southeast. And there was quite a bit of skepticism about our ability to compete. I think we put that to rest. the growth in various categories has been fairly substantial and very robust. So we have the product capability as well to go into some of the markets that we don't have density in within our existing seven-state footprint.
spk06: Great. Thanks for that, Vince. And then just last for me, just on the effective tax rate guide, it says, you know, assumes no investment tax credit activity. Can you just remind us quickly, you know, what the activity looked like last year and just also, you know, if you do move forward with any transactions there, what you guys typically look at from an opportunity standpoint? I guess a VC answer.
spk10: Go ahead. I would just say, I mean, it's a line of business for us, but we don't have some transactions each year. I mean, in 22, I don't think we had one in 22. We had maybe a couple in 21. So, I mean, there's an active business process there, and we may have some this year. We just don't want to put it in the guidance. If we do, then it's a positive additive to the guidance there.
spk03: Is that like housing income tax credit stuff, though, or is it like what type of... Renewable energy tax credit projects, typically solar, may have a long gestation period. It takes a lot of time to get to the finish line. There have been some supply chain issues with the solar panels, so that elongated some of those projects. Perfect. Thank you, guys. All right. Thanks, Mike. Thank you.
spk12: And our next question comes from Brian Martin from Janie Montgomery. Please go ahead with your question.
spk13: Hey, good morning, guys. Congrats on the nice quarter. Take on the questions. Just one clarification. I think it was Vince. Vince, you mentioned the pipelines. Can you, I guess, was it 15%? I'm not sure if you were speaking more to the commercial, the consumer. Just give us an update on what those pipelines, I know they're a little bit softer, but just connecting the dots there, just now whether it was commercial or consumer and just kind of how they're trending here.
spk03: This is Vince DeLee, and I was speaking specifically to commercial, not consumer. What I said, we had two very strong orders. know in terms of production that tends to you have to reset we're moving into a slower uh seasonal period so our pipelines are down and even given all that when you look at it on a comparable basis taking the seasonality out of it we're still down 10 to 15 percent and they're rebuilding and they're you know rebuilding the pipelines that's just something that you know It illustrates where we are economically. I think there's a lot of uncertainty. I think, you know, our borrowers are on the sidelines for a little bit here to see what happens. And it's going to be a little while until we start to see that build back. Gotcha.
spk13: Yep, into second quarter. And then on the consumer side, you know, how is that trending today?
spk03: Yeah, consumer pipelines, there's seasonality there as well. So it's kind of tough to say. I think, you know, the pipelines in general have been pretty consistent where they've been seasonally, maybe down a little bit. Mortgage, you know, there's more production coming online, you know, in terms of opportunities for us to take on adjustable rate mortgages on our balance sheet. So, you know, we're seeing both in that category. You know, direct consumer, you know, we're seeing a little bit of slowness in the HELOC space now, but that tends to build back up again as we move through, you know, the normal housing sales season, you know, the home improvement season starts to kick up here at the end of March. So it's a little tough to tell what business ends up. Small businesses are pretty much across the board. We have some good momentum in a number of markets that we've entered. We have a fairly sizable portfolio there relative to the total bank. It's over a billion dollars, but relative to any other commercial portfolio, it's not gigantic. But we're seeing some really good positive momentum in the Carolinas, in the Mid-Atlantic region, and in the East.
spk13: Thanks for the caller. And maybe just one or two others. Just on the inside the guide on the fee income side, just kind of your thoughts on mortgage obviously being kind of a low point for the year. And just trying to, as you think about next year, I guess, can you give any thoughts just on high level on how you're viewing the mortgage activity given kind of what we saw throughout the year?
spk03: Yeah. I think I'm going to turn this over to Vince in a minute. Basically, the mortgage business, we've always tracked globally what the expectations are from a number of statistical sources that tell us what growth is expected to be. We tend to do a little better, not a little better, we do a lot better than what the typical forecasts are. So I attribute that to the geographic dispersion of our originators. We've had great success in certain segments as well. Physicians, the physicians program that we had, that portfolio has now grown substantially. It was over a billion dollars. So there's little pockets that we go after. But there's also certain markets that tend to have better housing. markets generally than our legacy markets like the Carolinas and the Atlantic region where we have originators dispersed. I think we'll probably outperform the market overall again this year. I would expect that. You know, I think that the servicing portfolio that we have has been a good hedge for us from an earnings perspective. So, you know, that's helped us. But go ahead, Vince. You had a couple of other facts.
spk10: Yeah, I was just going to to add that, you know, look at production overall for the fourth quarter, $567 million. You know, it's seasonally down from the third quarter, but, you know, 16%, so it fell off a cliff. And then to Vince's point, I mean, the high-level industry forecast right now is for production regulations to be down 24%. You know, baked into our expectations and our guidance, it's more like a down kind of 14%. we would expect to outperform the industry, like Vince said, and we have done that in the past and continue to do that.
spk13: Gotcha. Okay. So a little bit lower. At least you're talking about 14% year over year is kind of what you're looking at there, right, Vince? Yeah, full year to full year. Gotcha. Okay. Perfect.
spk03: And just one more thing. I mean, with the lowering of the 10-year industry, we have seen a pickup in lockup volume in both mortgage and in the consumer vote, just so you know. Yeah.
spk13: So that makes sense.
spk03: Rates do have a impact.
spk13: Yep. And just to remind me, I guess on the deposits, there's been a lot of talk about the beta. Where did you guys exit the quarter on the cost of deposits? I guess I know you talked about the betas where they tried to, but for like the month of December, where were the, I think you said loan yields were, I thought they were 6% for the quarter of the origination yields, but the cost of deposits as far as exiting in December, where were you guys there?
spk02: Yeah, total deposit costs ended December at 79 basis points and interest-bearing deposits ended a year at about 1.14%.
spk13: Gotcha. Okay. Perfect. And the last one for me was just on the deposits. You guys talked about the guide being relatively flat. It's just a mix. I mean, I know you talked about the work it takes to keep the deposits where they are. Just where you are now on the DDA, you know, as you kind of look throughout the year, I mean, do you expect that number to come down a bit? Is that kind of in your forecast? Or do you think the efforts you guys have, you can kind of maintain this level you've reset to?
spk10: We're going to work hard to maintain and grow that important source of funding for us, honestly. I mean, there's been some mixed shift into CDs, as you would expect, particularly in the municipal and commercial side. I mean, there's been some shifting into CDs. The key is that it's still kind of staying in the house, so it's moving around a little bit. And the non-interest-bearing deposits, like I said earlier, it's a big focus in the company with existing clients but also bringing in new clients.
spk03: Yeah, but really, we have to see how things play out throughout the year. I mean, there's going to be pressure. on non-interest-bearing deposits with disintermediating within the existing book as we move into a period of extended high rates, Brian. So we're going to have to work really hard. But I think we've outperformed at least what we've seen reported recently, and we're going to keep doing what we're doing to maintain those balances to the best of our ability. Because that really drives our profitability through the next year.
spk13: And you're in a much higher base now with all the efforts you guys have had here the last year or two with the money you've taken in.
spk03: There's considerable granularity in that just varying deposit base. So there's some hope there.
spk13: I got you. Okay. Thanks, guys. Nice quarter.
spk03: Yes. Thank you very much. I appreciate it.
spk12: Next question comes from Manuel Navas from DA Davidson. Please go ahead with your question.
spk09: Hey, good morning. Most of my questions have been answered, but could you just give me a reset on the Physicians First portfolio? You said it's about just over a billion, kind of like the year-over-year growth. What are new loans coming in on? Any kind of extra color there would be great.
spk03: I'll start out with the program itself so you understand. We have a dedicated team that originates mortgage loans in this space. They've done a terrific job. We built out on our eStore platform a digitized product offering. It bundles a set of products for physicians. That's been offered electronically on the eStore. We use that eStore to promote the product digitally. We've done very, very well. I can tell you the CAGR on this portfolio is fairly significant. So it's grown nicely. We started with the originators first and then we supplemented their effort with the digital offerings and set up the campaign. If you just look at households with positions, we're up 66% in eastern North Carolina and mid-Atlantic region alone. So we've had some good success in those markets. Full year production was over a half billion. The portfolio stands at 1.2 billion at year end. So the program has worked very well for us. And those are high value households in that we feel confident that with our digital capabilities and our analytics, we'll be able to continue to penetrate that household with additional products and services. It's a good program for us. The credit quality is stellar in that portfolio.
spk04: We're also rolling out, as we speak, the small business side of that equation for the physician practices. So that's something that we're looking to do as we speak, and we'll start to see some activity there as we get into 2023.
spk02: So it is an exciting space for us.
spk09: Perfect. I appreciate that. So you're building on it. Thank you.
spk12: And ladies and gentlemen, with that, we'll end today's question and answer session. I'd like to turn the floor back over to Vince for any closing remarks.
spk03: Well, I'd like to just thank everybody for your interest and the good questions we had today. It was a tremendous year. you know, we really hit on all cylinders. I think the company is in a really good position moving into this year. And, you know, that doesn't come without a tremendous effort from our employees. So I'd like to thank all of our employees, the executive leadership team, and the board of directors for their support and confidence. I think, you know, over the last four or five years, we've proven that we can execute, you know, on a number of levels. And this company keeps exceeding my expectations in terms of what we deliver and what our employees deliver in the field. So I want to thank them and thank our shareholders for sticking with us and supporting us. And we're really looking forward to what's coming. So no matter what the challenges are, we're going to get there and we're going to win together. So thank you very much.
spk12: And, ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.
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