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spk02: Good morning and welcome to the F&B Corporation first quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.
spk04: Thank you. Good morning and welcome to our earnings call. This conference call of FMV Corporation and the report it files with the Securities and Exchange Commission often contain 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 materials and in our earnings relief. 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 Friday, April 29th, and the webcast link will be posted under the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince DeLee, Chairman, President, and CEO.
spk09: Thank you, and welcome to our first quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. F&B reported first quarter net income available to common stockholders of $144.5 million, or $0.40 for diluted common share. On an operating basis, EPS grew 54% over the first quarter of 2022. Operating pre-provision net revenue increased 68% from the year-ago quarter as we managed a positive operating leverage of 21%. The overall success of F&B's financial performance was due to the consistent execution of our previously stated strategic initiatives. For example, we set out to diversify incomes and rely on various sources to maintain performance. This quarter, F&B reported record wealth management revenue of $18 million on a linked quarter basis, contributing to our stable monitoring. We also strive to be our customers' primary operator. And through our deep customer relationships and granular deposit base, we were able to maintain stable average deposit balance. Our philosophy of maintaining consistent and prudent underwriting standards, regardless of the macroeconomic environment, contributed to FMB growing average loans 3.6% in the quarter without compromising on asset quality. The first quarter also had positive momentum on several key performance metrics, including return on tangible common equity of 20%, return on average assets of 1.4%, and a tangible common equity ratio of 7.5%, one of the highest levels in company history. We are pleased with this quarter's results and believe it validates the aforementioned execution of our strategy, especially our conservative and diligent balance sheet management with ample capital and liquidity to withstand the adversity of the industry in a more challenging economic environment. The recent bank failures however idiosyncratic in nature, have placed a spotlight on the importance of liquidity in maintaining a diversified and granular deposit, conservative and prudent balance sheet management, solid capital levels, and sound risk management policies and governance. These practices have always been integral to FNB's long-term strategy and are ingrained in our enterprise risk management programs which includes regular liquidity stress test analysis, capital stress testing, CECL reserve model analysis, and diligent proactive credit monitoring. As I previously mentioned on multiple calls, we foster close relationships with our customers and remain focused on being their primary operating bank. In addition to prioritizing high-touch service, we have made strategic investments in our digital technology treasury management platform, and payment solution capabilities, which enables our customer privacy. The first quarter deposit levels through the industry disruption are a testament to the success of our focus on growing client relationships, with deposits ending the quarter at $34.2 billion, a slight decline of 1.7% from the prior quarter, outperforming the HH deposit data for small and large banks. Between March 8, when the industry volatility began, and quarter end, our deposit balances were essentially flat, declining 0.7%, primarily due to seasonal offloads from normal wholesale and retail customer activity. Another strength is the diversity of our deposit base throughout the different customer segments, with consumer account balances comprising the largest segment of total deposits at 41%. The consumer segment is comprised of approximately 1 million accounts with the median consumer deposit balance at quarter end around $5,000. Additionally, since March 8th, we experienced a net increase in the number of accounts across all customer segments. Positioning F&B is a benefactor as deposit inflows are restored to normal levels and customers diversify funds between banks. Because of the granularity in our deposit base, FMV ended the quarter with approximately 76% of deposits either insured by the FDIC or collateralized, which exceeds the peer median for the 50 banks in the KRX Bank Index at Dear Energy. If necessary, we also have available liquidity to fund up to 170% of our uninsured and non-collateralized deposit balances. As of March 31, placing F&B in a very strong liquidity position. F&B's investment portfolio philosophy is also conservative by nature with respect to duration and risk. We managed to an average duration of between three to five years and have historically maintained a fairly even split between available for sale and health maturity. At the onset of the current banking industry disruption, F&B management activated our contingency funding plan. Our team's response was swift and working diligently over the weekend to ensure that our board of directors were briefed, employees were reassured of our stability, and customer-facing personnel began proactive client outreach with talking points regarding the strength of our balance sheet, including F&B's capital and liquidity position on a relative and outright basis. In addition, we bolstered our liquidity position by increasing cash on the balance sheet by nearly $1 billion. Through the financial crisis, pandemic, and now the banking industry disruption, F&B has earned our customers' trust, and we promise to uphold that trust as we have positioned the company to outperform the industry in a wide array of potential economic and industry scenarios. Credit continues to remain as one of our strengths. I am very pleased to once again report a solid credit position with low delinquency at 60 basis. I will now turn the call over to Gary to give more details on our asset quality and our consistent management of credit risk. Gary?
spk01: Thank you, Vince, and good morning, everyone. We ended the quarter with our credit portfolio well positioned and our asset quality metrics remaining near historically low levels. Our performance for the period reflects total delinquency that ended the quarter at 60 basis points, NPLs and OREO at 38 basis points, and net charge-offs at 18 basis points. Criticized loans were up moderately at 19 basis points quarter over quarter, although down 55 basis points year over year and still at historically low levels. I will cover these GAAP asset quality highlights for the quarter in more detail, followed by some insight into our credit strategy we use to manage the loan portfolio throughout economic cycles. Let's now walk through our credit results. Total delinquency declined 11 basis points in the quarter, maintaining the historically low delinquency levels seen in previous quarters. NPLs in OREO were down one basis point compared to the prior quarter, with 55% of our NPLs in a contractually current payment status. Net charge-offs for the quarter totaled 13.2 million, or 18 basis points on an annualized basis, with 11 basis points reflecting the use of previously established specific reserves. Total provision expense for the quarter stood at $14.9 million, providing for loan growth and charge-offs that did not have a previously established specific reserve. Diesel-related model bills were moderate at approximately $4 million. Our ending funded reserve increased $1.7 million in the quarter and stands at $403 million, or a solid 1.32% of loans. reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.49%, and our NPL coverage position remains strong at 356%. We remain steadfast in our approach to consistent underwriting, and managing credit risk to maintain a balanced, well-positioned portfolio throughout economic cycles. We proactively review and stress test portfolios on an ongoing basis, including in the current quarter where we performed an in-depth review of commercial real estate loans maturing in 2023 and 24. We were pleased with the outcome of that exercise and did not have any risk rating changes, which was not unexpected as we maintain a diversified commercial real estate portfolio backed by strong sponsors and low LTVs. Regarding the office portfolio, delinquency remains very low at 27 basis points and criticized loans are below 10%. Our top 25 office exposures averaged $28 million and 43% of the loans are less than $5 million. We have and will continue to aggressively manage this portfolio on a loan-by-loan basis as part of the in-depth reviews we regularly perform. In closing, we had a successful quarter marked by the strength and favorable positioning of our credit portfolio as we continue to generate diversified loan growth in attractive markets. We closely monitor macroeconomic trends and the individual markets in our footprint and will continue to manage risk proactively and aggressively as part of our core credit philosophy, which has served us well in softer economic times. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk11: Thanks, Gary. Good morning, everyone. Today, I will focus on the first quarter's financial results, provide some color on our balance sheet management activities during the banking disruption in March, and offer guidance updates for the remainder of 2023. First quarter net income available to common shareholders totaled $144.5 million, or 40 cents per share, with record revenue contributions, seasonally higher expenses, and continued solid asset quality performance. Total earning assets reached an all-time high, ending in the quarter at $39.3 billion, with a $352 million quarterly increase driven by loans and leases growing $418 million, or 5.6% annualized. Commercial loans increased $222 million, or 4.7% annualized, driven by the continued success of our strategy to grow high-quality loans across our diverse geographic footprints. While commercial production was slightly lighter than the fourth quarter, reflecting normal seasonality, attrition improved and loan pipelines increased sequentially after the robust loan production last quarter. Consumer loans increased $196 million linked quarter, or 7.3% annualized, as growth in residential mortgages of $292 million was partially offset by decreases in average direct home equity installment loan balances consumer lines of credit, and indirect auto loans. Given the high-rate environment, organic growth and residential mortgage reflects customers' continued preference for adjustable-rate mortgages, as well as the continued success of our Physicians First Mortgage Program, both of which we currently keep in portfolio. Investment portfolio remains stable at $7.3 billion, with 46% classified as available for sale. When including the fair value marks in our AFS and HCM portfolios, our CET1 ratio is above the peer median calculated on the same basis, and we remain well capitalized. Duration of our securities portfolio at March 31st is 4.5 years, and inclusive of our cash position is 3.9 years. Total deposits ended the quarter at $34.2 billion. a decrease of $580 million linked quarter, or 1.7%, largely due to normal first quarter seasonality. In fact, since March 8th, deposits were relatively flat, with a slight 0.7% decline due to normal outflows from wholesale and retail customer activity. Vince mentioned earlier our median consumer deposit balance was $5,000 at the end of March. And looking at the total deposit portfolio, our average account balance is approximately $30,000, which is well below Silicon Valley Bank's average of $1.1 million and Signature Bank's $508,000. We are also lower than our peer median as of year-end. The deposit mix did shift this quarter, with time deposits increasing $1.1 billion as customers moved funds out of money market accounts take advantage of higher CD rates. As of March 31st, our mix of non-interest-bearing deposits remained strong at 33% of total deposits, down slightly from 34% at year-end, but the loan-to-deposit ratio remained at a comfortable level, ending the quarter below 90%. In light of the bank and industry disruption, we decided to bolster our on-balance sheet liquidity position by increasing short- and long-term borrowings by about $1 billion in the aggregate, bringing our excess cash position to $1.3 billion at quarter end. Looking at the income statement, record quarterly revenue of $416 million was driven by net interest income totaling $337 million, a linked quarter increase of $1.8 million, or 0.5%. The net interest margin expanded three basis points as the earning asset yield increased 39 basis points, with loan yields up 42 basis points, while the cost of funds increased 38 basis points. Currently managing deposit costs in this rate environment continues to be a significant focus. Spot interest-bearing deposit costs ended the quarter at 171, with the quarterly average coming in at 150, reflecting the ongoing diligent work by our team. Total cumulative deposit basis ended the quarter at 21.8%, within our prior guidance of 22%. Turning to non-interest income and expense, non-interest income totaled $79.4 million, a slight decrease of 1.5% in the fourth quarter of last year. Wealth management reached a record $18 million with a quarterly increase of $2.4 million, closely split between securities, commissions, and fees, driven by strong annuity revenue, and truck services, primarily from strong organic growth and seasonality. Higher production and contingent revenues led to a $3.3 million, or 73%, linked quarter increase in insurance commissions and fees, while mortgage banking operations income increased $2.1 million linked quarter, reflecting a 5% increase in sold mortgage volume and improved gain on sale margins. Capital markets income decreased $3.2 million, due to reduced syndications and swap fees from very strong levels in the fourth quarter of 2022. Service charges in the quarter decreased $2.9 million, largely reflecting the expected decline in overdraft and non-sufficient fund charges due to our previously announced fee program changes given the current competitive environment. Operating non-interest expense totaled $218 million, an 11% increase from the fourth quarter largely reflecting normal seasonality combined with the addition of the union expense base for a full quarter and the impact of the previously announced increase in the FDIC insurance assessment rate. Salaries and employee benefits increased $17 million, of which approximately $12 million was related to normal seasonal compensation activity, including $6.7 million of long-term compensation and seasonally higher employer-paid payroll taxes. The remaining $5 million increase is primarily from reduced salary deferrals, even lower loan origination volumes, and the addition of the acquired union expense base. Even with these expense items, the efficiency ratio remains at a favorable level of 50.6%. Our capital ratios end at the quarter at levels that are expected to be at or above peer medians. Tangible book value for common share was $8.66 at March 31st, an increase of $0.39 per share for 4.7% from December 31st, largely from the higher level of earnings and the decreased impact of AOCI, which reduced the current quarter end tangible book value by $0.87 per share compared to $0.99 at year end. As Vince mentioned, our TCE ratio is one of the highest in company history at 7.5%. To demonstrate the strength of this level amidst the industry disruption, TCE adjusted for our HTM unrealized losses equals 6.9%, which is 50 basis points higher than our pure median using reported year-end levels. Let's now look at the 2023 financial objectives, starting with the balance sheet. On a full-year spot basis, we maintained our previous guide for loans to increase mid-single digits year-over-year. Total deposits are projected to end 2023 at a similar level as the December 31, 2022 spot balances, although we do expect a continued shift in the deposit mix given the current rate environment. Full-year net interest income is expected to be between 1.315 and $1.365 billion, with the second quarter between $325 to $335 million. Our guidance currently assumes a 25 basis point rate hike in May, then flat for the remainder of the year. The modest decrease in guidance from last quarter is largely related to our expectation for higher deposit betas given the current banking industry environment. If rates were to come down this year, as the forward curve currently is projecting, That could lead to modest upside to our NII forecast. Full-year non-interest income is expected to be between $305 and $320 million, with a slight upward revision reflecting our first quarter beat relative to our previous guidance. The second quarter is expected to be in the mid-$70 million range, with continued benefits from the diversified revenue strategy. Full year guidance for non-interest expense on an operating basis is $835 to $855 million. The adjustment is to account for the higher first quarter expense levels, but the remaining nine months are expected to be consistent with our prior guidance. Second quarter non-interest expense is expected to be between $205 to $210 million. Full year provision guidance remains $65 to $85 million and is dependent on net loan growth potential CECL model-related bills from a softer macroeconomic environment. Lastly, the expected tax rate should be between 20% and 21% for the full year, which does not include any investment tax credit activity that may occur. With that, I will turn the call back to Vince.
spk09: Our conservative business practices have positioned F&B to sustain solid performance during turbulence in our industries. We ended the first quarter with a strong capital position and stable deposit base and are confident that we are poised to capitalize on this foundation in the months to come. F&B's financial performance is directly correlated to maintaining our superior culture. We are proud of our differentiated culture and the awards we have received for our industry leadership and employee and client experiences. In 2023, FAB was selected as a selling model bank for omni-channel retail delivery for our proprietary e-store, one of America's best banks by force, top workplace USA by Energage, and a Greenwich Excellence Award winner for client service for the 12th consecutive year. We also continue to be honored for our commitment to diversity and inclusion, is one of America's greatest workplaces for LGBTQ+, a best of the best company by three diversity publications, and a Woman's Choice Award winner for Women and Millennial Women. FIB earned these awards through the hard work and dedication of our employees who share our commitment to our values and mission. Thank you. to our team for cultivating an environment that succeeds at creating shareholder value while respecting one another and winning together. We will now begin the question and answer session.
spk04: All right, that was great. Is there anything you would like to rerecord?
spk02: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Frank Chiraldi of Piper Sandler. Please go ahead.
spk06: Good morning. Vince, you mentioned the negative carry or you mentioned the additional liquidity on the balance sheet. Just wondering what the negative carry is on that. And is that a primary driver of the lower NAI guide, or is it more the mixed shift? I guess you now have accelerating a bit into time, it seems.
spk09: Yeah, the negative carry, Frank, is really like in maybe 10, 15 basis points.
spk11: It's not that significant because, you know, we're earning our excess cash position. We're still at $1.3 billion. We're earning $4.90 on that. I think the borrowing we took down, we're around you know, given current deposit rates.
spk06: Okay. And I'm just kind of curious, I don't know if you have this granularity there in front of you, but as you think about the mix shift that's baked into your guide, what does that sort of assume in terms of non-interest bearing levels as a percentage of total deposits by the end of the year?
spk11: It comes down slightly between now and the end of the year. As you know, that's a big focus in the company. Our account acquisition strategy and lending strategy is always revolved around bringing in the operating accounts. Those continued efforts continue to bring in new accounts. During this disrupting period, we actually net added accounts.
spk09: But as a percentage, we talk about customer primacy. What we mean by that is we're the principal operating bank. We're the disbursement bank for consumers and businesses. If you look at the granularity in the consumer book, you know, that we mentioned on the call and the prepared comments, right, there's, you know, that's pretty sticky. You know, there's not a lot of places to go to earn more on $5,000. I don't know that it, you know, is impactful enough for people to move their money around. And we tend to be, that tends to be their principal operating account for us. So, you know, they're going to keep cash in there that cover items that are presented for payment. And it's where, you know, direct deposits is credited to. And then on the business side, you know, as we've said historically, if you look at the concentration, 17% of the deposits that we have in the commercial segment, you know, a good bit of that is tied directly to services. So, you know, compensating balances where you gain an earnings credit, that sits in a non-interest-bearing bucket and, again, tends to be sticky because customers So that's all embedded into that non-interest DDA category. So we feel pretty good about having a good solid base, and at a minimum we feel we'll outperform others who may be relying on more transient balances. I think it shows, basically. If you look back historically, you can see it in our performance relative to other banks in that category.
spk06: Okay. All right. I appreciate that. Yeah. And then just lastly, as a follow-up, just a question for Gary on credit. You know, in your slide deck, you talk about the average LTVs. I think it's in the office book, specifically in the low 60s. I'm guessing, you know, I assume that's largely value at origination of these loans. And just wondering, as you've gone through this in-depth portfolio review, what that's sort of telling you if you can share what that's telling you about where, you know, value has moved in some of your markets in terms of the underlying property, you know, in sort of percentage terms. Thanks.
spk01: We've updated various appraisals, Frank, on properties in that space. We've seen reductions, generally speaking, in the 15% to high teen range. into the 20s. We did have one that had some leasing issues that got into the 30s. But so far at this point, you know, that's the range that we have been experiencing. And that's pretty much been across the board with the ones that we've had to update. Okay, great. I appreciate that. Thanks.
spk11: Frank, just to clarify on the negative carry question. I forgot, we had some portion of what we took down with two-year money at like 440. So kind of all in the additional liquidity, which really had no negative carry, kind of all in on a flat basis.
spk09: Okay, thank you. Thanks.
spk02: The next question comes from Daniel Tomeo with Raymond James. Please go ahead.
spk00: Thanks. Good morning, everyone. Maybe first, You know, on the operating expense guidance, if you could just give me an idea of what drove the overall outlook higher given, you know, I guess my overarching thought that with the outlook down, that that should drive a decline in incentive compensation.
spk11: Yeah, I can comment on that, Danny. I mean, expenses for the quarter, you know, on an operating basis came in at $218 million. Our range from January was $210 to $215, so $3 million above the high end of that range. Half of that variance was just lower deferrals on loan origination costs and lower consumer volumes, consumer loan volumes than what we had planned. So that was kind of half of that $3 million difference. And then the rest of it was really a handful of kind of one-time items. If you look at our guidance for the second quarter, $205 to $210, that compares to a $218 figure. That's consistent with our original guidance that we gave in January. In fact, the nine months, as I mentioned in my prepared remarks, is unchanged from what we had said before. So it's really just a combination of lower FAS 91 deferrals, half of it, and then some one-time items. So as we move forward, depending on how the year plays out, there is commission incentive cost as variable, right? Depending on how much revenue we create, that'll be up or down. So that is a swing item or a variable expense that will vary depending on But it's really just, it was $3 million above the high end of the range. So it's not that significant. And the guidance forward, you know, we'll manage expenses diligently as we always have.
spk00: I appreciate that. Sorry, I missed your comment and the prepared remarks on the stable from prior guidance for the rest of the year. But thanks for that. And then maybe a couple for Gary here on credit. First, the office portfolio, appreciate all the incremental detail there. Just wondering if you had a breakdown of, you know, I know you mentioned spread across the footprint, but what properties are in, you know, what cities are urban versus suburban? Any way that we could get more detail into kind of the type of city that those offices are in?
spk01: Well, I mean, the majority of the larger offices facilities are, are in the Metro cities, Daniel. Um, you know, as, as mentioned in the, in the remarks, I mean, 43%, almost half of that books under $5 million. So they're kind of scattered in suburban markets, uh, for the most part. Um, but in, you know, in terms of, in terms of those appraisals, um, we had, we had one with leasing issues in Pittsburgh that came down. We had one in the Carolinas that came down. So, you know, it's pretty much across the board.
spk09: Gary, just to clarify, you know, like you said, the vast majority of our CRE exposure is suburban in nature. I know you said metro markets, but we tend not to finance on a long-term basis large office facilities other than our own. But, I mean, we don't. You know, we're not in that business, right?
spk01: No, with the average being $28 million, I mean, that kind of speaks to the top 25 at $28 million, speaks to, you know, the type of properties and locations. We have, you know, very little urban, big city center type of office properties, very little.
spk09: And, you know, our LTVs are very conservative. I think, you know, a portion of the portfolio that's in construction, you know, fund up basically is typically secured by leases. You know, we don't do a lot of spec or hardly any. So, you know, that's backed up by leases. And the LTVs are going to be a little higher on the construction pieces of the portfolio versus what we have in our book because we tend not to keep large exposures you know we underwrite them to a permanent take down so i just want to make sure everybody understands that in the makeup of the numbers on the slide that we present for known owner occupied series okay thanks for that thank you um lastly just to follow up there on uh not on office but in
spk00: I guess the macro outlook overall, the reserves came down in the quarter, which was a little bit surprising. But just curious on your thoughts on the driver there of reserves down and then your thoughts on the overall macro outlook, I guess, relative to last quarter.
spk01: Yeah, actually dollar reserves were not down. And the reserve was down from 133 to 132. So it was down one basis point. Still at $403 million. And, you know, we use some specific reserves that I mentioned in the prepared remarks in terms of that one basis point. So, you know, we look at it as slattish. And, you know, when you include the unamortized loan discounts at 149, I mean, our reserve position compared to peers is very strong.
spk09: Okay, so here's been 2025 basis points.
spk11: If you look at our coverage level in versus the peers, you know, that's a significant buffer over and above where others have been carrying their reserves.
spk00: Understood. Yeah, I got you. All right. Well, I appreciate all the color. That's it for me. Thanks, guys. Thanks, Dan. Thanks.
spk02: The next question comes from Jared Shaw with Wells Fargo. Please go ahead.
spk07: Hi, good morning. This is Timor Braziler filling in for Jared. Maybe just continuing the last line of questioning on the allowance ratio. I mean, to your point, it is quite elevated compared to peers. I guess how much of a pending recession reserve is already embedded in your numbers? And I guess if we do end up in a more punitive macro environment, Does that 25 basis point buffer kind of hold true as the rest of the group catches up, or is some of that already embedded in your more cautious starting point?
spk01: Yeah, Tim Moore, we've taken a cautious position ever since we got six months into COVID. We felt very strongly that it was going to be an issue for quite some time. We did not release reserves as other institutions did during that timeframe in large sums. And we looked at it from a standpoint that we wanted to maintain those reserves based on what we saw coming down the road. And then we get into what appears to be naturally a softer economic timeframe. So we've been able to maintain those reserves. They're well within our ranges of being quantitative versus qualitative. And it's an analysis that we go through each and every month. Actually, we rerun the reserve every week based on the changes in the portfolio week to week. So when you look at that position, You know, we feel good about where we are, and we're going to continue to manage it accordingly.
spk07: Okay, great. And then, Gary, one more for you, just following up on the line of questioning regarding the office book. I guess for the, you laid out 13% maturity in 23, 11% in 24. I guess for those loans that are coming up for kind of maturity or refi, cycle what's the new rate that they would be rolling into and I guess what's the confidence kind of the underlying occupancy and underlying trends that there is the ability to absorb the higher interest rate that they'd be rolling into yeah we we just did a deep dive on every single one of those larger credits during the quarter and we had no downgrades as I mentioned in the remarks
spk01: around those credits. We manage them on a regular basis, on a loan-by-loan basis. And so that most recent review, which reflected no downgrades, took into consideration those maturity walls and the ability to reset generally in the 7% range. So, you know, we've got that built into those particular situations. I'll also mention that, you know, LTVs generally in the 60s, naturally some of that's going to take a hit when you have some leases roll out. But the sponsorship is extremely strong across that book and, you know, we feel that it's very manageable. based on the most recent review, which reflected no downgrades, as I mentioned.
spk09: Hey, Gary. Gary, the question that came up about our reserves relative to peers, I think it's helpful to mention that our criticizing classified loan ratios are typically higher than the other banks because of our aggressive gradation. It doesn't necessarily translate into net charge-offs. So if you look at, over a long period of time, FMV versus the peers, we tend to run higher but then have lower charge-offs throughout the cycle. That's a function of our credit people being very aggressive and proactive in downgrading credits, which results in a higher reserve position. So the gradation really matters within the portfolio. Other institutions could delay or have delays in their assessment of risk, and they won't see the same level of reserves until the very tail end of a crisis. So it should be viewed as a positive, not a negative. I just want to make sure everybody understands that. Am I on task here, Gary?
spk01: No, I would agree with everything that's said there, don't you? I mean, we're very aggressive around the management of risk ratings, as you mentioned. And this portfolio is front and center for certain, and it has been for quite some time.
spk07: That's a good color. I appreciate that. Maybe one for Vince Calabrese. On slide 15, the interest rate sensitivity, it looks like the shock to both the 100 up and the 100 down increased. I'm just wondering what the dynamic is that NII benefits in both an upside and a downside scenario.
spk09: Sure. This is Scott Free, the treasurer. The inverted yield curve has kind of created a unique circumstance where with the deposit rates finally moving up, in the down scenario, now we'll start to get benefit moving those down a little faster than .
spk07: Okay, got it. And then just last for me, any thoughts around the buyback? Banks are kind of all over the place in terms of continuing it, pausing it. You guys were active in the first quarter. I'm just wondering if you can give any color as to what was repurchased kind of subsequent to March 8th and then what the outlook is for the buyback going forward.
spk09: Well, I'd like to start out by saying of our investment portfolio. Thank you, God, who's sitting there with us. So I think that puts us in a different position. We're already, you know, CET1, you know, we're already where we're bargaining, right? So we expect capital appreciation to continue to advance those capital ratios. You know, that gives us a little bit more flexibility than others. Having said that, we're still very cautious about because of the environment that we're in. I'm not quite sure how things play out throughout the rest of the year. I'm a little bit cautious because I feel that we are headed into a recessionary period, and we're seeing some slowing down in the economy in various sectors, so we're getting mixed signals. But because of that, we're going to proceed very cautiously, but we do have the capacity to do it if we desire to do so and if it's beneficial to the shareholders. So, Vince, I don't know if you want to add any color to that.
spk11: Yeah, no, I would just say, I mean, the 10% target that we've talked about we still think is very appropriate, but given the risk profile, it's probably the balance sheet. So, you know, as we move forward, we do, as Vince said, expect that to kind of gradually build from here. You know, we have capacity. I mean, we'll be thoughtful about repurchasing. We repurchased in the 13th. once we get comfortable with the environment, we'd like to be repurchasing in the 11th, obviously. So I think there's definitely interest in having some of that deployed as we go through the year. It's just going to be kind of a matter of when.
spk09: And just to confirm, none of the report quarter reports activity happened once the market disruption started, all before that, right? But I will say, again, we're in a different position than others, fortunately. So we have options. And we'll be very careful about how we execute those options, but we do have the capacity to do it. Others do not. That's why you're getting mixed responses. Right.
spk07: Great. Thank you. Appreciate all the color. Yep.
spk11: The only other thing I would add, Timur, too, is on the asset sensitivity, just to add to what Scott was saying, if you look at the numbers, it's very close to neutral. The numbers plus or minus are not significant. like they may have been nine or 12 months ago. So we do get that slight benefit, whether it's a plus or minus. But you're kind of starting to try around a mutual position there.
spk02: The next question comes from Michael Perito with KBW. Please go ahead.
spk10: Hey, good morning, guys. Thanks for taking my questions. Good morning. You guys have hit most of it. I guess just one kind of bigger picture question around loan growth here. I guess what... You guys have talked a lot about the credit side, but I guess what about in terms of the funding side? I mean, is there a scenario that could impact your appetite for incremental loan growth here? I mean, obviously, I think in response to recent events, the CD growth kind of across the industry has surged. I would imagine... that will continue to a certain extent, maybe not quite as severely as it did over the last 30 days of the quarter. But is there a scenario where the funding, if it sustains, kind of like the current beta increase and higher-cost CDDs, where that could impact your appetite to book new loan growth?
spk09: Well, I think our guidance is pretty conservative for us, given the markets that we're in. And if you look at our deposit base and our liquidity position, the mix of our deposits, you know, we have a lot of avenues to drive liquidity that still creates a scenario where, you know, it's accretive to book loans. So I don't think we're going to be impacted like others might be. I'm not suggesting, I think you're spot on across the industry, but that's what differentiates us again. You know, our conservative nature, the fact that you know, the company's been positioned, the deposit base that it has, and, you know, our conservative credit underwriting standards gives us the ability to continue to lend through the cycle very selectively. So, you know, while demand may fall off, there'll be fewer players out there looking to originate. I think, you know, the last cycle we went through, we saw it. So we may have an opportunity to increase share the markets that we've expanded into relative to a number of competitors i don't see us in a position where we have to pull back and you know i've told our employees that they should be very happy that they work here particularly if you're in the lending business so you know while it's difficult during good times because we tend to be a little more conservative our ability to sustain our lending activity through the cycle is real and gary's philosophy about credit is real So we stay within a narrow band and we don't try to, you know, outgrow ourselves during frothy times and take on undue risk. And during times like this, we're in the market supporting our clients and growing share. I think that's utopia for a commercial banker. I wouldn't say that's the case for everyone. You know, as you look across the broad spectrum of banks, everyone's in a different position. But FMV is in a very sound position relative to achieving our guidance.
spk10: That's helpful, Vince. Thanks. And then, you know, not to put their car in front of the horse here, but just as you guys think about that relative strength, right, and we get through these next couple quarters and, you know, maybe hopefully finally get a better idea of whether we're going into a recession or maybe to stabilize, what have you. I mean, how does that translate to, I mean, I think one of the reasons that you guys are in this position is just because of the diversity of the franchise, line of business, geography. M&A, obviously, historically has been a big part of achieving that diversity. And there's dislocation. You guys are kind of strongly positioned here. I mean, what type of opportunities longer term do you think could stem for F&B from all this dislocation?
spk09: Well, I certainly think the industry is going to change. I think the landscape is going to change because of what's gone on. There will be pressure on others. As we move through this cycle, we're going to stay pretty focused on managing risk, making sure we have ample liquidity, pricing our funding appropriately, not worrying too much about growth, worrying more about margin as we move through this portion of the economic cycle. But I do think that there will be opportunities on the other end of it. I don't know what they are. I will tell you, though, that we've also done a terrific job, our team, done a great job of building businesses from the ground up. So if you look at our non-interest income, which performed pretty well this year, and reflecting on the prepared comments, Vince mentioned the wealth management business, and we've had good success in insurance. We have a very granular, diversified group of businesses that generate the income for the company, and that's largely been grown organically. So, you know, we'll continue to focus on building out our capabilities within those groups to drive the income, which is an annuity benefit to the earnings. And then we're going to stay focused on our digital strategy. I think, you know, the award that we received for the e-store was fairly substantial. There were large, large, the largest banks in the world applied, you know, to be recognized and we were selected. So, Our strategy is different. We are very focused on continuing to add features to that and continuing to penetrate the customer base that we have and the prospects that we have in the seven states that we operate in, which are pretty good states to be in. I think that's the focus as we move forward. I've already gone over our M&A strategy. We've talked about it before. I think for now, we're just pausing and I think we will come through this in a position of strength, so we'll have plenty of opportunities.
spk10: No, that makes sense. I appreciate you guys providing all the colors today. Thank you.
spk09: Thanks, Mike. Appreciate it.
spk10: Thanks, Mark.
spk02: The next question comes from Russell Gunther with Stevens. Please go ahead.
spk08: Hey, good morning, guys. Just a quick follow-up. You guys mentioned the... liquidity steps taken in the quarter and excess cash, just remind us of your target level of whether it's cash to assets and has that bogey changed at all intra-quarter even just for the near term?
spk11: We've been managing that cash position fluidly over the last year and a half or so. I would say that we took down quite an extra billion dollars or so liquidity where we brought in liquidity just given the uncertainty in the environment and just given our conservative nature so that was a billion we wouldn't have otherwise taken right so we thought that was the smart thing to do and conservative thing to do in this environment and when we look at what we put on so our total wholesale funding today about three billion dollars and about a third of it is two years a third is one year and the other third is inside of six months so kind of a for the last to kind of fund what we organically create as far as the lending side. So, I mean, that really, that billion is a reference point that we could use.
spk08: That's helpful, Vince. Thank you. And then just a follow-up to the NII guide. You mentioned the, you know, slight step down due to higher deposit data assumptions. Have you guys quantified what you think the deposit data through the cycle will be? Is that increased, do you care to put a target on that?
spk11: Yeah, we have our quarterly target in the slide. I would say that so far, just to remind everybody, as we have on the slide, our cumulative data for total deposits was 21.8 at the end of the quarter. We had guided to 22, so pretty close to that. And it was, remember, 16.3 at the end of the year. So as we look ahead, You know, we're projecting kind of mid-20s total deposit basis at the end of the second quarter. And, you know, while the end of the year feels very far away, I mean, our current thoughts, and I'll call them thoughts for year one, will be kind of low 30s for total deposits as far as the cumulative data through the end of this year.
spk08: That's great. Okay, Vince, I appreciate that. Last one for me, Gary, you guys have been conservative and de-risked the portfolio in a couple of ways over the past two to three years. Do you see any opportunity or appetite for further de-risking as you look out into the environment ahead?
spk01: As we look at the portfolio today, Russell, naturally there are softer economic times ahead. We're not looking at any significant de-risking at all at the moment because we're pleased with the position of the portfolio. Naturally, we're extremely cautious on the office sector, as we have been for quite some time now, and we continue to review, you know, that book on a loan-by-loan basis. So, you know, in the normal course of business, potentially um you know move an asset or two or or a small small segment of them but we have nothing teed up at this point all right thanks gary and thank you all for taking my question thank you very much the next question comes from brian martin with jannie please go ahead hey good morning guys say most of my stuff's been answered but just a couple things uh
spk05: Maybe Vince Calabrese, just on the margin, I mean, I guess, can you talk about where the March margin was? Kind of what the steps, you talked about a little bit, the liquidity, just kind of what's the starting point, if you will, for next quarter?
spk11: Yeah, the March margin, Brian, was 349. That's kind of our entry point into the second quarter.
spk05: Gotcha. Okay. And just kind of the puts and takes from here, I guess, as you look into 2Q, kind of with the guide you've given.
spk11: I guess one thing, too, to point out that's important is with the excess cash that we have, right, the additional liquidity that we grab, the billion dollars, that obviously affects that ratio, right? So, you know, the net interest income comes down a little bit. The ratio gets affected by that kind of excess liquidity position while it's there. I'm sorry. What was your second question again, Brian?
spk05: Yeah, no, I was just saying, just to kind of think about that, you know, that margin, you know, just stepping, you know, the stepping point into the next quarter, 349 is kind of the starting point, just as it ties to the guidance. I mean, I guess your expectation that that margin percentage is relatively flat from here, or just, I know you talked about with rates being down, you could see a little bit of a benefit, but just near term, you know, the next quarter or two.
spk11: Yeah, I think you're going to talk about that interest income. I mean, it comes down a little bit from here. And then with bills into the third and fourth quarter, kind of giving our earning asset growth as we move into the third and fourth quarter. I mean, the margin fluctuates a lot. And with the noise and the balance sheet, it's just harder to talk to the margin piece, Brian. But the net income. Yeah.
spk05: Okay. And as far as just that excess liquidity, Vince, I mean, what's the plan? I guess, how long do you plan? I guess, do you just plan to keep that for a bit? Will some of it exit? Or just how are you thinking about that then?
spk11: Well, that's what I was saying. A third of it is kind of six months or less, and then the third is one year, and the third is two years. So we're not going to prepay it. Just let that naturally kind of get absorbed as we move through time.
spk05: Gotcha. Okay. I missed that part. All right. And then just the pipelines, the loan pipelines in the quarter, I missed what you guys said there on the commercial side. Maybe that was Vince as far as where they're at or just kind of how they're trending here.
spk09: Well, I think the pipelines are a little softer than they've been historically at the same time. I don't think that we're out as aggressively knocking on doors, and I think that the demand has fallen off a little bit, kind of unilaterally, kind of across the board. I will tell you that the short-term pipelines look pretty decent. We measure at 90 days and then beyond 90 days. Beyond 90 days looks a little softer. The 90-day pipeline is looks a little more solid. There's a higher percentage of fundings coming through in that pipeline, which means there's less junk in it. I think people are a little more focused. It's a mixed bag as I look across all of the markets. Some of the markets in Carolina are down. Some have better pipelines. South Carolina looks pretty good. Charlotte looks good short-term. is probably building their long-term pipeline. Cleveland and Pittsburgh are doing okay. So, you know, it's kind of all over the board, which tells me there's a lot of caution out there in the customer base. So, you know, it's not us. It's not due to a lack of effort on the calling side. I think it's more about what the client's doing and there's less demand from our existing customers. portfolio. What we're also seeing is utilization rates are flat. No one asked that question. It's all offered up. I think basically as we look at the CNI book, and Gary, you can chime in if you'd like to, but I think a lot of our customers have not been building inventories. They've actually been leading inventory and moving their short-term assets to cash as we move into a slower economic period. So we're starting to see reductions in line balances. And I think after the disruption that occurred in the banking industry, a number of companies, you know, it gave them a heightened awareness about where they are and they took cash and, you know, basically paid down revolver debt because they're, you know, paying a much higher interest rate than they're receiving. So, you know, a lot of that's gone on over the last few months and they us to be in line with our guide, but it's going to be a fight to get there, right?
spk01: I would agree with the customer's position on managing inventory downward. We're pretty much seeing that across the board. Naturally, they built up some inventory during the supply chain issues. They've moved through some of that, and with caution ahead from an economic standpoint and a potentially slowdown there, they are very focused on their inventory positions, and I would expect that to continue to move down as we go forward. Perfect.
spk05: Thank you for all the color. And just on the new origination yield, just I don't know if Gary or whomever, but just kind of where are those at today on the loan front?
spk01: No, go ahead. Go ahead, Vince. You got the specific numbers. I mean, I have generalities.
spk11: I can make a high-level comment here, and then any color you want to add. New loans made during the first quarter came on at 631. But for comparison, that was 570 in the Probably wrong.
spk05: Gotcha. Okay, perfect. And maybe, Gary, you mentioned early on the call just the criticized level. Did you say that that was up modestly in the quarter? I think you said down year over year. Do I have that wrong as far as what criticized assets did?
spk01: It was up 19 basis points quarter over quarter, Brian. Down 55 basis points on a year over year basis with a with a $5 billion larger balance sheet. So, you know, they're at near low record levels, you know, from a criticized standpoint still today.
spk05: Okay. And just the increase, was there anything specific that kind of drove the increase, or is it just, you know, just a lot of things in there, just anything you would point to given all the things you've added, all the disclosures you've added on credit?
spk01: Yeah, not really. It was kind of just general.
spk05: Okay.
spk01: Nothing specific.
spk05: Gotcha. Okay. Just the last one for me was on the capital markets revenue. I think you talked about the syndications and being a little bit lower. Any thoughts on just how that expectation would be that you see a little bit of volatility in that, but it should trend higher as you go throughout the year?
spk09: Yeah, I think if you look at how we perform this quarter, you know, it's pretty consistent with, you know, a less robust, it's kind of our baseline performance, right? So, you know, I think that all depends on how everything shakes out as we move forward. I mean, obviously, you know, on the structural side of syndications, if we're leading, if people left lead, you know, it's going to depend on CapEx needs M&A activity, there's a bunch of factors that go into driving fee income in that category. I would expect some things to come up over the next few quarters that will benefit that area because we do have a fairly significant falling effort syndication side. And then I would also expect derivatives. As we move through the cycle and you see a number of companies burn through their old fixed rate program, I would expect to see them re-upping, particularly with the inversion in the yield curve. So, I mean, there's hope that we can sustain or grow those numbers. I think that's reflected in our guide. So, you know, I actually thought they did pretty well in the first quarter, which is typically seen only lower. So, that was my take. well, producing new net asset values, growing net asset values, compliance in the southeast in particular and in the mid-Atlantic. So I would expect that to continue because we've beat the staffing down there over the last few years and have better penetration. So I'm expecting that to do a little better than previous years in terms of organic growth. That should help us in the long run. And then mortgage, you know, there's quite a bit of uncertainty about where we're headed from a gain on sale perspective because of where rates are. But, you know, again, you know, we're new to many of the markets. We have great people, you know, great originators. And, you know, we're spread across a pretty vast geography with diversification, with, you know, lower relative share in many markets. So we should be able to sustain that. So we We feel pretty good about our guide.
spk05: Yeah, no, that's all understood. Okay, well, thank you for taking the questions, and thanks for all the added disclosures on the office book and the Siri book. It's very helpful.
spk09: Yeah, thank you. Thank you for your questions. Yep. That concludes the question, so I want to thank everybody for participating. Thank you for your thoughtful questions, very detailed. Hopefully we were able to answer. We put out quite a bit, so I'd recommend reading through the disclosures that we put out. I thought our team did an excellent job getting the information out to the street. I'd like to thank you and thank our employees here and and the shareholders for standing with us. And we're going to do well as we move through this on a relative basis. I know it because we've got a great team here. So thank you for participating. Take care. We'll see you.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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