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spk09: Good morning, everyone, and welcome to the FMB first quarter 2024 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 using a touchtone telephone. To withdraw your questions, 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. Ms. Hajdu, is it possible that your phone is on mute?
spk03: Good morning and welcome to the conference call. We will now turn it over so that we can hear some of the prepared remarks that we have. Thank you. Good morning and welcome to our earnings call. This conference call of FMV Corporation and the report that files to 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 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 websites. A replay of this call will be available until Thursday, April 25th, 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.
spk02: 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. FMB produced a solid quarter, reporting operating earnings per share of 34 cents and operating net income available to common shareholders, totaling $123 million. Our balance sheet resilience, robust fee income generation, strong credit results, and continued progress of our clicks-to-bricks strategy were at the forefront this quarter. Our team remains focused on balance sheet management's position FMV for optimal flexibility during the volatile interest rate period. This is evident by our tangible common equity ratio ending the first quarter at an all-time high of 8%. In addition, our company reported solid loan growth of 6% and deposit growth of 2% on a year-over-year basis. Deposit mix remained similar to the prior quarter, with a favorable total deposit cost of less than 2%, which is expected to remain superior to peers. Tangible book value per share also reached a record high at $9.64, an 11% increase year over year, as tangible book value growth remains a key value driver of our strategy. FMV maintains strong levels of liquidity and uninsured and non-collateralized deposit coverage ratio of 162%. Our non-interest income continues to grow, reaching $87.9 million, a near record level. This achievement is the result of our geographic expansion and a decade of strategic investments in our mortgage, wealth management, international banking, treasury management, and capital markets capabilities, including the launch of loan syndications and the F&B debt capital markets platform. Our diversified business model has enabled non-interest income to grow 75% from $200 million in 2016 to over $350 million on an annualized basis. We recognize the benefit of having diverse revenue streams, which complement one another during various points of the economic cycle. Looking ahead, we will continue to diversify our non-interest income products and services, with plans to further enhance our treasury management, merchant services, and payment capabilities. This past decade also included the launch of our clicks-to-bricks strategy. That vision, along with our investments in people and infrastructure for data analytics, has laid the groundwork for the success of our digital bank today, as well as FMV's increased use of AI in the future. What began with QR code-enabled product boxes has evolved into an omni-channel experience with our proprietary e-store. Paired with our new common application, we can bundle products and streamline the application process, enabling customers to open 30 products with one application, creating efficiencies and significantly reducing the number of keystrokes for our clients. Our strategy offers us the opportunity to align high-value product solutions for our customers based upon need in a bundled manner, which helps retain and attract clients. F&B also leverages our investments in data infrastructure and analytics for driving revenue growth through enhanced lead generation, Our enterprise data warehouse stores over 71 billion records across 41,000 attributes, enabling our data scientists to utilize machine learning more effectively. We developed Opportunity IQ, our proprietary tool that utilizes AI and data aggregation to produce a one-page snapshot of our customers, including the lead score, next best product to offer, and overall needs. This at-a-glance insight enables our employees to have elevated conversation and deepen our relationships with data-driven knowledge. Leveraging our proprietary data and analytics within our common app, we can improve product penetration through tailored offerings to our customers to increase their financial well-being and client loyalty to our brand. As we continue to expand our current relationships and gain new households FMV remains steadfast in our consistent underwriting standards and credit management process. I will now turn the call over to Gary to provide additional information on our credit risk metrics.
spk05: Gary? Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid levels. Total delinquency finished the quarter at 64 basis points, down 6 bps from the prior quarter. NPL's Inorio decreased one basis point to end at 33 bps, a multi-year low, with net charge-offs of 16 basis points. I'll provide an update on our CRE portfolios and conclude with an overview of our credit risk management strategies and focus around the current environment. Total provision expense for the quarter stood at $13.9 million, providing for loan growth and charge-offs. Our ending funded reserve stands at $406 million, or 1.25% of loans, flat compared to the prior quarter, continuing to reflect our strong position relative to our peers. When including acquired unamortized loan discount, our reserve stands at 1.36%, and our NPL coverage position remains strong at 425%, inclusive of the discounts. We continue to closely monitor the non-owner-occupied CRE portfolio and on a monthly basis review upcoming maturities, largest exposures, and analyze overall market performance across our footprint. At quarter end, delinquency and NPLs for the non-owner-occupied CRE portfolio improved slightly and continued to remain very low at 19 and 13 basis points, respectively. Specifically related to the non-owner-occupied office portfolio, our most recent review reflected a 60% weighted average LTV providing additional protection for potential market declines. Delinquency and NPLs were three and two basis points, respectively, outperforming the prior quarter. Net charge-offs for the non-owner-occupied CRE portfolio reflected solid performance for the quarter at nine basis points, confirming our consistent underwriting and strong sponsorship. We remain focused on credit risk management along with consistent underwriting, which allows us to maintain a balanced, well-positioned portfolio throughout various economic cycles. On a quarterly basis, we continue to perform specific in-depth reviews of our portfolios, as well as full portfolio stress tests. Our stress testing results for this quarter have again shown lower net charge-offs and stable provision compared to the prior quarter's results, with our current ACL covering approximately 90% of our projected charge-offs in a severe economic downturn. again confirming that our diversified loan portfolio enables us to withstand various stressed economic scenarios. In closing, our asset quality metrics ended the quarter at good levels. Our loan portfolio continues to remain stable and benefits from proactive risk management being further enhanced by experienced banking teams and tenured leadership. which have successfully managed through many economic cycles. We continue to seek loan growth through a diversified mix of products and geographies while maintaining our strong core credit philosophy and consistent approach to underwriting through the cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk08: Thanks, Jerry, and good morning. Today I will review the first quarter's financial results and walk through our second quarter and full year guidance. Total loans and leases ended the quarter at $32.6 billion, a 3.3% annualized linked quarter increase, driven by growth of $209 million in consumer loans and $53 million in commercial loans and leases. Residential mortgages led consumer loan growth, driven by on-balance sheet production this quarter in physicians and jumbo mortgage loans. Total deposits ended the quarter at $34.7 billion, a slight increase of $24 million linked quarter, even with the headwind of seasonal deposit outflows. For context, our seasonal deposits peaked in mid-November and troughed in mid-February, and balances should continue to build through the next couple of quarters, benefiting from normal seasonality and our team's success driving deeper market penetration on an organic basis. As of March 31st, non-interest-bearing deposits comprise 29% of total deposits, maintaining the same level as year-end. While the deposit mix continues to shift from low-interest checking and savings products into higher-yielding CD and money market products, we believe we will continue to outperform the industry from both a mix and deposit cost perspective. Our deposit cost ended the first quarter at 2.04%, leading to a total cumulative deposit beta of 36% since the current interest rate increases began in March of 2022. The first quarter's net interest margin was 318, a decline of only three basis points. A 15 basis point increase in the total yield on earning assets to 540 was slightly more than offset by a 19 basis point increase in the total cost of funds to 233. On a monthly basis, net interest margin was down a modest one basis point per month during the first quarter, and March's net interest margin was 317. Net interest income totaled 319 million, a $5 million decrease from the prior quarter, with over half the difference due to the current quarter having one less day. Turning to non-interest income and expense, non-interest income totaled a robust 87.9 million, with length quarter growth in nearly every line of business. Wealth management revenues increased 12% compared to the prior quarter, reaching a record $19.6 million through continued strong contributions across the geographic footprint. Mortgage banking operations totaled $7.9 million, the highest quarterly figure since 2021, with our focus on the purchase market driving good production growth. Several of the lines of business Vince mentioned had strong performance this quarter. Our debt capital markets platform, which is part of capital markets, had a record number of bond transactions this quarter and more than doubled the prior record. Treasury management revenues have gained momentum as we execute on our strategic initiatives building out the platform, with total TM revenues increasing around 19% from the year-ago quarter, driving the increase in the service charge line item. Operating non-interest expense totaled $234.1 million, an increase of $15.2 million from the prior quarter after adjusting for $3 million of significant items in the current quarter and $46.6 million last quarter. This quarter's significant items included $1.2 million of branch consolidation expenses and $4.4 million estimated for the additional FDIC special assessment, partially offset by a $2.6 million reduction to the previously estimated loss on the indirect auto loan sale that closed in February. The largest driver for operating non-interest expense was salaries and employee benefits, which increased $15 million, primarily related to normal seasonal long-term compensation expense, plus $6.9 million, seasonally higher employee payroll taxes, which increased $4.6 million, and reduced salary deferrals given seasonally lower loan origination volumes. As previously mentioned, F&B redeemed all of our outstanding Series E perpetual preferred stock on February 15th and paid the final preferred dividend of $2 million on the redemption date. The excess of the redemption value over the carrying value on the preferred stock of $4 million was considered a significant item impacting earnings. F&B continues to actively manage our capital position for ample flexibility to grow the balance sheet and optimize shareholder returns while appropriately managing risk. Our financial performance and capital management strategy resulted in our TCE ratio reaching 8% and CET1 ratio at 10.2%, both record levels. Tangible book value per common share was $9.64 at March 31st, an increase of $0.98, or 11.3%, compared to March 31, 2023. ALCI reduced the tangible book value per common share by $0.70 as of quarter end compared to $0.87 for the year-ago quarter. Let's now look at guidance for the second quarter and full year of 2024. We are maintaining our full-year balance sheet guidance. We project period-ending loans to grow mid-single digits on a full-year basis as we increase our market share across our diverse geographic footprints. And total projected deposit balances are expected to grow low single digits on a year-over-year spot basis. Overall, our projected full-year income statement guide is consistent with last quarter with some additional thoughts on where we expect to land within the provided ranges. Our projected full-year net interest income is still expected to be between $1.295 and $1.345 billion assuming two 25 basis point rate cuts occurring in the latter half of 2024. Our current expectation is to be in the lower half of the full year guide given those two rate cuts, but where we ultimately end up in the range may change due to the fluidity of the rate environment and the number and timing of interest rate cuts that actually occur. Second quarter net interest income is projected between $315 and $325 million. The non-interest income full-year guide remains between $325 and $345 million. However, given the strong momentum in the first quarter, we anticipate being in the upper half of that range. The second quarter non-interest income guide is between $80 and $85 million. Full-year guidance for non-interest expense is expected to be between $895 and $915 million, with the second quarter non-interest expense expected to be between $220 and $230 million. Full-year provision guidance is $80 to $100 million and is dependent on net loan growth and charge-off activity. Lastly, the full-year effective tax rate should be between 21 and 22 percent, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.
spk02: FMV had a good start to the year, and we are optimistic that as we enter the second half of the year, we have the potential to return to positive operating leverage and benefit from a more favorable interest rate environment, as well as a growing pipeline for loans and deposits. Our award-winning client experience is shaped by our digital technology and eStore, and we are proud to appear among some of the nation's largest banks as a finalist for a FinTech Award for our innovation and customer experience. Our strategy is consistently supported by third-party recognition. In fact, we received approximately 30 awards for our client service, financial performance, and culture during the first quarter alone, with multiple awards received in 2024 for small business and middle market excellence. These select examples of FMV's third-party recognition highlight the strength of our business model and financial achievements, which led to F&B being named by S&P Global Market Intelligence as one of the top 50 performing U.S. public banks. The ongoing recognition that our company receives is made possible by our engaged teams. We provide an environment where everyone has an opportunity to excel. And as a result, F&B is a top workplace USA for the fourth consecutive year based upon employee feedback. Our employees' dedication enables us to serve all of our stakeholders and positions FMV for continued success. I want to thank the team for their outstanding efforts in the first quarter, given the difficult operating environment, and I look forward to working together to build on our momentum throughout the year.
spk09: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 on your touch-tone telephones. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and 2. Once again, that is star and then 1 to join the question queue. At this time, we'll pause momentarily to assemble the roster. And our first question today comes from Frank Chiraldi from Piper-Standler. Please go ahead with your question.
spk06: Good morning. Just on the NII, well, on the NII guide and also on the loan-to-deposit ratio, I think in the past you've talked about as you get up to, you know, 95%, 96% taking some potential actions to help, you know, mitigate getting up to 100% loan-to-deposit ratio. And so, you know, I know there's some seasonality on the deposit side. But just curious, maybe if you could talk about what some of those actions might be. I know you had the indirect sale, indirect auto sale, which I guess helped a bit. But just curious if you could talk about what some of those potential actions might look like. And then also just remind us of – of what you get on a 25 basis point cut in interest rates. Thanks.
spk08: I would say on the loss to deposit ratio, we've historically talked about 97% is kind of a level where we've taken action. And the action was leveraging our franchise we have to generate deposits. So last time that had happened, We generated close to a billion dollars in CDs to kind of bring it back down into a kind of little commitment. So, you know, the $100 is there as a line, but $97 is a line that we would kind of manage. Once we got close to that, we would kind of manage it down. And there's a lot of things we can do. I mean, as you know, we have a big focus on generating deposits, demand deposits throughout the company. Our traditional commercial businesses, treasury management, small business, it's a focus throughout the company. It's always been. So generating... additional deposits, bringing in new households, new customer clients is a key part of it. And then also things like managing the book. We've adjusted our pricing strategy kind of mid-year last year to create more saleable product out of our originations than what we had before. And now we're up in the mid-40s for saleable percentage where we were at a low in the 20s. So that's another lever we have. In the indirect business, while we did a sale, we also have a lever there as far as how much we want to grow at any point in time, depending on kind of what's the shelf space on the balance sheet.
spk02: There are a whole list of things that we look at, both asset and liability. So, you know, there's a – Vince mentioned many of them. I think our pipeline for new production is pretty strong from a deposit perspective. So I don't think that we're worried about that. Obviously, you know, in the event that we need to generate deposits, you know, there's pricing mechanisms that we can employ. But, you know, we prefer to grow organically and try to bring in a balanced mix of deposits that are accretive. You know, that is going very well for the companies.
spk06: Great. And then just, yeah, just on the NII side, I mean, I guess you have one less rate cut baked into your expectations now, but guiding towards the lower half of the previous range. Is that just given where you sit in the first quarter and the trends from here? Or I guess I would be, I assume you still pick up a little bit potentially from less rate cuts baked into your guide. So I'm just curious the driver there.
spk08: You answered it pretty well, Frank, actually. So those are the key drivers. I mean, in our guidance in January, we had three cuts. One of them was December. So December falls off, which doesn't have much of an impact for the full year. So, you know, the two cuts we have in the second half of the year in the short term is positive, given we're still, you know, in an asset-sensitive position. You know, we've been organically moving back towards neutral. So in the short term, there's a benefit from having that cut. You know, the guide we adjusted in the first quarter, you know, we were at the lower end of our range for net interest income. You know, the timing of our seasonal deposits, average borrowings were a little higher just because of the timing of that. But by the end of the quarter, we were back to, you know, flat up a little bit. So, kind of just capturing that first quarter as we look ahead. And, you know, there's, we'll see. The interest rate environment is very fluid. You know, there's potential for us to beat that if the loan growth is stronger. That's kind of what baked in there. There's opportunity for us to be above that. But just kind of where we sit, how we started the year, we thought it was appropriate to kind of guide. And it's the bottom half. It's not the bottom of the range. It's kind of the lower half of the range is what we had guided to.
spk06: Right. Okay. And then just so to confirm there, the third rate cut was late in the year, really didn't. So going from three to two rate cuts really just doesn't have an impact given the timing of the rate cuts. Okay. Great. Thank you. Thanks, Brian.
spk09: And our next question comes from Daniel Tomeo from Raymond James. Please go ahead with your question.
spk07: Thanks. Good morning, guys. I guess first just wanted to dig into the office loans. I appreciate the detail you guys gave there. Looked like the and you touched on it in your comments, the delinquency in the MPLs for the office loans came down in the quarter. I guess first I was just wondering if there was anything in particular that happened that drove that, if there were sales or what, and then just curious on the small increase in the criticized portion of the office loans, if there's any other details you can provide there. Thanks.
spk05: Yeah, Daniel, the Slight increase was really one credit that we moved into that category. At this point, it's not a concern for us. It's a credit that is extended out already another five years. It was originally underwritten at 52% LTV, and it's fixed through a swap at 4.5%. So they had one tenant move out. They're working on replacing that. But we felt it appropriate, naturally, to replace that in a rated credit situation. The LTV on it was, like I said, right at about 50% going into the thing. So that increased that 9%, criticized to right around 11%. And in terms of the portfolio, The portfolio in office was down $37 million in exposure and down $15 million from a balance perspective. So we have seen some loans pay off in that category as we're managing that book of business. And with the performance of it, where we sit today at those very low levels, We'll continue to be aggressive around it and manage it appropriately.
spk07: Okay, that's great color. Appreciate that. And then maybe, Vince, on the swaps that you have in place that are going to impact 2025, just curious if you could provide a little color on how much impact you expect the rolling off to potentially have on the margin in 2025.
spk08: There's a billion dollars, billion two of swaps we have that will mature throughout 25, a billion actually within 25. And those are, our receipt rates are around 75 basis points to 1% currently. We put those on a while ago. Luckily, we didn't do a lot of it, but we had some of that that we did put on. So that negative drag will come off. Really starting in January, there's $250,000 that comes off in January. And then the rest of them, by October, the rest of the billion kind of rolls off. So that will be additive. I can't do that math in my head, but that will be additive next year.
spk07: Got it. Okay. So $250,000 in January and then the last billion in October. That's it for me. I appreciate the color. Thank you.
spk09: Thanks, Jim. And our next question comes from Kelly Mata from KBW. Please go ahead with your question.
spk04: Hi. Good morning. Thanks for the question. I was hoping to dig in a bit more into your fee guidance, how you notably took that to the upper half of the range. Just wondering which areas have been performing a bit better than maybe you had expected at this time last quarter. and where you see the greatest opportunities to continue to pick up some nice fee diversification and help with fee growth.
spk02: Yeah, you hit the nail on the head. Diversification is the answer. We built out a pretty broad set of fee-based businesses over the last decade. Capital markets, I mentioned in the prepared comments, we added a debt capital markets platform so we could participate in bond economics for some of our larger clients. And as you know, the capital markets opened up and there was quite a bit of activity there in the first quarter. So we benefited from, you know, that business unit that we built out a few years ago. Syndications, you know, ebbs and flows. But as the pipelines build, our pipelines are up about 15%. I would expect there to be more syndications activity as we move through the latter half of the year, so we'll get some benefit there. We have a pretty robust derivatives program where we have structuring teams in the marketplace that provide counsel to clients and help them address interest rate risk. That particular group did pretty well this quarter. Surprisingly, given the rate environment, they were able to to do some interesting things for clients to help them as we move through this volatile rate cycle. The mortgage company, you know, one of the strategies we mentioned, this kind of goes back to Frank's or all these comment about the balance sheet and how we manage on the deposit ratios, but we became much more aggressive on saleable mortgage loan pricing. We gave up a little bit of margin, but moved quite a bit off the balance sheet. So, you know, they're contributing from a pure volume perspective because we're positioned in some very attractive markets to continue to see a lot of purchase money activity where in our legacy markets, there's not a lot of inventory, so we're not seeing a lot of action. But in the other markets in the southeast and the mid-Atlantic regions, we've seen quite a bit of pickup. So that's contributed. SBA had a very solid quarter. Some of the loans that we originated with higher yields in the construction phase that were built, you know, basically based on building something out or had construction draws associated with them, became saleable. So we moved some of that off with a decent gain. And then, you know, the treasury management business that we've been talking about, we've received a lot of Greenwich Awards for treasury management over the last few years in the small business and middle market segments in particular. We continue to build out that business unit. We've added personnel. We built out our merchant services business, so we're getting nice contributions from merchant. And, you know, kind of the strategy here was to offset the consumer fees that we see declining, like overdraft fees and other fees, with higher value fees for customers from our, that's our opinion. But, you know, we kind of focused on building that out from a treasury management perspective. And then, you know, going after small businesses, we have, you know, 90 to 100,000 small businesses in our portfolio. And we have a tremendous opportunity to go in and drive a broader relationship through the e-store. So we're now focusing on building out a bundled product for small business that will include treasury management and merchant as part of the bundle. So those are the things that, I mean, there's a lot of work that goes into it. You know, we've got quite a bit of granularity. And it gives us confidence that we can hit the upper end of the range on the guide. I think it's 350, right? So, yeah. So, it's annualizing the first quarter, which, you know, usually the first quarter is weak, you know, weaker than others. So, we're pretty pleased with what we've got. Got it.
spk04: No, I really appreciate all the callers. Thank you so much. Maybe a last question for me, switching topics. Back to the balance sheet is on deposits. It seems like if I'm reading your prepared commentary correctly, some of the kind of qualification to NII to lower half of the range has to do with what you're seeing on the deposit flow side. So can you remind me the seasonality you have with deposits and Is there any color you can provide as to the cadence of what you're thinking about in terms of customer deposit growth to get to that single-digit range that you reiterated?
spk02: Yeah, I think, you know, first of all, you know, there is an extreme amount of seasonality within the deposit portfolio. So it's kind of difficult to look at the first quarter and draw conclusions between the outflows and inflows that are occurring. throughout the quarter. And really, it starts to build now. So we're starting to see considerable inflows. The demand deposits were pretty steady at about 29%, I think, on a quarter-over-quarter basis. So imagine that's the core of our profitability. It's basically maintaining those non-interest-bearing deposits. What's happened over the last few quarters is we've seen some of the higher-priced deposit categories moving into CDs or moving into something with a little bit of terms within the customer base. So that's eroded a little bit of the net interest income, right? We saw that happen. That's not surprising. You can see it in the escalation in the data. You know, I believe that over time, throughout the course of this year, we should be able to manage the non-interest-bearing deposit balances within that range and grow the other categories without sacrificing margin because we've seen some lower pricing stick in the marketplace. We don't have to be as hot on the pricing. So I think that should help us as we move through the rest of the year. And then also the inflows that occur. In many instances, even with the municipal deposits, this is the truth for just about all of them, we don't do those transactions with municipalities to just get balances. You know, we kind of have a rule here where we have to be the primary disbursement bank for those entities. And what ends up happening is the increased activity with ACH activity and wire activity and the movement of funds increasing the amount of free balances grow to cover those services. So, you know, that's part of what happens over the course of the next three quarters as well. So, anyway... I don't know if you want to add anything on the timing. No, I really commented on it.
spk08: It kind of troughs in mid-February and builds through October, November. It's kind of the cadence of that. That's all I would add.
spk04: Thank you so much. I appreciate the caller. I'll step back.
spk09: Thank you. Thank you. And once again, at this point, if you'd like to ask a question, please press star and 1. To withdraw your questions, you may press star and two. Next in line, we have Nick Lorenzoni from Stevens. Please go ahead with your question.
spk10: Hey, good morning, guys. Filling in for Russell Gunther. I just had a quick question with regard to your office portfolio. I appreciate the color of the deck, but was wondering if you could provide some additional detail on the geographic breakdown, including specific office exposure in your DC and Baltimore markets?
spk05: In terms of the exposure in DC, we have essentially one transaction in the DC market. We had a few on top of that over the last year. We've been able to move those off the balance sheet, just in the normal course of refinance at other institutions. So we only have one transaction there, and it's a transaction that's a $20 million loan. And that's a market that we saw quite a while ago that we felt was extremely overheated. So we were very cautious going into that market. And we're pleased with, you know, where we sit today with very, very little exposure there.
spk10: Okay, great. Thank you for taking my questions. Sure.
spk09: And our next question comes from Brian Martin from Janney, Montgomery. Please go ahead with your question.
spk01: Hey, good morning. Hey, Brian. Hi, Brian. Thanks. Just a couple, maybe Gary, just one for you on the credit side. Just in terms of overall trends and criticized and classified levels, can you give any just broad characterization of how trends went this quarter just before we see the 10Q filing, just on kind of how those trends were for the whole portfolio rather than just the specific buckets?
spk05: Yeah, in terms of the criticized trends, they were up slightly, less than seven or eight credits in the criticized. We had a couple move into the substandard. I touched on one of them earlier, Brian. Those credits basically were from just some slight softer performance We're very aggressive in moving those type of credits into a special mention category, which was primarily where the movement was, and we don't have any concerns with any of those credits that move into there from a loss perspective. Long-term customers, just a little softer performance, and so we build a little bit of reserve against that software performance, we expect that to turn around, you know, over the next six to 12, 18 months in terms of those particular movements.
spk02: And Brian, I have a tremendous amount of confidence in Gary and his team. I can tell you, you know, as we look at the portfolio, Gary's on top of the credits. His people are on top of the credits. The line looks at these credits and they downgrade them if necessary very quickly. That's different than what you'll find at other companies. So, you know, you're going to see movement. I think it's positive because it keeps us, you know, well-reserved, you know, relative to risk. So I think as you look over long periods of time, and Gary's been in the seat a long time. Let me go back as long as I did this year. It's been 14, 15 years. Maybe longer. I'm 15. I'm getting old. It's 15 years. You were there 15 years. Yeah, we're old timers. So, you know, you've got a long track record to look at. Our delinquencies are, you know, surprisingly low at historical lows. The overall quality of the portfolio appears to be, you know, good. We are focusing on certain segments that we believe, you know, globally are soft. You mentioned office. That's one area we look at, we focus on. But thank goodness we have tremendous granularity. and a credit culture that encourages prompt action. And I think that's what you're seeing. There was a slide we presented, I think, in the past. I don't know if it's in the deck, with charge-offs versus reserve build for us. We tend to be very early at reserving, and then our charge-offs end up better than the beers. So that's a testament to Gary and his team. And getting out early. Addressing situations early helps you get out of trouble so that you're not experiencing the charge-offs down the road. Waiting and not addressing issues creates a shortfall, which, you know, exacerbates credit problems when you're in a cycle. So I don't know, you know, I think we've done a great job. He won't say that, but I'm going to say it about him.
spk01: No, I appreciate it. The numbers speak for themselves. And Gary, I mean, they're great. And even the criticized not being up much is, you know, testimony to kind of the portfolio and the granularity. So just, you know, trying to stay in front of it if there's things that are coming down the pipe. Gary, you mentioned the stress testing. Was there anything specific you guys stress tested this quarter that you would call out or just in general that you just continue to, you know, stress test the entire portfolio?
spk05: Yeah, it's a general stress test of the entire portfolio on a loan-level basis, Brian. So it is a really deep dive every quarter that Tom Fisher and his team undertake. We review that every quarter. Updates are made on a monthly basis when necessary. So it keeps us forward-looking. from that perspective, and I think it's a best practice that we've put into place that has been very beneficial as we look forward through the economy and what we expect down the road. Gotcha.
spk01: Okay, thanks. And then maybe just one or two others here. Just on the two things, on the loan side, just maybe just kind of how the pipelines, you know, I appreciate the guidance for the year, just kind of just trying to get a feel for where the pipelines are today on the commercial side, you know, primarily, and then I think you mentioned on the mortgage side you were a bit more aggressive on the sales. I mean, first quarter is typically a seasonally weaker quarter. So do you expect to remain aggressive on the sales, which could mean that potentially one cue is a bottom for the mortgage revenue as you look throughout the year? Is there any difference in strategy there as you go to the balance of the year?
spk02: Yeah, I think the first quarter typically is seasonally we're focusing on purchase money mortgage loans because there are fewer transactions that occur in the first quarter. I would expect that to build through the next two quarters and then come back down again. You know, just speaking to the purchase money side and forming mortgage loans, you know, I would expect that to happen. There are other origination areas that will produce through that. You know, we have positions loans that we do, which are pretty much throughout the year. you know, so they kind of offset some of the declines in the later half of the year on the conforming stuff. So you'll see more jumbo private banking loans coming online, which is why we do what we do. We want to balance out what goes on the balance sheet and, you know, what becomes saleable. Our team has done a great job. We have terrific people in the mortgage business. You know, we've grown it over the last 10 years or so. I mean, it's, it's a, big part of our business and a key product for the consumer. It really adds to our ability to obtain clients. I think we're going to continue to focus on it and manage it very conservatively, but I would expect that to contribute more over the next few quarters, I think it's fair to say, given the seasonality.
spk08: I would just add from an income statement standpoint, baked into our guidance is the mortgage banking income coming down a little bit from the first quarter level. It's going to be a function of how much we do sell. We'll continue to manage it. But like Ben said, seasonally, second and third quarter, not quite as big of a lift in production, which is what's baked into our guidance. And then it falls in.
spk02: And then it kind of falls off over the quarter. The bell shapes. But, you know, I'm pretty optimistic. I think, you know, they're doing pretty well. And we're very well entrenched. We have great people in that business, like I said. So we're good about it. The activity is very good.
spk08: Even in the first quarter was very good, too. I'm expected to see them move up in the second and third, like Ben said. Okay.
spk02: Obviously impacted by interest. Right. I mean, if rates go up, that's game over. We'll talk about it down the road. But I think given the way things are today in a stable industry environment for now, they should pick up. There should be more activity.
spk01: Gotcha. And just on the commercial pipeline, what you're seeing there?
spk02: Yeah, the pipelines, they're up 15%. The overall pipeline's up from the last quarter. Remember, we had a big quarter closing out in December of last year. So the fourth quarter of last year was pretty solid from a production perspective. So pipelines are rebuilding. South Carolina is at their second highest level historically. So there's a lot of activity there. Raleigh's got a nice pipeline. What we call the capital region, which is the central part of the state, has a tremendous pipeline. And, you know, we've seen some good activity in some of the rural Pennsylvania markets. You know, the folks in State College, Tony Marchese and his team, doing a terrific job. I mean, we're seeing a lot of activity. And, you know, good, solid middle market C&I opportunities, so. I would expect us to continue to build the pipelines as we move through the year and businesses hopefully become more confident in the economy. Gotcha.
spk01: Okay. And the last one for me, and I'll step back, was just the – it sounds like the DDA level you're comfortable that you can maybe sustain this around the current level and then just kind of the outlook on the capital flexibility with kind of reaching a record level in TCE and CET1, just kind of your thoughts on capital deployment here, if it's still just primarily organic growth?
spk08: Yeah, I would say, I mean, on the capital front, we still like 10% as our CET1 target. You know, we think that's the right level, just given our risk profile, the balance sheet, and also the higher level of capital generation that we've been producing. You know, if you look at what's baked into our guidance, the capital ratio is kind of gradually built from here between now and the end of the year. As you saw this quarter, we had a nice pickup in CET1 and TCE ratio. And we commented in January that once the indirect sale kind of cleared, that would be added to, added like 10 basis points to CET1 and TCE ratio. So we have that and then we'll kind of gradually go from there. And, you know, we'll be opportunistic as we have been in the past. We'll look to actually do some buybacks. You know, we have issuance of stocks in the first quarter from normal incentive stuff, we could repurchase some of that and do some level of activity as we go through the year.
spk02: Given the profitability of the company, we have options. We're building capital. You go back pretty far, so 8% is a pretty nice number for us. It's a solid TTE ratio. Gotcha.
spk01: Okay. I appreciate you taking the questions. Thank you.
spk02: Thank you, Brian. Thanks, Brian. Take care.
spk09: And ladies and gentlemen, with that being our last question, I'd like to turn the floor back over to Vince DeLee for any closing remarks.
spk08: I just wanted to make one comment. There was a question earlier about the swaps we have rolling off next year. You know, I mentioned kind of what we're receiving. We're paying 544 on that $1,000. So just as far as the math as you get into 2025, it's basically $2.50 a quarter and a sub-1% of what we're receiving and we're paying around $5.44. So that'll be a benefit next year starting in January. Just wanted to clarify that. Yeah, sure.
spk02: Thank you, everybody. Appreciate it. Appreciate the support from our shareholders. And again, very appreciative of our employees and the teams that we have and their desire to win. So, you know, we have a great culture, winning culture, and, you know, people just want to do the best they can for their clients and compete. And I think we've proven that we do that very effectively. So thank you. Thank you, everybody.
spk09: And, ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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