Q4 2021 Financial Institutions Inc Earnings Call
Speaker 1: Good morning, welcome to today's financial institutions in fourth quarter earnings call. My name is Candice and I will be your moderator for today's call.
Good morning, welcome to today's Financial Institute Houston, Inc. Fourth quarter earnings call. My name is Candice and I will be your mother.
Right so for today's call.
Speaker 1: Online will be muted during the presentation portion of the course with an opportunity for question and answer at the end.
All lines will be muted during the presentation portion of the coal with an opportunity for question and answer at the end. If you would like to ask a question. Please press star followed by one on your side if I keep hot.
Speaker 1: If you would like to ask a question, please press start, followed by one on your telephone keypad.
Speaker 1: I would now like to pass the conference call over to our host, Shelley Dodorin, Director of Investment Relations.
I would now like to pass the conference call over to our host Shelly Doran.
Director of investment relations.
Speaker 2: Thank you for joining us for today's call. Providing prepared comments will be President and CEO Marty Birmingham and CFO Jack Plants.
Thank you for joining us for today's call, providing prepared comments will be president and CEO , Marty Birmingham and CFO Jacques <unk>.
Speaker 2: Chief Community Banking Officer Justin Viggum and Director of Financial Planning and Analysis might grub or will drive us for Q&A.
Keeps me banking officer, Justin Degen, and director of financial planning and analysis, Mike rubber will join us for Q&A.
Speaker 2: Today's prepared comments and Q&A will include forward-led watching scenes.
Today's prepared comments and Q&A will include forward looking statements.
Speaker 2: Extra results may differ materially from forward-looking statements to the variety of risks and certainties and add-of factors. We refer you to yesterday's earnings release and historical STC filing available on our Invest Relations website for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements.
Actual results may differ materially from forward looking statements due to a variety of risks uncertainties and other factors we.
We refer you to yesterday's earnings release, and historical SEC filings available on our Investor Relations website for Safe Harbor description and a detailed discussion of the risk factors relating to forward looking statements.
Speaker 2: We'll also discuss certain non-gape financial measures intended as supplements and not substitute for compilment GAAP measures . Reconciliation to these measures to GAAP financial measures will provide an early release by all that's going to be available to the form AK. Please note that this call includes information that may only be accurate as of today's date. February 1st, 2022. I'll now turn the call over to President and CEO Marty Burringham. Thank you.
We'll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures.
Reconciliations of these measures to GAAP financial measures provided in the earnings release filed as an exhibit to a form 8-K.
Please note that this call includes information that may only be accurate as of today's date.
<unk> 2022, I'll now turn the call over to President and CEO Marty Birmingham.
Thank you Shelly.
Morning, and welcome to our fourth quarter earnings call.
Speaker 3: It was another strong quarter with record net interest income and our second highest pre-tax pre-provision income.
It was another strong quarter with record net interest income and our second highest pretax pre provision income.
Speaker 3: We reported net income of 19.6 million or $1.21 per diluted share higher than both the length and prior year quarter.
We reported net income of $19 6 million or $1 21 per diluted share.
Higher than both the linked and prior year quarters.
Speaker 3: Pretax Pre-Privision Income was 22.6 million, a 1.5 million increase from the third quarter of 2021, and a 1.7 million increase from the fourth quarter of 2020.
Pre tax pre provision income was $22 6 million.
A $1 5 million increase from the third quarter of 2021 and a $1 7 million increase from the fourth quarter of 2020.
Speaker 3: Results were positively impacted by several factors including loan growth, de-accretion from forgiven, PPP loans, the prudent deployment of excess liquidity in a bond.
Results were positively impacted by several factors, including loan growth.
Accretion from forgiven PPP loans, the prudent deployment of excess liquidity in the bond.
Speaker 3: growth and revenue from our fee-based businesses and derivatives program. Combine with the positive impact of the release of credit reserves and benefits from tax credit investments.
Growth in revenue from our fee based businesses and derivatives program combined with the positive impact of the release of credit reserves and benefits from tax credit investments.
Speaker 3: I'm not providing a few comments about our loan portfolio and credit.
I'll now provide a few comments about our loan portfolio and credit.
Speaker 3: Total loans grew 26 million or 0.7% from September 30th.
Total loans grew $26 million or 7% from September 30th.
Speaker 3: Commercial business decreased 7%, commercial mortgage increased 4.8%.
Commercial business decreased 7%.
Commercial mortgage increased four 8%.
Speaker 3: residential real estate loans declined by 1.2% and consumer indirect was up 1.9%.
Residential real estate loans declined by one 2%.
Consumer indirect was up one 9%.
Speaker 3: excluding the impact of PPP loans, the commercial business portfolio increased 2.4% and total loans increased 2.5%.
Excluding the impact of PPP loans, the commercial business portfolio increased two 4% and total loans increased two 5%.
Speaker 3: Triple P loan forgiveness has been faster than we anticipated without standing decreasing from $248 million at year end 2020 to $55 million at $12.31 million.
Triple T loan forgiveness has been faster than we anticipated with outstandings decreasing from $248 million year end 2000 $20 million to $55 million at 12 31 21.
Speaker 3: While growth in C&I lending has been challenged for quite some time by supply chain constraints, the increasing cost of labor and supplies in M&AX.
While growth in C&I lending has been challenged for quite some time by supply chain constraints, the increasing cost of labor and supplies and M&A activity Youre seeing more requests for increases in lines of credit as customer liquidity levels are waning from peak 2021 level.
Speaker 3: We are seeing more requests for increases in lines of credit as customer liquidity levels are waning from peak 2021 level.
Speaker 3: In Business Banking, our small business lending unit, we are seeing increased origination activity. This activity, combined with a new experience team of Business Banking Lenders, positions us well to experience increased market share in the space.
In business banking or small business lending unit.
Seeing increased origination activity this activity combined with a new experienced team of business banking lenders positions us well to experience increased market share in this space.
Speaker 3: We continue to see high deal flow for commercial real estate in our markets and have a strong pipeline going into 2022. We continue to work with known quality sponsors and their
We continue to see high deal flow for commercial real estate in our markets and have a strong pipeline going into 2022.
We continue to work with known quality sponsors and they're presenting high quality viable projects.
Speaker 3: While developers continue to face cost increases from materials and extended delivery dates, they are seeing summary leave as lumber prices have returned to pre-pandemic level.
Developers continue to face cost increases for materials and extended delivery dates they're seeing some relief as lumber prices have returned to pre pandemic levels.
Speaker 3: Residential real estate loans continue to normalize in the fourth quarter as compared to the highest experience in 2020.
Residential real estate loans continued to normalize in the fourth quarter as compared to the highs experienced in 2020.
Speaker 3: And we experienced some personal turnover, contributing to a decline in new loan originates.
And we experienced some personnel turnover contributing to a decline in new loan originations.
Speaker 3: We recently brought in a new leader and have identified opportunities to build operational efficiencies in the first half of 2022, positioning us to further develop the business unit this year.
We recently brought in a new leader in hand, and have identified opportunities to build operational efficiencies in the first half of 2022 positioning us to further develop the business units this year.
Our consumer indirect auto portfolio continues to grow and we are benefiting from high auto valuation.
Speaker 3: Our consumer indirect auto portfolio continues to grow and we are benefiting from high auto value.
Speaker 3: Good access to quality credits through our deal in network of 500 franchise new auto dealerships and our strong credit to
Good access to quality credits through our dealer network of 500 franchise, new auto dealerships and our strong credit discipline.
Speaker 3: Current portfolio represents 26% of total loans down from 30% at year-end 2018. This asset class has provided us the opportunity to deploy excess liquidity in a loan product with short duration, strong credit performance, and relatively higher yield characteristics.
Current portfolio represents 26% of total loans down from 30% at year end 2018.
This asset class has provided us the opportunity to deploy excess liquidity into loan product with short duration strong credit performance and relatively higher yield characteristics.
Speaker 3: Provision for credit losses on loans was a benefit of 1.1 million in the quarter.
Provision for credit losses on loans was a benefit of $1 1 billion in the quarter.
Speaker 3: continued improvement in the National Employment Forecast, positive trends and qualitative facts.
Continued improvement in the national unemployment forecast positive trends in qualitative factors and a reduction in specific reserves resulted in a fourth consecutive quarterly release of credit loss reserves.
Speaker 3: and a reduction in specific reserves resulted in the fourth consecutive quarterly release of credit loss reserves.
Speaker 3: Many of you will recall that in the fourth quarter of 2020, we identified specific customers and industries believed to be the most at risk due to the pandemic and intentionally moved these loans totaling 127 billion to criticize that.
Many of you will recall that in the fourth quarter of 2020, we identified specific customers and industries believed to be the most at risk due to the pandemic and intentionally moved these loans totaling 127 million.
Criticized assets.
Speaker 3: As of December 31st, 2021, our at-risk COVID-Low pull was down to 75.
As of December 31, 2021 are at risk Covid loan pool was down to 75 million.
Speaker 3: The primary driver of the 52 million reduction in the at-risk COVID loans, 19 million of which occurred in the third quarter and 33 million in the fourth quarter, was credits that returned to full paying status and were upgraded to pass rate.
Driver of the 52 million reduction in the at risk Covid loans 19 million of which occurred in the third quarter and $33 million in the fourth quarter was credits that returned to full paying status and were upgraded to pass rated.
Speaker 3: URN specific reserves on the at-risk COVID loans were 5.3 million, and 1.4 million decreased from the end of the third quarter.
Year end specific reserves on the at risk Covid loans were $5 3 million a $1 4 million decrease from the end of the third quarter.
We continue to see improvement in performance indicators of several of these credits and remain optimistic they will return to past rated credits as the positive trends continue with the passage of time and as we review these credits and the normal annual review cycle. This spring.
Speaker 3: We continue to see improvement in performance indicators of several of these credits, and remain optimistic they will return to pass rated credits, as the positive trends continue with the passage of time, and as we review these credits in the normal and review cycle this spring.
Speaker 3: Let charge offs in the quarter were 4.7 million. The increase from length in prior year quarters is primarily the result of one commercial mortgage loan with a 3.8 million partial charge off and downgrade to non-performing status.
Net charge offs in the quarter were $4 7 million the increase from linked and prior year quarters was primarily the result of one commercial mortgage loan with a $3 8 million partial charge offs and downgrade to non performing status.
Speaker 3: As a result of all these factors, the allowance for credit losses decreased by 5.8 million in the quarter to 39.7 million.
As a result of all these factors the allowance for credit losses decreased by $5 8 million in the quarter to $39 7 million.
Speaker 3: The allowance for credit losses on loans to total loans was 1.08%. At quarter end, down 16 basis points from September 30th.
The allowance for credit losses on loans to total loans was 1.08%.
Quarter end down 16 basis points from September 30.
Excluding triple P loans, the ratio increases to 1.19% a decrease of 19 basis points from the linked quarter.
Speaker 3: including triple p-lones that ratio increases to 1.09%, a decrease of 19 basis points.
While we did experience growth in total loans in 2020 one portfolio credit performance has demonstrated stabilization since the onset of the pandemic as evidenced by 2021 net charge offs of 16 basis points and N P. As a $12 2 million.
Speaker 3: While we did experience growth in total loans in 2021, portfolio credit performance has demonstrated stabilization since the onset of the pandemic. As evidenced by 2021, that charge offers 16 basis points and NPAs of 12.2 million. A testament to our continued focus on premier credit quality.
To our continued focus on premier credit quality.
It's now my pleasure to turn the call over to Jack for additional details on our results in 2022 guidance.
Speaker 3: It's now my pleasure to turn the call over to Jack for additional details on results in 2022 guidance.
Thank you Marty good morning, everyone.
Speaker 4: I'll begin today by providing commentary on key areas of performance in the fourth quarter with comparisons to the third quarter of 2021. That interesting comes...
I'll begin today by providing commentary on key areas of performance in the fourth quarter with comparisons to the third quarter of 2021.
Net interest income was $40 $9 million to.
Speaker 4: 2.6 million higher than the linked quarter as a result of our deployment of access liquidity into investment securities.
$2 6 million higher than the linked quarter as a result of our deployment of excess liquidity into investment securities.
Growth in loans.
Speaker 4: Higher revenue and connection with triple P loan forgiveness and a lower overall cost of funds.
Higher revenue in connection with Triple T loan forgiveness, and a lower overall cost of funds.
Approximately $64 million and $56 million of P. P. P loans were forgiven in the fourth and third quarters of 2021, respectively.
Speaker 4: Approximately 64 million and 56 million of PTP loans were forgiven in the fourth and third quarters of 2021 respectively with a related fee accretion of 2.6 million dollars in the fourth quarter is compared to 1 million in the third quarter.
With a related fee accretion of $2 $6 million in the fourth quarter as compared to $1 million in the third quarter.
Speaker 4: Usually all of the 2020 vintage of loans have been forgiven or repaid and approximately 53% of the 2021 vintage was forgiven in the fourth quarter.
Nearly all of the 2020 vintage of loans have been forgiven or <unk>.
Paid approximately 53% of the 2021 vintage was forgiven in the fourth quarter.
Speaker 4: NIM on a fully taxable equivalent or FTE basis for the fourth quarter of 2021 with 315 basis points.
NIM on a fully taxable equivalent or FTE basis for the fourth quarter of 2021 with 315 basis points.
Speaker 4: Up 8 basis points in the linked quarter, and up 2 basis points from the fourth quarter of 2020.
Up eight basis points from the linked quarter and up two basis points from the fourth quarter of 2020.
Speaker 4: including the impact of triple P interest in C's and access liquidity from each quarter.
Excluding the impact of Triple T interest and fees and excess liquidity from each quarter.
Speaker 4: NIM decreased two basis points from the prior quarter. Primarily due to a three basis point decrease in earning asset yields, and a one basis point declined in the cost of interest bearing liability.
NIM decreased two basis points from the prior quarter, primarily due to a three basis point decrease in earning asset yields and a one basis point decline in the cost of interest bearing liabilities.
The impact of income from excess liquidity negatively impacted NIM by 14 basis points in the fourth quarter of 2021.
Speaker 4: The impact of income from excess liquidity negatively impacted NEM by 14 basis points in the fourth quarter of 2021.
Speaker 4: compared to a negative nine basis point impact in the third quarter of 2021. you
<unk> to a negative nine basis point impact in the third quarter of 2021.
Full year NIM was 305 basis points, excluding the impact of Triple P loans in line with guidance. We've provided since July of 2021.
Speaker 4: In line with guidance we've provided since July of 2021. We continue to make
We continue to manage through the excess liquidity on our balance sheet. However, triple P. Forgiveness added to the liquidity profile once again this quarter.
Speaker 4: However, triple P forgiveness added to the liquidity profile once again this court.
Speaker 4: approximately $60 million when comparing average balances for the linked quarters. The seasonality of public deposits.
Approximately $60 million when comparing average balances for the linked quarters.
The seasonality of public deposits, which are higher at the onset of the fourth quarter.
Speaker 4: Drove an increase in average public deposits of approximately 200 million dollars as compared to the third court.
Drove an increase in average public deposits of approximately $200 million as compared to the third quarter.
These sources of liquidity resulted in incremental investment securities in the quarter.
Speaker 4: These sources of liquidity resulted in incremental investment securities in the quarter within an average balance approximately $185 million higher than the length quarter.
With an average balance of approximately $185 million higher than the linked quarter.
Speaker 4: Our investment securities purchases have been focused on mortgage-backed securities with low-to-moderate duration that provide ongoing cash.
Our investment securities purchases have been focused on mortgage backed securities with low to moderate duration that provide ongoing cash flow.
Speaker 4: which we have prudently utilized as a low risk with putty management tool generates incremental yield over federal reserve balance.
Which we are prudently utilize as a low risk liquidity management tool generates incremental yield over federal reserve balances.
Speaker 4: Cash flow from the portfolio will allow for reinvestment into loans or additional investment securities.
Cash flow from our portfolio will allow for reinvestment into loans or additional investment securities when rates begin to rise.
Speaker 4: Are quarterly net interest margins did benefit from a lower cost of funds down two basis points from the third quarter, the 22 basis?
Our quarterly net interest margin did benefit from a lower cost of funds down two basis points from the third quarter to 22 basis points.
Noninterest income of $11 $7 million was relatively flat as compared to the third quarter down $409000.
Speaker 4: Non-interest income of $11.7 million was relatively flat as compared to the third quarter, down $409,000.
Speaker 4: Revenue categories with the largest changes colder over quarter were insurance income, which was down 521,000, with the result of the seasonal timing of commercial policy renewals.
Revenue categories with the largest changes quarter over quarter were insurance income, which was down 521000 as a result of the seasonal timing of commercial policy renewals.
Income from limited partnerships, which was down 400000 based on the activity and performance of underlying investments.
Speaker 4: Income from limited partnerships, which was down $400,000 based on the activity and performance of underlying investors.
Speaker 4: and income from derivative instruments, which was up to 658,000, they sum a number and value of transactions and the impact of changes in fair market value.
And income from derivative instruments, which was up 658000 based on the number and value of transactions and the impact of changes in fair market value.
Speaker 4: non-interested expense with $29.9 million. An increase of 728,000 from the Linktcourt.
Noninterest expense was $29 9 million, an increase of 728000 from the linked quarter.
Speaker 4: This increase was primarily driven by a $313,000 increase in salaries and employee bonus.
This increase was primarily driven by a $313000 increase in salaries and employee benefits.
Speaker 4: which was largely the result of non-recurring severance expense related to the redesign of the bank's retail branch structure.
Which was largely the result of nonrecurring severance expense related to the redesign of the bank's retail branch structure.
Speaker 4: In computer and data processing, which was 373,000 higher as a result of investment in technology, it should include digital banking initiatives and our new comprehensive customer relationship management solutions.
And computer and data processing, which was 373000 higher as a result of investments in technology.
<unk> digital banking initiatives, and our new comprehensive customer relationship management solution.
Income tax expense was $4 $2 million in the quarter, representing an effective tax rate of 17, 7%.
Speaker 4: Income tax expense was $4.2 million in the quarter, representing an effective tax rate of 17.7%.
Speaker 4: Effective tax rates in 2021 have been higher than the previous year due to the higher level of pre-tax earnings in 2021 in comparison to 2020.
The effective tax rate in 2021 have been higher than the previous year due to the higher level of pretax earnings in 2021 in comparison to 2020.
We remain comfortable with our capital position given that much of the asset growth we've experienced in the past year as a result of low risk assets.
Speaker 4: given that much of the asset growth we've experienced in the past year is the result of low-risk assets.
Primarily excess liquidity.
Speaker 4: Our regulatory capital ratios remain comfortably above well capitalized minimums.
Our regulatory capital ratios remain comfortably above well capitalized minimums, and our TCE ratio increased 34 basis points in the quarter.
Speaker 4: And our TCE ratio increased 34 basis points in the corridor. From 7.25% to 7.59%.
From 725% to 759%.
I'd now like to spend the next few minutes, providing our outlook for 2022 key areas.
Speaker 4: I now let this film the next few minutes providing our outlook for 2022 in Kiari.
Speaker 4: We expect mid to high single-digit growth in our total loan portfolio with commercial loan categories driving this growth.
We expect mid to high single digit growth in our total loan portfolio with commercial loan categories driving this growth.
Speaker 4: Guidance assumes the forgiveness or repayment of the remaining $55 million of triple P loans during the first three quarters. We plan for low-
Guidance assumes with forgiveness or repayment of the remaining $55 million of Triple P loans during the first three quarters.
We plan for low single digit growth in nonpublic deposits.
Speaker 4: We are focused on attracting new consumer and commercial deposit
We are focused on attracting new consumer and commercial deposit accounts and expect the positive impact of these new accounts to be partially offset by unexpected decline in the average balance per account.
Speaker 4: and expect the positive impact of these new accounts to be partially offset by an expected decline in the average balance per account as an outcome of the most recent interest rate forecast.
As an outcome of the most recent interest rate forecast.
We are projecting reciprocal and public deposits to be relatively flat.
Speaker 4: we are projecting reciprocal and public deposits to be relatively flat.
Speaker 4: Overall, we expect full-year NIM of 305 to 310 basis points, excluding the impact
Overall, we expect full year NIM of 305 to 310 basis points.
Excluding the impact of Triple P fee accretion.
Speaker 4: Although economists are predicting an increase in the Fed funds rate during 2022, we are guiding on NIM using a spot rate for it.
Although economists are predicting an increase in the fed funds rate during 2022, we're guiding on NIM using a spot rate forecast.
Speaker 4: We expect to continue carrying higher balances and investment securities due to carryover from our 2021 excess liquidity position, which will put pressure on NIM in early 2022. There will continue to be noise in NIM relative to
We expect to continue carrying higher balances in the investment securities due to carryover from our 2021 excess liquidity position.
Which will put pressure on NIM in early 2022.
There will continue to be noise in them relative to triple P forgiveness, although muted relative to 2021.
Speaker 4: We are guiding on them, excluding the impact of triple P activity as we did last.
We are guiding on NIM, excluding the impact of Triple T activity as we did last year.
As a reminder, our NIM fluctuate from quarter to quarter due to the seasonality of public deposits and its impact on both our earning asset and funding mix.
Speaker 4: As a reminder, our NIM fluctuates from quarter to quarter due to the seasonality of public deposits and its impact on both our earning asset and funding.
Speaker 4: In quarters where our average public deposit balance is are higher due to seasonal inflows, the second and fourth quarter.
In quarters, where our average public deposit balances are higher due to seasonal inflows.
Second and fourth quarters.
Speaker 4: Our earning asset yields are lower, given the short-term duration of the deposits and limited opportunities to invest the funds.
Our earning asset yields are lower given the short term duration of the deposits and limited opportunities to invest the funds.
While our NIM guidance was developed utilizing a flat rate forecast our balance sheet is well positioned for rising rate environment with 34% of our loan portfolio excluding triple P.
Speaker 4: While our NIM guidance was developed utilizing a flat rate forecast, our balance sheet is well-positioned for rising rate environment. The 34% of our loan portfolio, excluding triple P, is indexed to variable in...
Index to variable interest rates.
Speaker 4: We are projecting low single-digit growth in non-interest income, excluding gains on investment securities and non-interest income categories that are difficult to predict, such as limited partnership.
We're projecting low single digit growth in noninterest income excluding gains on investment securities and noninterest income categories that are difficult to predict.
As limited partnership income.
We also expect a decline in mortgage banking revenue as a result of lower anticipated refinance activity.
Speaker 4: We also expect a decline in mortgage banking revenue as a result of lower anticipated refinance activity and tightening of gain on sale spreads due to the interest rate environment.
Tightening of gain on sales spreads due to the interest rate environment.
We are targeting an increase in the mid single digit range for noninterest expense.
Speaker 4: You're targeting an increase in the mid single digit range for non-interest expense.
Speaker 4: which is expected to range from 31 to $32 million per quarter.
Which is expected to range from $31 million to $32 million per quarter.
Speaker 4: Our spend in 2022, including investments with strategic initiatives, including further enhancements to our new customer relationship management solution, digital banking and banking as a service.
Our spend in 2022 includes investments in strategic initiatives, including further enhancements to our new customer relationship management solution.
Digital banking and banking as a service.
Speaker 4: We expect these investments to begin producing incremental revenue in 2022. Over full benefits are likely to be realized over the coming.
We expect these investments to begin producing incremental revenue in 2022.
Full benefits are likely to be realized over the coming years.
Speaker 4: By way of reference, we have a demonstrated record of making short-term investments that support longer-term efficiency benefits.
By way of reference we have a demonstrated record of making short term investments that support longer term efficiency benefits.
Speaker 4: For example, our ESP initiatives executed in the third quarter of 2020 resulted in a short-term increase in our efficiency ratio. Yet we realized an urnback on the investments inside of one year. And the long-term benefits contributed to our efficiency ratio performance in 2021.
For example, our ERP initiatives executed in the third quarter of 2020 resulted in a short term increase in our efficiency ratio.
Yet we realized an earn back on the investments inside of one year and the long term benefits contributed to our efficiency ratio performance in 2021.
We expect inefficiency ratio within a range of 59% to 60% for the year.
Speaker 4: The EXPACT inefficiency ratio was in a range of 59 to 60% for the year.
Speaker 4: which is negatively impacted by upfront costs associated with our aforementioned investments and strategic initiatives.
Which is negatively impacted by upfront costs associated with our aforementioned investments in strategic initiatives.
Speaker 4: We expect the 2022 effective tax rate to fall within a range of 19 to 20 percent, including the impact of the amortization of tax credit investments placed through service in recent years.
We expect the 2022 effective tax rate to fall within a range of 19% to 20%.
Including the impact of the amortization of tax credit investments placed in service in recent years.
Speaker 4: We will continue to evaluate tax credit opportunities, and our effective tax rate would be positively impacted by taking advantage of further investment opportunities.
We will continue to evaluate tax credit opportunities and our effective tax rate would be positively impacted by taking advantage of further investment opportunities.
Speaker 4: We expect net charge off to be within our annual historical range of approximately 35 to 40 basis points.
We expect net charge offs to be within our annual historical range of approximately 35 to 40 basis points.
Speaker 4: Our overall focus includes executing on strategic initiatives that will improve profitability and operating leverage over.
Our overall focus includes executing on strategic initiatives that will improve profitability and operating leverage over time.
Speaker 4: We believe that achieving results in line with the guidance provided will drive these outcomes.
We believe that achieving results in line with the guidance provided we will drive these outcomes.
Speaker 4: That concludes my prepared remarks. I'll now return the call back to Marty.
That concludes my prepared remarks, I'll now turn the call back to Marty.
Thank you very much Jack.
Speaker 3: Our management team remains focused on a strong execution of strategic initiatives while remaining resilient and nibble. We learned a lot over the past two years, and those lessons learned are being incorporated into our strategic and risk frameworks that guide the evolution, and in some cases, transformation of the company to drive long-term shareholder value and position us for a bright future.
Our management team remains focused on the strong execution of strategic initiatives, while remaining resilient nimble.
We learned a lot over the past two years and those lessons learned are being incorporated into our strategic and risk frameworks that guide the evolution and in some cases transformation of the company to drive long term shareholder value and position us for a bright future, while the fundamental strategic outcomes of sustained deposit growth.
Speaker 3: While the fundamental strategic outcomes of sustained deposit growth, credit discipline loan growth, diversification of revenue.
Credit disciplined loan growth diversification of revenue.
Speaker 3: and sustainable business practices remain critical and correlated to high performance.
<unk> disciplined and sustainable business practices remain critical and correlated to high performance our strategy continues to evolve during.
Speaker 3: Our strategy continues to evolve. During 2021 planning cycle, we added a six strategic outcome, exceptional digital experiences enabled by complimentary Fintech and digital partnership.
During 2021 planning cycle, we added six strategic outcome exceptional digital experiences enabled by complementary fintech and digital partnerships.
Speaker 3: Overall, our digital transformation efforts are taking hold, and we continue to enhance a digital experience for our consumers.
Overall, our digital transformation efforts are taking hold and we continue to enhance the digital experience for our consumers.
Speaker 3: Recently, we have leaned into two current macro trends, payments and digital current.
Recently, we have leaned into to current macro trends payments and digital currencies.
Speaker 3: Payments are rapidly rising in importance as the primary touch point between customers and their banks, forming the heart of active primary banking relationships.
Payments are rapidly rising in importance as the primary touch point between customers and their banks for them at the heart of active primary banking relationships.
In response.
Speaker 3: We, along with other banks in the Alloy Labs consortium, announced the launch of CHUCK, our open payments network that allows customers to send money from their five-star bank
We along with other banks in the alloy Labs consortium announced the launch of Chuck are open payments network that allows customers to send money from their five star Bank account and it gives the recipient the option of choosing where they want the money to go.
Speaker 3: and gives the recipient the option of choosing where they want the money to go.
Speaker 3: Chuck takes the friction out of digital payments for our customers by promoting customer choice and flexibility.
Chuck takes the friction out of digital payments for our customers by promoting customer choice and flexibility.
Speaker 3: Chuck is part of a broader payment strategy that leverages the power of collaboration to reach economies of scale and both innovation and investment in operating costs.
Chuck as part of a broader payment strategy that leverages the power of collaboration to reach economies of scale in both innovation investment and operating costs.
Speaker 3: Our robust payment strategy will have several additional offerings coming to market over the next 12 months that will benefit our consumer and commercial customers while expanding our capabilities in RE.
Our robust payment strategy will have several additional offerings coming to market over the next 12 months that will benefit our consumer and commercial customers, while expanding our capabilities and reach.
Well bitcoin has been in the news in recent weeks due to its downturn. It is nonetheless of great interest to certain consumers.
Speaker 3: While Bitcoin has been in the news in recent weeks due to its downturn, it is nonetheless of great interest to certain consumers.
Speaker 3: Bitcoin and blockchain technology are playing a significant role in the decentralization of finance.
Bitcoin blockchain technology are playing a significant role in the decentralization of finance.
Speaker 3: Smaller banks may fall behind if they do not embrace change and innovate to meet changing consumer behavior.
Smaller banks may fall behind if they do not embrace change and innovate to meet changing consumer behaviors.
Ultimately could push consumers to unregulated providers of financial services.
That's why our partnership with Dai dig as an opportunity to bring together our respective strengths to benefit consumers, while maintaining a safe and sound financial system.
In addition to our efforts with payments in bitcoin.
Bank is collaborating with partners on several initiatives that will increase deposit gathering and loan origination create efficiencies and helped drive our recently launched banking as a service line of business.
We are pursuing AI decisioning for consumer lending in further digitizing, our small business lending among others.
Our organization continues to operationalize initiatives intended to increase efficiencies optimize processes and improve customer experiences and these include our enterprise standardization program robotics and analytics.
These initiatives are ingrained in our approaches and are fundamental to lowering operating costs, while enhancing associate and customer experiences.
Another outcome of our 2021 strategy update once the refresh of our human capital strategy in response to the new normal way of working the great resignation and the great re imagination.
Long term growth and success are linked to our ability to attract develop and retain associates in the context of a diverse and inclusive workplace, where everyone can thrive simply put ensuring we have the right people or access to the right people and skills to deliver strategy today and in the future supported by an organizational frame.
Work that nurtures, a strong and healthy culture.
One of the components of the human capital strategy is the rollout of five star fulfilled we recognize that working styles or not.
One size fits all and our new flexible philosophy embraces the benefits of both remote and in office work.
Both styles of work are purposeful and meaningful and we are working with also shifts to find the right balance it fits the individual and the five star team.
The five start new way of working is scheduled to go live on April four.
And finally building on our strong track record of driving credit disciplined loan growth. We are open to leveraging available talent to expand our commercial platform through the recruitment of commercial professionals and establishment of loan production offices and viable markets outside of our existing footprint.
2021 was a terrific year for our company in addition to identifying and making strategic investments for our future and delivering strong financial and operating results.
We provided continuous essential support and services to our customers throughout the pandemic, helping them navigate a period of great uncertainty.
We successfully completed two bolt on acquisitions to our SDN insurance subsidiary, expanding our insurance offerings and presence in the important Rochester and finger lakes market and expanding.
Standing our employee benefits and human resources consulting business.
In a time when many large banks are closing branches in urban markets. We opened two new branches in the city of Buffalo and area is undergoing significant redevelopment and revitalization.
We also relocated our existing city of Elmira branch to a new development.
<unk> in New York State downtown Revitalization initiative partnering with other businesses to help revitalize the service area.
Through the many ups and downs of 2021, we never lost sight of our critical mission to support our customers and communities.
Across our operating footprint.
I encourage you to read the five Star Bank 2021 community report available on five Star Bank website.
And our Investor relations website to better understand the many ways our organization and associates provide support.
One of the areas highlighted in the 2021 report as affordable housing.
We recognize the critical need for affordable and special needs housing across our geographic footprint and a few years ago, we hired lenders with deep experience in this area.
They have let our initiative to provide debt and equity financing for numerous affordable housing projects across our operating footprint.
I want to sincerely. Thank my fellow teammates for their ongoing dedication and commitment to our customers our communities and each other and for their many contributions to our achievements.
Operator. This concludes my prepared comments and we are ready to open the call for questions.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
For any reason you would like to remove your question. Please press star followed by K again to ask a question. It is star followed by one Oh sorry.
Linda if you like using a speaker phone. Please remember to pick up you'll handset before asking the question.
I'll pause briefly while the questions.
Counted.
Our first question comes from Alex Potter Piper Sandler. Your line is now open. Please go ahead.
Hey, good morning.
Hi, Alex Good morning, Alex.
First question for me.
You said it from severance costs in the release, but I didn't see the exact breakout can you just break that out for us Jack.
Yes, I think it was about.
$225000 during the fourth quarter and it was related to some of the redesign we had on the retail side and then some.
Some changeover in other areas of the bank.
Yeah.
Okay, and then just kind of going through the <unk>.
The new expense guide I think you said, 31% to $32 million, which is a little bit of a click up from from where we are kind of run rating in the fourth quarter.
And can you just breakout for us how much of that is due to some of these initiatives you talked around the tech side, how much it is wage inflation and if there's anything else in there and then you know in terms of the timing of that guide is that kind of a good number for each quarter of the year or is there going to be some ramp up as the year goes on.
Sure so.
Or is the run rate appears for on a quarterly basis Thats a good thats a good number to use it's pretty stable from a quarter to quarter view for 2022.
Did not budget for any wage inflation outside of.
Some incremental staffing adds that are at current market levels, and then normal merit increases that get rolled out at the end of the third quarter.
And then as far as it pertains to.
The initiatives that are underway, there is about $3 $1 million of incremental increase of expense attributable to those initiatives. The totals $4 6 million for the annual noninterest expense in 2022.
Thats really through the form of our upgraded CRM platform, our fast strategy and then overall digital making expansion.
Yeah.
I'm sorry, you can say that you said it was $4 6 million of the of the guide in 2022.
That's correct.
Okay.
And then Alex.
I would say just wood.
Add that as we consider those investments a couple of things.
The efficiency that we're driving through enterprise standardization allows us puts us in a position to make take on the incremental expenses and Jack has been leading a very.
Robust conversation internally routed and business cases that lays out a very clear expectation in terms of the cost benefits and return the timing of returns.
Several of these initiatives have earn back periods that are inside of 12 months and the benefits of others, particularly the CRM platform have a payback period, that's about two years.
Okay. So does that set up.
Expenses in 'twenty three to be roughly flattish or is it just kind of.
How do we think about it.
And 2022.
Yes, im not going to I'm not going to comment on 2023.
Senses, but the expectation from these initiatives as they begin to generate positive operating leverage as a.
Mature past that initial earn back period.
Okay.
And then.
In your prepared remarks, Marty I think you talked about line utilization rates.
Essentially trending higher can you just where those are today and kind of what the normalized level is.
Yeah. So I think for the vast majority of 2020 and all of 2021, we really experienced modest commercial utilization.
Realizations of our lines of credit and our C&I business, particularly.
We're starting to see those balances kind.
Reduce in terms of the customers that we're talking to.
Working with relative to their own liquidity and they're starting to hit their lines in a more normal fashion.
Okay. So and then if you kind of take it one step further and just kind of give us a sense for what that could do to the C&I portfolio. If lines you normalize over the course of the year.
What kind of.
What kind of dollar value to be associated with that or percentage growth can be associated with just that piece.
So I would just share anecdotally that our C&I business relative to budget in 2021 was performing with a negative variance. There then.
At year end.
The gap was closed.
So there's momentum there that we've acknowledged in my prepared remarks.
From a budget standpoint, we're looking at high single digit growth in the C&I portfolio for in 2022.
Okay.
And then just a final question for me just on the.
The reserves.
And the $5 three or so that's related to Covid is that specifically associated with that $120 million or so of criticized and classified.
Or is there a piece in there thats kind of general reserve that can be really even before those criticized and classifieds returned to full bank status.
Yes.
So as we look at potential for releases there. There's there are a couple of the Covid deferral loans.
I think it equates to about $3 $5 million of that specific that are.
They are performing well and we really need them.
We need to observe the passage of time for consistency in their payment behavior before we can release those reserves, but they are on positive outlook at this stage of the game.
Yes, I would ask the sides, Alex as part of our Covid process and our commercial bridge is that we provide the COVID-19 bridges.
Essentially downgraded those where we provided bridges to criticize risk rating status. So anecdotally, we're in we're seeing as well as Harry.
Very positive trends in these customers and that's why I said as we go through the annual review cycle. This spring. So the natural course of our expectation is that those credits will return to Paas status.
Okay. Thanks for taking my questions.
Thanks Al.
Thank you Alex next question goes to price five from <unk>. Your line is now open. Please go ahead.
Thanks, Good morning wanted to maybe start on on the margin.
If you don't mind.
Jackie you noted the percentage of loans that are kind of indexed.
Our variable rate.
Can you just can you speak to kind of the timing of.
When those loans might reset is it more more immediate or is it just kind of a function of when youre seeing some level of maturity here coming up in 'twenty two.
Yes.
Those are loans that are tied to prime and LIBOR. So.
Assuming the primary first with any fed hikes that would be an immediate impact.
Okay, and so no no floors that would kind of impact any kind of positive that you might see from fed rate hikes.
As much as we tried to get floors implemented years ago. We were unsuccessful in that regard. So we now have the benefit of them.
Repricing and continuously.
Okay. Okay.
And then in terms of.
The kind of the analysis the asset sensitivity analysis that you provide within the Qs in the case, what kind of deposit data.
I assumed.
And those sensitivities.
Yeah, when we look back to.
The last fed hiking cycle and 2018.
And our deposit behavior during that timeframe. It was 8% to 10% betas on our non maturity deposits so fairly low in the Grand scheme of things.
Okay.
Okay.
And then maybe one last one here on the on the NIM in terms of.
Cash flow coming off the bond portfolio, what is that estimated at here in the year.
In the coming year.
Yes, we ran some analysis at year end and it looks like we have about $200 million unexpected cash flow for 2022.
Okay.
Okay.
And then maybe one for Marty.
Made mentioned of.
Loan production offices, there in your prepared remarks.
Possibility of opening up loan production offices in new markets can you can you talk a little bit more about that comment.
And how you would how you.
What kind of position that or think about that if you were to execute on that strategy.
Sure, Kevin Quinn, who leads our commercial line of business and it's one of our named Executive officers has extensive experience having worked in that.
Supporting a bank with that type of activity Kevin early on before <unk>.
Standard their footprint.
To help to open up markets for them in the Ninety's and spent 15 years running commercial teams in.
Abroad geographic swath of from Chicago over to Boston, having worked out it is a native of Buffalo New York. So we've got the leadership and the expertise that can help us do it frankly, we've been <unk>.
Driving loan activity in Syracuse, which technically is out of our geographic footprint and so to establish an LPL there.
Would be would.
Would be new in this.
We're going to take advantage of Kevin's expertise and.
Think about the opportunity to.
Work with lenders who are in play consolidation continues to play out and lenders are looking for opportunities to work with an organization like ours, where they can have an impact and help us.
Drive the success of the institution forward so.
<unk> also.
What we're experiencing through our work in digital activities as that.
Having a branch network located next to it around the market where commercial business is being driven is not necessarily the imperative that it once was so we can drive.
Utilization of our balance sheet through lending activities, but as well work with customers to open up deposit accounts leveraging current technology.
Okay, that's great and geographically I mean is there any constraint around.
How youre thinking about lender ads.
With the I guess.
The landscape now does it does it open it up to really most most geographies.
I would say, it's much broader most geographies and really the fundamental gate.
We'll walk through is getting to know these lenders ideally being introduced to these lenders by people we know.
So we can get to know them and they can get to know us and we can then drive forward together in a credit discipline manner.
Okay, Okay alright.
Alright, I'll jump back in queue. Thanks for your.
Your answers.
Thanks, Brian .
Thank you Bryce on next question guys to Marla backer from Sidoti. Please go ahead.
Okay.
Mueller Your line is open. Please go ahead.
Sure.
I think David del Monte's line it looks like it's open.
Yeah, David line.
Damon.
Please go ahead. Your line is now open.
Great. Thank you good morning, everyone.
Hi, David I, just wanted to quickly hi, just wanted to follow up on the on the margin and the outlook there. So.
So you're calling for a full year margin of 305 to $3 10 for 2022 and that does not assume any rate hikes is that correct.
That's correct and it also excludes the impact of the Triple PPE accretion.
Okay. So I'm trying what I'm trying to get to like a starting point here. So this quarter you had $3 15 was your reported NIM.
And if you kind of take the impacts from PPP is that around 20 basis points this quarter.
Yes that was actually 17 basis points.
17 baseline, okay, so kind of starting that ground.
Like a 298 ish.
Courtyard Youre 98.
Yes, so when we engage with our margin excluding the impact of Triple play.
Got it Okay, and then from there that's where the 305 to $3 10 for the full year comes out got it. Okay. That's helpful. Thank you and then.
With respect to the reserve level.
Obviously, it came down to like 109 ex PPP.
You know Youre forecasting 35 to 40 basis points of net charge offs and you still have the COVID-19 .
Specific reserves in place.
What do you as you look out over the course of the year, what do you what do you feel as a normalized reserve level based on your portfolio.
So our current coverage ratio of 108 basis points.
It really aligns with our pre pandemic seasonal they wanted the option level.
And if we expect that theres going to be some stabilization in those COVID-19 deferral loans and the potential for a release of the reserves associated with them.
Could be comfortable seeing this coverage ratio dropped a little bit lower in 2022, assuming that those credit stabilize.
But we are expecting to have a normalized level of provisioning to cover regular loan growth and then normalized MTO is about 35% to 40 basis point level.
Got it okay, alright, that's helpful.
And then.
I you know I guess just lastly.
Could you just talk a little bit more about the new relationship with the being towards the bitcoin that came out last week and kind of what are some of the longer term opportunity there and how the bank can ultimately benefit from that.
Sure. So a couple of comments.
David.
First of all I think it is a great example of how we're trying to lean in the tech forward financial institution in terms of the intersection of technology and community banking.
In this case <unk> is a new York.
PFS regulated institution. So are we and we were able to simply connect our digital platform.
<unk> to be responsive to customer interest and demand for the ability to buy and sell and hold bitcoin and so.
We would make it didn't cost us much to get into that and we would make money at the margin in terms of the transactions that occurred in terms of buying and selling it but from our perspective.
Got it.
As a seamless digital experience for our customers and it's a safe and sound experience in terms of it being.
Technically cold storage you can buy you can sell and you could hold that you can't use it to spend it they.
Would have to sell it and converted et cetera. So.
For me, it's exciting that we're able to demonstrate the nimbleness and agility that we were talking about internally and I think thats required externally to take advantage of these opportunities.
Yes. This is Jack I think the other important.
It allows us to continue to evolve our relationship with <unk>.
As they expand their product set and services based on bitcoin across both the consumer wealth and commercial platforms.
Yes.
That's great that's great color. Thank you I appreciate it that's all that I had this morning. Thank you.
Thank you Steven.
Thank <unk>.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Yeah.
We currently have no more questions registered at this time, so I'll pass the conference over to the management team for closing remarks.
All questions come back for you from Mala My apologies.
Mala Unfortunately, we keep losing connection with your line.
Can you try and where you Register your question.
Unfortunately, he has disconnected. So this does conclude today's conference call I will hand over to management for closing remarks.
Okay. Thanks, so much for your support and helping to facilitate the call and thanks for those that have called in.
It was a little longer this morning, because we wanted to try to provide a comprehensive update on the company our strategy and our outlook for 2022, and we look forward to building on the conversation.
And the following quarters.
Thank you.
This.
Today's conference call you may disconnect your line.
Yeah.
Yeah.
Okay.
Okay.
Yes.
Uh huh.
Yeah.
Yes.