Q4 2022 FNB Corp Earnings Call
Good morning, everyone and welcome to the F N B fourth quarter 2022 earnings conference call.
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At this time I'd like to turn the floor over to Lisa Hi deal manager of Investor Relations Ma'am. Please go ahead.
Thank you good morning, and welcome to our earnings call.
This conference call of F N B Corporation and reports it files with Securities and Exchange Commission.
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 the most directly comparable GAAP financial measures.
In our presentation material in our earnings release, please refer to these non-GAAP and forward looking statements disclosures contained in our latest materials reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website.
A replay of this call will be available until Tuesday January 31st and the webcast link will be posted to the about US Investor Relations section of our corporate website.
I will now turn the call over to Vince Silly, Chairman President and CEO .
Thank you and welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, Gary Guerrieri, Our Chief Credit Officer.
FSC closed strong 2022, continuing our streak of outstanding performance and is positioned to capitalize on our momentum as we navigate it.
Economic landscape.
F&B fourth quarter operating earnings per share totaled a record 44 <unk>.
Increasing 13% linked quarter basis, and bringing the full year operating earnings per share to $1.
The success. This quarter was further highlighted by record revenue continued strong loan growth disciplined deposit cost management and the closing and conversion of the <unk> Bancorp acquisition.
Yeah.
The fourth quarter's exceptional woman is captured and its strong profitability metrics with operating return on average tangible common equity totaling 22%.
In the quarterly efficiency ratio below 46%.
In the fourth quarter total revenue grew 10% linked quarter to 460 billion.
With net interest income is the primary driver contributing 13% growth.
In addition to benefiting from the fed rate hikes or net interest income reflects strong loan growth favorable funding cost the strategic steps our team has taken.
Asset sensitive condition of our balance sheet.
Net interest margin significantly expanded quarter over quarter.
319% to three 3%.
Operating expenses were well managed increasing one 5% linked quarter.
The revenue growth and disciplined expense management.
That is a strong positive operating leverage and an 18% linked quarter increase.
Re provision net revenue.
F&B ended the year with nearly 44 billion in total assets and $30 billion in loans and leases a 5% increase linked quarter.
On an annualized basis, excluding DZ bank.
In commercial and consumer loans grew 14% and 6% respectively.
Continuing a trend we have upheld throughout the entire year, we saw strong loan growth and market spanning our pulpwood.
Once again, demonstrating the importance of our diverse geographic coverage and presence in both mature and high growth markets.
The acquisition of <unk> Bank, we're closed on December nine 2022, with the systems conversion successfully completed and integrated with.
With the addition of UV Bancorp's rich deposit, which includes 43% noninterest bearing deposits. We ended the year with a total noninterest bearing deposit mix at 34%.
This result was in line with the end of 2021, despite that funds increased to 425 basis points, demonstrating the strength of our deposit franchise.
We are pleased with the financial benefits and dedicated employees you'd be Bancorp acquisition has brought to us and we expect to generate additional revenue as these customers are introduced to F&B, it's more robust product set.
F&B impressive fourth quarter full year results demonstrate our significant success driving value for our clients communities employees and shareholders.
To call out a few of our many accomplishments.
F&B achieved operating earnings per share of $1.
One of the highest levels in company history led by record revenue of $1 4 billion.
Total loans grew by $5 3 billion year over year or 21%.
This strategic combination.
Wide organic growth and the completion of the two accretive acquisitions, bringing total assets 244 billion.
Despite the challenging economic environment, we grew total deposits to an all time record of 35 billion.
And reported average balanced growth in all four quarters of 2022, while also maintaining a favorable deposit mix comprised of 34% noninterest bearing deposits.
We currently hold the top five deposit market share in nearly 50% of our msas. According to data provided by the FDIC.
We generated over $1 1 billion in net interest income up 24% year over year, driven by solid loan growth a favorable deposit mix.
The asset sensitive portion of our balance sheet.
Our team controlled expenses in a high inflationary period contributed.
<unk> contributed <unk>.
Full year efficiency ratio of 52%.
F&B reported total shareholders' equity of five weeks 7 billion and a CET one ratio of nine 8%.
Our growing capital base provided our company with unprecedented flexibility even after returning $220 billion to shareholders through common dividends, our active share repurchase program, which has 175 million remaining.
Our strong earnings also resulted in a 40% dividend payout ratio and 34% on an operating basis, providing our company more internal capital to support.
Future growth and capital actions.
Credit quality remains solid with consistent prudent underwriting standards throughout the footprint with total delinquencies ending the year at 71 basis points net charge offs of six basis points for the full year and our reserve position of 133%.
We will maintain our steadfast focus on our disciplined credit culture as we continue to navigate a changing economic cycles.
We closed and converted two acquisitions Howard Bancorp at January <unk>.
Which have enhanced our market position in Maryland, Washington, D C and North Carolina.
Driven by our continued investment in Fnb's digital delivery channels and our dedicated mortgage employees. The physicians first program comprised 25% of retail mortgage production in 2022.
And grew those high value households significant.
We continue to expand our E store platform, which received over 500000 interactions in 2022 up 104% year over year and introduced online applications for multiple consumer loan and small business deposit products.
The success of our digital strategy increased adoption across our expanding customer base, including a 17% increase in online application.
Our consistent performance does not happen without the right culture and the commitment of the exceptional people.
We focus on fostering a positive productive workplace, we're engaged employees provide superior service for our clients and attractive returns for our shareholders. Our success. In this regard has led to extensive third party recognition.
Since 2011, F&B has received more than 80 prestigious Greenwich Excellence and best brand.
With 17 in 2022 of them on this.
These results are based on direct feedback from our commercial middle market and small business banking model.
Additionally, F&B received approximately 50 awards as an employer of choice.
Adding multiple national and regional honors in 2022, earning a place as one of Newsweek's America's top workplaces for diversity in 2023.
And most recently named to just capital list of America's most just companies for the sixth consecutive year with exceptionally high marks for community development employee benefits and work life balance.
Our board and leadership team proud of this year's achievements, we are confident in our companies continue to build and to execute on our strategic plan in 2023.
Even in times of economic uncertainty.
Well positioned given our diversified loan portfolio investments in technology strong liquidity position capital flexibility and strong historical credit.
I will now turn the call over to Gary to provide additional detail on our asset Paul Gary.
Thank you Vince and good morning, everyone. We ended the year with our credit portfolio, well positioned and our asset quality metrics remain near historically low levels.
Our performance for the period reflects total delinquency and ended the year at 71 basis points Npls and Oreo at 39 basis points rated asset levels remained essentially flat quarter over quarter, Excluding Union bank and full year net charge.
Jobs at six basis points.
I will cover these GAAP asset all the highlights for the quarter and full year in more detail followed by some insight into our credit strategy, we use to manage the loan portfolio throughout economic cycles.
And finally, we will provide a brief update on the UV Bancorp acquisition that closed during this year.
Let's now walk through our credit reserves.
Total delinquency ended December at 71 basis points, reflecting a 12 basis point linked quarter increase coming off of historically low past due levels and trailing quarters.
Npls and Oreo at 39 basis points were up seven bps in the quarter with nearly 60% of our Npls and our contractually current payments to us.
Net charge offs for Q4 totaled $11 9 million or 16 basis points on an annualized basis.
Full year net charge offs for 2020, two totaling $16 2 million.
<unk> had a very solid six basis points for the year consistent with 2021 levels also at six basis points.
Total provision expense for the quarter stood at 28 5 million, which includes 94 million of initial provisioning or non PC deal.
Were acquired from Union Bank Corp.
The remainder in providing for loan growth.
Charge offs on updated economic forecast that reflected the softer macroeconomic environment.
Acquiring additional reserve.
In closing we loved the additional day, one PCB growth of 1.8 million.
Ending funded reserves stand at $402 million or a solid 1.33% of loans at year end.
Reflecting our strong position relative to our peers.
Funded reserve ticking down one basis point.
<unk> to the prior quarter.
Our NPL coverage position remained strong at 354%.
And now I'd like to briefly update you on our recently closed <unk> acquisition and the successful conversion of the $650 million portfolio during the fourth quarter.
Our credit and lending teams continue to diligently review their loan portfolio.
Part of our standard cost conversion process following an acquisition.
The book remains in line with our expectations from due diligence with no material impact to our overall credit.
Low risk profile of our portfolio concentrations at the close of the year.
We'd like to congratulate the team on closing another successful.
That will bring additional opportunities to expand our customer base and support our corporate growth objectives in the desirable Carolina markets.
We welcome our new UV Bancorp customers and we look forward to the opportunity to provide our expansive set of banking products and services to them as we deepen those relationships.
In closing we had another successful year marked by the continued strength and favorable positioning of our credit portfolio moving into 2020.
As well as closing two acquisitions to enhance our presence in attractive markets that will further support our loan growth objectives.
Consistent with our proactive and aggressive approach to managing risk.
Waiting credits and positional potential problem assets, we continued to closely track emerging macroeconomic trends and signs of stress heading into a softer environment.
We remain steadfast in our approach to consist of underwriting and managing credit risk to maintain a balanced well positioned portfolio throughout economic cycles.
I will now turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary Good morning, everyone.
Today, I will focus on our fourth quarter financial results and offer guidance for 2023.
Reported fourth quarter net income available to common shareholders totaled $137 5 million or <unk> 38 per share.
After adjusting for $21 9 million of merger related expenses and $2.8 million in branch consolidation costs net income reached record levels of 157 million or <unk> 44 per share.
Full year 2022 operating earnings per share also represented one of the company's highest levels coming in at $1 40.
The growth in the balance sheet brought assets to 44 billion with earning assets nearly 39 billion at the end of the year.
This was largely driven by the $1 5 billion linked quarter increase in spot loans and leases, which included organic growth of 824 million or 11, 4% annualized in the $651 million of UV Bancorp acquired bonds, that's up to December 9th acquisition date.
But.
Real estate each grew six 3% linked quarter.
Consumer loans increased three 4%, reflecting portfolio growth and adjustable rate mortgages and the continued success of physicians first mortgage program.
Full year total loan growth was a robust five 3 billion or 21, 2% on a year over year spot basis.
Roughly half of this growth was related to the previously discussed our UV Bancorp acquisition.
The remaining half due to strong organic growth capping off three sequential quarters of double digit organic growth across the footprint.
Average deposits totaled $33 9 billion for the fourth quarter increase in $301 million or 1%.
<unk> Bancorp acquired deposits last three weeks of the year.
When excluding <unk> Bancorp deposits average non interest bearing deposits declined only 1% linked quarter and 11 7 billion.
We maintained a favorable deposit mix at year end with 34% noninterest bearing deposits demonstrating the strength and granularity of F&B as deposit base.
Record quarterly revenue of $415 5 billion were driven by record net interest income totaling $334 9 billion, a linked quarter increase of $37 8 million or 12, 7%.
The net interest margin increased 34 basis points to $3 53, and the earning asset yield increased 62 basis points, while the cost of funds increased 30.
The largest driver was the increase in yields on loans and leases, which increased 68 basis points.
In fact in December loan origination yield was over 6% the highest since 2009, and approximately 100 basis points higher than the spot portfolio right at quarter end.
With 59% of the loan portfolio repricing, we expect the portfolio rate continue to increase given the December federal reserve rate hike and the expected 25 basis point increases in February and March.
Fourth quarter also had record positive operating leverage of 29, 1%, which we expect rank in the upper quartile of our peers.
On the other side of the balance sheet deposit costs continue to be a significant focus for our team.
Total cumulative deposit betas ended the year at 16, 3%, although the forecasting 20% by maintaining the previously mentioned favorable high interest bearing deposit mix and actively managing interest bearing deposit costs.
We're able to keep the average interest bearing deposit costs below 1% for the fourth quarter again, demonstrating the strength of our customer relationships.
We have been able to effectively manage deposit costs.
Tejas pricing campaigns supported by our data analytics platform.
Competitive pressures on deposit pricing continue to rise we are forecasting a cumulative total deposit beta to be in the low 20 at the end of the first quarter of 2023.
Turning to noninterest income and expense.
Noninterest income totaled $80 6 million, a decrease of $1 9 million or two 2% compared to the prior quarter.
Mortgage banking operations income decreased $2 4 million with a decline in mortgages sold in the secondary market and lower gain on sale margins.
Insurance commissions and fees decreased $1 3 million, reflecting seasonality in the fourth quarter.
Capital markets income totaled $10 million. This strong level supported by an increase in syndications and solid contributions from swap fees and international banking.
On a full year basis, noninterest income totaled $323 6 million or two 1% decrease from 2021, primarily reflecting the significantly lower mortgage banking operations income, which was partially offset by several other fee based businesses again, demonstrating the importance of our diversified business strategy.
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On an operating basis noninterest expense totaled $195 8 million or one 5% increase from the third quarter and an increase of eight 3% in the year ago quarter, which was primarily driven by the firepower union expense bases and occupancy and equipment and outside services.
Other noninterest expense increased linked quarter, primarily from charitable contributions during the quarter to qualify for Pennsylvania Bancshares' tax credits.
Salaries and employee benefits decreased from the third quarter due to lower medical costs and seasonally lower production performance related incentives.
Excluding significant items totaling $52 3 million in 2022, and $4 4 million in 2021 full year operating non interest expense increased $45 4 million or six 2%.
Fourth quarter's operating pre provision net revenue totaled a record $219 million, representing an 81% increase from the year ago quarter.
On a full year basis operating pre provision net revenue was $669 2 million an increase of 31, 7% in 2021.
Our capital ratios ended the year at levels that are expected to be at or above peer median.
Book value for common share was $8 seven at December 31, and.
An increase of 25 cents per share from September 30.
Largely from the higher level of earnings and the decreased impact of OCI by <unk> <unk> per share.
CET one ended the year at a solid nine 8% TCE ratio totaled $7 two 4%.
Let's now look at the 2023 financial objectives, starting with the balance sheet.
We expect lowest increased mid single digits on a year over year spot basis.
Total deposits are projected to end 2023 at a similar level as of December 31, 2022 spot balances as customer growth continues alongside active management of deposit rates in an environment with rising deposit betas.
Full year net interest income is expected to be between 134, and $1 4 billion with the first quarter of 2023, 335 and $345 million.
Our guidance currently assumes 25 basis point rate increases in both February and March with no additional rate actions projected for the remainder of the year.
Full year non interest income is expected to be between 300 $320 million with the first quarter in the mid $70 million range.
Well your guidance for noninterest expense on an operating basis is $830 million to $850 million, which assumes an additional 8 million FDIC deposit insurance costs, reflecting higher assessment rates may remain in effect with deposit insurance funds reserve ratio mix. The fdic's long term goal of two <unk>.
<unk>.
This expense guidance range implies growth of 7% to 10% from full year 2022 operating expense figures.
The midpoint of our guidance efficiency ratio would be below 50% full year 2023.
By excluding the FDIC increase and a union acquired expense base by 2023 expense range would be 4% to 7% year over year basis.
The first quarter noninterest expense is expected to be between $210 million to $215 million as a compensation expenses higher in the first quarter largely due to normal seasonal long term stock compensation and higher payroll taxes at the start of a new year.
Full year provision guidance to 65% to $85 million and is dependent on net loan growth and seasonal model related builds from a softer macroeconomic environment.
Lastly, the effective tax rate should be between 21% for the full year, which does not assume any investment tax credit activity that may occur.
With that I will turn the call back to Vince.
Thanks Vince.
As we start the new year, we remain focused on executing our strategy and serving our stakeholders.
We will do this by staying true to our values based culture and delivering on the financial guidance Vince provided with a focus on generating positive operating leverage.
We deploy capital in the most effective way to optimize risk adjusted returns for our shareholders.
Before we close today I want to recognize our dedicated team who made our performance possible.
Every employee contributes to the success.
And I strongly believe that we will continue to win at F. N b because of our outstanding employees and the excellent culture, we have developed together.
With that I'll turn the call over to the operator for questions operator.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Ask a question you May press Star and then one using a touch tone telephone.
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Once again that is star and then one to join the question queue.
We will pause momentarily to assemble the roster.
Yeah.
And our first question today comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.
Good morning.
I'm just curious right you guys talked in the release, a little bit about where you saw the strongest growth geographically and just.
If you can give a little more color there specifically.
On the what percentage of the commercial growth you are seeing coming out of the Carolina footprint.
Yes.
I don't know that we have the specifics.
At our fingertips, but I can tell you.
Yes.
We get Carolinas.
Carolinas has had an exceptional year.
They contributed throughout the year in Raleigh Charlotte.
Might try that.
All of those areas.
Contributors to loan growth they all exceeded their plan objectives for the year.
<unk> had a tremendous year in cross selling.
<unk> two zero originating loans. They were also able to cross sell of capital markets products.
Trust and investment products.
Insurance throughout the footprint.
They were a significant driver Pittsburgh has always been a solid market for us given our market share here.
The group's in Pittsburgh, where big contributors this year.
And I also want to include our expansion market in Charleston.
<unk> down there has done an exceptional job.
Two years.
Yes.
The last two years, so those those areas have been huge contributors.
In the past the mid Atlantic region had been a fairly substantial contributor, but we were able to.
Through various takeouts reduce the size of the CRE portfolio in that market. So you know they had a little bit more of a headwind.
Coming into the year.
I will tell you that as we move into next year the pipelines.
Softened a little bit.
It kind of globally, but we had two consecutive quarters of pretty solid growth.
So we're down about 15% year over year pipeline.
Susan.
And we're being a little more careful as we move into next year.
There's quite a bit of economic uncertainty.
No.
Well you certainly side.
So.
Very excited about where we sit there Frank.
In terms of originations because it was it was.
Barely geographically.
Spread out we got some assistance from the Midwest and northeast with some of the slower growth markets because they have the heavier industrial base and there seem to be a little more activity there.
Offset some of the declines in CRE.
CRE opportunities.
I think bridge so it all kind of balanced out and I think.
As we've said all along that has been our strategy.
Holmes.
To growth.
Sorry actual.
Portfolios.
That's great.
Thanks for all the calls.
And then just wanted to follow up on the guide specifically on the fee income.
It seems like I don't know, even if I can sort of normalize the other line item. This quarter, maybe you can get mid Seventy's number.
Youre still sort of at already at sort of the midpoint of that.
Run rate.
<unk> for next year, and so just kind of curious.
If you can provide any any puts and takes in terms of.
Where you might see some some growth in fees and where we could see some further weakness.
In 2023.
Yeah, I could comment Brian just I guess high level, you know noninterest income was solid again at $80 6 million for the quarter.
Down slightly from the third quarter mortgage banking income coming down $2 $4 million is kind of normal seasonality there one.
One thing I did want to point out is that it's important the growth in the balance sheet of adjustable rate mortgages.
Has been higher than portfolio more loans that we might otherwise have been selling in the past so the fee revenues a little bit lower on the mortgage banking side.
Capital markets for the quarter.
Very solid at $10 million.
We had a higher contribution compared to the third quarter.
Partially offsetting that reduced contribution from mortgage and second consecutive quarter with strong syndication fees.
As you look ahead some of that revenue.
Revenue sources are lumpy right to syndication fees arent always.
Consistently the same level, they kind of come in lumpy. The swap piece now also can be a little bit lumpy so guiding.
Guiding to mid Seventy's again, which is what we guided to for the fourth quarter is really just kind of a function of that as well as we made some changes to consumer deposit fees, we had announced in November that is.
So kind of rolling through the numbers.
It's kind of a conservative look I would say based on kind of what we know today, but the lumpiness you can't predict with certainty as far as some of the kind of capital markets components. So that's why the guide at that kind of mid 70% level.
Hey, Frank.
Chris.
Stat on the Carolinas over the last three years.
The Carolina market.
In South Carolina produced roughly 40% of our net loan growth.
Okay, great another system.
And help me.
Important.
Yeah, No I appreciate that and then if I could just lastly, just you're getting closer and closer to that 10% CET one ratio and just wondering if you know any sort of strategic changes. We can expect when you do reach that level and pass through it and guess specifically wondering about additional capital return if this could trigger greater buyer.
Back activity.
As we go as we move through 2023.
Yeah.
Yes, I would just say we.
We expect to build a turn in the near term here given the level of earnings generating.
Sure.
Really creating capital flexibility we've ever had in the past so buybacks.
Buybacks I mean, our first and best use of capital as we've said all along the strategy is the same is to deploy it into loan growth. So depending on how strong loan growth is or how much slows down you'll have more opportunity to buy back. So it's clearly on the table for 2023.
As you know we remain committed to managing capital in a way that just fully optimize shareholder value.
We align with shareholder I'm sure. So so we will be looking at that we'll be opportunistic as we go through the year I think I told him to have about $175 million or so of capacity remaining.
Program. So so clearly as we expect to build past that 10% level.
Share buybacks are definitely something we'll be pursuing and evaluating on a daily basis.
Great. Okay. Thanks for all the color guys.
Okay.
And our next question comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.
Hey, guys. Good morning, how are you.
Alright.
Yeah, maybe.
Starting with Vince your comments on utilizing analytics to help them drive the deposit base can you give us some some examples of how you're doing that in your deposit performance has been really strong your beta among the best in the group so far.
I guess yeah.
How are you getting that and is.
Is that going to be a sustainable level or a sustainable Avenue of growth is as we go forward.
Yes. This is Vince to Lee actually Vince you mentioned that his comments and.
I will tell you we've made a significant investment in our ability.
Analyzed large quantities of that we've talked about that.
EBITDA.
Our team that manages that governments and systems.
We've invested.
Early ethylene.
I believe in that area over the last five or six years, we use that team to basically give us a better understanding of the types of clients that we have.
Really drill into client behavior expectation.
And it enables us to be able to provide them with better solutions and the answer on the deposit stability and growth I think we're in outstanding deposit franchise I think if you look at the mix. The mix is very strong relative to the peers. The stability of the demand deposit base is very.
Hum.
This strong so there's quite a bit that goes into managing deposit portfolio of that size, there's not just one silver bullet.
So we focus we use analytics to focus on treasury management opportunities within our customer base, we use the analytics.
<unk>.
Few customers that are single source or single product customers that may have a loan product that don't have a floor to.
Depository relationship with US we use the analytics tool.
Here the clients based upon need and that helps us direct our resources more effectively to drive growth. We also use the analytics tool.
Digital offering so that we can present products and services to clients as they engage the E store online and I mentioned in my comments, we had 500000.
Use on the website and on the mobile app because already stores embedded into our mobile application. So its right there for the customers.
With that all of that helps us manage the betas and the deposit outflows in deposit growth.
And the mix of the deposit so it's a pretty complex.
Net of strategies that we've deployed and the tactics that underlie this strategy in each segment really are geared towards driving better performance than that in that deposit portfolio.
Hopefully that answers your question that's pretty well.
Yes.
That goes on there.
That was great color.
Yeah, maybe looking at it at the margin.
You know you project or you expect a couple more 25 basis point hikes, what's your.
Or what's your expectation for.
DDA diminishment in that scenario and have you taken any steps to protect margin. If we start shifting to more of an expectation for lower rates in the future.
Yeah, I would I would start with just the noninterest bearing deposits again are a big focus in the company. So.
Our ability as you can see here in my prepared remarks, I mean, you guys were down 1% or so.
For the quarter. It takes a lot of effort all the pools that Vince talked about analytically as well as our team on the frontline and our relationships with customers that are very strong we created a lot of goodwill going to triple P. During that process with existing customers and new customers that we've been broadening relationships with.
No.
That those relationships and our COO.
Customers' willingness to talk to us and.
They are looking to move money instead of just moving money is very valuable and our team on the frontline.
Been very active throughout the fourth quarter.
And the customers we have a large corporate initiative that's been on the lending side as well as deposit side in Japan during the quarter. So.
Our goal is to sustain the D D A's and you to grow them here.
Slide in there that shows the percent of.
Deposits from 16 up to 34.
Our team is intended to work hard to grow those noninterest bearing deposits, we have a lot of tools in place, but why don't you mentioned also our active asset liability.
<unk> focus on preserving margin yes.
I would say.
You would expect I mean, our treasury team studies at Daily I mean, we've been looking at hedging opportunities really for the last year and we.
We did some small amount of hedging.
Six months or so ago, but decided not to put more on things where levels were in what was expected.
That happened with rates got to go back that far when everybody was locked in at rates or just kind of follow up.
Yep.
One quarter or two quarters into the year.
Protection.
And that became very expensive so.
We put some on.
Naturally our asset sensitivity.
Approaching neutral if you look at the asset sensitive interest rate risk position now youre down to like 1% or so four plus 100 minus 100, so organically, it's been kind of coming down as we've been deploying cash just kind of a natural movement on the balance sheet. So we'll continue to monitor Jerry.
But at this point price points haven't made sense.
<unk>.
On hedges for the balance sheet, but we'll continue to look at it and we'll be smart about it when it makes sense and if it doesn't make sense to us.
But something like that.
Yeah, we've done about $1 billion or so of receive fixed swaps.
Over the recent period, so we have that component there, but the natural asset sensitivity coming down and as you know our net interest income is at a much higher base. So it's kind of coming off of that so.
Having that lower interest rate risk a more neutral interest rate risk position is a positive.
As we move forward. So continue to monitor as we have and and evaluate any hedging opportunities make sense, but demand deposits are always valuable in this environment or even more valuable.
Success.
He knows and non interest bearing deposits. This was key for us and that will always be a focus.
Okay. Thanks, and then just finally for me just on the capital management side, what's the appetite for M&A here and maybe Vince what's what's your view of sort of the current state of the.
The bank mergers.
Overall.
I think I wouldn't.
I want to be an investment banker in the short run here I think it's been a pretty challenging environment.
Investment banking fees in general were down 20%.
Given what's happened with <unk> level, it becomes very challenging to do a deal thats accretive and it doesn't have substantial elements to it.
Stated repeatedly.
Interested diluting tangible book value.
As Vince said, we have capital flexibility, but we've never had before which could mean a number.
We could become more aggressive in buying shares back is loan growth.
Lows.
If you look at the dividend payout ratio on an operating basis were down to 34% unheard of and it will be.
So the range here.
88%, 80% payout ratio. So we have incredible flexibility moving forward, we want to make sure benefits our shareholders. So our focus is just driving shareholder returns and making sure that we're making smart decisions and capital so that we have.
The stock price up and repatriate appropriate levels of capital at some.
That's the strategy.
Okay.
Great. Thanks, Garik just to go back on the interest rate risk on slide 11, we did add a chart there that shows the interest rate risk sensitivity over time.
You can see kind of how it's moved out.
Plus 200, plus 100 and.
You can see how it organically has come down what should be meaningful by the end of the year.
I point that out.
And our next question comes from Casey Haire from Jefferies. Please go ahead with your question.
Yeah. Thanks, good morning, everyone.
A question on the funding strategy. So the guide outlines about $1 billion of half of loan growth with deposits flat.
Just wanted to understand what what.
What's the what's the outlook for funding that loan growth be it bond book or borrowings.
Yes, I would say, we still have some excess cash Casey to put to work so we'll deploy that.
We go through the year I think if you look at the loan to deposit ratio.
What's in our guidance and kind of our plan, we get down to maybe 99 for up to 19, 91% by the end of the year, which is still very comfortable level for us.
So a combination of deploying the cash.
We might have some small level of borrowings as we get towards the end of the year, but overall loan to deposit ratio now very comfortable with those levels.
Okay, very good and just.
I guess as a follow up to that is.
What is the comfortable mid cash position for you guys as well as what is <unk> two higher loan to deposit ratio.
Well I mean in the past I remember when we got up to about 97% we started to get uncomfortable.
We took some actions at that point, some promotional CD program and those types of things to kind of bring it down so I'm not saying that's the level, but our prior history that was when we decided to start doing things. So I think if you got up to $95 97.
We would look at.
Other option strategies, we should deploy at that point, we have many tools at our disposal.
To drive deposits.
The question is how much margin do you want to give.
In this environment.
Okay very good.
Two pace. So just just to clarify Casey two I didn't have a bigger in front of me. So theres 1 billion to look at our balance sheet at the end of the year.
Interest bearing deposit so so that cash being deployed to support the loan growth will.
It will be the first place you would go.
Yeah understood Okay.
And then I apologize if I missed it.
The <unk> beta is coming in very nice.
Surprised positively versus what was.
You were expecting this year any updated thoughts on where to beta ends.
Ends up.
Yeah in my prepared remarks, Casey I mentioned kind of low 20 at the end of the first quarter.
Look at kind of overall I.
I would say well a few comments on betas right.
I think our team has done an admirable job in the field strategically managing interest bearing deposit costs.
While we are building an experience it's a lot of effort as you would expect it's daily effort talking to customers.
Managing the relationships.
Being smart about raising rates for customers that have kind of a full relationship. So it's been a very active process. We will continue to be an active process for us.
We ended the year as you saw on slide 16, three will.
Getting down into the low twenty's by the end of the first quarter and then if you look at kind of the midpoint of our guidance.
By the end of the year kind of cumulative total data will be in the high twenty's as well.
Kind of projecting as we sit here today versus about 24% in the last tightening cycle.
Okay got you so I apologize I missed that so high twenty's through the cycle is what youre thinking.
At the end of the year.
Okay.
Sure.
Okay.
Alright.
Last one for me, maybe one for Gary.
So the provision guide.
Of 65 to 85, you guys do mentioned a softer macro economic environment, we're all kind of struggling we'd see some modeling and just wondering if any color.
And.
You can provide on on what.
Softer that macro is be it unemployment rates GDP et cetera.
Yes, it's pretty much across the board Casey.
Casey.
During during the quarter we.
We also saw some softer economic forecasting NRC, some models, which impacted the provision.
To the tune of about $8 million.
So we've got that built in through 2023.
So that is no.
A good portion of.
Where we've guided to.
Across across the year.
The other naturally as well.
They're naturally as loan growth.
As far as far as the drops are there.
Loan growth will you know, we'll move those numbers a little bit within within that range.
We've talked in the past.
Thank you.
Yes.
And our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.
Thank you good morning, everyone.
Sorry first I.
Just wanted to clarify that last comment Gary did you say that.
$8 million reserve build is what was built into your assumptions for the 2023 provision.
No the I'm sorry the.
The $8 million was seasonal.
Economic forecast changes in Q4.
Okay, I apologize alright terrific.
Do you have.
A thought on.
How much.
The reserve build is in the guidance relative to what would be.
Just loan growth or or.
Charge off activity.
Sure.
Yes. She is seasonal impact is about a third.
Loan growth is about half of it.
Okay.
Alright, thank you.
And then.
Maybe we could just talk a little bit more about the margin.
<unk> talked a lot about deposit betas, but.
Just interested in your thoughts on on actually the pace of the margin.
Yes.
What the rest of the 2023 would look like based on your guidance, but.
Just interested in terms of you know.
If you do continue to get.
Expansion in the first quarter.
Kind of how much how accelerated the contraction youre expecting after that point would be.
Yes, I can comment on that day.
The outlook just to restate again includes an additional 50 basis points.
February and March but no additional fed action for the rest of the year.
Our guidance would imply a slight increase in margin from the 353 level that we were.
In the fourth quarter.
And then maybe the second quarter and based on what's in our plan, but we're talking single digit some basis point movement. Here. So there is still some upside to that level and then similarly on the other side come down a little bit from that peak.
And the single basis point type level.
What's baked in Florida.
Okay, Great I appreciate it.
Alright terrific.
And then I just wanted to.
Clarify an earlier comment I think you said.
The mid point of your expense guidance would assume that you.
Our would be under 50% efficiency ratio in 2023.
I just wanted to make sure that that's what I heard and if there was kind of a had original question.
How likely you think it is that you do stay under 50%. So I guess, assuming your expenses come in.
What do you expect you would expect that.
To be under 50% is an accurate statement.
Yes, using the midpoint of our guidance kind of across all the different categories.
Right, that's an accurate statement.
Okay.
And is that kind of are becoming a longer term goal for the bank to stay under 50% efficiency ratio or.
We get into a lower rate environment do you think that might drift back over.
I would say our goal would be to.
Continue to reinvest in the company and with the changes in the margin based upon macroeconomic factors it could swing.
Swing back and forth.
Over 50.
I would say it would be a reasonable longer term yes.
But I will tell you that there will be capital investment required as we move forward, particularly in technology.
To stay competitive for us to maintain margins in the future and to keep doing what we're doing with the data.
It's not a free pass forever.
So we have to keep watching what we do and we're going to have to manage the margin as you know we're in a very good period for our organization.
Art.
For this time benefiting but obviously the world is going to change. So we're diligent on expense control and we continue to reinvest in the company.
Sorry, I didn't know if that's okay. I would just add to that I didn't mentioned that kind of cost savings target for 'twenty, three which is $9 million.
As you know we're disciplined manager of expenses continue to invest as Vince said in a variety of initiatives.
A digital side and de novo's.
Some of our kind of digital infrastructure and then one other thing I would add.
On the Paas I've talked about kind of project improvement process improvement I should say.
We've always had a focus on that we negotiated with vendors facility space optimization, but the process improvement side of it we've recently reorganized a little bit internally, adding some additional resources.
To drive our corporate wide focus on process improvement I think theres a lot of opportunity point RPG type technology.
Really drive further efficiency as we go forward, we're still in early stages of that but that also will contribute.
Allowing us to have.
Sustainably in the low fifties as you move forward.
Given all of those efforts.
Terrific. Thanks for all the color that's all for me.
Thanks, Ken.
Our next question comes from Michael Perito from <unk>. Please go ahead with your question.
Hey, good morning, Thanks for taking my questions.
Sure.
Obviously, you guys covered most of it just a couple quick ones to wrap us up here.
Vince in terms of the kind of geographic footprint, you know you mentioned, a little bit about some pipeline and some stuff like the Carolinas et cetera, but just as we look at kind of the spread of the bank today.
Opportunities or areas of focus for you guys in 2023 that we should be mindful of maybe.
Something like like Philadelphia, where theres been a lot of you know mid caps taken out over the last couple of years, just anything kind of like that that you guys. That's on your radar that you would convey to us at this point.
Yes, I mean, I will tell you that we have studied Philadelphia yet from.
From a commercial lending perspective, we do have an office there our plan is to continue to expand it.
There is some opportunity there in the middle market and large corporate space.
Also think Philadelphia, when we ran our model looked at Msas because of the number of companies domiciled, there and the competitive climate scored out pretty high.
The dynamic keeps changing.
There are fewer competitors right.
Thanks Jay.
Seeing it as an opportunistic area to expand and there are several other markets.
We launched into that we'll continue to do both want to we've had tremendous success in Charleston.
Our plan is to continue to grow there.
We are looking at de Novo expansion enrichment.
We've studied opening a loan production office commercial only in Atlanta.
And those are pretty much the areas.
We're focusing on but nothing dramatic nothing Earth shattering.
Yes.
Movement.
<unk> expansion, but I think there are opportunities for us to extract additional high quality growth.
Our existing footprint, we may not have the density and then the other thing that we've done strategically with substantially increased our ATM.
All out what we've found is that that has helped us immensely with retention of customers broken DDA balances.
Expanding small business opportunity, so we've done that through as well.
Branding opportunities in direct placement of Atms in <unk>. So.
Our ATM network grew more than 30% across our footprint. So we have 208.
T M locations, so 250 of those rolled out in north and South Carolina.
And then another 250 in Maryland.
In Baltimore.
D C.
Virginia plus.
So we're trying to supplement our physical delivery channel branches with other <unk>.
Channel to distribute cash and then we're marketing our E store.
Which enables individuals and small businesses to open accounts online.
Anyway, that's the strategy.
And I think from a geographic perspective, there's plenty of opportunity within our existing footprint for us to continue to grow.
Yeah, I mean that makes sense from the outside looking in it would seem like especially around the 95 corridor like Virginia like you mentioned Philadelphia like there a lot of the competitors there, though are much more loaned up right, probably a lot less willingness to lend deposit betas are a lot higher.
You know the balance sheets are lot smaller it would seem like you guys should have a pretty attractive value proposition for for some lending talent in those markets you know coming from the western South as opposed to coming from the New York area, where there's just more balance sheet constraints.
Yes, and I think our treasury management offering at least hasnt scores out through Grad engine. Other surveys is pretty well respected so that enables us to go in and garner deposits as well we go in we become the principal banks, we get the operating accounts and cross sell.
Treasury management services, and I think we've proven moving into the south east that our products stand up pretty well. If you look at the noninterest income growth of the company a lot of that was driven from our expansion into the southeast and there was quite a bit of skepticism about our ability to compete I think I think we put that to rest.
Okay.
The growth in various categories, it's been fairly substantial one.
Been very robust so we have the product capabilities as well to go into some of the markets that we don't have density within our existing seven state footprint.
Great. Thanks for that Vince and then just last for me just on the effective tax rate Guy that says you know assumes no investment tax credit activity can you just remind us quickly what the activity looks like last year and just also you know if you do move forward with any transactions. There what you guys typically look at.
From an opportunity standpoint.
I got to Vince see answer.
I would just say I mean, it's a line of business for us, but we don't have some transactions each year I mean in 'twenty. Two we had one in 'twenty two we had maybe a couple in 'twenty one so.
The active business process, there and we may have some this year, we just don't want to put it into guidance. If we do that it's a positive.
Added to the guidance there so.
It's just that right now seeing income tax credit stuff, though or is it like more like what what type of renewal.
Renewable energy tax credit probably the ultrashape typically so.
Nevertheless, long gestation period, so there is a long.
Got.
It takes a lot of time to get to the finish line. So then some supply chain issues with the solar panels. So that's elongated some of those projects.
Perfect. Thank you guys for that.
Alright, Thanks, a lot. Thank you.
And our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question.
Hey, good morning, guys, congrats on a nice quarter.
Taking the questions.
Just one clarification I think it was Vince Vince.
You've mentioned the pipelines.
Can you I guess it was at 15% I'm not sure. If you were speaking more to the commercial or the consumer just give us an update on what those pipelines I know, they're a little bit softer, but just a.
It's connecting the dots are just not whether it was commercial or consumer just kind of how they are trending here.
This is Vince to Lee and I was speaking specifically to commercial.
One.
<unk>.
So.
What I said, we had two very strong quarters.
In terms of production.
It tends to have to reset we're moving into a slower season.
Seasonal period, so our pipelines are down and even given all of that when you look at it.
On a comparable basis tightened seasonality out of it we're still down 10% to 15%.
And to rebuild them in their rebuilding the pipeline that's just some things.
Yes illustrates where we are economically I think theres a lot of uncertainty I think.
Our borrowers are on the sidelines for a little bit here to see what happens right.
And.
It's going to be.
It's going to be a little while until we start to see that build back.
Got you, Okay and then.
Okay.
In the second quarter, and then on the consumer side, how is that trending today.
Yes consumer pipeline.
These analogy there as well so it's kind of tough to say.
I think.
The pipelines in general have been pretty consistent with where they've been seasonally maybe down a little bit mortgage theres more production coming online.
Now in terms of opportunities for us too.
To take on.
Adjustable rate mortgages on our balance sheet. So we're seeing.
In that category.
Direct consumer.
We are seeing.
Little bit of slowing wellness.
<unk> space now, but that tends to build back up again.
The normal.
Housing sales season.
Movement season starts to kick up here at the end of March So it's a little tough to tell the slot business ends up small businesses up pretty much across the board.
Some good momentum the number of markets we've entered.
We have a fairly sizable portfolio.
Total bank it's not.
It's over $1 billion.
Relative to the commercial portfolio as much again, but we're seeing some really good positive momentum in the Carolinas in the mid Atlantic.
So.
Yes, no. Thanks. Thanks.
Thanks for the color and maybe just one or two others just on the.
Inside the guide on the fee income side, just kind of your thoughts on mortgage obviously being kind of a low point for the year and kind of.
Trying to if you think about next year I guess.
Can you give any thoughts just on high level on how you're viewing the mortgage activity given kind of what we saw throughout the year.
I think I'll turn this over to Vince in a minute.
Okay.
Basically the mortgage business, we've always sonatrach globally.
Expectations are from a number of.
<unk> will sources tell us where growth is expected to be we tend to do a little better not a little better we do a lot better than what the typical forecasts are so.
I attribute that to the geographic dispersion of our originators, we've had great success in certain segments as well physicians physicians program that we had that portfolio has now grown substantially over $1 billion.
So theres little pockets that we go after but there's also <unk>.
Certain markets that tend to have better housing markets generally than our legacy markets like the Carolinas mid Atlantic region, where we have.
Originators dispersed.
I think we will probably outperform the market overall again this year I would expect that.
I think that the servicing portfolio that we have has been a good hedge for us from an earnings perspective. So.
That's helped us.
But go ahead, Vince you got a couple of those back yes, I was just going to add that.
Looking at production overall.
$567 million.
It's only down third quarter, but now 16%.
And then to Vince's point.
The high level industry forecast right now is for production nations to be down 24%.
Baked into our expectations and our guidance is more like a downturn at 14% so.
We would expect to outperform the industry like Vince said, it and we have done that in the past.
Pat.
Got you, okay, so a little bit lower.
And they see you tie that 14% at year over year is kind of what youre looking at there right Vince.
Yes, full year to full year, alright gotcha, okay.
And then just one more thing.
With the lowering of the 10 year interest rate, we have seen a pick up.
Lockup volume in both mortgage and consumer.
Yeah, no that makes rates do have.
Okay.
Yep.
Just to remind me I guess on the on the deposits.
Ill talk about the beta what did you guys exit the quarter on the cost of deposits I guess I know you talked about the betas, where they tried to hit but that for the month of December were worthy I think he said loan yields where I thought they were 6% for the quarter the origination yields but the cost of deposits as far as exiting in December where.
Or what are you guys there.
Total deposit costs ended December at 79 basis points and interest bearing deposits ended the year at all.
114%.
Gotcha, Okay, perfect and last one for me was just on the on the deposits.
You guys talked about the guide being relatively flattish the mix I mean, I know you talked about the work it takes to keep the deposits or they are just where you are now on the DTA.
Yes, you kind of look throughout the year I mean, do you expect that number to come down a bit is that kind of in your forecast or I guess.
Do you think the efforts you guys have can you can kind of maintain this level you've reset too.
We're going to work hard to maintain and grow that.
Source of funding for us honestly.
There's been some mixed shift into Cds as you would expect.
Yes, particularly in the municipal and commercial side.
Some shifting into <unk>. The key is that it's still kind of staying in the house. So it's moving around a little bit in the noninterest bearing deposits like I said earlier, it's a big focus in the company.
Existing clients, but also bringing in new clients.
Yeah.
Really we have to see how things play out throughout the year and theres going to be pressure on noninterest bearing deposits with this therapy.
<unk> book.
We move into a period of extended high rates Bryan. So we're going to have to work really well.
I think we've outperformed.
At least what we've seen reported recently and we're going to keep doing what we're doing to maintain those balances. The probability is that really drives our profitability.
Thanks.
And you had a much higher base now with all the efforts you guys have had here the last last year or two it yeah. The money you pick anyway.
So there is considerable granularity and that.
Interest bearing deposit base.
There is some hope there.
Okay.
I gotcha, Okay, Thanks, guys nice quarter.
Yes. Thank you very much appreciate it.
And our next question comes from Emmanuel <unk> from D. A Davidson. Please go ahead with your question.
Hey, good morning, most of my questions have been answered, but could you just give me a reset on the physician's first portfolio. You said is about just over $1 billion.
Kind of like the year over year growth what are the new loans coming in on any any kind of extra color there would be great.
Great.
Well I'll start out with the program itself. So you understand we have dedicated team that originates mortgage loans in this space they've done a terrific job, we built out on our E store platform.
A digitized.
Product offering bundles set of products for physicians. So thats been offered electronically on the eastern will use that.
Let me start to promote the product digitally.
We've done very very well.
Yeah.
I can tell you the CAGR on this portfolio is.
Its fairly significant 65% up since we started in 2018, so its grown nicely.
We started with the originators first and then we supplemented their effort with digital offerings and set up the campaign.
If you just look at households.
<unk>.
We're up 66% in Eastern North Carolina, and the mid Atlantic region alone. So we've had some good success in those markets.
No.
Full year production was over $5 billion.
Well, it's been the portfolio stands at one 2 billion at year end.
So the program has worked very well for us and those are high value also.
That we feel confident that with our digital capabilities, our analytics will be able to continue to.
Penetrate that household with additional products and services.
No. It's a good program for us the credit quality is stellar.
And that portfolio.
So we're also rolling.
As we speak.
The small business side of that equation.
For the physician practices. So that's that's something that we're watching.
We will start to see some activity there as we get into 2023.
Oh it is.
Great items base growth.
Yeah.
Okay perfect I appreciate that so youre building on it thank you.
Okay.
And ladies and gentlemen, with that we'll end today's question and answer session I'd like to turn the floor back over to Lee for any closing remarks.
Well I'd like to just thank everybody for your interest and good questions. We had today it was a tremendous year.
We really hit on all cylinders as a company is in a really good position moving into this year.
And that doesn't come without a tremendous effort from our employees. So I'd like to thank all of our employees and executive leadership team and the board of directors for their support and pump I think.
Over the last four.
Four five years, we've proven that we can execute on a number of levels in this company keeps.
<unk> my expectations in terms of what we deliver on what our employees delivered yield so I want to thank them and thank our shareholders for sticking with us and supporting us.
We're really looking forward to what's coming so no matter what the challenges are we're going to we're going to get there and we're going to win together. So thank you very much.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.
Okay.