Q2 2023 F.N.B. Corporation Earnings Call

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Good morning and welcome to the FNB second quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

Please note this event is being recorded. I would now like to turn the conference over to Lisa Haidu, Manager of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to our earnings call. This conference call of FMB Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. non-GAAP financial measures should be viewed in addition to and not as an alternative for FMB Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. non-GAAP financial measures should be viewed in addition to and not as an alternative for FMB Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures.

of reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings relief.

Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Thursday, July 27, 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 Dilly, Chairman, President, and CEO .

Thank you and welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrari, our Chief Credit Officer.

FMB reported second quarter net income available to common stockholders of $140.4 million, or 39 cents for diluted common share, on an operating and reported basis.

This brings the total year-to-date operating earnings per share to 79 cents, a 39% increase over the same period in 2022.

operating pre-provision net revenue increased 51% year-to-date, resulting in an improvement in the efficiency ratio to 50% and an increase in operating return on tangible common equity to 19.1%.

Average total loans increased 2.1 percent length quarter to over $31 billion. Commercial loan balances benefited from solid production primarily in the Pittsburgh, Harrisburg, and North and South Carolina markets. Average deposits totaled over $34 billion.

a 1.3% decrease from the first quarter, largely due to seasonal deposit outflows caused by tax-related payments.

and the impact of the inflationary macroeconomic environment on our clients.

Despite the acceleration of deposit competition caused by the recent banking disruption, the mix of non-interest-bearing deposits to total deposits at June 30 remained relatively stable at 32 percent.

The loan-to-deposit ratio was 92.7% at quarter-month.

Our strong deposit mix was a result of a focus on fostering relationships with our customers and serving as their primary bank.

Over the past several years, we've enhanced our product suite and digital capabilities, grown our exceptional team of bankers, and have been working to increase the quality of our product.

and strategically expanded our market presence to offer best-in-class experiences for our customers.

that builds convenience, trust, and a stable deposit base.

For example, we recently launched the Common Account application.

in our award-winning Easter.

where we intend to be the first bank to offer a single, universal application for the majority of our products and services.

enabling customers with the ability to apply for multiple products simultaneously.

utilizing advanced technology including artificial intelligence and machine learning. The eStore common app delivers a more efficient and secure application process.

with sophisticated data capabilities to offer customized product recommendations that cater to specific customer needs.

data capabilities to offer customized product recommendations that cater to specific customer needs. By pre-filling numerous fields,

The common application minimizes customer keystrokes and significantly reduces the amount of time needed to complete an application for multiple products.

The first phase of the Common Application, which we launched last month, includes all consumer loan products.

Consumer deposit products will be added by the end of 2023, and business products will follow shortly after in the first half of 2024.

The streamlined process has led to an increase of over 170 percent in online applications for the month of June compared to a year ago, and we expect this number to continue to increase as we actively promote the capability.

Outside of digital, we have continued to invest in our e-based services offering.

We are now expanding our award-winning treasury management platform with strategic priorities to drive organic growth, increase revenue, and generate low-cost deposits. This quarter alone, clients of our new integrated payable solutions product executed nearly $1 billion of payments.

while simultaneously benefiting from check outsourcing and reduce fraud risk.

We've also leveraged integrated cables to continue to grow our commercial card rep.

which has a 19% compounded annual growth rate over the past three years and continues to expand through deeper penetration with commercial and small business clients.

These investments in our comprehensive set of product and services continue to help that then be grow non-interest-bearing and positive in and burn their diversified our fee-based income streets. Providing customers.

comprehensive set of products and services continue to help F&B grow non-interest-bearing deposit accounts and further diversify our fee-based income streams, providing customers with high-value services.

F&B continues to steadily increase market share.

This quarter's 12% spot lung growth year over year.

has been achieved while adhering to our consistent and conservative underwriting guidance.

risk management remains an integral part of our culture.

I will now turn the call over to Gary to comment in more detail on our asset quality and credit risk.

Gary?

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining near historically low levels. Our performance for the period reflects total delinquency that ended the quarter at 75 basis points, NPLs in Oreo at 47 basis points, and net charge-offs at 11 basis points. Those loans were down one basis point.

basis points in the quarter and NPLs and Oreo as a percent of total loans were up nine basis points compared to the prior quarter.

The increase in NPLs in OREO was primarily attributed to a single $32 million C&I loan placed on non-performing status.

At quarter end, we reserve for approximately 40% of our exposure.

This credit surfaced right at the end of the quarter from an emerging issue between our borrower and their primary business partner.

Net charge-offs for the corridor totaled $8.7 million, or 11 basis points on an annualized basis, with eight basis points reflecting the use of previously established specific

Total provision expense for the quarter stood at $18.5 million, providing for loan growth and the previously mentioned specific reserve, offset by releases from the reduction in classified loans.

Our ending funded reserve increased $9.3 million in the corridor and stands at $413 million, for a solid 1.32% allowance, reflecting our strong position relative to our peers.

When including acquired unamortized loan discounts, our reserve stands at 1.48% and our NPL coverage position remains strong at 325% inclusive of the unamortized loan discounts.

We remain committed to consistent underwriting and strong credit risk management to maintain a balanced, well-positioned portfolio throughout economic cycles. We proactively review and stress test portfolios on an ongoing basis, including in the current quarter.

where we performed a full company wide stress test consistent with prior years. We were pleased with the outcome of the results as it confirms that our diversified portfolio and proactive credit risk management enables us to withstand various

economic downturn scenarios.

Regarding the office portfolio, delinquency remains very low at 26 basis points.

and criticized loans remained below 10% with no negative migration in the quarter.

We renewed all commercial real estate loans secured by office properties that matured in the quarter with no downgrades required.

We have and will continue to proactively manage this portfolio on a loan-by-lone basis.

As part of the in-depth reviews we regularly perform.

In closing, asset quality metrics remain near historical lows, and we continue to generate diversified long growth in attractive markets.

We closely monitor macroeconomic trends and the individual markets in our footprint, and we'll continue to manage risk proactively and aggressively as part of our core credit philosophy.

which has served us well throughout various economic cycles.

I will now turn to call over the Vince Calibri's Archief Financial Officer for his remarks. I'm going to turn to call over the Vince Calibri's Archief Financial Officer for his remarks.

Thanks Gary and good morning. Today I will focus on the second quarter's financial results and offer guidance updates for the remainder of 2023.

Set and quarter net income available to common shareholders total of 140.4 million to 39 cents for deluded common share on both an operating and reporting basis.

Bringing total year-to-date operating earnings to $0.79 per share.

On a spot basis, loans and leases ended the quarter at 31 billion, growing 681 million or 2.2% linked quarter.

Consumer loans increased $517 million, with strong seasonal contributions from the Physicians' Birth Mortgage Program. Commercial loans and leases grew $164 million, or 0.8%, with loan spreads improving from the birth quarter levels.

The investment portfolio decreased slightly to $7.2 billion, and we redeployed cash to support loan growth.

The total securities portfolio remains at a fairly even split between AFS and HTM with 47% and available for sale and a duration of 4.5 years at quarter end.

Total deposits ended the quarter at $33.8 billion, a decrease of $365 million linked quarter or 1.1%, primarily due to seasonal deposit outflows and tax-related payments and the impact of the inflationary macroeconomic environment.

The deposit mix continued to shift this quarter as customers moved 586 million into time deposits.

RC offsetting the decline of 273 million in interest-bearing demand deposits.

and $383 million in non-interest bearing demand deposits. As of June 30th, non-interest bearing demand deposits comprised 32% of total deposits, compared to 33% at March 31st.

While the banking industry's disruptions clearly accelerated the positive competition, we still expect the mix of non-interest bearing demand to total the positive to remain above three COVID levels.

The long-to-deposit ratio increased to 92.7% during the quarter, reflecting strong loan growth and a seasonal effect of tax payments on our deposits. Revenue totaled 410 million driven by net interest income of 329 million and stable non-interest income benefiting from our diversified fee businesses.

Second quarter's net interest margin was 337.

with the quarterly decline expected to slow as the month of June was 334.

The yield on earning assets increase 26 basis points to 494 due to higher yields on loans, investment securities, and interest-faring deposits with banks.

While the cost of funds increased 46 basis points to 164, as the cost of interest-bearing deposits increased 47 basis points to 197.

We continue to actively manage our total deposit costs, which ended the quarter at 147, bringing the total cumulative deposit rate to 27%.

Leach step to end 2023 in the mid 30s.

Turning to non-existing common expense, non-existing common total of 80.3 million, a 1% increase from the solid first quarter level.

Service charges increase 1.4 million or 4 percent, reflecting strong Treasury management services and interchange fees, offsetting the overdraft practice changes that definitely be implemented in the first quarter of 2023.

Givetend on non-marketable securities increased 1.4 million or 33% reflecting higher FHLV dividends due to additional borrowings. Insurance commissions in fees decreased 1.8 million or 23% due to normal seasonality and strong overall production in the first quarter.

Our wealth management business continues to generate strong contributions.

combined revenue of 17.7 million up 12% on a year-over-year basis.

Non-interest expense totaled $212 million, the decrease of $8 million were nearly 4% from last quarter.

Dalleries and employee benefits decreased 6.3 million, primarily from seasonal compensation that occurred in the first quarter, partially offset by normal annual merit increases in the second quarter, and higher commissions driven by better than expected contributions from our mortgage banking and fee based businesses. The efficiency ratio equal 50.0%.

Given the strong revenue and well-managed expenses.

Our capital ratio is remained solid throughout the quarter.

with the CET-1 ratio at our 10% targeted level.

Our TCE ended the quarter at 747, and went adjusting for our health and maturity investment marks equal 6.8%, which we expect to remain higher than peer medium levels.

We also repurchased 2.3 million shares during the quarter in a weighted average price of $10.80.

Tengible Book Value for Common Share was 8.79 at June 30th. An increase of 13 cents per share from March 31st, largely from the higher level of earnings, offsetting the increased impact of AOCI, which reduced tangible book values by 99 cents per share, compared to 87 cents at the end of the prior quarter.

Let's now look at the 2023 financial objectives starting with the balance sheet.

On a full year spot basis, we maintain our previous guide for loans to increase mid-single digits in your year.

Total deposit balances are revised and 2023 down low single digits relative to the December 31st, 2022 spot balances. We expect year-end levels to be flatish to the June 30th level of $33.8 billion as seasonality should become a tailwind in the second half of 2023.

Full year net interest income is expected to be between 1.28 and 1.32 billion, with the third quarter of 2023 between 313 to 323 million.

Our guidance currently assumes the 25 basis point rate height next week then flat for the remainder of the year.

The decrease in guidance from last quarter is largely related to our expectation for higher deposit data driven by strong competition for deposits.

And continued mix shift into time deposits.

We still expect a ratio of non-interestant demand to total deposits to remain above pre-COVID levels. Full year non-interest income is expected to be between 315 and 325 million, with the third quarter expected to be around 80 million. This upward revision in corporates

to benefit of our diverse five debate income strategy.

Full year guidance for non-interest expense on an operating basis.

It is expected to be at the high end of our fire guidance, 835 to 855 million.

Larger due to higher commissions, types of better than expected fee income.

The third quarter, non-interest expense, is expected to be between 210 to 215 million. Full-year provision guidance remains 65 to 85 million and is dependent on net loan growth and potential seasonal model-related bills from a softer macroeconomic environment.

Lastly, the effective tax rate should be between 20 and 21% to the full year, which does not include any investment tax credit activity that may occur.

With that, I will turn the call back to Vince. Thank Vince, what can be achieved in another solid court? Our financial performance stands out because of our innovative suite of products and services.

conservative balance sheet management and our culture rooted in risk management. All of this is made possible by our talented and dedicated employees.

Our philosophy enables us to serve our customers through business cycles in ways other competitors cannot.

We were currently recognized in Forbes' 2023 Global 2000.

and America's Best in State Banks.

with the latter award based on customer feedback showcasing the impact our employees have on our performance.

Our capital position remains strong to see EP1 at our targeted operating level from 10%, while supporting loan growth and share repurchase activity in the floor.

The tangible book value for share continues to grow, totaling $8.79 this quarter, up 8.6% year-over-year. As we look to the second half of the year, we remain uniquely positioned to capitalize on disruption, and to

and are poised to continue to drive shareholder value.

We will now begin the question and answer session. To ask a question, you may press star than one on your touch tone phone.

If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster.

Our first question comes from Daniel Tameo from Raymond James. Please go ahead. Good morning, guys. Thanks for taking my question.

I guess first, just on the nonexious, sorry, non-intersparing, the positive balances, if I heard you, did you have an explicit assumption baked into your guidance for where those end up at the end of the year? And I know you mentioned.

They would end up above pre-toga doses. I'm wondering if you had a little more detail on where about you're kind of thinking that could land. And then also just kind of within the quarter, if you had any comments on the cadence of the mix shift, if it slowed throughout the quarter, if there was any kind of...

We were kind of 26% or so and stopped looking for us to migrate down to that in the tour run, which is kind of expected maybe higher than that.

you know.

know, in my mind the target would be...

30 handle if we can keep the 30 handle as we move forward. We do have seasonal municipal deposits that kind of build from here you know through October November period that would affect that non-interparent line item.

And it's a big focus in the company. It's been for the team 16 years, large growing on anxious private retail, commercial municipal as well as small busy.

very much to see it help you see. Our internship just changed, right? And the second part of that question was about being a...

what's happening as we move forward with the deposit mix? Yeah, the mix shift into CDs, I mean, it's still been pretty heavy, but it's definitely slowed. I would say on the retail side, the requests for matching others rates definitely slowed significantly from where it was.

a few quarters ago. On a commercial side, you're still very active as you would expect.

with every bank call and every other bank's customers. But I think we've done a very nice job retaining our customers and adding others.

in the marketplace. And I know we keep mentioning this, but part of the reason I think our performance is going to show very well relative to others when you look at the non-interest bearing category in particular because as I've said on numerous calls, our strategy has been to focus on client primacy.

to be the primary bank for our customers. You know, the deposit base, particularly the non-interest bearing deposit base is supported by compensating balances that are paying for trade management services.

you know, embedded balances that exist with the float and consumer and small business account. So, you know, I think our people have done a pretty good job of continuing that, and that's what's really helping us support.

our non-intersparing positive base. The other thing I would add to, as far as a proof point for the mix shifts happening during the quarter, definitely is following through the quarter. If we look at the margin, the margin with everything that...

banks did for the winning purposes in March. From March to April our margin went down 9 basis points to a 340 level and then we were down 3 basis points from April to May and 3 from May to June .

Clearly, there's been a slowing impact to the margin statistic that also runs through the net interest income.

I appreciate all that. Maybe changing gears here for my second question on expenses. Just curious, assuming we get through the year, it's kind of the top of the guidance that implies. If you changed gears, what's the lead time at $500,000 on 100%, which means that one

You know, the quarterly run rate maybe, and just quickly from around here, around the 2.13 marker. So, but wondering if you see any kind of opportunities to reduce expenses going forward, given the pressure on the top line?

Well, you know, I mean, we've had close savings target every year, not at the corner, what, fourth or fifth year of having, you know, meaningful cost savings targets for this year. It was $9 million.

We run 50% efficiency ratio. It's not like there's excess cost to take out. But we continue every day to manage expenses.

It's really negotiating contracts, particularly one of the things rolling through expenses.

just completion of our impacts, contracts, to have CPI clauses that have kind of kicked in over previous quarters, we're actively going out to those vendors to look at renegotiating those contracts and get something back for us.

contracts to have CPI clauses that have kind of kicked in over previous quarters. We're actively going out to those vendors to look at renegotiating those contracts and get something back for us with CPI where it's been at times.

We've had some significant increases there. Process improvement is a big focus in the company throughout, so there continues to be opportunity there. It's every day, Danny, that we're managing the expense side of it. We're disciplined and we're continuing to pursue ways to optimize our facilities, space optimization. It's just a constant focus.

So, is that something extra kind of baked into what we do every day? I understand. Well, thanks for taking my questions. Appreciate it. All right. Thank you.

Our next question comes from Jared Shaw from Wells Fargo. Please go ahead. Hi, good morning. This is Tim Orders' Miller, filling in for Jared. Maybe just following up on that line of commentary for deposits with the prepared remark of kind of mid-30s beta by year end.

I mean, that seems like a pretty conservative number. I mean, beta increased by percentage point this quarter. You're assuming one more hike here. Is there an expectation that just given how, you know, how well your deposits have performed so far that there's gonna be some element of a lag following the last rate hike?

Or should we assume that kind of once the Fed is done barring any kind of additional mix shift, the cost that is going to kind of slow as well.

Yeah, I would say, I mean, I think our teams continues to impact on changes in managing deposit costs in an especially challenging environment.

I mean, I think our team continues to do an act of changing the managing deposit costs and it is especially challenging the environment, the balancing act there is close failure who has been quite an effort throughout our company.

commercial side and the retail side with the Fed continuing to raise rates. I think that the

One more move that everybody expects to happen in February . I mean, February . Next week. Something that just stops, I think there's, as I mentioned, a little bit earlier, for continues to be a lot of competition on the commercial deposit side.

We've done a great job retaining our customers for sure and retaining deposits. So, but I think there's some public carry on that that happens.

to go through there for some period of time. But I mean, we, you know, the beta at 27.

We originally guided in April to mid-20, so it was a couple of coins higher than 25. I kind of used the mid-1 a lot, so...

Based on what we know now and our forecast and how we're managing it, the mid-30s, higher than the low 30s that we guesstimated, I would say, in April . But I think that's a figure that feels reasonable to us and if we can do better, that would be great.

Okay, great. And then, maybe switching gears to the loan growth, I guess two questions. Number one, the RESI growth and the Physician First program just continues to fire on all cylinders. RESI is now approaching almost 20% of the loan book. I'm wondering about 6.5% profit

A, who's taking on mortgages right now? Is this purchase? Is this kind of refi activity? How much more room is there to run in resi? And then as we look ahead, what's kind of the mix shift or the mix of loan growth going forward that you're expecting?

First of all, the borrowers in the Physicians First program are some of our best credit profiles, right? Yes, they are continuing their expansion on Sunday soon.

It tends to be positions that are lost average, that are upgrading their home. Most of the business that we do is purchased money. So the vast majority, not just physicians first, but across our entire footprint, has been historically skewed towards purchase money. That's been our strategy. I would expect as we move forward.

to be positions that are well established, that are operating their home. Most of the business that we do is purchase money. So the vast majority, not just positions first, but across our entire footprint, has been historically skewed towards purchase money. That's been our strategy. I would expect as we move forward, you know.

We've kind of changed the focus a little bit so that we're producing more saleable product. You know, the physicians first loans tend to be a little balance sheet for you in it. So the rest of the product has been moving, we've been moving more in a direction of producing saleable product, which should help us manage the balance sheet.

As we move forward with the comment about the concentrations, you know, we're perfectly aware and capable of adjusting. It could include sales and other avenues.

but we also monitor concentrations. But I think overall, very high quality borrowers, particularly purchase money, and the game here is to make sure that we circle back or on the front end of origination. That's why we developed the eStore.

is to offer multiple products and services to that group, particularly wealth management, brokerage insurance, fee-based, high quality, fee-based businesses. And then, when we look at, we end up also getting opportunities on the business side with the practices and offering trade management services. No furtherktion. And so then, we would inspect.

long products to help facilitate the build out for acquisition practices. Probably not so much how many draw to nose over time as well. So giving that that's been much our strategy with the mortgage book. I will say, you know, our goal has been to find originators to really do focus.

and are networked into the new home purchase market versus relying on refinance activity for production.

So, that's been how we've looked at it for a long time.

Very little reply, but that'll pick up again when rage comes down. But as we sit here today, it's virtually all purchased. Okay. And then just last for me, maybe one for Gary. No, we're in this period right now where everybody is expecting some sort of credit event. And in the back end of this year, 0.4.

I guess as you are going through your kind of everyday review of the loan book, does anything change with this expectation for some sort of credit event or is it kind of business as usual as you are reviewing those loans? Are you trying to be more proactive? I know you are reviewing all the loans.

changes. We're very aggressive with managers and our program doesn't change from a move into the economy. So excuse me.

We're going to continue to manage the book portfolio by portfolio, loan by loan in some cases as we've talked about in the office book with the issues going on in that space at this point. But no real change as far as our risk management practices are concerned.

just continue to stay ahead of it, which is important from our perspective.

continue to stay ahead of it, which is important from our perspective. Great. Thank you for the questions.

Thank you. The next question comes from Frank Schiraldi from Piper Sandler. Please go ahead.

Good morning. Just a couple for me on...

On capital, Vince, I think you noted you're kind of right at your CT1 target ratio. Just wondering, you know, I would assume, you know, including the AFS book, given the size of the bank, that's...

kind of less of a concern for you guys and maybe some of the larger banks out there that might see changes in capital rules. But you know just wondering about your priorities here if we could see those that CT1 ratio dip down a little bit through growth and you guys were a little bit more aggressive and share buybacks than I had in my model.

wondering how you think about it here, is it just more opportunistic at this point on buybacks? Yeah, I would say so Frank. I mean, you know, we established that 10% as an operating target for us.

You know we're right at 10.0. We're not going to manage it to 10.0 every quarter but given the strong earnings for the quarter as well as where the stock was trading.

opportunistic as you mentioned that's kind of the key word so we were opportunistic. We'll continue to be opportunistic as we go through the year. You know if you look at we have a slide we added in here looking at...

And the TE-1 ratio and the TC ratio has reported with the marks. You can see the TE-1 ratio, at least at marks, we were 10.0, 10.1 for the peers. When you add an AFS, we're 9.3 versus 8.9 and then we added AFS and HTM or 8.6 versus 8.3. So those are all comfortable levels and better than peers. Similarly on the TC ratio, you can bounce 5.7. You can see the TTC ratio. And then you can see the TTC ratio.

the impact there. So I mean given the risk profile the balance sheet we're very comfortable with that 10%. You know the strong earnings generation supported our asset growth and then it enabled us to be opportunistic.

We expect to kind of gradually build student T1 into second half of the year based on our current forecast. And we're gonna put the money to support long growth first as we always do. And then where there's opportunities or if the long growth is a little bit slower than what's in our model, we'll be more, more active. Okay, all right, great. And then just.

Vince just to follow up on on the deposits you mentioned the seasonality of the muni deposit dollars Just wondering just for modeling purposes if you can help with you know remind us that the size In the past of those kind of flows and and the expected costs may be of those relative to the rest of the book

Yeah, I mean, for pizza trough, we usually use 300 to 500 million in kind of a normal flow from down in the first quarter and then up through kind of the afterlwork November timeframe. We haven't disclosed costs specifically on those.

I mean, you know, we've talked about where we're pricing, you know, we have some promotional CD rates that we instituted in May that are out there kind of 5% for 13 month CD for 75 for

send them on CD and so far we've generated about 400 million in CDs since the beginning of May with about two-thirds of that being brand new money to the company so and some of the municipal customers will take advantage of that too. You know in almost every right we're the primary treasury management provider.

We're not just, you know, permitting them to waste hot money with us. So, you know, it's less likely that they'll migrate into those higher cost of products. And if there's seasonality, particularly with ad valorem, tax collection, and other activities that go on that are seasonal, the amount of Treasury management fees increase.

at this point in time, so they tend to leave more demand deposits to cover the cost of that increase in operation. So there's a lot of things going on with that portfolio, it's not just money flowing in and out into high-yielding.

Yes. OK, so I guess some of that will come in as non-interest bearing, just kind of curious if it's going to, you know, if it's going to really impact that kind of non-interest bearing trend in a big enough way for us to kind of see it next quarter. But maybe not. I don't think it's going to have a dramatic impact. It's hard to say, though, based upon, you know, earnings credit rates and.

what type of investment rate they can get and whether the folks managing those balances at those entities decide to use free balances or a bit from investing. So that's all part of it, but I just wanted to make clear that we're not just basically taking the toss and high yielding, but it's not what we do.

So, the bulk of the money I reference will really come through DDA side. They collect the taxes, increase the taxes. So, that will flow through the non-airship fair and line, just to clarify that. Okay, great. That's what I was curious on. Thank you, guys.

All right, thank you. Our next question comes from Michael Perito from KBW. Please go ahead. Hey, good morning everybody. Thanks for taking my questions.

I wanted to start and this question admittedly might be a quarter or so early here, but I was wondering if you could give us a little more color on the incremental CD growth, the type of duration and as you guys think about that moving forward.

you know at what point does that turn from kind of headwind to tailwind and you know what's your experience kind of an uncharted territory here but is that something you would hope you know if you're right forecast proves be accurate that if the environment cools off you would be able to kind of roll some of that forward

lower, you know, obviously competitively the CD rates right now are probably the most competitive it's been in memory, recent memory, which is curious how you guys think about that dynamic in the margin as we look ahead to next year at this point.

Yeah, no that's exactly how we think about it Mike. So the average term of the CD portfolio is 10 months right now. The two specials that I mentioned that we have are 13 month and 7 month CDs. So it's very short. The idea being there that, like you said, it's very competitive now. But

If rates start to come down mid-year, second half of next year, we have an opportunity to reprice those lowers. So that's exactly the strategy. So that's exactly the strategy.

Got it. And then just as you guys think about all the disruption in the industry, I think one of the reasons, at least in my opinion, that you guys have weathered the storm so well is just the diversity of the franchise, you know, both line of business, geographic.

You had some really large well-respected players that are no longer around just strategically. Is there anything on your roadmap that might be new or pulled forward where there's opportunities maybe like on the private banking side or in some of these other small business niche businesses that...

These banks had large market share in that that you guys are looking at that we should be mindful of as we think about you know 24 and 25 growth opportunities. I Don't think there's a specific business line

From other banks that we would be interested in, I mean we would have pursued that long ago. We've always said that we were different. We had been compared to those banks that are in our relative size range, at least a couple of years ago. So they were peer in our peer group, they would eventually benchmark it.

in the middle market, handling consumers, kind of midstream consumers. We do have a private banking effort. We do have the Physicians First program, which is...

focus on higher high income consumers. But we cater to the broad spectrum of consumer and small business. And that's really, that's been our focus. We focused on investing in product capabilities that help us broaden the returns on capital that we deploy with consumers. And

you know, businesses. You know, that doesn't sound like a very sexy model, but we've tried to manage risk by diversifying geographically. We said that repeatedly. Gary spends lots of time with his team.

Tom Fisher, Gary, the whole team, analyzing concentrations of risk so that there's granularity within the portfolio. And then I think if you go back and look at the earnings transcripts, even before all this happened.

I said we are a very strong consumer franchise with a granular deposit base. Our deposit mix was very favorable and quite frankly, I think that is really paramount to the valuation of a bank. I think if you're going to evaluate the value of a financial institution, you want to look at their deposit base. That borrowing becomes very much worth a lot of money, but it's going to actually survive

So, I think, I don't see us really changing. I do think, with the exit, they are in our businesses as well, right? So, the exit of those players, from a competitive perspective, will help us.

And I think from a wealth perspective, doing loans to high net worth individuals.

you know, commercial lending in certain markets, you know, able to benefit from the disruption. Most opportunities to pick up bankers too. Absolutely. Hiring people, we've had, you know, no issue attracting talent.

So actually people reach out to us all the time and that's not the way it was historically so I think our you know

staying power and conservatism, you know, really puts us in a strong position. That's why I said in my comments as we move through the cycle to compete more effectively, we have to put it in capital capacity, a great product set. And I think from a, I said it before and I'll say it again, I think that our investment in technology.

What we're focusing on for us is spot on. It's improving the ability for clients to purchase multiple products and services through us in a very efficient way. So we continue to focus on the eStore and that's why the consumer applications are up.

as much as they are. I think if we add deposits in November to that platform, that's really going to help us with getting new consumers. It will be really easy to purchase multiple products and services and open depository accounts on one platform with one application.

So that's the most exciting part, you know, I think as we move forward It's using AI and the digital tools that we put in place to

to make a better experience for the clients. Anyway, that's. No, that's really helpful, Collar. Thank you guys. And then just last question from me. I was just curious if you were willing to maybe share or find some thoughts about the kind of the next phase of Bank M&A here, Vince. I mean, it's.

pretty apparent that there's going to be some more consolidation on the heels of this event. Just curious what you're seeing out there, it seems very slow and kind of regulatory headwinds at this current juncture, but just also maybe a comment on what you think that next iteration of consolidation could mean for F&B from an opportunity standpoint, if at all.

Well, I, you know, I said, I made a comment on one of the calls that I wouldn't want to be an investment banker, and, you know, everybody went crazy at this point in time. So, I'm not going to make any, you know, sarcastic comments. But I will say, it might be a good time, you know, in the future, right, to be an investment banker, because there are a lot of banks that are struggling for a variety of reasons.

As we move through this cycle, I think when we come out the other end, there will be things to look at. I don't think we're there yet.

You know, I think if we were to be active in M&A, and I'm not suggesting that we are, we're kind of internally focused right now. You know, we pick to the tried and true strategy of focusing on in-market deals where we can get cost saves that are immediately accretive to earnings and

have very limited tangible health value dilution.

returns on capital that are well above our cost of capital. That's our, we've said that forever, that's what the board expects.

we're very disciplined around that and I think it shows in our performance that we've stayed true to that, you know, that strategy. You know, I think the current M&A market is very challenging still. You know, there's a lot of banks that probably

would like to sell themselves, but I don't know that the deal works from a mathematical perspective, you know, financial perspective. So, you know, we've been focusing principally on building out our e-delivery channel, the e-store that I mentioned, and then augmenting that channel across our seven-state footprint.

with the deployment of ATMs and ITMs. So, you know, we feel that that's a better way for us to go in very cost-effectively, bridge our physical delivery channel with the ATMs, branded ATMs, and then push our digital products.

to that customer base and you know we've had some good success doing that. So we're going to stay focused on that de novo strategy and the deployment of ATMs.

continue to drive consumers and small businesses. Anyway, that's my view on M&A.

No sarcastic headlines. So now I appreciate it's interesting time. So your thoughts are helpful. Thank you. Thank you guys for taking all my questions. Thanks.

Our next question comes from Russell Gunther from Stevens. Please go ahead. Hey, good morning, guys. I wanted to follow up on comments that Gary made earlier. Just be helpful if you're able to share some of the assumptions that went into the company-wide stress test you performed this quarter.

Sounds like that's something you do this time every year. Would be interesting to just get some broad strokes around assumptions, particularly CRE price declines. Anything you guys could elaborate on.

Yeah, it's pretty much our normal stress test review, Russell, from the assumption perspective. From a result perspective, charge-offs came in a little lower than they did the past review. So ah, we make a bunch of progress in terms of Lead that is their previous use, you can still see this getting noticed.

And in terms of the economic forecast, a little higher provision around the forecast. In terms of the ACL, it covered those potential losses by more than 50% in a worst case nine quarter scenario.

So just a standard review which we do on a pretty regular basis and it came out better than we expected and better than the prior review.

Thank you. And then just switching gears for my last question here on the securities portfolio. Just any appetite to restructure some of that and if so, what type of earned back you guys might be willing to stomach? Let me know in the comments below.

Yeah, no, I would say, I mean, historically we've looked at that and it's a zero-sum game. So, you know, we like the portfolio that we have. The cash flows, you know, are pretty healthy level. Eight hundred and almost $900 million over the next 12 months, about 12% of the portfolio. And that's rolling off at 241 and...

Today we're reinvesting in that kind of 540 level. So given the structure of the portfolio, I think our team, Scott and his team, have done a very nice job creating a portfolio so you don't have significant extension risk or contraction risk. And with where we are today, the opportunity is there to cash flow every month. I mean, for the second quarter, we're going to be able to

We reinvested about two thirds of the cash was 135 million or so into the portfolio.

Before Colio did shrink a little bit, which is some of the funds to loan growth. But in the quarter we reinvested at 529, today it's 540. Last quarter, first quarter was 510.

You know we'll continue to opportunistically invest there as we look ahead Kind of the general plan will be to hold the portfolio about the same level That it was at the end of June as we go forward again being opportunistic With where we invest so far we've been able to put 82 million to work at 540 with a three-year duration So I think the strategy the portfolio. It's a good sound portfolio, and I think strategy

We'll continue to opportunistically invest there. As we look ahead, the general plan will be to hold the portfolio about the same level as it was at the end of June as we go forward. Again, being opportunistic with where we invest. So far we've been able to put $82 million to work at $540 with a three-year duration. So I think the strategy of the portfolio, it's a good, sound portfolio and I think the strategy makes a lot of sense for us.

Yep, no, it makes sense. Vince, thank you very much for the color. Thank you. Our next question comes from Manuel Navas from DA Davidson. Please go ahead. Hey, good morning. Just to kind of follow up on that, can you give a little bit more color on where you stand with borrowing and kind of decision-making and the process? I know you had it laddered out a little bit and you gave kind of an update last quarter. I just kind of want to hear where you stand with borrowings today and what you think about that.

and with the cash on the balance sheet as well. Yeah, I mean as we sit here today, we still have about a billion too of what I would call excess cash. You know, we put that on, you know, in the March timeframe given the market disruption that occurred. Like I said, that affected our net interest margin statistic that went down from kind of that March to April timeframe that I talked about. But the dollars of NII kind of goes to a push to that. We talk about it regularly. For now, we're going to keep a billion too, right Scott? Yeah. Thanks for having me. Thanks for having me.

Okay. If I jump back to loan growth for a bit, it seems like the perspective is on the consumer's side.

as purchase comes down and you're doing more gain on sale business, the consumer growth might...

Decline a bit across the back half of the year also on seasonality just got what are trends there on an outlook and then What do you think right now commercially? Yeah, I think you nailed it on the mortgage.

But I mean we're expecting it to You know tail off a little bit towards the end of the year But I do think you know commercials up the pipelines are up about 12%

across the board.

good activity in the Carolinas. A little slower than previous years, but still good solid activity. This is where our geographic diversification really helps us, right? Because I think the mid-Atlantic is slow, you know, DC and Baltimore is a little slower. Pittsburgh is still, Pittsburgh is Pittsburgh, it just chugged along.

Cleveland and Pittsburgh and then the South is still experiencing, we're experiencing elevated pipelines, but like I said, I think it's a little slower than it has been in the past. It's substantial enough to provide us with the opportunities to get our guide and that's why.

and we reaffirmed our guide for the year. So, you know, as we were halfway through here, so we're feeling a little better, right, about where we're gonna end up in. It sounded, yeah. So, anyway, that's kind of the look. I think, you know, from a CNI perspective, there's probably a little more activity on the CNI side.

Obviously, CRD is a little slower. We're not a player in the large office space. If we're in large office, we're not really a player there. What we're seeing is a little different than others may have chased. But, you know, that's where we are.

portfolio and is there any updates possible on kind of success on cross-sell or anything like that that you can share?

portfolio and is there any updates possible on kind of success on cross-sell or anything like that that you can share? Yeah, I don't have statistics at hand to share with you.

used to grow. It was north of 750 million in total. I don't have the exact number in front of me, but... Yeah, it's around like a one and a half billion of the vision per 40 million. That's globally. I'm referencing what we originated in our program versus what we hold on our balance sheet. We hold on our balance sheet for larger. That's all the conditions in the mortgage space.

not just positions in the positions program. So the total portfolio would be a billion and a half. Originated through our specific program would be about 750 to 800 million. But I think the you know again I think we're going to be focusing as we move forward on more saleable product.

So we should be able to bring balances down. And those customers have, you know, we really just started to scratch the surface in terms of how we go after our sell opportunity. So I don't have good statistics for you. We're very early on, particularly with the aggregation of those products in the e-store. And come November .

when we add the depository products, what's going to happen is when somebody originates a mortgage loan, even through the Physician's First program, they're going to be able to purchase the insurance and depository and other consumer loan products on the same platform.

at one time with one application. Insurance isn't going to come until a little later, but deposits and loans will be there end to end by November . Yeah, for physicians loans made this year, I mean we're talking about 90% plus have multiple products.

at one time with one application. Insurance isn't gonna come until a little later, but deposits and loans will be there end to end by November . Yeah, for physicians loans made this year, I mean, we're talking about 90% plus have multiple products. That was the goal of us. Meta is the money that you pay with that bank, we'll economy, the financial artists and the St Alan's committee that sell proudly everything we haveAmy Tobias andlerio

That's great. I guess my last question is, as we see NII and, you know, given your rate assumptions.

That's great. And I guess my last question is, as we see NII and, you know, giving your rate assumptions, that can change very quickly.

But given NII and NIM guidance, do we think that NII could bottom out early next year? Do we think that NIM could bottom out early next year?

thoughts around that, given that this is a little bit of a hypothetical for next year. I would say the margin in NI probably bottoms kind of forth to first quarter kind of based on our current. So Details ofUockingumbn

forecast and what we're thinking and then we'll start to build there. Obviously the earning asset growth that we have is a key factor in there in helping to build and what you're thinking. I would say over that fourth to first is based on what we see today. Like you said, it could change quickly but that's kind of where we would see things kind of bottoming out. Thank you. Thank you, I appreciate the time.

going forward to the margin should be less and less. So if you are dropping in fourth quarter, first quarter, then the rate of decline in the margin should be maybe a bit more this quarter, maybe a bit less in the fourth quarter and kind of tailing off. How to think about it given your outlook on rates.

I would say, I mentioned the three basis points a month the last couple of months. What's baked into our guidance would probably be in that three to four a month. We would probably have a much slower pace than the 19 basis points that it was down in the first or second quarter. That's what.

baking tool guidance and then bottoming in that kind of forth the first line and then starting a slowly building there Gotcha. Okay, and just on the on the liquidity part in just deposit growth in general I know you talked about you know Maybe the non-interest bearing being a bit lower but just as far as a contraction and you talked about that the seasonality this quarter on Deposits, what's your outlook on deposits here? I mean if you keep you maintain that liquidity as your expectation of those deposits

seasonality grow a bit this quarter. Yeah, I know you kind of gave the guidance for the full full year,

thinking about deposits and aggregate not just the non-interest bearing bucket. Yeah, I mean what we commented on is kind of flat from June to the end of the year. You know just given the municipal deposits flipped the flow through there, and you know I think our if you look at our data I mean all the peers aren't out yet, but our deposit decreases.

versus the H8 data I think show very well. I think the non-interest bearing changes from some of the stuff I've read is at the better end of things for sure in the prior quarter compared to those that are out so far.

Just your thought on the liquidity when you actually look at using that to fund the loan growth as opposed to just holding it for a bit.

What's kind of the outlook on that liquidity? Yeah, really just for now. I mean we're going to hold it right where it is. I mean we're earning 515 on it right now Yeah, well 25 basis points that break so it's really not costing us to keep it and just given the environment You know we don't have a set date. I ask that all the time.

We're going to start to deploy it, but for now we're going to maintain that billion too. Like I said, from an NII standpoint, it's just not hurting us.

Yeah, you got to. Okay. And maybe just the last two was it sounds like with the loan growth, the pipelines are up a bit, but still kind of maybe a tepid on the commercial side. The buyback, I guess, is that something, I guess this current level type of repurchases could continue for the near term if the earnings are there and you're willing to take the capital maybe a bit lower if you've got the conservative credit quality after the stress test? That's right.

how to think about the buyback going forward, certainly expecting that to be opportunistic. I think that's the key word, it's really opportunistic and if the loan grows a little slower than what's in our forecast, we could become more active. From a capacity standpoint, we still have plenty of our authorization, $140 million of capacity. The last incremental change that really happened was the manufacturing and capital Far sans mentioned in the

authorized and still could be used by. So we'll continue to be optimistic and you know we manage that total alignment with shareholder interests and we'll continue to do that. Yep okay and it and maybe it's the last one I think Gary you mentioned last quarter that you might after you've done the stress test that you might think about doing you know making some sales on selective sales on the office.

I guess any updates on that? Have you gone through things? Any changes to your outlook there? Still potential that that may occur? Frank, we don't have anything in our queue at the moment. So really, really nothing that is teed up for a later use.

sell. It's always part of our quiver that we have to take action. So you know we'll continue to look at that as we as we move through the year see if anything needs to be put into that category here before the end of the end of the year but nothing right now.

Okay, perfect. I appreciate the update. Thanks for taking the questions. Thanks, Brian . Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Vincent DeLee for any closing remarks.

I'd just like to thank everybody for the questions, for the interest in FMB, and thank our shareholders.

for the continued support. We're looking forward to the second half of the year. I think there's some great opportunities for us.

to execute and perform well. And I'd also like to thank our employees who are so dedicated and always get us through difficult times, good times.

We've got very engaged and dedicated employees and I wanted to thank them as well for everything they've done. So that's all I have. Thank you everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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