Q4 2023 Financial Institutions Inc Earnings Call
Thank you for joining I would like to welcome you Okay.
The financial institutions, Inc, fourth quarter, and full year 2023, adding scope.
breaker: My name is breaker and I will be your event specialist mounting today's call.
breaker: All lines are on mute so the presentation portion of the cool with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
breaker: And I would now like to pass the conference over to your host Vice President and CTO.
breaker: Mr Mountain dining room to begin say Martin. Please go ahead.
breaker: Thank you for joining us for today's call, providing prepared comments will be president and CEO, Marty Birmingham and CFO Jack plan. They will be joined by additional members of the company's financial leadership teams. During the question and answer session. Today's prepared comments and Q&A will include forward looking statements actual results may differ materially from forward looking statements due to a variety of.
Marty Birmingham: Risks uncertainties and other factors, we refer you to yesterday's earnings release, and Investor presentation, as well as historical SEC filings, which are available on our Investor Relations website first safe Harbor description and a detailed discussion of the risk factors relating to forward looking statements well.
Jack Plan: We'll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to a form 8-K.
Please note that this call includes information that may only be accurate as of today's date January 26, 2024, I will now turn the call over to President and CEO Marty <unk>.
Marty Birmingham: Thanks, Ken Good morning, everyone and thank you for joining us today.
Marty Birmingham: Throughout 2023, and the unprecedented pressures are brought to the banking industry. Our company was proactive in defending deposits growing relationships.
Marty Birmingham: With new and existing customers and strengthening liquidity and capital.
Marty Birmingham: The fourth quarter was no different as we made strategic decisions in the best interest of the company that reflects our proactive efforts to control expenses and put us in a stronger position going into 2024.
Marty Birmingham: In December we announced changes to our leadership team.
Marty Birmingham: Associated realignment that strengthens our ability to execute our long term strategy by enabling us to operate in a more nimble manner by reducing layers of management, a realigning key areas of our organization to better leverage the experience within our executive and senior leadership team.
Marty Birmingham: Drive greater operational efficiency and process improvements, particularly within our retail franchise <unk>.
Marty Birmingham: Accelerate growth of our digital engagement, while ensuring our customer facing teams remain in a strong position to provide value added services.
Marty Birmingham: Align marketing brand strategy and enterprise sales more closely with our long term growth targets.
And continue to carefully manage expenses, particularly within salaries and benefits and third party vendor relationships.
Marty Birmingham: This realignment reflects a very thoughtful process that was certainly not easy.
But the current operating environment requires us to reflect on past investments to ensure they are still appropriate and adjust our approach to drive near term success in support of our long term objectives.
Marty Birmingham: The prolonged higher interest rate environment, and inverted yield curve growth funding costs higher throughout 2023, which pressured revenue.
Marty Birmingham: As a result, our app.
Marty Birmingham: Net income available to common shareholders of $48 8 million or $3 15 per diluted share and quarterly net income of $94 million or <unk> 61 per share were down from both the linked and prior year periods.
These results were also impacted by a number of items that again reflect our proactive work to enhance our forward earnings potential including active balance sheet management through realignment of our company owned life insurance investments and the repositioning of a segment of our investment securities portfolio Jack.
Unnamed Host: Thank you all for joining us. I would like to welcome you all too.
Brika: The Financial Institutions, Inc. Fourth Quarter and Full Year 2023 Earnings Call. My name is Brika, and I will be your event specialist running today's call with you. All lines are on mute for the presentation portion of the call, with an opportunity for questions and answers at the end.
Jack Plan: Jack will walk through these actions in more detail in his remarks.
Our 13% nonpublic deposit growth and 6% total deposit growth were highlights of 2023 results.
Brika: If you would like to ask a question, please press star followed by 1 on your telephone viewpad. And I would now like to pass the conference over to your host, vice president, and CEO, Mr. Martin Birmingham, to begin, so Martin, please go ahead.
Jack Plan: While deposits were down from the end of the third quarter due primarily to the seasonality of public deposits.
We remain very pleased with our ability to attract and retain deposits amid intense competition over the course of the year.
Unnamed Host: Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham, and CFO, Jack Clance. They will be joined by additional members of the company's finance and leadership teams during the question and answer session. Today's prepared comments and Q&A will include forward-looking statements. However, actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties, and other factors.
Jack Plan: Our success was driven in part by a money market account campaign that ran from late July through November.
Marty Birmingham: In total we welcome more than 1000, new retail customers, who are primarily based in the metros of Buffalo and Rochester. These new customers brought in more than $100 billion to five Star Bank. In addition to deposits brought in by our long standing customer base.
Unnamed Host: We refer you to yesterday's earnings release and investor presentation, as well as historical FEC filings, which are available on our investor relations website, for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We will also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to Form 8K.
Marty Birmingham: SaaS deposits grew to $127 million during 2023.
While this was short of our initial target of $150 million year end balances reflect a combination of our thoughtful governance process and deliberate pace of transitioning clients onto our <unk> platform as well as the natural fluctuation and partner balances.
Marty Birmingham: Maintaining our credit discipline lending, we grew loans to $4 5 billion up 10% in 2023 and about 1% during the fourth quarter.
Marty Birmingham: Please note that this call includes information that may only be accurate as of today's date, January 26, 2024. I'll now turn the call over to President and CEO, Marty Birmingham. Thanks, Kate. Good morning, everyone, and thank you for joining us today.
Marty Birmingham: On a linked quarter basis growth in residential and commercial lending was partly offset by a decline in our consumer indirect as we continue to moderate production, while enhancing the profitability of this portfolio.
Marty Birmingham: Throughout 2023 and the unprecedented pressures it brought to the banking industry, our company is proactive in defending deposits, growing relationships with new and existing customers, and strengthening liquidity and capital. The fourth quarter was no different, as we made strategic decisions in the best interest of the company that reflect our proactive effort to control expenses and put us in a stronger position going into 2024. In December, we announced changes to our leadership team and an associated realignment that strengthens our ability to execute our long-term strategy by enabling us to operate in a more nimble manner by reducing layers of management and realigning key areas of our organization to better leverage the experience within our executive and senior leadership team, drive greater operational efficiency and process improvements, particularly within our retail franchise, accelerate growth of our digital engagement while ensuring our customer-facing teams remain This realignment reflects a very thoughtful process that was certainly not easy.
Marty Birmingham: We also made the decision to exit the Pennsylvania auto market effective January one in order to align our focus more fully around our core upstate New York market.
Marty Birmingham: Commercial real estate growth remained muted in the fourth quarter as anticipated due to a combination of softer demand amid a challenging economic environment.
Marty Birmingham: Our pricing hurdles and our efforts to moderate production.
Marty Birmingham: Commercial industrial lending was up more than 3% during the quarter and as a reminder, our newest commercial LPL opened in January 2023 in Syracuse, New York and houses a team of experienced C&I lenders.
Marty Birmingham: Given the tech driven economic development, taking place in Central New York, We are well positioned to capitalize on both C&I and CRE opportunities that we believe around the horizon as this region becomes a hub of the micro chip industry.
Marty Birmingham: Turning to asset quality nonperforming loans as a percentage of total loans were 60 basis points at year end up from 21 basis points at September 32023.
Marty Birmingham: This increase was largely due to higher commercial nonperforming loans as we moved to a single relationship totaling $13 6 million in exposure to non accrual.
Marty Birmingham: This CRE sponsor, who has a long and positive track record and strong portfolio of performing properties is working through what we believe are short term cash flow issues related to newer properties that have not yet stabilized.
Marty Birmingham: But the current operating environment requires us to reflect on past investments, to ensure they're still appropriate, and adjust our approach to drive near-term success in support of our long-term objectives. As a result, our annual net income available to common shareholders of $48.8 million, or $3.15 per diluted share, and quarterly net income of $90.4 million, or $0.61 per share, were down for both the length and prior year period. These results also reflect a number of items that, again, reflect our proactive work to enhance our forward earnings potential, including active balance sheet management through realignment of our company-owned life insurance investments and the re Jack will walk through these actions in more detail in his remarks.
Marty Birmingham: We are actively managing this situation with our workout group the borrower in the bags participating in this club deal to ensure a satisfactory resolution.
Marty Birmingham: Setting aside this borrower the remaining $2 6 million of commercial nonperforming loans are primarily smaller relationships that are not concentrated in any specific industry.
Marty Birmingham: Annualized net charge offs to average loans were 38 basis points for the fourth quarter and 20 basis points for the full year of 2023.
Marty Birmingham: During the fourth quarter, we did experience a commercial charge off of approximately $1 million largely associated with one relationship.
Marty Birmingham: Given the $1 million recovery recorded in the third quarter, our full year 2023, commercial net charge off ratio was zero basis points, while consumer indirect charge offs are up compared to September 30 year end 2022. They are commensurate with the size of this portfolio and remain within our historical norms with annual.
Marty Birmingham: Our 13% non-public deposit growth and 6% total deposit growth were highlights of 2023 results. While deposits were down from the end of the third quarter, due primarily to the seasonality of public deposits, we remain very pleased with our ability to attract and retain deposits amid intense competition over the course of the year. Our success was driven in part by a money market account campaign that ran from late July through November. In total, we welcomed more than 1,000 new retail customers who were primarily based in the metros of Buffalo and Rochester.
Net charge offs to average loans of 76 basis points in 2023.
Marty Birmingham: This annual ratio has ranged between 45% to 87 basis points since 2008.
Marty Birmingham: Apart from the exceptionally low 14 basis points, we reported in 2021.
Marty Birmingham: What we've experienced since that is a return to normalcy and we do expect delinquencies in this asset class to remain somewhat elevated through at least the first half of 2024 as the impacts of inflation the exhaustion of stimulus payments by consumers resumption of student loan payments and economic headwinds worked their way through the portfolio.
Marty Birmingham: These new customers brought in more than $100 million to Five Star Bank, in addition to deposits brought in by our long-standing customer base. Fast deposits grew to $127 million in 2023. While this was short of our initial target of $150 million, year-end balances reflect a combination of our thoughtful governance process and deliberate pace of transitioning clients onto our BAS platform, as well as the natural fluctuation in partner balances. Maintaining our credit discipline lending, we grew loans to $4.5 billion, up 10% in 2023 and about 1% during the fourth quarter. On a length quarter basis, growth in residential and commercial lending was partly offset by a decline in our consumer indirect as we continue to moderate production while enhancing the profitability of this portfolio. We also made the decision to exit the Pennsylvania auto market effective January 1st in order to align our focus more fully around our core upstate New York market.
Marty Birmingham: No.
Marty Birmingham: As we continue to reduce overall indirect balances consistent net charge off amounts over the next few quarters would be reflected as higher charge off ratios.
Marty Birmingham: I would note that as a total loans have grown our credit quality metrics have remained solid and generally stable a reflection of our strong fundamental underwriting processes and experienced credit professionals working in separate credit delivery and relationship based functions.
Marty Birmingham: Since the start of 2008, our nonperforming loans have range from 17 to 90 basis points of total loans every quarter.
Marty Birmingham: Considering that the median publicly traded $5 billion to $10 billion asset bank in the U S. Today reported between $36 278 basis points over the same time period, we consider this to be exceptional.
Marty Birmingham: In fact.
Marty Birmingham: Our nonperforming loans ratio beat this peer group median more than 80 basis points on average in all but one of the more than 60 quarters since the start of 2008.
Marty Birmingham: Commercial real estate growth was muted in the fourth quarter, as anticipated, due to a combination of softer demand amid a challenging economic environment, higher pricing hurdles, and our efforts to moderate production. However, commercial and industrial lending was up more than 3% during the quarter. And as a reminder, our newest commercial LPO opened in January 2023 in Syracuse, New York, and houses a team of experienced C&I lenders. Given the tech-driven economic development taking place in central New York, we are well positioned to capitalize on both CNI and CRE opportunities that we believe are on the horizon as this region becomes a hub of the microchip industry. Turning to asset quality, non-performing loans as a percentage of total loans were 60 basis points at year-end, up from 21 basis points at September 30, 2023.
Marty Birmingham: Overall, we remain very confident in the health of our loan portfolio and associated asset quality metrics.
Jack: This concludes my introductory comments, it's now my pleasure to turn the call over to Jack for additional details on our results and details of our 2020 for guidance.
Jack Plan: Thank you Marty good morning, everyone.
Jack Plan: Net interest income of $39 9 million for the fourth quarter was down $1 8 million from the third quarter of 2023 as our overall cost of funds increased 24 basis points to five 4%.
Jack Plan: Reflective of the impacts of the continued high interest rate environment.
Jack Plan: The inverted yield curve and strong competition in our markets.
Jack Plan: We continue to experience margin compression in the fourth quarter.
Jack Plan: Net interest margin on a fully taxable equivalent basis of 278 basis points for the quarter compared to 291 basis points from the linked quarter.
Marty Birmingham: This increase was largely due to higher commercial non-performing loans as we moved a single relationship totaling $13.6 million in exposure to non-accrual. This CRE sponsor, who has a long and positive track record and a strong portfolio of performing properties, is working through what we believe are short-term cash flow issues related to newer properties that have not yet stabilized. We are actively managing this situation with our workout group, the borrower, and the banks participating in this club deal to ensure a satisfactory resolution. Setting aside this borrower, the remaining $2.6 million of commercial non-performing loans are primarily smaller relationships that are not concentrated in any specific industry. Annualized net charge-offs to average loans were 38 basis points for the fourth quarter and 20 basis points for the full year of 2023. During the fourth quarter, we did experience a commercial charge-off of approximately $1 million, largely associated with one relationship.
Jack Plan: NIM was impacted by the reversal of interest income associated with a single commercial relationship placed on non accrual during the quarter, which reduced quarterly NIM by three basis points.
Jack Plan: NIM for the full year was 294 basis points at the low end of our previously guided range.
Jack Plan: Given our more than $1 billion and anticipated cash flow in 2024, which youll see summarized in our investor presentation, along with the associated yields rolling off the securities and loan books we.
Jack Plan: We have ample opportunity to redeploy these funds into higher yielding earning assets.
Jack Plan: Accordingly, we expect margin to incrementally improve throughout the year.
Jack Plan: Relative to the magnitude of FMC rate increases that occurred in 2022 and 2023, our total deposit portfolio has experienced a cycle to date beta of 45%.
Jack Plan: Including the cost of time deposits.
Jack Plan: Excluding the cost of time deposits the non maturity deposit portfolio had a beta of 27%.
Marty Birmingham: Given <unk> expectations and internal modeling, we expect the trajectory of deposit beta to slow in 2024.
Marty Birmingham: Noninterest income totaled $15 4 million in the fourth quarter.
Marty Birmingham: $4 9 million on a linked quarter basis.
Marty Birmingham: Given the $1 million recovery recorded in the third quarter, our full-year 2023 commercial net charge-off ratio was zero basis points. While consumer indirect charge-offs are up compared to September 30th and year-end 2022, they are commensurate with the sizes of this portfolio and remain within our historical norms, with annual net charge-offs to average loans of 76 basis points in 2023. This annual ratio has ranged between 45 to 87 basis points since 2008, apart from the exceptionally low 14 basis points we reported in 2021. What we've experienced since then is a return to normalcy, and we do expect delinquencies in this asset class to remain somewhat elevated through at least the first half of 2024, as the impacts of inflation, the exhaustion of stimulus payments by consumers, resumption of student loan payments, and economic headwinds work their way through the portfolio.
Noninterest income included $9 1 million of company owned life insurance income.
Marty Birmingham: Of which approximately $8 million related to the investment of premium into a separate account product in the fourth quarter of 2023.
Marty Birmingham: The premium was redeployed from the surrender of underperforming general accounting policies.
The increased income was driven by several factors.
Including the timing of the premium deployment into investment divisions of our separate account product and the economic value of the stable value component.
Marty Birmingham: Incremental income associated with the cash surrender value of these policies and the stable value component is expected to stabilize in 2024 and is included in our forward guidance related to noninterest income.
Marty Birmingham: I would like to further note that the income from the reinvested proceeds more than offset the $5 4 million in incremental taxes associated with the capital gains that modified endowment contract penalties on the general account coli surrender.
Marty Birmingham: Career capital.
Marty Birmingham: Our RIAA subsidiaries, serving mass affluent and high net worth individuals and families institutional clients and 401K plan sponsors.
Marty Birmingham: As we continue to reduce overall indirect balances, consistent net charge-off amounts over the next few quarters would be reflected as higher charge-off ratios. However, I would note that as total loans have grown, our credit quality metrics have remained solid and generally stable, a reflection of our strong fundamental underwriting processes and experienced credit professionals working in separate credit delivery and relationship-based functions. Since the summer of 2008, our non-performing loans have ranged from 17 to 90 basis points of total loans every quarter.
Marty Birmingham: Positive net inflows in the quarter and.
Marty Birmingham: And increase revenue that supported a $125000 or 5% increase in overall investment advisory income.
Marty Birmingham: Swap income was down as expected given our lower level of commercial real estate activity during the quarter.
Marty Birmingham: Noninterest expenses were up less than 1% on a linked quarter basis.
Marty Birmingham: As lower salaries and benefits and advertising and promotion, partially offset increases in computer and data processing professional services and restructuring charges.
With respect to the realignment and associated workforce reduction announced in December <unk>.
Marty Birmingham: Non recurring severance expense of 759.
Marty Birmingham: Considering that the median publicly traded 5 to 10 billion asset bank in the U.S. today reported between 36 and 278 basis points over the same time period, we consider this to be exceptional. In fact... Our non-performing loans ratio beat this peer group median by more than 80 basis points on average in all but one of the more than 60 quarters since the start of 2008. Overall, we remain very confident in the health of our loan portfolio and associated asset quality measures. This concludes my introductory comments. It's now my pleasure to turn the call over to Jack for additional details on the results and details of our 2024 guidance. Thank you, Marty. Good morning, everyone.
Marty Birmingham: Was more than offset by a reduction in stock based compensation expense due to the forfeiture of awards and reversals of incentive compensation for those impacted.
Marty Birmingham: Provision for credit losses was $5 3 million in the fourth quarter of 2023 compared to 966000 in the linked quarter.
Marty Birmingham: The higher provision for the current quarter reflected the increase in net charge offs that Marty previously discussed.
Marty Birmingham: With an increase in specific reserves on commercial loans.
Marty Birmingham: Primarily associated with the $13 $6 million relationship moved to nonaccrual in the fourth quarter.
Jack Plan: Our ACL to total loans ratio increased to 114 basis points up two basis points from the linked quarter.
Jack Plan: Our coverage ratio, we are very comfortable with given the quality of our loan portfolio.
Jack Plan: Income tax expense was $5 2 million in the quarter.
Jack Plan: Representing an effective tax rate of 34, 5%.
Jack: That interest income of $39.9 million for the fourth quarter was down $1.8 million from the third quarter of 2023, as our overall cost of funds increased 24 basis points to 2.54%, reflective of the impact of the continued high interest rate environment, the inverted yield curve, and strong competition in our market. We continue to experience margin compression in the fourth quarter, reporting a net interest margin on a fully pactable equivalent basis of 278 basis points for the quarter compared to 291 basis points in the linked quarter. NIM was impacted by the reversal of interest income associated with a single commercial relationship placed on non-accrual during the quarter, which reduced quarterly NIM by three bases. NIM for the full year was 294 basis points, at the low end of our previously guided range.
This reflects taxes on capital gains and modified endowment contract penalties associated with the coli surrender executed in the quarter.
Jack Plan: Our accumulated other comprehensive loss stood at $119 9 million at December 31, 2023.
Jack Plan: Compared to $161 4 million at the end of the third quarter.
Jack Plan: We reported a TCE ratio at December 31.
Jack Plan: 6%.
Jack Plan: Tangible common book value per share of $23 69 trucks.
Jack Plan: Excluding the OCI impact since December 31, 2021, the TCE ratio and tangible common book value per share would have been 775%.
Jack Plan: And $30 61, respectively.
Jack Plan: We continue to expect these metrics to return to more normalized levels over time.
Jack Plan: Given the high credit quality and cash flow nature of our investment portfolio.
Jack Plan: That said as we shared with you on our third quarter call. We did reposition the segment of our securities portfolio in October selling.
Selling approximately $54 million of agency mortgage backed securities and an after tax loss of $2 8 million and reinvesting the proceeds in the higher yielding Ginnie Mae and Freddie Mac bonds.
Jack: Given our more than $1 billion in anticipated cash flow in 2024, which you'll see summarized in our investor presentation, along with the associated yields rolling off of securities and loan books, we have ample opportunity to redeploy these funds into higher-yielding earning assets. Accordingly, we expect margin to incrementally improve throughout the year. Relative to the magnitude of FOMC rate increases that occurred in 2022 and 2023, our total deposit portfolio has experienced a cycle-to-date beta of 45 percent, including the cost of time deposits. Excluding the cost of time deposits, the non-maturity deposit portfolio had a beta of 27%.
Jack Plan: Considering the two year earn back given the associated $1 $4 million of annual income.
We believe this to be an appropriate use of capital.
Jack Plan: I would now like to provide an update on our outlook for 2024 in key areas.
Jack Plan: We expect net interest margin of 285 to 295 basis points using a spot rate forecast as of year end.
Jack Plan: NIM is expected to show modest improvement throughout 2024, as we reposition our balance sheet by utilizing cash flow from the loan and investment portfolios, coupled with core deposit growth to fund the anticipated loan originations.
Jack Plan: We are projecting relatively flat noninterest income for 2024 versus 2023.
Jack: Given FOMC expectations and internal modeling, we expect the trajectory of deposit data to slow in 2024. Non-interest income totaled $15.4 million in the fourth quarter, up $4.9 million on a linked quarter basis. Non-interest income included $9.1 million of company-owned life insurance income, of which approximately $8 million related to the investment of a premium into a separate account product in the fourth quarter of 2023. The premium was redeployed from the surrender of an underperforming general account policy. The increased income was driven by several factors, including the timing of the premium deployment in two investment divisions of the separate account product and the economic value of the stable value component. Incremental income associated with the cash surrender value of these policies and the stable value component is expected to stabilize in 2024 and is included in our forward guidance related to non-interest income.
Excluding items, such as the impact of the stable value component in the 2023 company owned life insurance transaction impairing.
Jack Plan: Impairment of investment tax credits and other noninterest income categories that are difficult to predict.
Jack Plan: Such as limited partnership income and losses on investment Securities.
Jack Plan: Such as limited partnership income and losses on investment Securities.
Jack Plan: We are also projecting relatively flat noninterest expense for 2024 versus 2023.
Jack Plan: Our spend in 2024 reflects the cost reductions from our fourth quarter realignment activities.
Jack Plan: Set by inflationary impacts experienced in recent years and ongoing investments in strategic initiatives, namely digital banking technology bass and risk oversight.
Jack Plan: These investments are expected to contribute to the positive operating leverage that we are modeling for 2024.
Jack Plan: We expect the 2024 effective tax rate to fall within a range of 14% to 16% <unk>.
Jack Plan: Including the impact of the amortization of tax credit investments placed in service in recent years.
We will continue to evaluate tax credit opportunities and the positive impact that these investments would have on our effective tax rate.
Jack Plan: We expect full year loan growth will be relatively modest between 1% and 3%.
Jack Plan: This guidance is based on recent quarterly production and pipelines.
Jack: I would like to further note that the income from the reinvested proceeds more than offset the $5.4 million in incremental taxes associated with the capital gains and modified endowment contract penalties on the general account Coley surrendered to Career Capital. Our RIA subsidiary serving mass affluent and high net worth individuals and families, institutional clients, and 401k plan sponsors saw positive net inflows in the quarter, an increased revenue that supported a $125,000 or 5% increase in overall investment advisory income. Swap income was down, as expected, given our lower level of commercial real estate activity during the quarter.
Jack Plan: We remain focused on reserving balance sheet capacity for our most profitable business partners and realizing the corresponding benefit to our capital ratios.
Jack Plan: We also expect full year total deposit growth of between one and 3%.
The growth we focused on the nonpublic deposit category, which includes banking as a service.
Jack Plan: Although we do expect continued disintermediation from lower cost higher price deposit product types of 2024.
Jack Plan: We expect full year net charge offs to be within our historic annual range of 30 to 40 basis points.
Jack Plan: Our overall focus remains on executing strategic initiatives that will improve profitability and operating leverage over time.
Jack Plan: We believe that achieving results in line with the guidance provided we will drive these outcomes.
Marty Birmingham: That concludes my prepared remarks, and updated guidance I'll now turn the call back to Marty Thanks Jack.
Jack: Non-interest expenses were up less than 1% on a late-quarter basis, as lower salaries and benefits and advertising and promotion partially offset increases in computer and data processing, professional services, and restructuring charges. With respect to the realignment and associated workforce reduction announced in December, non-recurring severance expense of $759,000 was more than offset by a reduction in stock-based compensation expense due to the forfeiture of awards and reversals of incentive compensation for those impacted. For more information, visit www. FEMA.gov. Provision for credit losses was $5.3 million in the fourth quarter of 2023, compared to $966,000 in the linked quarter. The higher provision for the current quarter reflected the increase in net charge-offs that Marty previously discussed, coupled with an increase in specific reserves on partial loans, primarily associated with the $13.6 million relationship that moved to non-accrual in the fourth quarter. Our ACL, the total loans ratio, increased to 114 basis points, off two bases from the linked quarter, a coverage ratio we are very comfortable with given the quality of our loan portfolio. Income tax expense was $5.2 million in the quarter, representing an effective tax rate of 34.5%.
Marty Birmingham: We are off to a strong start in the first quarter and ready to maximize the benefits of the improvements we've made to our organizational structure and our balance sheet with.
Jack Plan: With good momentum from 2023 carrying us into this year, our team remains focused on liquidity capital and earnings Jets.
Jack: Just as we have done we will continue to evaluate our business for opportunities to protect and enhance these three key areas to drive long term value for our shareholders.
Marty: Before I conclude I want to thank our <unk> associates for all they did to contribute to our success in 2023 and all they will do in 2020 forward to take great care of our customers communities and shareholders.
Marty: That concludes our prepared remarks, operator, please open the call for questions.
Marty: Okay.
Marty: Thank you.
Marty: If you would like to ask a question. Please press star followed by one on your telephone keypad.
Marty: If anything you would like to repeat that question. Please press star one at Nike.
Marty: Again to ask a question. Please press star followed by line.
Marty: Can you briefly ask question and like you said.
Marty: We have the first question on the phone line from.
Tom: Sure Tom.
Tom: Hey, everyone. Good morning.
Nick: Hi, Nick.
Nick: I just wanted to start on the loan growth can you provide some additional context for the 1% to 3% target for 2024 after double digit growth in 'twenty three you alluded to some pipeline rebuild or are you moderating the growth given the funding and economic landscape.
Jack: This reflects taxes on capital gains and modified endowment contract penalties associated with the Coley surrender executed in court, and accumulated other comprehensive losses so that 119.9 million at December 31st, 2023, compared to 161.4 million at the end of the third quarter. We reported a TCE ratio of 6% on December 31st, and an intangible common book value per share of $23.69.
Nick: So in generally in general Nick we've been moderating growth in light of the economic landscape and we've been doing that through a variety of tactics, we have been working with our lending teams to ensure that we've got.
Nick: Adequate spreads in light of.
Nick: Changes to our cost of funds at our company as well as the general interest rate environment.
Jack: Excluding the AOCI impact since December 31st, 2021, the TCE ratio and tangible common book value per share would have been 7.75% and $30.61, respectively. We continue to expect these metrics to return to more normalized levels over time, given the high credit quality and cash-flowing nature of our investment portfolio. That said, as we shared with you on our third-quarter call, we did reposition a segment of our securities portfolio in October, selling approximately $54 million of agency mortgage-backed securities at an after-tax loss of $2.8 million and reinvesting the proceeds in the higher-yielding Ginnie Mae and Freddie Mac boxes. Considering the two-year earnback and given the associated $1.4 million of annual income, we believe this to be an appropriate use of capital.
Nick: As well as working with our customers and risk.
Jack Plan: Receiving feedback that they themselves are being more conservative in terms of taking on projects, whether it's in the CRE or a commercial industrial space, but.
Jack Plan: Specifics for how we built our plan for 2020 for Jack I would ask you to comment sure. Thanks, Marty and thanks for the question Nick So one of the areas that we've been focusing on I guess as a mantra for the company as liquidity capital and earnings and to Marty's point, we're focusing more directly on full relationships. So those that have come with deposits are.
Nick: Pension into our insurance and wealth management platforms. In addition to loan originations. So in that regard we're backing away from transactional exposures in the event that one does come across it would require sufficient pricing to clear our internal risk adjusted return on capital hurdles. So what.
Jack: I would now like to provide an update on our outlook for 2024 and here. We expect an interest margin of 285 to 295 basis points, using a spot rate forecast as of year end. NIM is expected to show modest improvement throughout 2024 as we reposition our balance sheet by utilizing cash flow from the loan and investment portfolios coupled with core deposit growth to fund the anticipated loan origination. We are projecting relatively flat non-interest income for 2024 versus 2023. Excluding items such as the impact of the stable value component in the 2023 company-owned life insurance transaction, impairment of investment tax credits, and other non-interesting income categories that are difficult to predict, such as limited partnership income and losses on investment security.
Nick: That translates to an in tandem with what we're seeing in the market from a demand standpoint.
Marty Birmingham: Continued runoff of the indirect portfolio.
Marty Birmingham: Largely flat.
Marty Birmingham: Oh single digit growth in commercial.
Marty Birmingham: Continued low digit.
Marty Birmingham: So I would say mid single digit growth in the commercial real estate space.
I appreciate the color and then in terms of the margin you mentioned the fed what are your assumptions with respect to rate cuts.
From a point.
Marty Birmingham: And the guidance that we provided assumes.
Marty Birmingham: First rate environment, and when I look at what.
Marty Birmingham: What the market's expecting versus what the feds expecting there is quite a.
Marty Birmingham: Wide range of estimates there so I personally don't like to bet against the fed. So if there are rate cuts I would assume that they follow the fed dot plot with the three cuts that they've indicated in their most recent <unk> recent guidance.
Marty Birmingham: Okay, and then did I hear you correctly that as it stands now you assume an increase in margin across the year.
Jack: We are also projecting relatively flat non-interest expense for 2024 versus 2023. Our spend in 2024 reflects the cost reductions from our fourth quarter realignment activities, offset by inflationary impacts experienced in recent years, and ongoing investments in strategic initiatives, namely Digital Banking, Technology, BAS, and Risk Oversight. These investments are expected to contribute to the positive operating leverage that we are modeling for 2024. We expect the 2024 effective tax rate to fall within a range of 14 to 16 percent, including the impact of the amortization of tax credit investments placed in service in recent years. We will continue to evaluate tax credit opportunities and the positive impact these investments would have on our effective tax rate. We expect full-year loan growth to be relatively modest, between 1 and 3 percent.
Marty Birmingham: Yes, what we saw in the fourth quarter was what we consider to be the bottom from a margin standpoint, and we're projecting modest expansion through 2024.
Marty Birmingham: Yeah.
Marty Birmingham: I appreciate that and then just lastly for me I heard the best deposits at $127 million at the end of the year, but could you discuss your expectations for new partnerships over the course of the year are you expecting to hold relatively steady in harvest your existing relationships or should we expect another big year for partnership growth.
Marty Birmingham: So we re blading is here, our chief banking officer, and I'll ask him to comment but in general.
Marty Birmingham: We are comfortable with.
Marty Birmingham: Five customers that we have.
Marty Birmingham: On boarded to our platform in.
Jack Plan: In light of whats happening in the industry regulatory feedback, we're very conscious to ensure that we've got the right governance around this business activity, the right management routines and making as Jack commented the right investments to support <unk>.
Jack Plan: Risk management and other technological.
Jack Plan: Initiatives that support this business. So we wanted to take a measured pace to ensure that we are doing it correctly and drive operational integrity.
Jack: This guidance is based on recent quarterly production and pipeline, and we remain focused on reserving balance sheet capacity for our most profitable business partners and realizing the corresponding benefit to our capital ratios. We also expect full year total deposit growth of between 1% and 3%. The growth will be focused on the non-public deposit category, which includes banking as a service, although we do expect continued disintermediation from lower cost, higher price deposit product types in 2024. We expect full year net charge-offs to be within our historic annual range of 30 to 40 basis points. Our overall focus remains on executing strategic initiatives that will improve profitability and operating leverage over time. We believe that achieving results in line with the guidance provided will drive these outcomes. That concludes my prepared remarks and updated guidance. I'll now turn the call back to Marty.
Jack Plan: And to the company, but please.
Jack Plan: Yes, good morning, Nick Thanks for the question.
Jack Plan: I think with our existing pipeline, we do expect.
Some of that deposit growth throughout the year. So as Marty noted, we would expect some growth in the pipeline through 2024, however, not at the pace of scale that we've seen over the past couple.
Jack Plan: A couple of quarters will really double down on our commitment to select those partners that are most financially advantageous and really align well with our operational readiness to execute as well as our risk appetite and.
Marty Birmingham: And strategy.
Marty Birmingham: Thank you for taking my questions.
Marty Birmingham: Thanks, Jack. We were off to a strong start in the first quarter and ready to maximize the benefits of the improvements we've made to our organizational structure and our balance sheet. With good momentum from 2023 carrying us into this year, our team remains focused on liquidity, capital, and earnings. Just as we have done, we will continue to evaluate our business for opportunities to protect and enhance these three key areas to drive long-term value for our shareholders. Before I conclude, I want to thank our five-star associates for all they did to contribute to our success in 2023 and all they will do in 2024 to take great care of our customers, communities, and shareholders.
Marty Birmingham: Okay.
Marty Birmingham: Thank you.
Marty Birmingham: We now had gaining 10 months from K B W.
Marty Birmingham: Hey, good morning, everyone I hope everybody is doing well today and thanks for taking my question.
Marty Birmingham: Just had a question on the deposit trends that we're seeing.
Marty Birmingham: Guys feel that the rotation out of non interest bearing.
Marty Birmingham: Into higher costing.
Marty Birmingham: Accounts has slowed or will be slowing here in the early part of 'twenty four would you expect that to continue throughout the year.
Jack: Hi, David This is Jack I'll take that question. So that's something that we obviously saw throughout the course of 2023.
And while we do expect that that is slowing and we we.
Unnamed Host: That concludes our prepared remarks. Operator, please open the call for questions. Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If, for any reason, you would like to remove that question, please press star followed by T. Again, to ask a question, please press star followed by 1.
Jack: We do expect to see that it will continue into 2024 and we've also from a cost standpoint expected the trajectory of our betas are slowing as we enter 2024 as well so it appears as though that.
Jack: Trend is expected to come to an end towards the end of.
Jack: Probably the third and fourth quarters next year.
Unnamed Host: We'll pause here briefly as questions are registered. We have the first question on the phone line from Nick Crutchdale from COVID. Hey, everyone. Good morning. Bye, Nick.
Jack: Got it okay. Thank you.
And then with regards to the guidance with credit and the.
How to look at like net charge offs for 2024.
Jack: As you try to back into an appropriate provision level is it fair to kind of model. The 30 to 40 basis points of net charge offs and then just kind of layer on top of that something for the loan growth.
Marty Birmingham: We're next. I just wanted to start on the loan growth. Can you provide some additional context for the 1% to 3% target for 2024? After double-digit growth in 2023, you alluded to some pipeline rebuild. Are you moderating growth given the funding and economic landscape? In general, Nick, we've been moderating growth in light of the economic landscape, and we've been doing that through a variety of tactics. We've been working with our lending teams to ensure that we've got adequate spreads in light of changes to our cost of funds at our company, as well as the general interest rate environment, as well as working with our customers and receiving feedback that they themselves are being more conservative in terms of taking on projects, whether it's in the CRE or our commercial industrial space. But on the specifics for how we built our plan for 2024, Jack, I'd ask Sure. Thanks, Marty.
Jack: And kind of have something in that maybe three $5 million to $4 million a quarter range.
Jack: Okay.
Jack Plan: I figure out appropriate measure for <unk>.
Jack Plan: Provisioning expectations is maintaining a coverage ratio of around 114 basis points with the loan growth estimate at 1% to 3% and then as you suggested the MTO from that 30 to 40 basis point range.
Jack Plan: Got it okay.
Jack Plan: <unk>.
Marty Birmingham: Great and then just to clarify you said on the fee income youre expecting that to be flat on a year over year basis.
Marty Birmingham: Is that on the reported no thats on your operator, so I think on the call it $44 million ish is a flat flat level.
Marty Birmingham: Yes.
Marty Birmingham: Great.
Marty Birmingham: Okay. That's all that I had thank you.
Jack: And thanks for the question, Nick. So one of the areas that we've been focusing on, I guess, as a mantra for the company, is liquidity, capital, and earnings. And to Marty's point, we're focusing more directly on full relationships, so those that come with deposits or expansion into our insurance or wealth management platforms, in addition to loan originations. So in that regard, we're backing away from transaction-only exposures, and in the event that one does come across, it would require sufficient pricing to clear our internal risk-adjusted return on capital hurdles. So what that translates to, and in tandem with what we're seeing in the market from a demand standpoint, is continued runoff of the indirect portfolio, largely flat to low single-digit growth in commercial real estate, and then continued low-digit – I would say mid-single-digit growth in the commercial real estate space. I appreciate the caller.
Marty Birmingham: You have the next question from Andy.
Marty Birmingham: Hello.
Sandler: Sandler Your line is now open.
Sandler: Hey, good morning.
Sandler: Hey, Alex.
Jack: Jack I appreciate all the guidance on the NIM I.
Jack: I guess on your outlook as it is now but can you just help clarify your expectations for how the balance sheet would react to a fed cut.
Yes, we did some modeling that was.
Jack Plan: Aligned with our expectations if the fed did cut as they intend to which is the three cuts that they've outlined in the dot plot and we're fairly neutral I think were showing about $500000 of interest income benefit under that scenario and the reasoning behind that is that it comes down to repricing in our time deposit portfolio and then <unk>.
Jack Plan: And the money market campaign that we launched.
Jack Plan: In the summer of last year, which did have guaranteed rate for a 12 month period. So those deposits would be.
Jack: And then, in terms of the margin, you mentioned the Fed. What are your assumptions with respect to rate cuts? From a budget point of view, the guidance that we provided assumes an interest rate environment. And when I look at what the market's expecting versus what the Fed's expecting, there's quite a wide range of estimates there. So I personally don't like to bet against the Fed. So if there are rate cuts, I would assume that they follow the Fed's dot plot with the three cuts that they've indicated in their most recent guidance.
Jack Plan: We expect it to start to come up on their 12 month guarantee maturity.
Jack Plan: July of 2024, which would align with that.
Jack Plan: Fed reduction so.
Jack Plan: Modest improvement in the current period or the current projection and then I would see expansion in 2025.
That's great color. Thanks, and then on the auto book is.
Jack Plan: Is that just fully in rundown complete mode. At this point or do you think that stabilizes at.
Jack Plan: At a certain percentage of the loan portfolio or a certain dollar level.
Jack: Okay, and then did I hear you correctly that, as it stands now, you assume an increasing margin across the year? Yes, what we saw in the fourth quarter was what we considered to be the bottom from a margin standpoint, and we're projecting modest expansion through 2024.
Jack Plan: That said we have been.
Jack Plan: Thoughtfully considering.
Jack Plan: The percentage of the overall loan portfolio in terms of our indirect book.
Jack Plan: This is just a reflection of some adjustments we've made the last year the exit of Pennsylvania.
Jack: And then, just lastly for me, I heard that Bass deposits deposits at $127 million at the end of the year. But could you discuss your expectations for new partnerships over the course of the year? You know, are you expecting to hold relatively steady and harvest your existing relationships?
Jack Plan: Consistent with trying to simplify the business and focus on our core upstate markets.
Jack Plan: Continuing to drive it forward in a way that is consistent with our plans relative to our budget and the market opportunities.
Jack Plan: So I think that will continue to moderate but be around $900 million Mark plus.
Or should we expect another big year for partnership growth? Reid Whiting is here, our Chief Banking Officer, and I'll ask him to comment. But in general, you know, we are comfortable with the five customers that we have onboarded to our platform. In light of what's happening in the industry and regulatory feedback, we're very conscious of ensuring that we've got the right governance around this business activity, the right management routines, and making, as Jack commented, the right investments to support risk management and other technological initiatives that support this business. So we want to take a measured pace to ensure that we are doing it correctly and drive operational integrity into the company. Yeah, good morning, Nick.
Jack Plan: Yes, Thats fair Mark the only thing I would have to add Alex is.
Jack Plan: We've had the ability to really test price elasticity in that platform over the course of the last 18 months and we've gotten to a level where the spreads that we're originating for new production that aligns with our ideal credit mix are are really good.
Alex: <unk> opportunities for us to expand the profitability in that line of business, but as we think about the big picture for the company and opportunities to improve tangible and regulatory capital we're comfortable with our approach for 2024, although that is a spec that we can adjust so to speak from a pricing standpoint, as we see the landscape unfolds in future periods.
Alex: Got it.
Thanks for the question. I think with our existing pipeline, we do expect some significant deposit growth throughout the year. So, as Marty noted, we would expect some growth in the pipeline through 2024. However, not at the pace or scale that we've seen over the past couple quarters.
Alex: Presumably there'll be some mix shift then commercial growth will be faster indirect continues to wind down a bit towards that 900 level.
Jack Plan: Does that I guess, what's the ACL like in the in the <unk>.
Jack Plan: Auto book versus the commercial and does that provide a little bit of relief on the on the provision.
We'll really double down on our commitment to select those partners that are most financially advantageous and really align well with our operational readiness to execute, as well as our risk appetite and strategy. Thank you for taking my questions. Thanks, Zach. Thank you. We now have Damon Delmont from KDW.
Jack Plan: So the ACR on the indirect book is a little bit higher and generally what you see in that portfolio.
Marty Birmingham: As the as the portfolio seasons, the credit performance becomes a little bit more pronounced as far as delinquencies are concerned.
Jack Plan: Are you wouldn't expect to see even even with a low tier credit or.
Jack Plan: Our level of delinquency in a short period of time, so with the seasoning of the portfolio Thats whats.
Jack Plan: Pushed up a little bit in the fourth quarter, and we expect that trend to continue at our current levels for.
Unnamed Host: Hey, good morning everyone. I hope everybody's doing well today and thanks for taking my question. I just had a question on the deposit trends that we're seeing. Do you guys feel that the rotation out of non-interest-bearing and into higher costing accounts has slowed or will be slowing here in the early part of 2024? Would you expect that to continue throughout the year? Hi David, this is Jack.
Jack Plan: At least the first nine months.
Jack Plan: 2024, but overall, it's layered into our overall NCO and provision guidance.
Jack Plan: That $3 billion per quarter ish of charge offs level.
Jack Plan: Yes, I think thats a good estimate.
Jack Plan: Okay, and then just as you kind of look at that.
Jack Plan: I know you just said sort of seasoning in the portfolio, but.
Jack Plan: It does seem like that level is higher than.
Jack: I'll take that question. So that's something that we obviously saw throughout the course of 2023. And while we do expect that that is slowing, and we do expect to see that it will continue into 2024, and we've also, from a cost standpoint, expected that the trajectory of our betas will slow as we enter 2024 as well. So it appears as though that trend is expected to come to an end towards the end of probably the third and fourth quarters of next year.
Jack Plan: Than historical standards based on the ranges you gave and whatnot is there any specific like sub segment of the indirect auto.
Jack Plan: The borrower thats kind of driving those higher losses that you can point to and is there a way to sort of ring fence those specific types of customers.
Jack Plan: So I think what we're experiencing in the current time is working through some vintage.
Jack Plan: Buckets production buckets that relate back to.
Speaker Change: <unk>, hi, stimulus period et cetera.
Jack: Okay. Thank you. And then with regard to the guidance with credit and the..., how to look at net charge-offs for 2024. As you try to back into an appropriate provision level, is it fair to kind of model the 30 to 40 base points of net charge-offs and then, you know, just kind of layer on top of that something for loan growth? and kind of, you know, have something in that maybe three and a half million and a quarter range. I think an appropriate measure for provisioning expectations is to maintain the coverage ratio of around 114 basis points with the loan growth estimate at 1 to 3 percent and then, as you suggested, the MCOs in that 30 to 40 basis point range. Okay.
And now we are overlaying economic headwinds and that has definitely impacted the performance of the portfolio, but we continue to ground the focus and origination of 70, 70% or above right now is in 700.
Jack Plan: <unk> credit score, our tier one bucket and 88% as tier one and two 680 and above so no changes, it's just kind of the idiosyncrasies of the last several years are working their way through.
Jack Plan: The portfolio and the fact that we are shrinking at those good credits are paying off faster than the.
Jack Plan: Slower credits.
Marty: Got it and then just final question for me Marty last quarter, I think you expressed some openness to exploring the idea of seeing what your insurance business was worth is that something thats still on the table and still being considered.
Jack: Great. And then just to clarify, you said on the fee income, you're expecting that to be flat on a year-over-year basis. Is that on the reported?
Jack: No, that's on your op rate. So it's like I'm like, call it 44 million-ish is the flat level. Yeah. Great. Okay, that's all that I have.
Marty Birmingham: It's consistent with my comments earlier in terms of liquidity capital and earnings and.
Marty Birmingham: We as a company remain open to that.
Jack Plan: Opportunity, we are aware of the transactions that have happened in <unk>.
Unnamed Host: Thank you. We have the next question from Alex Trow of Piper Sandler. Your line is now open. Hey, good morning.
Marty Birmingham: To the extent that it.
Marty Birmingham: It's something we can take advantage of.
Marty Birmingham: We will thoughtfully consider it.
Unnamed Host: Hey, y'all. Jack, I appreciate all the guidance on the NIM, and I guess on your outlook as it is now, but can you just help clarify your expectations for how the balance sheet would react to a Fed cut? Yeah, we did some modeling that was aligned with our expectations if the Fed did cut as they intended, which is the three cuts that they've outlined in the dot plot. And we're fairly neutral.
Marty Birmingham: I appreciate you taking my questions.
Marty Birmingham: Thanks, Alex.
Marty Birmingham: Your next question comes from Matthew Breese with Stephens, Inc.
Marty Birmingham: Please go ahead. Thank you.
Marty Birmingham: Good morning.
Matthew M. Breese: I was hoping we could start.
Matthew M. Breese: On the NIM outlook.
Matthew M. Breese: Good morning, guys.
Matthew M. Breese: And when do you expect deposit costs to peak in 2004, it sounds like the back half of the year type of event.
Jack: I think we were showing about $500,000 of interest income benefit under that scenario. And the reasoning behind that is that it comes down to repricing in our time deposit portfolio and then repricing in the money market campaign that we launched in the summer of last year, which did have a guaranteed rate for a 12-month period. So those deposits would be expected to start to come up on their 12-month guaranteed maturity in July of 2024, which would align with that Fed reduction. So modest improvement in the current period or the current projection, and then I would see expansion in 2025. That's a great color.
Matthew M. Breese: And then can you remind us of what percentage of loans reprice immediately.
Jack Plan: Sure. This is Jack I'll take that one from a cost of funds perspective.
Jack: Our modeling indicates that the cost of funds is expected to increase around 20 basis points from the fourth quarter of 2023 to the fourth quarter of 2024. However, when you look at the earning asset side of the portfolio. That's up approximately 40 basis points over that same period, which is contributing to the the modest margin expansion that were.
Jack: Guiding too.
Jack: And then on the.
Variable component of the portfolio I think it's around 33%.
Marty Birmingham: Thanks. And then on the auto book, is that just fully in rundown complete mode at this point? Or do you think that stabilizes that, you know, at a certain percentage of the loan portfolio or a certain dollar level? That's a question we've been thoughtfully considering: the percentage of the overall loan portfolio in terms of our indirect book. And this is just a reflection of some adjustments we've made in the last year.
Jack: Got it and could you just.
Jack: So additional color on what.
Jack: The blended new origination yields on loans versus what's rolling off or does that rollout versus roll off any of it.
Jack: I think we put a slide presentation that shows.
Jack: Roll off.
Jack: We have.
Jack: Expectations for 'twenty for the.
Jack: Let's say range anywhere from.
Jack: Six feet 300 basis points on a roll on basis over what's coming off depending on the portfolio.
Marty Birmingham: The exit from Pennsylvania, consistent with trying to simplify the business and focus on our core upstate markets and continuing to drive it forward in a way that's consistent with our plans relative to our budget and market opportunities. And so I think that will continue to moderate but be around the 900 million mark plus. Yeah, I think that's fair, Martin.
Jack: We ultimately didn't want a guide to our full.
Jack: Coupons that were putting on just limits on competitive pressures you might see in the commercial space.
Jack: Okay.
Jack: Okay.
Jack Plan: <unk> always be.
Jack Plan: The anticipated securities cash flow for the year.
Jack: The only thing I would have to add, Alex, is that we've had the ability to really test price elasticity in that platform over the course of the last 18 months, and we've gotten to a level where the spreads that were originating for new to production that aligns with our ideal credit mix are really great opportunities for us to expand the profitability in that line of business. But as we think about the big picture for the company and opportunities to improve tangible and regulatory capital, we're comfortable with our approach for 2024, although that is a spigot that we can adjust, so to speak, from a pricing standpoint as we see the landscape unfold in future periods. I got it.
Jack Plan: $150 million.
Jack Plan: Okay.
Jack Plan: Thank you last one I had was just on the commercial relationship to $13 6 million.
What type of loan was that was that.
Jack Plan: Office multifamily industrial.
Jack Plan: And then where was it wasn't in upstate New York or DC or one of your other geographies.
Jack Plan: Okay.
Marty Birmingham: It's upstate New York called the finger Lakes.
Marty Birmingham: A real unique small city, that's grounded by the headquarters of large Ivy League institution and another elite.
Jack: Presumably, there'll be some mixed shift then. Commercial grows a little bit faster, and indirect continues to wind down a bit towards that 900 level. Does that, I guess, tell you what the ACL is like in the auto book versus the commercial?
Marty Birmingham: College that calls at home.
Marty Birmingham: And we're very confident as a result of the unique characteristics of that.
Marty Birmingham: That the collateral values are solid.
Marty Birmingham: It's just the issues that we talked about with working through some short term issues here, but it was a light industrial loan that's tied to.
Jack: And does that provide a little bit of relief on the provision? So the ACL on the indirect book is a little bit higher, and generally, what you see in that portfolio is, as the portfolio seasons, the credit performance becomes a little bit more pronounced as far as delinquencies are concerned, or you wouldn't expect to see, even with a low-tier credit or a level of delinquency in a short period of So with the seasoning in the portfolio, that's what pushed up a little bit in the fourth quarter, and we expect that trend to continue at our current levels for at least the first nine months of 2024. But overall, it's layered into our overall NCO and provision guidance at like three million per quarter-ish of charge-offs.
Jack Plan: <unk> made.
Jack Plan: Major economic drivers of the community down there.
Jack Plan: Okay.
Jack Plan: And it is a club deal. So that's all I had we are not leaving it where it is.
Jack Plan: Okay.
Jack Plan: Oh interesting, what's the do you know what the overall, thanks battery sizes.
Jack Plan: I don't off the top of my head.
Okay I'll leave it there thank you very much.
Jack Plan: Yes.
Jack Plan: Thank you thanks Beth.
Jack Plan: I would like to hand, it back to Mr. Birmingham for any closing remarks.
Mr. Birmingham: Thanks, very much for your assistance this morning, operator and to those who attended the call. We look forward to building on this conversation with our second quarter results.
Jack: Yeah, I think that's a good estimate. Okay, and then, I mean, just as you kind of look at that, I mean, it's just, I know it's just sort of seasoning in the portfolio, but it does seem like that level is higher than, you know, than historical standards, you know, based on the ranges you gave and whatnot. Is there any specific subsegment of the indirect auto, you know, the borrower that's kind of driving those higher losses that you can point to, and is there a way to sort of ring fence those specific types of customers?
Marty Birmingham: Thank you all for joining I can confirm this does conclude today's conference call. You may now disconnect your lines.
Marty Birmingham: Thank you.
Marty Birmingham: [music].
Marty Birmingham: So I think, you know, what we're experiencing in the current time is working through some vintage, buckets, production buckets that relate back to, you know, pandemics, the high stimulus period, etc. And now we're overlaying economic headwinds, and that has definitely impacted the performance of the portfolio. But, you know, we continue to ground the focus on origination of 70% or above right now is in the 700-credit or tier one bucket, and 88% is tier one and two, 680 and above. So, no changes. It's just kind of the idiosyncrasies of the last several years are working their way through the portfolio, and the fact that we are shrinking it, you know, those good credits are paying off faster And then just a final question for me, Marty, last quarter I think you expressed some openness to exploring the idea of seeing what your insurance business was worth. Is that something that's still on the table and still being considered?
Marty Birmingham: It's consistent with my comments earlier in terms of liquidity, capital, and earnings, and I remain open to that opportunity. We're aware of the transactions that have happened, and to the extent that it's something we can take advantage of, we will thoughtfully consider it. Appreciate you taking my question. Thanks a lot. Your next question comes from Matthew Breese of Stephens Inc. Please go ahead when you're ready.
Unnamed Host: Good morning. I was hoping we could start on the NIM Outlook. Good morning, guys. Where and when do you expect deposit costs to peak in 24? It sounds like it's a back half of the year type event.
Jack: And then, can you remind us of what percentage of loans we price immediately? Sure. This is Jack.
Jack: I'll take that one. From a cost of funds perspective, our modeling indicates that the cost of funds is expected to increase around 20 basis points from the fourth quarter of 2023 to the fourth quarter of 2024. However, when you look at the earning asset side of the portfolio, that's up approximately 40 basis points over that same period, which is contributing to the modest margin expansion that we're guiding to. And then on the variable component of the portfolio, I think it's around 33%. Got it. And could you just give us some additional color on what... The Blended New Origination Yields are on loan versus what's rolling off. What is that roll-on versus roll-off, then, Anna? I think we put a slide in the presentation that shows Roloff, we have, and then expectations for 2024. The results, I would say, range anywhere from 60 to 300 basis points on a roll-on basis over what's coming off, depending on the portfolio.
Jack: We ultimately didn't want to guide to our full..., coupons that we're putting on just to limit some competitive pressures we might see in the commercial space. Okay, and what was the anticipated securities cash flow for the year? $150 million. Thank you. The last one I had was just on the commercial rate relationship, $13.6 million. What type of loan was that? Was that office, multifamily, or industrial? And then where was it? Was it in upstate New York or D.C. or one of your other geographies?
Marty Birmingham: It's upstate New York, called the Finger Lakes, a really unique, small city that's grounded by the headquarters of a large Ivy League institution and another elite college that calls it home, and we're very confident, as a result of the unique characteristics of that multi-stakeholder community, that the collateral values are solid. It's just the issues that we talked about with working through some short-term issues here. But it was a light industrial loan that's tied to one of the major economic drivers of the community down there, and it is a club deal, so that's all it had. We're not leading it. We're a participant as I said. Oh, interesting.
Marty Birmingham: What's the... Do you know what the overall... Thanks, Matt....herb size is?
Unnamed Host: I don't know off the top of my head. I'll leave it there. Thank you very much. Thank you. I would like to hand it back to Mr. Birmingham for any closing remarks. Thanks very much for your assistance this morning, Operator, and to those who attended the call; we look forward to building on this conversation with our second quarter results. Thank you all for joining us. I can confirm this does conclude today's conference call. You may now disconnect your lines, and please enjoy it. Thank you, Align.