Q1 2024 Financial Institutions Inc Earnings Call

Harry: Hello everyone, and welcome to the Financial Institutions Incorporated first quarter 2024 earnings call. My name is Harry, and I'll be your operator. If you'd like to ask a question during Q&A, you may do so by pressing star one on your telephone.

Hello, everyone and welcome to choose if not just institutions incorporated first quarter 2024 earnings call.

Name is Harry and I'll be your operator.

Harry: If you'd like to ask a question during Q&A you may do so by pressing star one on your telephone keypad.

Kate Croft: Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham, and CFO, Jack Plants. They will be joined by additional members of the company's finance and leadership teams during a 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 risks, uncertainties, and other factors. We refer you to yesterday's earnings release and investor presentation, as well as our 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.

Harry: I'll now hand over to Ken Krause to begin. Please go ahead.

Ken Krause: Thank you for joining us for today's call.

Ken Krause: Providing prepared comments will be president and CEO Mardi Burney CFO Jack will be joining.

Ken Krause: Joining me additional labor to the company's financial leadership teams during the question and answer session.

Speaker Change: 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 Brent certainties and other factors.

Speaker Change: Yesterday's earnings release, and Investor presentation, as well as historical SEC filings, which are available on our Investor Relations website for Safe Harbor description and a detailed discussion of the risk factors relating to forward looking statements.

Kate Croft: 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 Form A-K, or in our investor relations presentation available on our IR website, www.fisi-investors.com. Please note this call includes information that may only be accurate as of today's date, April 26, 2024. I'll now turn the call over to President and CEO, Marty Birmingham.

Speaker Change: Well as certain non-GAAP financial measures intended to supplement and not skewed.

Speaker Change: For comparable GAAP measures.

Speaker Change: Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to a form 8-K oar in our Investor relations presentation available on our IR website, Www Dot ISI dash investors dotcom.

Speaker Change: Please note. This call includes information that may only be accurate as of today's date April 26 2024.

Speaker Change: I'll now turn the call over to President and CEO Marty Birmingham.

Martin K. Birmingham: Thank you, Kate. Good morning, everyone, and thank you for joining us today. Heading into 2024, we knew that the challenging operating environment would persist. In the fourth quarter, you'll recall, we took steps to optimize the configuration of our balance sheet and completed a strategic reorganization to enhance the earnings potential of the company while positioning us for sustained incremental performance in the future. Given the broad event we experienced, we could never have imagined the intensity of the challenges we have faced and vigorously managed in the last several weeks.

Martin K. Birmingham: Thank you Kate.

Martin K. Birmingham: Good morning, everyone and thank you for joining us today.

Martin K. Birmingham: Heading into 2024, we knew that the challenging operating environment would persist in the fourth quarter, you'll recall, we took steps to optimize the configuration of our balance sheet.

Martin K. Birmingham: The strategic Merit of organization to enhance the earnings potential of the company, while positioning us for sustained him from outperformance in the future.

Martin K. Birmingham: Given the broad event, we experience we never could have imagined the intensity of the challenges we have faced and vigorously manage the last several weeks.

Martin K. Birmingham: As previously disclosed, in early March 2024, we discovered fraudulent activity conducted by an in-market, deposit-only five-star bank business customer that resulted in an $18.4 million deposit-related charge-off in the first quarter. This has been broken out in our income statement from other expenses. The charge is modestly lower than the $18.9 million potential exposure we originally estimated, reflecting funds recouped in late March. We are actively pursuing all legal recourses available to us to recover additional funds from the customer and minimize this loss.

Martin K. Birmingham: As previously disclosed in early March 2024, we discovered fraudulent activity conducted by in market deposit of only five star Bank business customer.

Martin K. Birmingham: And the $18 4 million deposit related charge offs in the first quarter.

Martin K. Birmingham: This has been broken out in our income statements for other expenses.

Martin K. Birmingham: The charge was modestly lower than the $18 9 million potential exposure, we originally estimated.

Martin K. Birmingham: Reflecting upon free cooked in late March.

We are actively pursuing all legal recourse available to us to recover additional funds from the customer and minimize this loss.

Martin K. Birmingham: This event certainly had a significant impact on our otherwise solid first quarter 2024 financial results, with the associated pre-tax fraud loss and elevated legal and consulting expenses totaling approximately $19 million, as we recognize this loss in the first quarter. Net income available to common shareholders was $1.7 million, or $0.11 per diluted share, compared to $9.4 million, or $0.61 per share in the late fourth quarter, and $11.7 million, or $0.76 per share in the first quarter of 2023. We report an annualized return on average assets of 13 basis points and an efficiency ratio of approximately 106%. Excluding the impact of expenses related to this product.

Martin K. Birmingham: This event certainly had a significant impact on our otherwise solid first quarter of 2024 financial results with the associated pre tax fraud loss and elevated legal and consulting expenses totaling approximately $19 million.

Martin K. Birmingham: As we recognize this loss in the first quarter.

Martin K. Birmingham: Net income available to common shareholders was one 7 million.

Martin K. Birmingham: <unk> 11 per diluted share compared to $9 4 million or 61 cents per share in the linked fourth quarter, and 11 7 million or <unk> 76 per share in the first quarter 2023.

Martin K. Birmingham: We reported annualized return on average assets of 13 basis points and an efficiency ratio of approximately 106%.

Martin K. Birmingham: Excluding the impact of expenses related to this product that the company would have reported.

Martin K. Birmingham: [inaudible] 2012 Earnings for Duluth Chair, ROA of 1.14%, and an efficiency ratio of approximately 69, even as we navigated this matter. We remain focused on strategic action to enhance liquidity, capital, and earnings. On April 1st, we announced and closed the sale of the assets of our insurance subsidiary, FDM Insurance Agency, to NFP Property and Casualty Services, a leading property and casualty broker and benefits consultant.

Martin K. Birmingham: The <unk> 12 of earnings per diluted share.

Martin K. Birmingham: ROA of 114%.

Martin K. Birmingham: And an efficiency ratio of approximately 69%.

Martin K. Birmingham: Even as we navigated this matter.

Martin K. Birmingham: We remain focused on strategic actions to enhance liquidity capital and earnings.

Martin K. Birmingham: On April <unk>, we announced and closed the sale of the assets of our insurance subsidiary SDN Insurance agency to NSP property and casualty services.

Martin K. Birmingham: Leaving property casualty broker and benefits consultant.

Martin K. Birmingham: In addition to having a meaningful contribution over all that income, the sale occurred at an opportune time when this line of business was generating what we believe was a peak EBITDA margin. 27 Money in all cash transactions represents four times 2023 insurance revenue and approximately 10 times our. This transaction allowed us to capture strong value in this business, generating a gain of approximately $11.2 million on an after-tax basis, prior to selling costs, while also eliminating $11.3 million of goodwill and other intangible assets.

Martin K. Birmingham: In addition to having a meaningful contribution overall net heiko.

Martin K. Birmingham: Sal occurred an opportune time when this line of business was generating what we believe was a peak EBITDA margin.

Martin K. Birmingham: The $27 million all cash transaction represents four times 2020 is really insurance revenue and approximately 10 times earnings.

Martin K. Birmingham: This transaction allowed us to capture strong value premium in this business generated a gain of approximately $11 2 million on an after tax basis prior salary costs.

Martin K. Birmingham: I'll also eliminating $11 3 million goodwill and other intangible assets.

Martin K. Birmingham: Importantly, the transaction provides at least 40 basis points of incremental regulatory capital. It positively impacts our TCE ratio by more than 30 basis points, which will be reflected in the second quarter results. We were pleased to have the opportunity to source capital at a time when it is needed in such an efficient shareholder-friendly manner. It's been 10 years since we acquired SDN, which supported revenue diversification and allowed us to expand the capabilities and services we provide our customers.

Martin K. Birmingham: Importantly, the transaction provides at least 40 basis points of incremental regulatory capital positively impacts our TCE ratio by more than 30 basis points, which will be reflected in second quarter results.

Martin K. Birmingham: We were pleased to have the opportunity to source capital at a time when it is needed.

Martin K. Birmingham: Such an efficient shareholder friendly manner.

Martin K. Birmingham: The 10 years since we acquired SD AD supported revenue diversification has allowed us to expand the capabilities and services, we provide our customers.

Martin K. Birmingham: We enhanced our former insurance subsidiary through bolt-on acquisitions into the Buffalo and Rochester markets and helped it grow into a leading insurance agency serving Western New York and clients nationally. We evaluated potential buyers for this business. NFP's offer was compelling both financially and in terms of its vision for SDN's future, in continued collaboration with our five-star main team.

Martin K. Birmingham: We enhanced our former insurance subsidiaries through bolt on acquisitions in the Buffalo and Rochester markets and help them grow into a leading insurance agency, serving Western New York and clients nationally.

Martin K. Birmingham: We evaluated as potential buyers for this business.

Martin K. Birmingham: Nse's offer what's compelling both financially and in terms of its vision for <unk> future and continued collaboration with our five Star Bank team.

Martin K. Birmingham: Looking forward, NFP will be the bank's insurance partner of choice, ensuring our customers have continued access to exceptional insurance counsel, products, and services. We expect to deploy proceeds from the sale into our core banking business in the form of high-quality, credit-disciplined loan origination to drive higher-yielding earning asset growth and support net interest margin expansion through the year. We continue to expect that our 40-year-long growth will be driven by a commercial lending loop that operates across western and central New York and our Mid-Atlantic region.

Looking forward <unk>.

Martin K. Birmingham: <unk> will be the banks insurance partners choice, ensuring our customers have continued access to exceptional insurance council products and services.

Martin K. Birmingham: We expect to deploy proceeds from the sale into our core banking business in the form of high quality credit disciplined loan origination to drive higher yielding earning asset growth and support net interest margin expansion through the year.

Martin K. Birmingham: We continue to expect that our full year loan growth will be driven by our commercial lending.

Martin K. Birmingham: Which operates across western and Central New York, and our mid Atlantic region in.

Martin K. Birmingham: In the first quarter, growth in this portfolio was offset by anticipated declines in our indirect auto segment as we continue to enhance the profitability of this line of business while benefiting from the steady cash flow it provides. However, total loan balances were relatively flat at the end of 2023, down $20 million or 50 days. We have solid pipelines and have closed several notable commercial deals so far in the second quarter. Credit quality remains strong and stable in the first quarter, with non-performing loans and total loans of 60 basis points until March 31, 2024 and December 31, 2023.

Martin K. Birmingham: In the first quarter growth in this portfolio was offset by anticipated declines in our indirect auto segment as we continue to enhance the profitability of this line of business, while benefiting from the steady cash flow provides.

Martin K. Birmingham: While total loan balances were relatively flat to the end of 2023 down $20 million or 50 basis points.

Martin K. Birmingham: We have solid pipelines and have closed several notable commercial deals so far in the second quarter.

Martin K. Birmingham: Credit quality remained strong and stable in the first quarter with nonperforming loans to total loans was 60 basis points a slow March 31, 2024 and December 31 2023.

Martin K. Birmingham: Annualized net charge-offs to average loans were 28 basis points in the current quarter, an improvement of 10 basis points from the fourth quarter. While we have seen higher charge-off rates in our indirect portfolio in the last few quarters, a trend that continued into the first quarter of 2024, we saw positive trends in overall indirect latencies during the first quarter of 2024. For example, total delinquencies, including non-accruals, declined by more than $12 million during the first three months of the year to 1.24% on March 31. Essentially, half of the 2.53% we saw on December 31, 2023.

Martin K. Birmingham: Net charge offs to average loans were 28 basis points in the current quarter.

Martin K. Birmingham: Movement of 10 basis points from the fourth quarter.

Martin K. Birmingham: While we are seeing higher charge off rates in our indirect portfolio the last few quarters.

Martin K. Birmingham: And that continued into the first quarter of 2020 floor, we saw positive trends in overall indirectly since during the quarter. As an example, total delinquencies, including non accruals declined by more than $12 million. During the first three months of the year and $1 two 4% March 31.

Martin K. Birmingham: Essentially half of the $2 five 3% you saw at December 31, 2023.

Martin K. Birmingham: Overall, we remain confident in the health of our loan portfolio and associated asset quality measures. Deposit growth was a highlight for our first quarter performance, with bounces up 183.8 million, or 3.5% from year-end 2023. While seasonality of public deposits was the main driver of this increase, we experienced growth of non-public and reciprocal deposits as well.

Martin K. Birmingham: Overall, we remain confident in the health of our loan portfolio and associated with asset quality metrics.

Deposit growth was a highlight for our first quarter performance with balances up $183 8 million or three 5% from year end 2023.

Martin K. Birmingham: While seasonality in public deposits was the main driver of this increase we experienced growth of nonpublic reciprocal deposits as well.

Martin K. Birmingham: Banking as a Service or BAS related deposits were down modestly from the end of 2023 to approximately $116 billion, reflecting normal fluctuation within end-user accounts. We remain energized by the opportunity this line of business presents, while mindful of the challenges others in this space have experienced. As we have stated in the past, our approach to BAS has been measured, deliberately aligned with our Organizational Risk Appetite Statement, and focused on select partners serving small and mid-sized businesses, affinity groups, and niche barks.

Martin K. Birmingham: Thank you you as a service or Bath related deposits were down modestly from the end of 2023 to approximately $160 million.

Martin K. Birmingham: Selecting normal fluctuation within end user accounts.

Martin K. Birmingham: We remain energized about the opportunity. This line of business presents while mindful of the challenges others in this space of experience.

Martin K. Birmingham: As we have stated in the past our approach the past has been matrix deliberately alive with our organizational risk appetite statement and focused on select partners, serving small and midsized businesses.

Martin K. Birmingham: The entity groups in niche markets.

Martin K. Birmingham: Our risk-adjusted process for evaluating BASC partners, coupled with a controlled approach to transitioning them onto our platform, has resulted in modest but sustainable growth in this line of business and a reduction in our partnership pipeline. We deem this prudent and are currently focused on cultivating strong and lasting partnerships. 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 guide. Thank you, Marty. Good morning, everyone.

Martin K. Birmingham: Our risk adjusted process for evaluating bass partners, coupled with a controlled approach to transitioning them onto our platform.

Martin K. Birmingham: It resulted in modest but sustainable growth in this line of business and a reduction in our partnership pipeline.

Martin K. Birmingham: We gave this prudent and are currently focused on cultivating strong lasting partnerships.

Martin K. Birmingham: 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: Thank you Marty good morning, everyone.

William Jack Plants: That interest income of $40.1 million for the first quarter was up $196,000 for the fourth quarter of 2023. Interest-Earning Asset Yields Increased 11 Base, in line with overall cost of funds, reflective of the impact of the continued high interest rate environment, the inward yield curve, and strong competition in our markets. Margin has stabilized, and we reported MIM on a fully taxable equivalent basis of 278 basis points for both the current and linked corridors. Margin increased incrementally on a monthly basis in the first quarter.

Jack: Net interest income of $40 1 million for the first quarter was up 196000 for the fourth quarter of 2023.

Jack: Interest, earning asset yields increased 11 basis points in line with overall cost of funds reflective of the impact of the continued high interest rate environment.

Jack: The inverted yield curve, it's strong competition in our markets.

Jack: Margin has stabilized and we reported NIM on a fully taxable equivalent basis of 278 basis points for both the current and linked quarters.

Jack: Margin increased incrementally on a monthly basis in the first quarter.

William Jack Plants: Given our $1.1 billion in anticipated cash flow in 2024, we have ample opportunity to redeploy funds into higher-yielding earning assets. In looking at our total deposit portfolio, relative to the magnitude of FOMC rate increases that occurred in 2022 and 2023, we have experienced a cycle today beta of 46%. Excluding the cost of time deposits, the non-maturity deposit portfolio had a beta of 28.

Jack: Given our $1 1 billion and anticipated cash flow in 2024.

Jack: We have ample opportunity to redeploy funds, the higher yielding earning assets.

Jack: And looking at our total deposit portfolio relative to the magnitude of FMC rate increases that occurred in 2022 and 2023.

Jack: We have experienced a cycle to date beta.

Jack: 46%.

Jack: Excluding the cost of time deposits the non maturity deposit portfolio had a beta of 28%.

William Jack Plants: Given FOMC expectations and internal modeling, we expect the trajectory of deposit betas to slow in 2026. Non-interest income totaled $10.9 million in the first quarter, down $4.5 million on a length of quarter basis. This variance was largely driven by lower company-owned life insurance, or COLE, income in the current quarter. As you recall, we reported $9.1 million of COLE income in the fourth quarter, of which approximately $8 million related to a higher crediting rate on the investment of the premium into a separate account product during that period.

Jack: Given <unk> expectations and internal modeling, we expect the trajectory of deposit betas slow 2024.

Jack: Noninterest income totaled $10 9 million in the first quarter down $4 5 million on a linked quarter basis.

Jack: This variance was largely driven by lower company owned life insurance or coli income in the current quarter.

Jack: As Youll recall, we reported $9 $1 million of core income in the fourth quarter of which approximately $8 million related to a higher crediting rate on the investment of the premium two separate account product during that period.

William Jack Plants: As expected, incremental income associated with cash-strainer value, those policies, and the stable value component has stabilized, and it's reflected in our first quarter of 2024 results. In the linked fourth quarter, we also reported a $3.6 million loss on investment securities related to the repositioning we completed in October, which, along with seasonally higher insurance income in the quarter, partially offset the full income variance between periods. Investment Advisory, Inc. Largely driven by career capital, our RIA subsidiary serving mass affluent and high net worth individuals and families. Institutional Clients, and 401k Plan Sponsors, were down about 87,000 from the late quarter.

As expected incremental income associated with cash surrender value those policies stable value component has stabilized and is reflected in our first quarter of 2024 results.

Jack: And the linked fourth quarter, we also reported a $3 $6 million loss on investment securities related to the repositioning we completed in October.

Jack: Along with seasonally higher insurance income in the quarter, partially offset the coli income variance between periods.

Jack: Investment advisory income.

Jack: Largely driven by Courier capital Ria's subsidiary, serving mass affluent and high net worth individuals and families institutional clients and four one K plan sponsors.

Jack: It was down about 87.

Jack: Linked quarter.

William Jack Plants: As of March 31, 2024, Courier Capital had assets under management of approximately $3 billion. As Marty noted, increased non-interest expense was primarily attributable to the fraud event we experienced in March of 2024, including an $18.4 billion deposit related fraud charge off and approximately $660,000 in related legal and consulting expenses. Excluding these two items, non-interest expense would have been flat for the linked forecourt.

Jack: As of March 31, 2020 for Courier capital had assets under management of approximately $3 billion.

Jack: As Marty noted increased noninterest expense was primarily attributable to the fraud that we experienced in March 2024.

Jack: At $18 4 billion deposit related fraud charge off approximately 660000 related to legal and consulting expenses.

Jack: Excluding these two items noninterest expense would have been flat with the linked fourth quarter.

William Jack Plants: We recorded a benefit for credit losses this quarter, as a decrease in qualitative factors, coupled with an improvement in forecasted loan losses and a decrease in consumer indirect loans, resulted in a reserve. We've provided additional details on slide 19 of our investor presentation, but I'd like to touch on a couple of the contributing factors. The primary driver of the improved qualitative factor in our model was the lower level of consumer indirect delinquencies relative to year-end 2023.

Jack: We recorded a benefit for credit losses this quarter.

Jack: Decrease in qualitative factors, coupled with an improvement in forecasted book losses, and a decrease in consumer indirect loans resulted in a reserve release.

Jack: We've provided additional details on slide 19 of our Investor presentation.

Speaker Change: I'd like to touch on a couple of the contributing factors here.

The primary driver of the improved qualitative factor in our model with the lower level of consumer direct delinquencies relative to year end 2023.

William Jack Plants: This qualitative factor for trends and delinquencies is purely quantitative in nature and corresponds to the range of delinquencies in the portfolio over the look-back period since 2006. We also saw improved commercial delinquencies and observed favorable trends in our commercial credit review and administration functions. Income tax expense was $356,000.25, representing an effective tax rate of 14.7%.

Speaker Change: This qualitative factor for trends in delinquencies is purely quantitative in nature and corresponds to a range of delinquencies in the portfolio over the look back period since 2006.

We also saw improved commercial delinquencies and observed favorable trends in our commercial credit review and administration functions.

Speaker Change: Income tax expense was 356000 in the quarter, representing an effective tax rate was 14, 7%.

William Jack Plants: Our accumulated other comprehensive loss was $126.3 million on March 31, 2024, compared to $119.9 million on December 31, 2023. We reported a TCE ratio at March 31st of 5.72%. Tangible common book value per share was $23.60. Excluding the AOCI impact, the TCE ratio and tangible common book value per share would have been 7.53% and $30.37, respectively.

Speaker Change: Our accumulated other comprehensive loss was $126 3 million at March 31, 2024.

Speaker Change: <unk> to $119 9 million at December 31, 2023.

Speaker Change: We reported a TCE ratio at March 31% to 572%.

Speaker Change: <unk> common book value per share of $23.06.

Speaker Change: Excluding the OCI impact the TCE ratio and tangible common book value per share would have been 753% and $30 37, respectively.

William Jack Plants: We continue to expect these metrics to return to more normalized levels over time, given the high credit quality and cash flow nature of our investment portfolio. I would now like to provide an update on our outlook for the remainder of 2024 in key areas. Following our April 1st, 2024 insurance transaction, we now expect recurring non-interest income between $8.5 and $9 million per quarter, for $36.5 to $38 million for the full year. This guidance excludes income related to investment tax credits, limited partnerships, and gains or losses on investment securities and assets, including the FDM sale.

Speaker Change: We continue to expect these metrics to return to more normalized levels over time, given the high credit quality of cash flow nature of our industrial portfolio.

Speaker Change: I would now like to provide an update on our outlook for the remainder of 2024 key areas.

Speaker Change: Following our April one 2020 for insurance transaction, we now expect recurring noninterest income between $8 $90 million per quarter or.

Speaker Change: Or 36 $5 million to $38 million for the full year.

Speaker Change: This guidance excludes income related to investment tax credits limited partnerships and gains or losses on investment securities and assets, including the Sps sale.

William Jack Plants: We're now projecting non-interest expense of $33 to $34 million per quarter for the remainder of 2024, again reflecting the sale of SBI. This translates to a full year non-interest expense of $135 to $136 million, excluding the $19 million of expense related to the fraud event recognized in the first quarter.

Speaker Change: We're now projecting noninterest expense of $33 million to $34 million per quarter for the remainder of 2024 again, reflecting the sale of STI.

Speaker Change: This translates to full year noninterest expense of $135 million to $136 million, excluding the $19 million of expense.

Speaker Change: So the fraud of that recognized in the first quarter.

William Jack Plants: We now expect the 2024 effective tax rate to fall within a range of 13 to 15%, including the impact of the fraud event in the first quarter, the SDM sale in the second quarter, and 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 credit. Our previous guidance on loan and deposit growth of between 1 to 3 percent, net interest margin of between 285 to 295 basis points, and full year net charge-offs within our annual historical range of 30 to 40 basis points remains unchanged.

Speaker Change: We now expect the 2024 effective tax rate to fall within the range of 13% to 15%.

Excluding the impact of the fraud event in the first quarter.

Speaker Change: <unk> sales in the second quarter and the amortization of tax credit investments placed in service in recent years.

Speaker Change: We will continue to evaluate tax credit opportunities and the positive impact that these investments would have on our effective tax rate.

Speaker Change: Our previous guidance on loan and deposit growth of between 1% to 3% net interest margin of between 285 to 295 basis points full year net charge offs within our annual historical range of 30 to 40 basis points remain unchanged.

William Jack Plants: Overall, our company remains in a strong financial position. We continue to be well capitalized and maintain a steady level of regulatory capital during the first quarter, despite the challenges we face, reporting a common equity Tier 1 ratio of 9.43% consistent with year-end 2023. Our liquidity position is among the strongest we've seen, approaching one and a half billion dollars, and our 12-month anticipated cash flow continues to exceed $1 billion, putting us in a strong position to continue to support our customers and communities. That concludes my prior remarks and updated guidance. I'll now turn the call back to Marty. Thank you, Jack.

Speaker Change: Overall, our company remains in a strong financial position.

Speaker Change: We continue to be well capitalized and maintain a steady level of regulatory capital during the first quarter. Despite the challenges we face.

Speaker Change: Reporting our common equity tier one ratio 943%.

Year end 2023.

Speaker Change: Our liquidity position is among the strongest we've seen.

Speaker Change: <unk>, one 5 billion.

Speaker Change: And our 12 month anticipated cash flow continues to exceed $1 billion.

I can answer in a strong position to continue to support our customers and communities.

Speaker Change: That concludes my prepared remarks updated guidance I'll now turn the call back to Marty.

Thank you Jack.

Martin K. Birmingham: As challenging as the first quarter was, I'm very proud of our team for not allowing adversity to distract us from our focus of running the business, delivering on our objectives and executing on longer-term initiatives. The second quarter is off to a strong start with the successful divestiture of our insurance subsidiary, supporting our capital ratios and earnings potential. Our pipelines are healthy, and we remain focused on our core banking business and on nurturing strong customer relationships in order to sustain and grow our deposits. Credit Discipline and Loan Growth has been and continues to be a fundamental focus of our retail, commercial, credit delivery, and risk association. That concludes our prepared remarks. Operator, please open the call for questions.

Martin K. Birmingham: As challenging as the first quarter was very proud of our team for not allowing adversity to distract us from our focus on running the business delivering on our objectives and executing on longer term initiatives.

Martin K. Birmingham: The second quarter is off to a strong start successful divestiture of our insurance subsidiary supporting our capital ratios and earnings potential our.

Martin K. Birmingham: Our pipelines are healthy and we remain focused on our core banking business and nurturing strong customer relationships in order to sustain and grow our deposit base.

Credit discipline loan growth has been and continues to be a fundamental focus of our retail commercial credit delivery and risk associates.

Speaker Change: That concludes our prepared remarks, operator, please open the call for questions.

Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two.

Speaker Change: Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now.

Speaker Change: You changed your mind, Please press star followed by two.

Operator: And when preparing to ask a question, please ensure that your phone is unmuted locally. Our first question today is from the line of Damon DelMonte of KBW. Damon, your line is open now if you'd like to proceed.

Speaker Change: When preparing to ask a question. Please ensure that you'll find is unmatched it locally.

Speaker Change: Our first question today is from the line of Damon Delmonte with <unk> Diamond. Your line is open now if you'd like to proceed.

Damon Paul DelMonte: Hi, good morning. Thanks for taking my question. So, just curious, you know, with regard to the provision reversal this quarter, I understand there's a combination of factors that were provided in the release that support the reversal, but I was just wondering what would have been the harm to kind of maintain a higher loan loss reserve, especially where we are in the cycle with credit trends today? You know, it looks like...

Damon Paul DelMonte: Hi, good morning, Thanks for taking my question.

Damon Paul DelMonte: So just curious you know with regards to the provision reversal. This quarter you know I understand there is a combination of factors that were provided in the release that support the reversal, but I was just wondering what would've been the harm to kind of maintain a higher loan loss reserve, especially where we are in the cycle with credit trends today.

Damon Paul DelMonte: Looks like the reserve now at 97 basis points is effectively kind of a round trip that they werent seasonal level.

Damon Paul DelMonte: So just curious as to what the hardwood have been to kind of keep the reserve a little bit higher and be a little bit more conservative.

Martin K. Birmingham: Damon, it's Marty. Thanks for the question. It's an important topic, I think, for the industry right now. There's dissonance relative to some of these reserve releases and, you know, to your point, what we think could happen relative to the economy and other, you know, challenges to credit, et cetera. You know, obviously, all these CISO models were built at a time when interest rates were zero to 25 basis points on a Fed funds basis.

Damon Paul DelMonte: Damian it's Marty thanks for the question.

Damian: It's an important topic I think for the industry right now theres dissidents relative to some of these reserve releases and to your point what.

Damian: We think could happen relative to the economy and other.

Speaker Change: The challenges to credit et cetera.

Speaker Change: We obviously.

Speaker Change: All of these see some models were built at a time when interest rates were.

Speaker Change: Zero to 25 basis points on the fed funds basis.

Martin K. Birmingham: We've not, you know, felt the impact of the velocity of interest rate increases. Obviously, the credit events that we've been talking about in the industry and in the financial press for the last 18 months didn't exist. So, we are, you know, thinking about that and the model and the times that we are in today versus when it was built and adopted in the late 19th and early 20th centuries and exploring other factors that would have acceptable statistical attribution in terms of predicting future credit losses. But, Jack, you started to think about that. Sure.

Speaker Change: Yes.

Speaker Change: The impact of the velocity of interest rate increases obviously, the credit events that we've been talking about in the industry and then the financial press for the last 18 months they didn't exist. So.

Speaker Change: We are.

Speaker Change: Thinking about that in the model.

Speaker Change: At the times that we're in today versus when it was built and adopted in the late 19 in early 'twenty.

Speaker Change: We're exploring other factors that.

Speaker Change: What have.

Speaker Change: Acceptable.

Speaker Change: Statistical attribution in terms of predicting future credit losses, but Jack you started to think about that sure. So David let me start by saying that our coverage ratio of 97 basis points.

William Jack Plants: So, Damon, let me start by saying that a coverage ratio of 97 basis points is comfortable with that given the credit performance of our portfolio. When I look back to the third and fourth quarters last year when we were building reserves, it was driven by one of the qualitative drivers of our CECL model that's quantitatively driven, and that's the delinquency on our indirect portfolio, which started to increase. And as a result, we saw higher net charge-offs in the indirect portfolio in the fourth quarter of 23 and again in the first quarter of this year.

Jack: I'm comfortable with that given the credit performance of our portfolio.

Jack: When I look back to the third and fourth quarter last year. When we were building reserves. It was driven by one of our qualitative drivers of our FIFA model with quantitatively driven and that's the total.

Speaker Change: With me on our indirect portfolio, which started to increase.

Speaker Change: We saw higher net charge offs in the indirect portfolio in the fourth quarter of 'twenty, three and again in the first quarter of this year. However, during the first quarter, we saw delinquencies basically 50% of what they were during the fourth quarter of last year, which is the leading indicator of future charge offs from that portfolio. So.

William Jack Plants: However, during the first quarter, we saw delinquencies at basically 50% of what they were during the fourth quarter of last year, which is a leading indicator of future charge-offs in that portfolio. So, given that performance and the quantitative factors around it, that drove the majority of our reserve release there.

Speaker Change: Given that performance in the quantitative factor around it.

Speaker Change: That drove the majority of our reserve release there.

Speaker Change: Okay.

William Jack Plants: Got it. Okay. And there's no concern that if rates stay higher for longer, and there's more stress on the consumer, that the indirect portfolio could experience some weakness.

Speaker Change: With the underlying performance of that portfolio basically comfortable with our current coverage ratio.

Got it Okay and then.

Speaker Change: There is.

Speaker Change: No concern that if rates stayed higher for longer and there's more stress on the consumer that that indirect portfolio could experience some weakness.

William Jack Plants: We saw weakness in the portfolio through net charge-offs in the fourth and first quarter of this year. That was driven by a slug of loans that had been originated during the pandemic when consumers were flushed with liquidity from government stimulus programs. We're working through that, given the current delinquencies on the portfolio.

Speaker Change: We thought we saw weakness in the portfolio through net charge offs in the fourth and first quarter of this year that was driven by.

Speaker Change: A slug of loans originated during the pandemic when consumers were flushed with liquidity from government stimulus programs, we're working through that.

Given the current delinquencies on the portfolio.

William Jack Plants: Okay, great, thank you. And then just one other question here on the margin, which came in at 278 this quarter. Do you happen to have what the margin was for the month of March?

Speaker Change: Expect to see some improved performance in that line of business.

Speaker Change: Okay, great. Thank you and then just one other question here on the margin.

Speaker Change: It came in at $2 78, this quarter do you happen to have what the margin was for the month of March.

William Jack Plants: Yeah, it was 280 basis points. Okay.

Speaker Change: Yes, it was 280 basis points.

Damon Paul DelMonte: Okay, great. Okay, that's all I have for now. Thanks.

Speaker Change: Okay great.

Speaker Change: That's all that I had for now thanks.

Speaker Change: David.

Operator: Thank you. And as a reminder, if you'd like to ask a question, please dial star 1 on your telephone keypad now. That's star 1 on your telephone keypad for any further questions. Our next question is from the line of Beda Hejela on Piper Sandler. Beda, your line is now open, please go ahead.

David: Thank you and as a reminder, if you'd like to ask a question. Please dial star one on your telephone keypad now.

Thats Star one on your telephone keypad for any further questions.

David: Our next question is from the line of Sheila of Piper Sandler. Your line is now open. Please go ahead.

Operator: Hey, good morning, guys. I'm just filling in for Alex today. Unknown Speaker. Thank you. Thank you.

Hey, good morning, guys just filling in for Alex today.

David: Peter.

Sheila: I just wanted to ask about the NIM guidance, you guys guided to $2 85 to $2 95 for the year.

Beda Hejela: I just wanted to ask about the NIMG guidance. You guys guide it to 285 to 295 for the year. Could you just walk us through the drivers of what would have to go right for it to hit the top end of the range, you know, 295 and vice versa to 285 throughout the year? Sure.

Sheila: Could you just walk us through the drivers of what would have to go right for it to hit the top end of the range of 295 and vice versa.

Sheila: $2 85 throughout the year.

Speaker Change: Sure a lot of what's driving that cash flow is coming off the portfolio with really tempered loan growth in that 1% to 3% range. So we're seeing.

William Jack Plants: Sure, so a lot of what's driving that is the cash flows coming off the portfolio with really tempered loan growth in that 1% to 3% range. So we're seeing the roll-on yields in our commercial book come on, you know, 8% or higher, which is exceeding the cash flows coming off the portfolio. So that's driving the modest expansion that we're forecasting. We're also including, you know, a modest amount of, you know, increased beta in the deposit book, just given the higher rate environment.

Speaker Change: Worldwide yields in our commercial book come on 8% or higher which is exceeding the cash flow coming off the portfolio. So thats driving the modest expansion that we're forecasting we're also including.

Speaker Change: Modest amount of.

Increased data and the deposit book, just given the higher rate environment. However, we think that that's at a much lower level than what we had experienced last year.

William Jack Plants: However, we think that that's at a much lower level than what we experienced last year. And, as we indicated in the call script, we saw margin improvement each month during the first quarter at a modest level, which gets us to that guided range of what we projected.

Speaker Change: And as we indicated in the call script, we saw.

Speaker Change: Margin improvement each month during the first quarter at a modest level of which.

Speaker Change: It gets us to that guided range of what we projected.

Beda Hejela: Got it. Thanks.

Speaker Change: Full year.

Beda Hejela: Um, and then just to follow up also about the NIM. Is it fair to assume, I mean, you just gave the NIM for March was $280. Is it fair to assume that 1Q would be the bottom for the NIM? And should we expect an inflection next quarter? That's the expectation. Got it. That's all my questions. Thanks for taking them.

Speaker Change: Got it thanks.

Speaker Change: And then just a follow up also about the NIM.

Speaker Change: Is it fair to assume I mean, you just gave.

Speaker Change: The NIM from March two ladies it's fair to assume that <unk> would be the bottom for the NIM.

Speaker Change: And should we expect an influx in next quarter.

Speaker Change: That's the expectation.

Speaker Change: Got it that's all my questions thanks for taking them.

Operator: Thank you. We have no further questions in the queue at this time, so I would like to hand it back to Martin Birmingham for any closing remarks.

Martin K. Birmingham: Thank you we have no further questions in the queue at this time, so I'd like to hand back to musket Birmingham for any closing remarks.

Martin K. Birmingham: I appreciate everyone's participation this morning and interest in the company. We look forward to continuing this conversation and updating you on our results in the second quarter of July.

Martin K. Birmingham: I appreciate everyone's participation this morning and interest in the company. We look forward to continuing this conversation and updating you on our results for the second quarter July.

Operator: This concludes today's call. Thank you all for joining us. You may now disconnect your lines.

Speaker Change: This concludes today's call. Thank you all for joining you may now disconnect your lines.

Speaker Change: [music].