Q1 2025 Fulton Financial Corp Earnings Call
Okay.
Unknown Executive: Good day and thank you for standing by.
Speaker Change: Good day, and thank you for standing by and welcome to the Fulton Financial first quarter 2025 results conference call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation there'll be a question and answer session to ask a question. Please press star.
Matthew Jozwiak: Welcome to the Fulton Financial First Quarter 2025 Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded.
Unknown Executive: After the speaker's presentation, there will be a question and answer session.
Unknown Executive: To ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker Change: One one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again I would not like to hand, the conference over to your speaker today, Matt Jos Whack.
Matthew Jozwiak: To withdraw your question, please press star 11 I would now like to hand the conference over to your speaker today, Matt Jozwiak, Director of Investor Relations.
Speaker Change: Correct there of Investor Relations.
Curtis Myers: Good morning and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter ending March 31, 2025.
Speaker Change: Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter ended March 31 2025. Your host for today's conference call is Curt Myers, Chairman and Chief Executive Officer, joining Kurt is Rick Kramer Chief Financial Officer.
Curtis Myers: Your host for today's conference call is Curt Myers, Chairman and Executive Officer.
Curtis Myers: Joining Curt is Rick Kraemer, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations page under Investor Relations on our website.
Speaker Change: Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at F. U L. T dot com by clicking on Investor Relations.
Speaker Change: And then on news.
Speaker Change: The slides can also be found on the presentations page under Investor relations on our website.
Curtis Myers: On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations, and business These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, and actual results could differ materially. Please refer to the safe harbor statement on forward-looking statements in our earnings release and on slide two of today's presentation for additional information regarding these risks, uncertainties, and other factors. Fulton undertakes no obligation, other than as required by law, to update or revise any forward-looking account.
Speaker Change: On this call Representatives of Fulton May make forward looking statements with respect to fulton's financial condition results of operations and business.
Speaker Change: These statements are not guarantees of future performance and are subject to risks uncertainties and other factors.
Speaker Change: And actual results could differ materially.
Speaker Change: Please refer to the Safe Harbor statement on forward looking statements in our earnings release and on slide two of todays presentation for additional information regarding these risks uncertainties and other factors.
Speaker Change: Fulton undertakes no obligation other than as required by law to update or revise any forward looking statements.
Curtis Myers: For more information visit www.FEMA.gov In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 16 through 22 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP Now, I would like to turn the call over to your host, Kurt. Thanks, Matt. And good morning, everyone.
Speaker Change: In discussing Fulton's performance representatives of Fulton, they refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday and slides 16 through 22 of today's presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.
Curt Myers: Now I would like to turn the call over to your host Curt Myers.
Curt Myers: Thanks, Matt and good morning, everyone.
Curtis Myers: For today's call, I'll be providing a summary of the first quarter operating highlights and an update on certain corporate initiatives.
Curt Myers: For today's call I'll be providing a summary of the first quarter operating highlights and an update on certain corporate initiatives then Rick will review, our financial results and discuss our 2025 operating guidance. After our prepared remarks, we'll be happy to take any questions you may have.
Richard Kraemer: Then Rick will review our financial results and discuss our 2025 operating guidance.
Curtis Myers: After our prepared remarks, we'll be happy to take any questions you may have. We were pleased with our first quarter operating results and encouraged by the strong start of the year. We continue to remain customer focused, deliver solid operating performance and execute on our strategy. Operating earnings per share of $0.52 represents a $0.04 increased link quarter as we continue to produce positive operating leverage and maintain a strong balance. With revenue exceeding expectations and a continued reduction in total operating expenses, PPNR increased nicely and we continue to become more efficient. The quarterly operating efficiency ratio dropped to 56.7%, operating return on assets increased to 1.25%, and operating return on average tangible common equity grew to 15.95%.
Curt Myers: We are pleased with our first quarter operating results and encouraged by the strong start of the year. We continue to remain customer focused deliver solid operating performance and execute on our strategy.
Rick Kramer: Operating earnings per share of <unk> 52 represents a 4% increase linked quarter as we continue to produce positive operating leverage and maintain a strong balance sheet with revenue exceeding expectations and a continued reduction in total operating expenses.
Rick Kramer: <unk> increased nicely and we continue to become more efficient.
Rick Kramer: Quarterly operating efficiency ratio dropped to 56, 7% operating return on assets increased to $1, two 5% and operating return on average tangible common equity grew to $15 95%.
Curtis Myers: Through discipline management of the balance sheet, we maintained historically strong liquidity and grew our equity portfolio. We remain focused on creating long-term value for our customers, communities, and our shareholders.
Rick Kramer: Through disciplined management of the balance sheet, we maintained historically strong liquidity and grew our equity base.
Rick Kramer: We remain focused on creating long term value for our customers communities and our shareholders and our team performed well for all stakeholders again this quarter growing our tangible book value per share 13, 8% on an annualized basis.
Curtis Myers: And our team performed well for all stakeholders again this quarter, growing our tangible book value per share 13.8% on an annualized So now let me turn and provide a few highlights of the quarter. We continue to execute on our strategic transformation through the implementation of Fulton First. During the quarter, we made tangible progress in areas related to talent alignment, reinvestment for growth and operational simplification. We are seeing positive benefits and outcomes, both operationally and financially.
Rick Kramer: So now let me turn and provide a few highlights of the quarter. We continued to execute on our strategic transformation through the implementation of <unk> during the quarter, we made tangible progress in areas related to talent alignment reinvestment for growth and operational simplification, we're seeing <unk>.
Rick Kramer: Positive benefits and outcomes, both operationally and financially.
Curtis Myers: Now let me turn to the balance sheet. Customer deposit growth was solid this quarter as we continue to win new customers while effectively managing overall deposit costs. Deposit accounts and balances are up while deposit costs are down.
Rick Kramer: Now, let me turn to the balance sheet customer deposit growth was solid this quarter as we continued to win new customers, while effectively managing overall deposit costs deposit accounts and balances are up while deposit costs are down on the lending side, we remain focused on relationship lending to generate prudent and profitable.
Curtis Myers: On the lending side, we remain focused on relationship lending to generate prudent and profitable loan growth over the long term. During this past quarter, total loans declined, even though originations were relatively consistently quarter, as several strategic actions impacted overall balance. During the quarter, we saw a $38 million decline in indirect auto balances, as we've previously forecasted. We also saw a $231 million decline in commercial construction balances as there were certain projects we elected not to convert to permanent. And finally, overall balances were also impacted by accelerated resolutions of troubled assets.
Rick Kramer: Notable loan growth over the long term during this past quarter total loans declined even though originations were relatively consistent linked quarter as several strategic actions impacted overall balances.
Rick Kramer: During the quarter, we saw a $38 million decline in indirect auto balances as we previously forecast. We also saw a $231 million decline in commercial construction balances as there were certain projects, we elected not to convert to permanent.
Rick Kramer: And finally overall balances were also impacted by accelerated resolutions of troubled assets.
Curtis Myers: Given these strategic decisions and the overall current environment, loan growth is expected to be in the low single-digit range for the year.
Rick Kramer: Given the strategic decisions in the overall current environment loan growth is expected to be in the low single digit range for the year.
Curtis Myers: Turning to the income statement, while revenue was relatively consistent, we've seen strong performance generated through a meaningful expense reduction length quarter.
Rick Kramer: Turning to the income statement, while relative revenue was relatively consistent we've seen strong performance generated through a meaningful expense reduction linked quarter.
Curtis Myers: Finally, let me provide some updates on our credit performance. As a result of several portfolio management actions, many of our asset quality metrics improved. Our NPL to total loan ratio declined as we resolved certain non-performing loans. Even with the accelerated non-performing loan resolutions, net charge-offs declined one basis point length quarter.
Rick Kramer: Finally, let me provide some updates on our credit performance as a result of several portfolio management actions many of our asset quality metrics improved our NPL to total loan ratio declined as we resolve certain nonperforming loans, even with the accelerated nonperforming loan resolutions net charge offs declined one basis.
Rick Kramer: Point linked quarter.
Curtis Myers: Saying all of that, we remain cautious in our outlook for credit quality as customers navigate the current volatile environment.
Rick Kramer: Saying all of that we remain cautious in our outlook for credit quality as customers navigate the current volatile environment.
Richard Kraemer: Now I'll turn the call over to Rick to discuss the impact of these initiatives on our financial results and provide comments on our 2025 Operating Guidance in more detail. Thank you, Kurt, and good morning. Unless I note otherwise, the quarterly comparisons I discuss are with the fourth quarter of 2024. Loan and deposit growth numbers I may reference are annualized percentages on a linked quarter basis. Starting on slide four, operating earnings per diluted share was $0.52, or $95.5 million of operating net income available to common shareholders. Consistent revenue, a stable balance sheet, and net interest margin combined with a decline in operating expenses drove positive operating leverage again this quarter.
Rick Kramer: Now I'll turn the call over to Rick to discuss the impact of these initiatives on our financial results and provide comments on our 2025 operating guidance in more detail.
Rick Kramer: Thank you Kurt and good morning, unless I note otherwise the quarterly comparisons I discuss are with the fourth quarter of 2024.
Rick Kramer: Loan and deposit growth numbers I may reference our annualized percentages on a linked quarter basis.
Rick Kramer: Starting on slide four operating earnings per diluted share was <unk> 52.
Rick Kramer: $95 5 million of operating net income available to common shareholders.
Rick Kramer: Consistent revenue.
Rick Kramer: Stable balance sheet and net interest margin combined with a decline in operating expenses drove positive operating leverage again this quarter.
Richard Kraemer: The deposit growth of $200 million, or 3%, was driven by strong growth in interest-bearing money market products, offset by modest declines in municipal and a $105 million decline in broker deposits. Our non-interest bearing balances ended the quarter at 20.6% of total deposits down more Total loans declined $182 million during the quarter due in part to the portfolio management activities Kurt discussed earlier. offsetting some of those declines with growth in commercial mortgage and residential mortgage. With these results, our loan to deposit ratio declined this quarter to 91%. As part of our broader balance sheet management, we continue to strengthen our on balance sheet liquidity by way of additional investment security.
Rick Kramer: Deposit growth of $200 million or 3% was driven by strong growth in interest bearing money market products.
Rick Kramer: Offset by modest declines in municipal and $105 million decline in broker deposits.
Rick Kramer: Our non interest bearing balances ended the quarter at 26% of total deposits down marginally.
Curt Myers: Total loans declined $182 million during the quarter due in part to the portfolio management activities Kurt discussed earlier.
Curt Myers: Offsetting some of those declines was growth in commercial mortgage and residential mortgage.
Curt Myers: With these results our loan to deposit ratio declining this quarter to 91%.
Curt Myers: As part of our broader balance sheet management, we continue to strengthen our on balance sheet liquidity by way of additional investment securities.
Richard Kraemer: The weighted average coupon on new purchases this quarter was approximately 5.56% and carried an effective duration of approximately three years. The impact of these balance sheet trends are shown on slide 5. Net interest income on a non-FTE basis was $251 million, a $2.5 million decrease one quarter, while net interest margin increased two basis points to 3.43 percent. Loan yields declined 11 basis points last quarter to 5.86%. Included in the loan yield is $13.1 million of accretion attributable to the purchase county marks on the acquired Republic loan portfolio. Our average cost of total deposits decreased 11 basis points to 2.03% per quarter.
Curt Myers: The weighted average coupon of new purchases. This quarter was approximately five 5%, 6% and carried an effective duration of approximately three years.
Curt Myers: The impact of these balance sheet trends are shown on slide five net interest income on a non FTE basis was 251 million a $2 $5 million decrease linked quarter, while net interest margin increased two basis points to 343%.
Curt Myers: Loan yields declined 11 basis points linked quarter to $5, 86% included in the loan yield is $13 1 million of accretion attributable to the purchase accounting marks on the acquired Republic loan portfolio.
Curt Myers: Our average cost of total deposits decreased 11 basis points to two <unk> or 3% linked quarter through the cycle, our cumulative non maturity deposit beta has been 29% and our total deposit beta has been 25%.
Richard Kraemer: Through the cycle, our cumulative non-maturity deposit beta has been 29% and our total deposit beta has been 25%. We continue to manage deposit costs with discipline while balancing the potential for future balance sheet growth.
Curt Myers: We continue to manage deposit costs with discipline, while balancing the potential for future balance sheet growth.
Richard Kraemer: Turning to slide 6, non-interest income for the quarter was $67.2 million. This included $2.5 million from income distributions and fair value adjustment related to equity method investment. Excluding this adjustment, fee income declined modestly, primarily due to day count and transactional activity. � The income as a percentage of revenue was 21% for the quarter.
Curt Myers: Turning to slide six noninterest income for the quarter was $67 2 million. This included $2 5 million from income distributions and fair value adjustment related to equity method investments.
Curt Myers: Excluding this adjustment fee income declined modestly primarily due to day count and transactional activity.
Curt Myers: Fee income as a percentage of revenue was 21% for the quarter.
Richard Kraemer: Moving to slide 7, non-interest expense on an operating basis was $182.9 million, a decrease of $7.8 million linked quarter. This decline was impacted by the timing of real-life savings and the benefit of a $4.4 million decline related to professional fees this quarter. When excluding this and several smaller items, operating expenses for the quarter would have been $187.2 million. Material items excluded from operating expenses as listed on slide 7 were charges of $6.2 million of core deposit intangible amortization.
Curt Myers: Moving to slide seven non interest expense on an operating basis was $182 9 million a decrease of $7 8 million linked quarter.
Curt Myers: This decline was impacted by the timing of realized savings and the benefit of a $4 4 million decline related to professional fees this quarter.
Curt Myers: When excluding this and several smaller items operating expenses for the quarter would have been $187 2 million.
Curt Myers: Material items excluded from operating expenses as listed on slide seven were charges of $6 2 million of core deposit intangible amortization.
Richard Kraemer: As a reminder, in the second quarter, we will realize the full impact of annual merit and related increases, as well as the impact of an increased day count on our expense Giving effect to these items, we expect operating expenses to range between $190 million and $195 million for the remaining three quarters of 2025. These items and trends have been factored into our annual operating guide.
Curt Myers: As a reminder, in the second quarter, we will realize the full impact of annual merit and related increases as well as the impact of an increased day count on our expense base.
Curt Myers: Giving effect to these items, we expect operating expenses to range between $190 million and $195 million for the remaining three quarters of 2025.
Curt Myers: These items and trends have been factored into our annual operating guidance.
Richard Kraemer: Also, as a reminder, for the remainder of 2025, we expect to incur up to $14 million of additional Fulton First non-operating expenses.
Curt Myers: Also as a reminder for the remainder of 2025, we accept we expect to incur up to 14 million of additional Burton Fulton first nonoperating expense.
Richard Kraemer: Turning to reserve metrics, provision expense declined approximately $2.8 million linked quarter to $13.9 million. Our allowance for credit losses to total loans ratio increased to 159%. and our ACL to non-performing loan coverage increased to 190.
Curt Myers: Turning to reserve metrics provision expense declined approximately $2 8 million linked quarter to $13 9 million.
Curt Myers: Our allowance for credit losses to total loans ratio increased to 159%.
Curt Myers: And our ACL to nonperforming loan coverage increased to 193%.
Richard Kraemer: Slide nine shows a snapshot of our capital. As of March 31, we maintain solid cushions over the regulatory minimum.
Curt Myers: Slide nine shows a snapshot of our capital base.
Curt Myers: As of March 31, we maintained solid cushions over the regulatory minimums.
Richard Kraemer: During the quarter, total internal capital generation added $77 million in total equity, including the benefit of $16 million of other comprehensive income. AOCI ended the quarter at $272 million and our CET1 ratio at 11%.
Curt Myers: During the quarter total internal capital generation added $77 million in total equity, including the benefit of $16 million of other comprehensive income.
Curt Myers: The OCI ended the quarter at $272 million and our CET one ratio at 11%.
Richard Kraemer: On slide 10, we are confirming our operating guidance ranges for 2025. Our original guidance incorporated a projected decrease in Fed funds of 25 basis points in March. 25 basis points in June of 2025.
Curt Myers: On slide 10, we are confirming our operating guidance ranges for 2025, our original guidance incorporated a projected decrease in fed funds of 25 basis points in March and 25 basis points in June 2025.
Richard Kraemer: Considering more recent events, we have updated our rate forecast to include four 25-basis point cuts in 2025, with the first beginning in June. Inclusive of these changes, we remain comfortable with our current guidance ranges.
Curt Myers: Considering more recent events, we have updated our rate forecast to include 425 basis point cuts in 2025 with the first beginning in June.
Curt Myers: Inclusive of these changes we remain comfortable with our current guidance ranges that said, our net interest income and noninterest income could trend towards the lower half of their respective ranges given the potential for a prolonged slower growth environment.
Richard Kraemer: That said, our net interest income and non-interest income could trend toward the lower half of the respective ranges given the potential for a prolonged, slower growth environment.
Unknown Executive: With that, we'll now turn the call over to the operator, Josh, for questions. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions.
Curt Myers: With that we'll now turn the call over the operator, Josh for questions.
Josh: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Frank Schiraldi: Our first question comes from Frank Schiraldi with Fiber Sandler. You may proceed. Proceed. Thanks. Good morning.
Frank Schiraldi: Our first question comes from Frank Schiraldi with Piper Sandler You May proceed.
Josh: Proceed.
Frank Schiraldi: Thanks, Good morning.
Josh: Good morning, Brian.
Frank Schiraldi: Wondering if you guys can talk a little bit more about loan growth here. You know, do you still have some strategic offsets that make growth more of a second half of the year story? Are you assuming you return to net growth in the second quarter?
Josh: I'm wondering if you guys can talk a little bit more about.
Speaker Change: Loan growth here.
Speaker Change: Do you still have some strategic offsets that make growth more of a second half of the year story.
Speaker Change: Are you assuming a return to net growth in the second quarter can you just talk a little bit more about what you're seeing in terms of loan demand amid some of this.
Curtis Myers: Can you just talk a little bit more about what you're seeing in terms of loan demand amid some of this macro uncertainty? Yeah, Frank, I'll give you a little more color on that overall pipelines actually went up a little bit year over year. And we continue to be cautious in the pull through rate as customers are really deciding whether to move forward with projects. So we have a good pipeline and we're just not sure on how that will convert, given the environment. Our originations, length quarter, were pretty consistent. So we do think we have momentum and most of the first quarter was because of the strategic headwinds and the specific actions that we took.
Speaker Change: Macro uncertainty.
Speaker Change: Yes, Frank I'll give you a little more color on that overall pipelines.
Speaker Change: It actually went up a little bit.
Speaker Change: Year over year.
Speaker Change: And we continue to be cautious in the pull through rate as customers are really deciding whether to move forward with projects.
Speaker Change: So we have a good pipeline and we're just not sure.
Speaker Change: On how that will convert given given the environment, our originations linked quarter were pretty consistent.
Speaker Change: So we do think we have momentum and most of the first quarter was because of the strategic headwinds and the specific actions that we took.
Frank Schiraldi: Okay.
Frank Schiraldi: And just in terms of, I mean, I don't want to try to split hairs here, but Rick, you mentioned, you talked about, you know, comfortable with the range on NII and could trend towards the lower end, just given some risks to growth. You know, would you say that the, uh, that you, you know, the low single digits is kind of the base case here. Can you, you know, is getting to the lower is the risk, I guess, that you don't get any long growth, can you still get to kind of the lower end of that?
Speaker Change: Okay.
Speaker Change: Just in terms of.
Speaker Change: What I'm trying to split hairs here, but.
Rick Kramer: Rick You mentioned, you talked about <unk> comfortable with the range.
Rick Kramer: NII and could trend towards the lower end just given.
Rick Kramer: Some risks to growth.
Rick Kramer: Would you say that the.
Rick Kramer: That you.
Rick Kramer: The low single digits.
Rick Kramer: It's kind of the base case here.
Can you.
Rick Kramer: Is getting to the lower is the risk I guess that you don't get any loan growth can you still get to kind of the lower end of that range.
Richard Kraemer: with flattish balances, I guess is what I'm trying to ask here. I'd say, Frank, yes, depending on what happens with rates. So it'll be more challenging if you get no growth and four cuts, still feel comfortable at the very low end of that, but otherwise you should be above that. So I think it's, you know, definitely balance sheet growth helps. The interest rates have, at this point, have a more muted effect on our NAI, just given what we've done on some hedging.
With flattish balances I guess is.
Rick Kramer: What I'm trying to ask here.
Frank Schiraldi: I would say Frank.
Speaker Change: Yes, depending on what happens with rates right. So.
Speaker Change: It'll be more challenging if you get no growth and four cuts.
Speaker Change: Still feel comfortable at the very low end of that but otherwise you should be above that so I think it's <unk>.
Definitely balance sheet growth helps.
Speaker Change: The interest rates have at this point have a more muted effect on our NII just given what we've done on some hedging and repositioning.
Richard Kraemer: Okay, and then and then just last question on that follow up there. What would you say in terms of, you know, still, I guess you're retained some asset sensitivity? What does a 20 to 25 basis point cut? How does that impact total NII at this point, would you say?
Speaker Change: Okay and then just last question on the follow up there.
Speaker Change: What would you say in terms of still.
Speaker Change: Still I guess your retained some asset sensitivity.
Speaker Change: What does a 2025 basis point cut.
Speaker Change: Does that.
Speaker Change: Impact.
Speaker Change: Total NII at this point would you say.
Frank Schiraldi: It would be a headwind of about $1.7 million. A 25 basis point? Okay, all right, great.
Speaker Change: It would be a headwind of about $1 $7 million annual.
Speaker Change: A 25 basis point correct.
Speaker Change: Okay, Alright, great I appreciate the color. Thanks.
Unknown Executive: Appreciate the call, thanks. Thank you.
Speaker Change: Thank you.
Daniel Tamayo: Our next question comes from Daniel Tamayo with Raymond James, you may proceed. Hey, good morning, guys.
Daniel Tamayo: Our next question comes from Daniel Tamayo with Raymond James You May proceed.
Daniel Tamayo: Hey, good morning, guys.
Daniel Tamayo: Danny.
Daniel Tamayo: And maybe just switching over to the credit side. I mean, things seem to be still strong for you guys. Certainly everything is trending in the right direction.
Daniel Tamayo: Maybe just switching over to the credit side, I mean things seem to be.
Daniel Tamayo: Still strong for you guys certainly everything is trending in the right direction.
Daniel Tamayo: But just curious your thoughts on, you know, the environment, what's happening with tariffs and in terms of, you know, what you're seeing from the borrowers, how that could change depending on, you know, how the environment changes as the year goes on. Yeah, so really two regards. So we're looking at the credit portfolio, you know, working through making sure we understand potential tariff impact, potential government cost cutting impact on our portfolio. So you know, that work is, is ongoing, like you would would expect us to do really know the portfolio, we really benefit from a very granular portfolio, and a deep understanding of the origination.
Daniel Tamayo: But just curious your thoughts on.
Daniel Tamayo: The environment whats happening with with tariffs.
Daniel Tamayo: And in terms of what Youre seeing from from the borrowers how that could change depending on.
Daniel Tamayo: How the environment changes as the year goes on.
Daniel Tamayo: Yes, so really two regards so we're looking at the credit portfolio.
Daniel Tamayo: Working to making sure we understand potential tariff impact potential Gulf.
Daniel Tamayo: Government cost cutting impact on our portfolio. So that work is.
Daniel Tamayo: It is ongoing.
Daniel Tamayo: You would expect us to do really know the portfolio, we really benefit from a very granular portfolio.
Daniel Tamayo: And a deep understanding of the originations in that portfolio.
Daniel Tamayo: in that portfolio. From a, you know, looking forward, we're really monitoring what impact it's going to have on growth, on margins and underlying performance of each individual business. But at this point, it's really analyzing and understanding the portfolio so that we can react to things that happen within the credit.
Daniel Tamayo: From a looking forward, we're really monitoring.
What impact it's going to have on growth on.
Daniel Tamayo: Margins in underlying performance.
Daniel Tamayo: Of each individual business, but at this point, it's really analyzing and understanding the portfolio. So that we can react to things that happen.
Daniel Tamayo: Within the credit book.
Daniel Tamayo: Is there anywhere in the portfolio that you've identified that is most at risk should these tariffs stayed on? I know they're changing almost daily, but have you zeroed in on a segment or part of the portfolio that you think might be at risk? And have you changed your risk ratings at all in those portfolios?
Speaker Change: Is there anywhere in the portfolio that you've identified that is.
Speaker Change: Is most of that risk should these tariffs stayed on and I know they are changing almost daily but.
Speaker Change: Have you have you zeroed in on that.
Segment.
Speaker Change: Part of the portfolio that you think might be at risk and have you changed your risk ratings at all in those portfolios.
Daniel Tamayo: Well, the biggest one that we look at first, or looked at first, is the ag portfolio. It's about a billion dollar portfolio. You know, it's been, you know, one of our strongest portfolios for decades. You know, that portfolio is impacted by commodity prices. And we also have an equipment business underlying there. So we're looking at that business. Our portfolio is very domestic. You know, it doesn't have a lot of import, export, actual business. But commodity price changes would impact that. So we are always following commodity prices. Tariffs could impact that, and we're doing sensitivity and really understanding that from our portfolio.
Speaker Change: Well.
Speaker Change: The biggest one that we look at first I looked at first is the AG portfolio. It's about $1 billion portfolio. You know, it's been one of our strongest portfolios for for decades.
Speaker Change: That portfolio is impacted by commodity prices.
Speaker Change: And we also have an equipment business underlying there. So we're looking at that business or our portfolio very domestic.
Speaker Change: It doesn't have a lot of import export actual business, but commodity price changes.
Speaker Change: Would impact that so we are always following commodity prices.
Speaker Change: <unk> could impact that and we're doing sensitivity and really understanding that from our portfolio, but that has been a strong portfolio.
Daniel Tamayo: But that has been a strong portfolio, very well diversified, and granular. And, you know, we're used to weathering cycles with the ag portfolio. But that's probably where we would see it the most.
Speaker Change: Very well diversified.
Speaker Change: And granular and we're used to weathering cycles with the the AG portfolio, but that's probably where we would say at the most we also look at our manufacturing business.
Daniel Tamayo: We also look at our manufacturing business. And we're looking at margins and procurement. And again, we don't do a lot of import, export. So it's really the impact of cost for those businesses. And we're working through it in a real granular basis. But we really haven't seen impact yet.
Speaker Change: And we're looking at margins and procurement.
Speaker Change: And again, we don't do a lot of import export so it's really the impact of cost.
For those businesses and we're working through it in a real granular basis, but we really haven't seen impact yet.
Daniel Tamayo: The one other thing I would point to is auto dealers. Part of those headwinds on loan growth for the first quarter is a few car dealers that we're no longer doing business with. And I think that, you know, reflects some actions that we've taken as well. Okay, great.
Speaker Change: The one other thing I would point to as auto dealers are part of those headwinds on loan growth for the first quarters. A few car dealers that we're no longer doing business with and I think that.
Speaker Change: Reflect some actions that we've taken as well.
Speaker Change: Okay, Great and then I guess lastly, just on credit as well.
Daniel Tamayo: And then, I guess, lastly, just on credit as well, you've got pretty strong reserves here. You are basically stable in the quarter, really above where you guys were in the pandemic.
Speaker Change: You've got pretty strong reserves here.
Speaker Change: Basically stable in the quarter.
Speaker Change: Really above where you guys were.
Speaker Change: And the pandemic.
Richard Kraemer: Does it feel like the reserves are at the point now where even if things got worse, you'd probably be okay? I know it's Cecil driven to a large extent, but I'm just curious your thoughts on where reserves may have to go. If we go under a recession, given that the strength of the of the the balance is already.
Speaker Change: Does it feel like the reserves are at the point now where even if things got worse, you would probably be okay. I know, it's seasonal driven to a large extent, but.
Speaker Change: Just curious your thoughts on where reserves may have to go if we go into a recession given the strength of the <unk>.
Speaker Change: Okay.
Speaker Change: The balance is already.
Richard Kraemer: Yeah, let me let me take that. So I think I specifically for the quarter, there was a you know, there's a couple of pluses and minus, I think benefiting the ACL. We're really, you know, one declining loan balances to some migration out of construction, and obviously lower non accruals. And then offsetting that is, you know, the more qualitative or the forecasted element in terms where Moody's goes on their on their forecast going forward, and you know, our usage of more call it more impactful economic or downside scenarios, right? So, yeah, I don't know that we'll see a substantial change on the surface.
Speaker Change: Yes, let me let me take that so I think specifically for the quarter. There was a couple of pluses and minus I think benefiting the ACO.
Speaker Change: We're really declining loan balances to some migration out of construction.
Speaker Change: And obviously lower non accruals.
Speaker Change: And then offsetting that is the more.
Speaker Change: Rotate over the forecasted element in terms of.
Speaker Change: We are Moody's goes on their on their forecast going forward and our usage of <unk>.
Speaker Change: More call it more impactful economic or downside scenarios right. So.
Speaker Change: I don't know that we will see a substantial change.
Richard Kraemer: There's obviously pieces a lot of moving pieces underneath. I would expect Moody's to get incrementally negative and call it more. current periods next quarter or two based on where they've been trending. So that that will have an impact for. Okay, all right.
Speaker Change: On the surface Theres, obviously pieces a lot of moving pieces underneath I would expect Moody's to get incrementally negative.
Call it more.
Speaker Change: Current periods next quarter or two based on where they have been trending so that will have an impact for everybody.
Speaker Change: Okay, Alright, well. Thank you for all the color very helpful.
Unknown Executive: Well, thank you for for all the color. Very helpful. Thank you.
Speaker Change: Thanks, Dan.
Speaker Change: <unk>.
Christopher McGratty: Our next question comes from Chris McGratty with KVW, you may proceed. Hey, how's it going?
Speaker Change: Our next question goes from Chris Mcgratty with <unk> you May proceed.
He has gone this is angela here on for Chris Mcgratty.
Andrew Leischner: This is Andrew Leischner on for Chris McGratty. Morning. Just on the buyback, you know, with the stock trading at 1.2 tangible bucks, CT 1 at 11% and credit trends pretty stable, I guess what's preventing you from resuming the buyback right now? Thanks. Yes, so our capital strategy is the same, you know, first we want to support organic growth, then any corporate initiatives, then buybacks would follow that. You know, in an environment like this where there's limited organic growth opportunities, maybe limited other corporate opportunities as well, buybacks certainly make a lot more sense right now, especially given the prices that we're trading at.
Speaker Change: Good morning.
Speaker Change: Just on the buyback with the stock trading at <unk> tangible book see tier one at 11% and credit trends pretty stable I guess whats preventing you from resuming the buyback right now.
Speaker Change: Yes, so our capital strategy is the same first we want to support organic growth than any corporate initiatives and then buybacks would follow that in.
Speaker Change: In an environment like this where theres limited or organic growth opportunities.
Speaker Change: May be limited.
Speaker Change: Other corporate opportunities as well buyback certainly make a lot more sense right now, especially given the prices that we're trading at we did.
Richard Kraemer: We did purchase a few shares, about 30,000 shares in the first quarter, right at the end of the quarter when we start to see the stock price go down. average or end of period. period. The last part is period. and then your first part, your first question. Yeah, I would expect it, candidly. Well, you know, reinvesting cash flows is kind of priority number one, and those have been looking on a monthly basis, $40 to $50 million. In terms of additions to securities, I think it's gonna be somewhat market dependent. and my guess is it will slow as the year goes on.
Speaker Change: Purchase a few shares about 30000 shares.
Speaker Change: First quarter right at the end of the quarter when we start to see the stock price go down.
Speaker Change: Okay, great. Thank you and then.
Speaker Change: Yes shifting back to the balance sheet.
Speaker Change: I know in your opening remarks, you mentioned your broader balance sheet strategy to continue to grow the investment portfolio.
Speaker Change: Based on from here should we expect a similar level of growth this quarter.
Speaker Change: Going forward.
Speaker Change: And on that.
Speaker Change: Low single digit interest.
Speaker Change: Earning asset guide what is what is the base number there is that.
Speaker Change: 2024.
Speaker Change: Average or end of period.
Speaker Change: Very good.
Speaker Change: The last part is period end.
Speaker Change: And then your first part of your first question, Yes, I would expect it candidly.
Speaker Change: Reinvesting cash flows as kind of priority number one and those had been looking on a monthly basis $40 million to $50 million.
Speaker Change: In terms of additions to securities I think.
Speaker Change: It's going to be somewhat market dependent.
Speaker Change: And my guess is it will slow as the year goes on.
Unknown Executive: Okay, great.
Speaker Change: Okay, great. Thank you.
Unknown Executive: Thank you.
Thank you.
Manuel Navas: Our next question comes from Manuel Navas with D.A. Davidson. You may proceed. Hey, good morning. Is there any give in the OPEX guide if the revenue comes in at the lower end? There would have to be a little bit more drastic fall. Just kind of talk about flexibility on OPEX under different, maybe in a downside scenario. I think there's, you know, there's potentially a little give on really on timing. So whether it occurs in 2025, or it gets pushed out, I mean, you saw some of the delayed spend in first quarter when we talked about realized timing, right.
Speaker Change: Our next question comes from Manuel Novelis with da Davidson You May proceed.
Speaker Change: Hey, good morning.
Speaker Change: Is there any give in the Opex guide if the revenue comes in at the lower end there would have to be a little bit more drastic fall just kind of talk about flexibility on opex under different maybe downside scenario.
Speaker Change: I think.
Speaker Change: There is potentially a little give on really on timing so whether it occurs in 2025 or it gets pushed out I mean, you saw some of the delayed spend in the first quarter when we talked about realized timing right. So we'll.
Richard Kraemer: So we'll start to catch up on a little bit of that. But we're pretty comfortable overall with that midpoint of our expense range.
Speaker Change: We will start to catch up on a little bit of that but we're pretty comfortable overall with that in mid point of our expense range for now.
Manuel Navas: And where is sentiment potentially impacting fees? Can you add a little bit of color there? I'm sorry, could you repeat that?
Speaker Change: And where it sentiment potentially impacted.
Speaker Change: A color there.
Speaker Change: I'm, sorry could you repeat that.
Richard Kraemer: Where is sentiment, this kind of more dour sentiment around tariffs, slowing any part of the fee guide? Yeah, the fee income business overall, if you look first quarter last year to first quarter this year, we've had nice growth over over 10% growth, you know, linked, linked quarter, you have some seasonal changes in fees. So as we look forward in fees, obviously, our wealth business has some market dependence on recurrent recurring fees that are on a portfolio balance. So there's some headwinds there. Interest rates, you know, have had some volatility, and that really affects our mortgage business.
Speaker Change: Sentiment.
Speaker Change: Kind of.
Speaker Change: More dour supplement around tariffs slowing.
Any part of the fee guide.
Speaker Change: Yes, the fee income business overall, if you look.
Speaker Change: First quarter of last year to first quarter. This year, we've had nice.
Speaker Change: Growth over over 10% growth.
Speaker Change: Linked linked quarter you have some seasonal.
Speaker Change: Changes in fee. So as we look forward in fees, obviously, our wealth business.
Speaker Change: As some market dependence on.
Speaker Change: Reeker recurring fees that are on our portfolio balance. So there are some headwinds there.
Speaker Change: Interest rates.
Speaker Change: Have had some volatility in that really affects our mortgage business.
Richard Kraemer: You know, so there there are potentials that there's headwinds in the fee income overall, I think that's why we're guiding to lower half of the range in fee income. As we look at those business that they may be impacted as we move, move forward. But those underlying businesses are strong. But they do have some market sense.
Speaker Change: So there are potentials that there's headwinds in the fee income overall I think thats why we are guiding to lower half of the range in fee income.
Speaker Change: As we look at those business that they may be impacted as we move move forward, but those underlying businesses are strong.
Speaker Change: But they do have some market sensitivity.
Richard Kraemer: Switching over to the margin for a moment, you don't have a cut expected in the second quarter. Your loan betas are seemingly performing better than they did in the prior cycle. Deposit costs have come down.
Speaker Change: Switching over to the margin for a moment.
Speaker Change: You don't have a cut expected in the second quarter.
Speaker Change: The loan betas are similarly, performing better than they did in the prior cycle.
Speaker Change: Deposit costs have come down can you kind of put those together for a near term NIM expectation.
Richard Kraemer: Can you kind of put those together for a year term NIM expectation? Yeah, I think without giving guidance on NIM, I would point to a couple things. Our spot rate on deposit costs at the end of March finished, I think one or two basis points below our quarterly average. So you don't have that kind of initial tail wind headed into 2Q. So that would imply that deposit betas are slowing from here. You also have, I'm not sure if it's been contemplated, but the The sub-debt feature we had in March, I think it was March 15th, so we had $195 million move from fixed to float.
Speaker Change: Yes, I think without giving guidance on NIM I would point to a couple of things our spot rate on deposit costs at the end of March finished I think one or two basis points below our quarterly average so you don't have that.
Speaker Change: Kind of initial tailwind headed into <unk>, so that would imply that deposit betas are slowing from here.
Speaker Change: You also have.
Speaker Change: I'm not sure if it's been contemplated but.
Speaker Change: The sub debt.
Speaker Change: Feature we had in March March March 15th So we had $195 million move from fixed to float.
Richard Kraemer: And that was at a 325 basis point moving to SOFR plus 230. So call it 335, 340 basis points up. So that's a little over, you know, six plus million dollars of annual. Expense, as well that you have to factor in. So all of the equal margins should be a little pressured.
Speaker Change: That was at a 325 basis point moving to so for plus $2 30, So call. It 335 to 340 basis points upwards.
Speaker Change: So that's $6 million of annual interest expense as well do you have to factor in so all else equal margin should be a little pressured from here.
Richard Kraemer: And the last piece is the CD renewals in the second quarter. How much of that is brokered versus retail CD renewals? Yeah, I think about 80% of it was retail or 85% of it was So 80% last quarter, but how about in the second quarter? It's a similar number. Great. Okay. I appreciate it. I'll step back into the queue. Thanks for the question. Thank you.
Speaker Change: And then the last piece is.
Speaker Change: The CD.
Speaker Change: In the second quarter, how much of that is brokered versus retail CD renewals.
Speaker Change: Yes, I think about 80% of it was retailers 85% of those retail.
Speaker Change: So 80% last quarter, but how about in the second quarter.
Speaker Change: It's a similar it's a similar number great.
Speaker Change: Great. Okay I appreciate it I'll step back into the queue. Thanks for the question.
Speaker Change: Thank you.
Matthew Breese: Our next question comes from Matthew Breese with Stevens, you may proceed. Hey, good morning. Just sticking with the NIMM for a second. Did net interest income include any sort of interest recapture from the payoffs you saw in special mention and substandard? And if so, how much did it impact the NIM? No, nothing material in there, Matt. Got it. Okay.
Speaker Change: Our next question comes from Matthew Breese with Stephens you May proceed.
Speaker Change: Hey, good morning.
Speaker Change: Okay.
Speaker Change: Just sticking with the NIM for a second.
Speaker Change: Net interest income include any sort of interest recapture from the payoffs you saw in special mentioned substandard, if so how much did impact the NIM.
Speaker Change: No no nothing material in there Matt.
Speaker Change: Got it Okay, and then Curt you had mentioned in your prepared remarks, a couple of times and it's also in the presentation that risk management actions impacted loan growth.
Curtis Myers: And then, Curt, you had mentioned in your prepared remarks a couple of times, and it's also in the presentation, that risk management actions impacted loan growth.
Curtis Myers: Can you provide a little bit more color on what's going on there? It's mentioned on page three. What are you being more careful on? And to what extent is that driving the lower loan growth outlook? Yeah, so really in the quarter, I mean, we're always working the challenge loan book. In this quarter, we had more than typical resolutions just happened to hit this quarter, but it really is ongoing management of the credit book to get resolutions on troubled assets. So really just highlighting that was a pretty successful quarter for us to be able to move some assets out.
Speaker Change: Can you provide a little bit more color on what's going on there. It's mentioned on page three what are you being more careful on and to what extent is that driving the lower loan growth outlook.
Curt Myers: Yes, so really in the quarter I mean, we're always working.
Curt Myers: The challenge loan book in this quarter, we had.
Curt Myers: More than typical resolutions just happened to hit this quarter, but it really is ongoing management of the credit book to.
Curt Myers: To get resolutions on troubled asset so really just highlighting that was a pretty successful quarter for us to be able to move on.
Curt Myers: Some assets out I also referenced a couple of the things that we did that werent troubled assets.
Curtis Myers: I also referenced a couple of the things that we did that weren't troubled assets, the auto dealer book, and a couple of things like that, and the conversion of commercial construction to permanent. We're being very prudent in what we commit to long term as we look at those portfolios. So it's really just active management that had a more significant result, which created the headwind for growth for the quarter. Again, I mentioned that originations were pretty similar fourth quarter to first quarter. So those actions were really highlighting just to show the impact on growth.
Curt Myers: The auto dealer book and a couple of things.
Curt Myers: Like that and the conversion of.
Curt Myers: Commercial construction to permanent.
Curt Myers: They are being very prudent in what we commit to long term.
Curt Myers: As we look at those portfolios. So it's really just active management.
Curt Myers: That had a more significant result, which which created a headwind for growth for the quarter again.
Curt Myers: I mentioned that originations were pretty similar fourth quarter to first quarter. So those actions were really highlighting just to show the impact on growth.
Unknown Executive: Okay, and then last one for me in your kind of, you know, bigger picture concern bucket.
Curt Myers: Got it Okay, and then last one from me in your kind of.
Speaker Change: Bigger picture concern bucket I didn't hear you talk about it at all but I was curious with all the government efficiency stuff going on could you remind us your exposures to DC DC office or anything do you see kind of government.
Curtis Myers: I didn't hear you talk about it at all, but I was curious with all the government efficiency stuff going on. Could you remind us your exposures to DC, DC office or anything DC kind of government with government exposure? Yeah, so federal government exposure in that DC market was very limited. We have historically been very cautious of government leases on real estate because they can be canceled. I think that's what we're seeing in this marketplace. But because we've been cautious in that, our portfolio is very limited for overall federal, whether it's office or other types of business for federal government leases.
Curt Myers: With government exposure.
Curt Myers: Yes, so its federal government exposure.
Curt Myers: In that DC market with very limited.
Curt Myers: We have historically.
Curt Myers: <unk> been very cautious of government leases on real estate because they can be canceled I think thats what were seeing in this marketplace.
Curt Myers: But because we've been cautious and that our portfolio is very limited.
Curt Myers: For overall federal whether it's office or other.
Curt Myers: Types of business for federal government.
Curtis Myers: In office, we have $105 million in the DC metro, and that's really the surrounding areas of DC. Those loans have been performing. We don't have any reason to risk this quarter than in prior quarters in that portfolio. And it's pretty small and granular for that market. Great.
Curt Myers: Leases in office, we have a.
Curt Myers: $105 million in the D C Metro and Thats really the surrounding areas of DC. They those loans have been performing we don't have any reason to believe there is more risk of this quarter than in prior quarters in that portfolio.
Curt Myers: It's pretty small and granular for for that market.
Richard Kraemer: If I could just squeeze in one more, just on the professional fee reversal, Rick, I'm assuming that that line can go back to kind of the $3 million range on a quarterly basis.
Curt Myers: Great if I could just squeeze in one more just on the professional fee reversal work I'm, assuming that that line can go back to kind of the $3 million range on a quarterly basis is that fair yes.
Unknown Executive: Is that fair? Yeah, I would I would say historical run rates more going to be more accurate moving forward. Thank you. And as a reminder, to ask a question, please press star 11 on your telephone.
Curt Myers: Yes, I would say historical run rates and we're going to be more accurate going forward.
Curt Myers: Perfect. Thank you.
Curt Myers: Thanks.
Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone. Our next question comes from David Bishop with D Group You May proceed.
David Bishop: Our next question comes from David Bishop with Hovde Group. You may proceed. Yeah, good morning, gentlemen. Most of my questions. I've been asked an answer, but curious that the indirect auto portfolio, just a reminder, that remains a runoff, and just curious the overall size of that exiting the quarter. It's about, it does remain, we're estimating around $40 million per quarter, it's around $200 million.
David Bishop: Yes, good morning, gentlemen, most of my questions have.
David Bishop: Been asked and answered, but curious what the indirect auto portfolio. Just reminder, that remains a run off and just curious the overall size of that exiting the quarter.
David Bishop: Yes.
David Bishop: It does remain we're estimating around $40 million per quarter, it's around $260 million remaining yeah.
Richard Kraemer: Got it. The one housekeeping item, I think last quarter, ring fencing, purchase accounting, accretion, and that $13 million range for the years that sort of holds true on a quarterly basis. Thanks. Yeah, it'll trend a little bit lower over the remainder of the year. So I think probably a good quarterly run rate is in that 12, closer to 12 million for the rest Great. Thank you.
Speaker Change: Got it and then one housekeeping item I think last quarter.
Speaker Change: Ring fencing purchase accounting accretion in that $13 million range for the year is that sort of holds true on a quarterly basis. Thanks.
Speaker Change: Yes, it will trend a little bit lower over the remainder of the year. So I think probably a good quarterly run rate is in that 12 closer to $12 million for the rest of the year.
Speaker Change: Great. Thank you.
Curtis Myers: Welcome. Thank you.
Speaker Change: Welcome welcome.
Curtis Myers: I would now like to turn the call back over to Kurt Myers for any closing remarks. Well thank you again for joining us today. We hope you're able to be with us when we discuss second quarter results in July. Thank you.
Speaker Change: Thank you I would now like to turn the call back over to Curt Myers for any closing remarks.
Speaker Change: Well. Thank you again for joining us today, we hope youre able to be with us when we discuss second quarter results in July. Thank you.
Unknown Executive: This concludes the conference. Thank you for your participation. You may now disconnect.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
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