F.N.B. - Q1 2024

Transcript

Speaker 9

Good morning and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. The non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release.

Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Thursday, 25 April 2024, and the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President, and CEO.

Vince Delie (Chairman, President and CEO)

Thank you and welcome to our first quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. F.N.B. produced a solid quarter, reporting operating earnings per share of $0.34 and operating net income available to common shareholders totaling $123 million. Our balance sheet resilience, robust NII income generation, strong credit results, and continued progress of our Clicks-to-Bricks strategy were at the forefront this quarter.

Our team remains focused on balance sheet management to position F.N.B. for optimal flexibility during the volatile interest rate period. This is evident by our tangible common equity ratio ending the first quarter at an all-time high of 8%. In addition, our company reported solid loan growth of 6% and deposit growth of 2% on a year-over-year basis.

Deposit mix remained similar to the prior quarter, with a favorable total deposit cost of less than 2%, which is expected to remain superior to peers. Tangible book value per share also reached a record high at $9.64, an 11% increase year-over-year, as tangible book value growth remains a key value driver of our strategy. F.N.B. maintained strong levels of liquidity and uninsured and non-collateralized deposit coverage ratio of 162%. Our non-interest income continues to grow, reaching $87.9 million, a near-record level.

This achievement is the result of our geographic expansion and a decade of strategic investments in our mortgage, wealth management, international banking, treasury management, and capital markets capabilities, including the launch of loan syndications and the F.N.B. Debt Capital Markets platform. Our diversified business model has enabled non-interest income to grow 75% from $200 million in 2016 to over $350 million on an annualized basis.

We recognize the benefit of having diverse revenue streams, which complement one another during various points of the economic cycle. Looking ahead, we will continue to diversify our non-interest income products and services, with plans to further enhance our treasury management, merchant services, and payment capabilities. This past decade also included the launch of our Clicks-to-Bricks strategy.

That vision, along with our investments in people and infrastructure for data analytics, has laid the groundwork for the success of our digital bank today, as well as F.N.B.'s increased use of AI in the future. What began with QR code-enabled product boxes has evolved into an omnichannel experience with our proprietary e-Store. Paired with our new Common Application, we can bundle products and streamline the application process, enabling customers to open 30 products with one application, creating efficiencies and significantly reducing the number of keystrokes for our clients.

Our strategy offers us the opportunity to align high-value product solutions for our customers based upon need in a bundled manner, which helps retain and attract clients. F.N.B. also leverages our investments in data infrastructure and analytics for driving revenue growth through enhanced lead generation. Our enterprise data warehouse stores over 71 billion records across 41,000 attributes, enabling our data scientists to utilize machine learning more effectively.

We developed Opportunity IQ, our proprietary tool that utilizes AI and data aggregation to produce a one-page snapshot of our customers, including the lead score, next best product to offer, and overall needs. This at-a-glance insight enables our employees to have elevated conversations and deepen our relationships with data-driven knowledge. Leveraging our proprietary data and analytics within our Common App, we can improve product penetration through tailored offerings to our customers to increase their financial well-being and client loyalty to our brand.

As we continue to expand our current relationships and gain new households, F.N.B. remains steadfast in our consistent underwriting standards and credit management process. I will now turn the call over to Gary to provide additional information on our credit risk metrics. Gary?

Gary Guerrieri (Chief Credit Officer)

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at solid level. Total delinquency finished the quarter at 64 basis points, down six basis points from the prior quarter. NPLs and OREO decreased one basis point to end at 33 basis points, a multi-year low, with net charge-offs of 16 basis points. I'll provide an update on our CRE portfolios and conclude with an overview of our credit risk management strategies and focus around the current environment.

Total provision expense for the quarter stood at $13.9 million, providing for loan growth and charge-offs. Our ending funded reserve stands at $406 million, or 1.25% of loans, flat compared to the prior quarter, continuing to reflect our strong position relative to our peers.

When including acquired unamortized loan discounts, our reserve stands at 1.36%, and our NPL coverage position remains strong at 425% inclusive of the discounts. We continue to closely monitor the non-owner-occupied CRE portfolio and, on a monthly basis, review upcoming maturities, largest exposures, and analyze overall market performance across our footprint. At quarter-end, delinquency and NPLs for the non-owner-occupied CRE portfolio improved slightly and continue to remain very low at 19 and 13 basis points, respectively.

Specifically related to the non-owner-occupied office portfolio, our most recent review reflected a 60% weighted average LTV, providing additional protection for potential market declines. Delinquency and NPLs were three and two basis points, respectively, outperforming the prior quarter. Net charge-offs for the non-owner-occupied CRE portfolio reflected solid performance for the quarter at nine basis points, confirming our consistent underwriting and strong sponsorship.

We remain focused on credit risk management along with consistent underwriting, which allows us to maintain a balanced, well-positioned portfolio throughout various economic cycles. On a quarterly basis, we continue to perform specific in-depth reviews of our portfolios, as well as full portfolio stress tests.

Our stress testing results for this quarter have again shown lower net charge-offs and stable provision compared to the prior quarter's results, with our current ACL covering approximately 90% of our projected charge-offs in a severe economic downturn, again confirming that our diversified loan portfolio enables us to withstand various stressed economic scenarios. In closing, our asset quality metrics ended the quarter at good levels.

Our loan portfolio continues to remain stable and benefits from proactive risk management, being further enhanced by experienced banking teams and tenured leadership, which have successfully managed through many economic cycles.

We continue to seek loan growth through a diversified mix of products and geographies while maintaining our strong core credit philosophy and consistent approach to underwriting through the cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Vince Calabrese (CFO)

Thanks, Gary, and good morning. Today I will review the first quarter's financial results and walk through our second quarter and full-year guidance. Total loans and leases ended the quarter at $32.6 billion, a 3.3% annualized linked quarter increase, driven by growth of $209 million in consumer loans and $53 million in commercial loans and leases. Residential mortgages led consumer loan growth, driven by on-balance sheet production this quarter in physician and jumbo mortgage loans.

Total deposits ended the quarter at $34.7 billion, a slight increase of $24 million linked quarter, even with the headwind of seasonal deposit outflows. For context, our seasonal deposits peaked in mid-November and troughed in mid-February, and balances should continue to build through the next couple of quarters, benefiting from normal seasonality and our team's success driving deeper market penetration on an organic basis.

As of 31 March 2024, non-interest bearing deposits comprise 29% of total deposits, maintaining the same level as year-end. While the deposit mix continues to shift from low-interest checking and savings products into higher-yielding CD and money market products, we believe we will continue to outperform the industry from both a mix and deposit cost perspective. Our deposit costs ended the first quarter at 2.04%, leading to a total cumulative deposit beta of 36% since the current interest rate increases began in March of 2022.

The first quarter's net interest margin was 3.18%, a decline of only three basis points. A 15 basis point increase in the total yield on earning assets to 5.40% was slightly more than offset by a 19 basis point increase in the total cost of funds to 2.33%.

On a monthly basis, net interest margin was down a modest one basis point per month during the first quarter, and March's net interest margin was 3.17%. Net interest income totaled $319 million, a $5 million decrease from the prior quarter, with over half the difference due to the current quarter having one less day. Turning to non-interest income and expense, non-interest income totaled a robust $87.9 million, with linked quarter growth in nearly every line of business.

Wealth management revenues increased 12% compared to the prior quarter, reaching a record $19.6 million through continued strong contributions across the geographic footprint. Mortgage banking operations totaled $7.9 million, the highest quarterly figure since 2021, with our focus on the purchase market driving good production growth. Several of the lines of business Vince mentioned had strong performance this quarter.

Our debt capital markets platform, which is part of Capital Markets, had a record number of bond transactions this quarter and more than double the prior record. Treasury management revenues have gained momentum as we execute on our strategic initiatives building out the platform, with total TM revenues increasing around 19% from the year-ago quarter, driving the increase in the service charge line item.

Operating non-interest expense totaled $234.1 million, an increase of $15.2 million from the prior quarter after adjusting for $3 million of significant items in the current quarter and $46.6 million last quarter. This quarter's significant items included $1.2 million of branch consolidation expenses and $4.4 million estimated for the additional FDIC special assessment, partially offset by a $2.6 million reduction to the previously estimated loss on the indirect auto loan sale that closed in February.

The largest driver for operating non-interest expense was salaries and employee benefits, which increased $15 million, primarily related to normal seasonal long-term compensation expense of $6.9 million, seasonally higher employee-paid payroll taxes, which increased $4.6 million, and reduced salary deferrals given seasonally lower loan origination volumes. As previously mentioned, F.N.B. redeemed all of our outstanding Series E perpetual preferred stock on 15 February 2024 and paid the final preferred dividend of $2 million on the redemption date.

The excess of the redemption value over the carrying value on the preferred stock of $4 million was considered a significant item impacting earnings. F.N.B. continues to actively manage our capital position for ample flexibility to grow the balance sheet and optimize shareholder returns while appropriately managing risk. Our financial performance and capital management strategy resulted in our TC ratio reaching 8% and CET1 ratio at 10.2%, both record levels.

Tangible book value per common share was $9.64 at 31 March 2024, an increase of $0.98 or 11.3% compared to 31 March 2023. AOCI reduced the tangible book value per common share by $0.70 as of quarter-end compared to $0.87 for the year-ago quarter. Let's now look at guidance for the second quarter and full year of 2024. We are maintaining our full-year balance sheet guidance. We project period-ending loans to grow mid-single digits on a full-year basis as we increase our market share across our diverse geographic footprint.

Total projected deposit balances are expected to grow low single digits on a year-over-year spot basis. Overall, our projected full-year income statement guide is consistent with last quarter, with some additional thoughts on where we expect to land within the provided ranges.

Our projected full-year net interest income is still expected to be between $1.295 to 1.345 billion, assuming two 25 basis point rate cuts occurring in the latter half of 2024. Our current expectation is to be in the lower half of the full-year guide given those two rate cuts, but where we ultimately end up in the range may change due to the fluidity of the rate environment and the number and timing of interest rate cuts that actually occur. Second quarter net interest income is projected between $315 to 325 million.

The non-interest income full-year guide remains between $325 to 345 million. However, given the strong momentum in the first quarter, we anticipate being in the upper half of that range. The second quarter non-interest income guide is between $80 to 85 million.

Full-year guidance for non-interest expense is expected to be between $895 million and $915 million, with the second quarter non-interest expense expected to be between $220 million and $230 million. Full-year provision guidance is $80 to 100 million and is dependent on net loan growth and charge-off activity. Lastly, the full-year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur. With that, I will turn the call back to Vince.

Vince Delie (Chairman, President and CEO)

F.N.B. had a good start to the year, and we are optimistic that as we enter the second half of the year, we have the potential to return to positive operating leverage and benefit from a more favorable interest rate environment as well as a growing pipeline for loans and deposits. Our award-winning client experience is shaped by our digital technology and e-store, and we are proud to appear among some of the nation's largest banks as a finalist for a FinTech Award for Innovation and Customer Experience. Our strategy is consistently supported by third-party recognition.

In fact, we received approximately 30 awards for our client service, financial performance, and culture during the first quarter alone, with multiple awards received in 2024 for small business and middle market excellence. These select examples of F.N.B.'s third-party recognition highlight the strength of our business model and financial achievements, which led to F.N.B.

Being named by S&P Global Market Intelligence as one of the top 50 performing US public banks. The ongoing recognition our company receives is made possible by our engaged teams. We provide an environment where everyone has an opportunity to excel, and as a result, F.N.B. is a top workplace USA for the fourth consecutive year based upon employee feedback.

Our employees' dedication enables us to serve all of our stakeholders and positions F.N.B. for continued success. I want to thank the team for their outstanding efforts in the first quarter given the difficult operating environment, and I look forward to working together to build on our momentum throughout the year.

Operator (participant)

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. To ask a question, you may press star and then one on your touchtone telephones. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Frank Schiraldi from Piper Sandler. Please go ahead with your question.

Frank Schiraldi (Managing Director)

Good morning. Just on the NII, well, on the NII guide and also on the loan-to-deposit ratio. I think in the past you've talked about as you get up to 95% to 96%, taking some potential actions to help mitigate getting up to 100% loan-to-deposit ratio. And so I know there's some seasonality on the deposit side, but just curious maybe if you could talk about what some of those actions might be.

I know you had the indirect auto sale, which I guess helped a bit, but just curious if you could talk about what some of those potential actions might look like and then also just remind us of what you get on a 25 basis point cut in interest rates. Thanks.

Vince Calabrese (CFO)

Well, I would say on the loan-to-deposit ratio, Frank, we've historically talked about 97% is kind of a level where we've taken action. And the action was leveraging our franchise we have to generate deposits. So the last time that had happened, we generated close to $1 billion in CDs to kind of bring it back down into the kind of low to mid-level. So the 100 is aligned, but 97 is a line that we would kind of if we got close to that, we would kind of manage it down. And there's a lot of things we can do. I mean, as you know, we have a big focus on generating deposits, demand deposits throughout the company.

Our traditional commercial businesses, treasury management, small business, it's a focus throughout the company it's always been. So generating additional deposits, bringing in new households, new customer, commercial clients is a key part of it. And then also things like managing, we've adjusted our pricing strategy kind of mid-year last year to create more sellable product out of our originations than what we had been before. And now we're up in the mid-40% for a sellable percentage where we were at a low in the 20%.

So that's another lever we have. In the indirect business, while we did a sale, we also have a lever there as far as how much we want to grow at any point in time depending on kind of what's the shelf space on the balance sheet.

Vince Delie (Chairman, President and CEO)

There are a whole list of things that we look at, both asset and liability. So as Vince mentioned many of them. I think our pipeline for new production is pretty strong from a deposit perspective. So I don't think that we're worried about that. So obviously, in the event that we need to generate deposits, there's pricing mechanisms that we can deploy. But we prefer to grow organically and try to bring in a balanced mix of deposits that are accretive. That is going very well for the company, so.

Frank Schiraldi (Managing Director)

Great. And then just, yeah, just on the NII side, I mean, I guess you have one less rate cut baked into your expectations now, but guiding towards the lower half of the previous range. Is that just given where you sit in the first quarter and the trends from here? Or I guess I assume you still pick up a little bit potentially from less rate cuts baked into your guide. So just curious the driver there.

Vince Calabrese (CFO)

You answered it pretty well, Frank, actually, so those are the key drivers. I mean, in our guidance in January, we had three cuts. One of them was December. So December falls off, which doesn't have much of an impact for the full year. So the two cuts we have in the second half of the year in the short term is positive given we're still in an asset-sensitive position. We've been organically moving back towards neutral. So in the short term, there's a benefit from having that cut.

The guide we adjusted in the first quarter, we were at the lower end of our range for net interest income. The timing of our seasonal deposits, the average borrowings were a little higher just because of the timing of that. But by the end of the quarter, we were back to flat up a little bit.

So kind of just capturing that first quarter as we look ahead. And we'll say the interest rate environment is very fluid. There's potential for us to beat that if the loan growth is stronger. That's kind of what baked in there. There's opportunity for us to be above that. But just kind of where we sit, how we started the year, we thought it was appropriate to kind of guide and it's the bottom half. It's not the bottom of the range. It's kind of the lower half of the range is what we get guided to.

Frank Schiraldi (Managing Director)

Right. Okay. And then just so to confirm there, the third rate cut was late in the year, really didn't, so going from three to two rate cuts really just doesn't have an impact given the timing of the rate cuts.

Vince Calabrese (CFO)

Right.

Frank Schiraldi (Managing Director)

Okay. Great. Thank you.

Vince Delie (Chairman, President and CEO)

Thanks, Frank.

Operator (participant)

Our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

Daniel Tamayo (Director)

Thanks. Good morning, guys. I guess first, just wanted to dig into the office loans. I appreciate the detail you guys gave there. Looked like, and you touched on it in your comments, the NPLs for the office loans came down in the quarter. I guess first, I was just wondering if there was anything in particular that happened that drove that, if there were sales or what. And then just curious on the small increase in the criticized portion of the office loans, if there's any other details you can provide there. Thanks.

Gary Guerrieri (Chief Credit Officer)

Yeah, Daniel, the slight increase was really one credit that we moved into that category. At this point, it's not a concern for us. It's a credit that is extended out already another five years. It was originally underwritten at 52% LTV, and it's fixed through a swap at 4.5%. So they had one tenant move out. They're working on replacing that, but we felt it appropriate, naturally, to replace that in a rated credit situation. The LTV on it was, like I said, right at about 50% going into the thing. So that increased, that 9% criticized to right around 11%.

And in terms of the portfolio, the portfolio in office was down $37 million in exposure and down $15 million from a balance perspective. So we have seen some loans pay off in that category as we're managing that book of business.With the performance of it where we sit today at those very low levels, we'll continue to be aggressive around it and manage it appropriately.

Daniel Tamayo (Director)

Okay. That's great color. Appreciate that. And then maybe, Vince, on the swaps that you have in place that are going to impact 2025, just curious if you could provide a little color on how much impact you expect the rolling-off to potentially have on the margin in 2025?

Vince Calabrese (CFO)

There's $1 to 1.2 billion of swaps we have, though, mature throughout 2025 or $1 billion, actually, within 2025. And those are our receipt rates are around 75 basis points to 1% currently. We put those on a while ago. Luckily, we didn't do a lot of it, but we had some of that that we did put on. And so that negative drag will come off really starting in January. There's $250 million that comes off in January. And then the rest of them, by October, the rest of the $1 billion kind of rolls off. So that'll be additive. I can't do that math in my head, but that'll be additive to next year.

Daniel Tamayo (Director)

Got it. Okay. So $250 in January and then the last $1 billion in October. That's it for me. I appreciate the color. Thank you.

Vince Delie (Chairman, President and CEO)

Thank you, Mr. Daniel.

Operator (participant)

Our next question comes from Kelly Motta from KBW. Please go ahead with your question.

Kelly Motta (Director)

Hi. Good morning. Thanks for the question. I was hoping to dig in a bit more into your fee guidance, how you notably took that to the upper half of the range. Just wondering which areas have been performing a bit better than maybe you had expected at this time last quarter and where you see the greatest opportunities to continue to pick up some nice fee diversification and help with fee growth.

Vince Delie (Chairman, President and CEO)

Yeah. You hit the nail on the head. Diversification is the answer. We built out a pretty broad set of fee-based businesses over the last decade. Capital markets, I mentioned in the prepared comments, we added a debt capital markets platform so we could participate in bond economics for some of our larger clients. And as you know, the capital markets opened up, and there was quite a bit of activity there in the first quarter. So we benefited from that business unit that we built out a few years ago. Syndications, ebbs and flows.

But as the pipelines build, our pipelines are up about 15%. I would expect there to be more syndications activity as we move through the latter half of the year. So we'll get some benefit there. We have a pretty robust derivatives program where we have structuring teams in the marketplace that provide counsel to clients and help them address interest rate risk. That particular group did pretty well this quarter. Surprisingly, given the rate environment, they were able to produce some interesting things for clients to help them as we move through this volatile rate cycle.

The mortgage company, one of the strategies we mentioned, this kind of goes back to Frank Schiraldi's comment about the balance sheet and how we manage loan-to-deposit ratios. We became much more aggressive on sellable mortgage loan pricing. We gave up a little bit of margin but moved quite a bit off the balance sheet.

So they're contributing from a pure volume perspective because we're positioned in some very attractive markets to continue to see a lot of purchase money activity where in our legacy markets, there's not a lot of inventory, so we're not seeing a lot of action. But in the other markets in the Southeast and the Mid-Atlantic regions, we've seen quite a bit of pickup. So that's contributed. SBA had a very solid quarter.

Some of the loans that we originated with higher yields in the construction phase that were basically based on building something out or had construction draws associated with them became sellable. So we moved some of that off with a decent gain.

And then the treasury management business that we've been talking about, we've received a lot of Greenwich Awards for treasury management over the last few years in the small business and middle market segments in particular. We continue to build out that business unit. We've added personnel. We've built out our merchant services business. So we're getting nice contributions from merchant. And kind of the strategy here was to offset the consumer fees that we see declining, like overdraft fees and other fees with higher value fees for customers from our that's our opinion.

But we kind of focused on building that out from a treasury management perspective. And then going after small businesses, we have 90 to 100 thousand small businesses in our portfolio, and we have a tremendous opportunity to go in and drive a broader relationship through the e-Store.

So we're now focusing on building out a bundled product for small business that'll include treasury management and merchant as part of the bundle. So those are the things that I mean, there's a lot of work that goes into it. We've got quite a bit of granularity, and it gives us confidence that we can hit the upper end of the range on the guide. I think it's 350, right, is that what you said?

Kelly Motta (Director)

Got it. That's.

Vince Delie (Chairman, President and CEO)

Yeah. So it's annualizing the first quarter, which usually the first quarter's weaker than others. So we're pretty pleased with where we sit.

Kelly Motta (Director)

Got it.

Vince Delie (Chairman, President and CEO)

That's a long answer to that.

Kelly Motta (Director)

No, I really appreciate all the color. Thank you so much. Maybe a last question for me, switching back to the balance sheet, is on deposits. It seems like, if I'm reading your prepared commentary correctly, some of the kind of qualification to NII to lower half of the range has to do with what you're seeing on the deposit flow side. So can you remind me the seasonality you have with deposits? And is there any color you can provide as to the cadence of what you're thinking about in terms of customer deposit growth to get to that single-digit range that you reiterated?

Vince Delie (Chairman, President and CEO)

Yeah. I think, first of all, there is an extreme amount of seasonality within the deposit portfolio. So it's kind of difficult to look at the first quarter and draw conclusions between the outflows and inflows that are occurring throughout the quarter. And really, it starts to build now. So we're starting to see considerable inflows. The demand deposits were pretty steady at about 29%, I think, right, on a quarter-over-quarter basis. So imagine that's the core of our profitability. It's basically maintaining those non-interest-bearing deposits.

What's happened over the last few quarters is we've seen some of the higher-priced deposit categories moving into CDs or moving into something with a little bit of term within the customer base. So that's eroded a little bit of the net interest income, right? We saw that happen. That's not surprising. You can see it in the escalation in the data.

I believe that over time, throughout the course of this year, we should be able to manage the non-interest-bearing deposit balances in that range and grow the other categories without sacrificing margin because we've seen some lower pricing stick in the marketplace. We don't have to be as hot on the pricing. So I think that should help us as we move through the rest of the year. And then also the inflows that occur. In many instances, even with the municipal deposits, this is the truth for just about all of them, we don't do those transactions with municipalities to just get balances.

We kind of have a rule here where we have to be the primary disbursement bank for those entities. And what ends up happening is the increased activity with ACH activity and wire activity and the movement of funds increasing the amount of free balances grow to cover those services. So that's part of what happens over the course of the next three quarters as well. So anyway, I don't know if you want to add anything on the timing. No, I really. I've seen from a long-term perspective.

Vince Calabrese (CFO)

When we commented on it, it kind of troughs in mid-February and builds through October and November. It's kind of the cadence of that. That's all I would add.

Kelly Motta (Director)

Thank you so much. I appreciate the color. I'll step back.

Vince Delie (Chairman, President and CEO)

Thank you. Thank you.

Operator (participant)

Once again, at this point, if you'd like to ask a question, please press star and one. To withdraw your questions, you may press star and two. Next in line, we have Nick Lorenzoni from Stephens. Please go ahead with your question.

Nick Lorenzoni (Research Associate)

Hey. Good morning, guys. Phoning in for Russell Gunther. I just had a quick question with regard to your office portfolio. I appreciate the color of the deck, but was wondering if you could provide some additional detail on the geographic breakdown, including specific office exposure in your DC and Baltimore markets?

Gary Guerrieri (Chief Credit Officer)

Yeah. In terms of the exposure in DC, we have substantially one transaction in the DC market. We had a few on top of that over the last year. We've been able to move those off the balance sheet just in the normal course of refinance at other institutions. So we only have one transaction there, and it's a transaction that's a $20 million loan. And that's a market that we saw quite a while ago that we thought was extremely overheated. So we were very cautious going into that market. And we're pleased with where we sit today with very, very little exposure there.

Nick Lorenzoni (Research Associate)

Okay. Great. Thank you for taking my questions.

Gary Guerrieri (Chief Credit Officer)

Sure.

Operator (participant)

Our next question comes from Brian Martin from Janney Montgomery Scott. Please go ahead with your question.

Brian Martin (Stock Analyst)

Hey. Good morning.

Gary Guerrieri (Chief Credit Officer)

Hey, Brian.

Vince Delie (Chairman, President and CEO)

Hi, Brian.

Brian Martin (Stock Analyst)

Hey. Just a couple. Maybe, Gary, just one for you on the credit side. Just in terms of overall trends and criticized and classified levels, can you give any just broad characterization of how trends went this quarter just before we see the 10-Q filing just on kind of how those trends were for the whole portfolio rather than just a specific bucket?

Gary Guerrieri (Chief Credit Officer)

Yeah. In terms of the criticized trends, they were up slightly, probably less than seven or eight credits in the criticized. We had a couple move into the substandard. I touched on one of them earlier, Brian. Those credits basically were from just some slight softer performance. We're very aggressive in moving those type of credits into a special mention category, which was primarily where the movement was. And we don't have any concerns with any of those credits that moved into there from a loss perspective.

Long-term customers, just a little softer performance. And so we build a little bit of reserve against that softer performance. We expect that to turn around over the next six to 12 or 18 months in terms of those particular movements.

Vince Delie (Chairman, President and CEO)

Brian, I have a tremendous amount of confidence in Gary and his team. I can tell you, as we look at the portfolio, Gary's on top of the credits. His people are on top of the credits. The line looks at these credits, and they downgrade them if necessary very quickly. That's different than what you'll find at other companies. So you're going to see movement. I think it's positive because it keeps us well-reserved relative to risk. So I think as you look over long periods of time and Gary's been in the seat a long time.

Let me go back as long as I do, say, 14, 15 years, maybe longer, right? But president of the bank, I'm 15. I'm getting old. It's 15 years. So you were there 16 years. Yeah. We're old-timers. So you've got a long track record to look at.

Our delinquencies are surprisingly low at historical lows. The overall quality of the portfolio appears to be good. We are focusing on certain segments that we believe globally are soft. You mentioned office. That's one area we look at. We focus on. But thank goodness we have tremendous granularity and a credit culture that encourages prompt action. And I think that's what you're seeing. There was a slide we presented, I think, in the past. I don't know if it's in the deck with charge-offs versus reserve build for us.

We tend to be very early at reserving, and then our charge-offs end up better than the peers. So that's a testament to Gary and his team. And getting out early, addressing situations early helps you get out of trouble so that you're not experiencing the charge-offs down the road. Waiting and not addressing issues creates a shortfall, which exacerbates credit problems when you're in a cycle. So I don't know. I think we've done a great job. He won't say that, but I'm going to say it about it.

Brian Martin (Stock Analyst)

No, I appreciate it. The numbers speak for themselves, Vincent and Gary. I mean, they're great. And even the criticized not being up much is testimony to kind of the portfolio and the granularity. So just trying to stay in front of it if there are things that are coming down the pipe. Gary, you mentioned that you'd stress-testing. Was there anything specific you guys stress-tested this quarter that you would call out or just in general that you just continue to stress-test the entire portfolio?

Gary Guerrieri (Chief Credit Officer)

Yeah. It's a general stress test of the entire portfolio on a loan-level basis, Brian. So it is a really deep dive every quarter that Tom Fisher and his team undertake. We review that every quarter. Updates are made on a monthly basis when necessary. So it keeps us forward-looking from that perspective. And I think it's a best practice that we've put into place that has been very beneficial as we look forward through the economy and what we expect down the road.

Brian Martin (Stock Analyst)

Gotcha. Okay. Thanks. And then maybe just one or two others. So just on the two things, on the loan side, maybe just kind of how the pipelines. I appreciate the guidance for the year, just kind of just trying to get a feel for where the pipelines are today on the commercial side primarily. And then just, I think you mentioned on the mortgage side, you were a bit more aggressive on the sales. I mean, first quarter is typically a seasonally weaker quarter.

So I guess do you expect to remain aggressive on the sales, which could mean that potentially 1Q is a bottom for the mortgage revenues as you look throughout the year? Is it any difference in strategy there as you go to the balance of the year?

Vince Delie (Chairman, President and CEO)

Yeah. I think the first quarter typically is seasonally slower, right, because there are less, especially when we're focusing on purchase money mortgage loans, because there are fewer transactions that occur in the first quarter. I would expect that to build through the next two quarters and then come back down again. Just speaking to the purchase money side and refinancing mortgage loans, I would expect that to happen. There are other origination areas that will produce through that. We have physicians' loans that we do, which are pretty much throughout the year.

So they kind of offset some of the declines in the later half of the year on the conforming stuff. So you'll see more jumbo private banking loans coming online, which is why we do what we do. We want to balance out what goes on the balance sheet and what becomes saleable.

So our team has done a great job. We have terrific people in the mortgage business. We've grown it over the last 10 years or so. I mean, it's a big part of our business and a key product for the consumer. So it really adds to our ability to obtain clients. And I think we're going to continue to focus on it and manage it very conservatively. But I would expect that to contribute more over the next few quarters, I think it's fair to say, given the seasonality.

Vince Calabrese (CFO)

I would just add from an income statement standpoint. I mean, baked into our guidance is the mortgage banking income coming down a little bit from the first quarter level. Yeah. It's going to be a function of how much we do sell, right? I mean, we'll continue to manage it. But like Vincent said, seasonally, second and third quarter, we have quite a big lift in production, which is what's baked into our guidance.

Vince Delie (Chairman, President and CEO)

And then it falls in.

Vince Calabrese (CFO)

And then it kind of falls off over the quarter.

Vince Delie (Chairman, President and CEO)

It's bell-shaped. But I'm pretty optimistic. I think they're doing pretty well. And we're very well entrenched. We have great people in that business, like I said. So I feel good about it.

Vince Calabrese (CFO)

The activity is very good. Even in the first quarter was very good too. Then expect it to seasonally move up in the second and third, like Vincent said.

Vince Delie (Chairman, President and CEO)

Obviously impacted by interest rates, Brian, right? I mean, if rates go up, that game's over. We'll talk about it down the road. But I think given the way things are today in a stable interest rate environment for now, they should pick up. There should be more activity.

Brian Martin (Stock Analyst)

Yeah. Gotcha. And just on then on the commercial pipeline, what you're seeing there?

Vince Delie (Chairman, President and CEO)

Yeah. The pipelines, they're up 15%. The overall pipeline's up from the last quarter. Remember, we had a big quarter closing out in December of last year. So the fourth quarter of last year was pretty solid from a production perspective. So pipelines are rebuilding. South Carolina is at their second-highest level historically. So there's a lot of activity there. Raleigh's got a nice pipeline. What we call the Capital Region, which is a central part of the state, has a tremendous pipeline. And we've seen some good activity in some of the rural Pennsylvania markets.

The folks in State College, Tony Marfisi, and his team doing a terrific job. I mean, we're seeing a lot of activity and good solid middle-market C&I opportunities, so. I would expect us to continue to build the pipelines as we move through the year. And businesses hopefully become more confident in the economy.

Brian Martin (Stock Analyst)

Gotcha. Okay. And the last one for me, and I'll step back, was just that it sounds like the DDA level, you're comfortable that you can maybe sustain this around the current level. And then just kind of the outlook on the capital flexibility with kind of reaching a record level on TCE and CET1, just kind of your thoughts on capital deployment here, if it's still just primarily organic growth?

Vince Calabrese (CFO)

Yeah. I mean, on the capital front, we still like 10% as our CET1 target. We think that's the right level just given our risk profile, the balance sheet, and also the higher level of capital generation that we've been producing. If you look at what's baked into our guidance, the capital ratios kind of gradually build from here between now and the end of the year. As you saw this quarter, we had a nice pickup in the CET1 and TCE ratio. And we had commented in January that once the indirect sale kind of cleared, that would be added to it.

They added like 10 basis points to CET1 and DDA. So it's a good TCE ratio. So we have that. And then we'll kind of gradually build from there. And we'll be opportunistic as we have been in the past. We'll look to potentially do some buybacks. We have issuance of stock in the first quarter from normal incentive stuff. We could repurchase some of that. We'll look to do some level of activity as we go through the year.

Vince Delie (Chairman, President and CEO)

Given the profitability of the company, we have options. We're building capital. You go back pretty far. 8% is a pretty nice number for us. It's a solid TCE ratio.

Brian Martin (Stock Analyst)

Okay. Gotcha. Okay. I appreciate you taking the questions. Thank you.

Gary Guerrieri (Chief Credit Officer)

Thank you, Brian.

Vince Calabrese (CFO)

Thanks, Brian.

Vince Delie (Chairman, President and CEO)

Take care.

Operator (participant)

Ladies and gentlemen, with that being our last question, I'd like to turn the floor back over to Vince Delie for any closing remarks.

Vince Calabrese (CFO)

I just wanted to make one comment. There was a question earlier about the swaps that we have rolling off next year. I mentioned kind of what we're receiving. We're paying 5.44% on that $1 billion. So just as far as the math as you get into 2025, it's basically 250 a quarter, kind of sub 1% of what we're receiving. And we're paying around 5.44%. So that'll be a benefit next year starting in January. Just wanted to clarify that.

Vince Delie (Chairman, President and CEO)

Yeah. Sure. Yeah. Makes sense. Thank you, everybody. Appreciate it. Appreciate the support from our shareholders. And again, very appreciative of our employees and the teams that we have. And their desire to win. So we have a great culture, winning culture. And people just want to do the best they can for their clients and compete. And I think we've proven that we do that very effectively. So thank you. Thank you, everybody.

Operator (participant)

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.