Vince Calabrese: Yes, I would just say, too, Frank, we don’t feel constrained as far as loan growth that we would want to go after. I mean, the mid to high single digits that we’ve done, we can do that. We’ve done things like Vince is describing and then, like in the mortgage business, we’ve adjusted our pricing a little bit there to make more saleable product. So we’re kind of reducing the amount of growth that’s going on to the balance sheet, which is kind of part of how we manage the balance sheet. So there’s a lot of different levers there.
Frank Schiraldi: Great. Okay. Thanks for the color.
Vince Delie: All right. Thank you.
Operator: Our next question comes from Timur Braziler from Wells Fargo. Please go ahead with your question.
Timur Braziler: Hi, good morning. Maybe starting Vince Delie, you had made a comment, positive operating leverage in ’23 look to be in the top quartile in operating leverage going forward. Does that put positive operating leverage on the table for ’24? Or is the revenue backdrop challenging enough where that’s more likely not going to happen next year?
Vince Delie: Yes, I think as we move through this interest rate cycle, it becomes more challenging, obviously, right? Because you’re seeing declining revenue and your expense base is pretty much fixed. So we’ve taken expense out, but it’s hard to dig deeper. I think the second-half of the year, I certainly would expect us to go produce positive operating leverage. So as we move through that inflection point that Vince spoke about earlier, right, margin compression, with the rate cuts, we should be able to move through that and into the second-half of the year experience positive operating leverage. If you look at FMB on a full year basis in 2023, we outperformed others, right, because we produced full year operating leverage, there was negative operating leverage all over the place, at least based on what I saw. So I think I would expect us to do everything we can to be in a similar position in ’24. If that helps.
Timur Braziler: Okay. That’s helpful. Yes, that’s helpful. Thank you. And then one for Gary. Just looking at the office maturities in ’24, it looks like 20% of that book is maturing. I’m just wondering how much of that maturation is for loans kind of vintage 2019 and earlier. And then as you look at your CRE portfolio, again, looking at the vintages 2019 and earlier, how different are those loans from a credit quality standpoint, just given us how different the world is today versus pre-pandemic?
Gary Guerrieri: Yes, generally speaking, we’re going to underwrite those things from the origination date in the low to high 60s range. So when you look at those maturities, in addition to that LTV level, which has been very helpful through this cycle so far, they’re also underwritten very short. So with maturities of inside of five years, or slightly less in some cases. So a number of those transactions have been renewed over the last year or two. Many of those borrowers right sized those transactions. It has been our intent to keep those maturities very short, and we’ll continue to do that during these times. That all said, we feel as focused as we are on that office space, as is everyone, we feel quite good about the portfolio at this point.
We’ve only had a couple of credits over the last number of years since this space has taken a tough go of it from all of the pandemic issues that we’ve seen, and we’ve only had a couple of credits that we’ve had to deal with from a loss standpoint. So we feel good about the position of it. There is a 20% roll rate in the coming year and we expect to move through that with our sponsors, which have shown the ability to right size, post additional interest reserves to pay down debt, and bring it back to a 120 type of debt service coverage. So we’ll continue to do the same thing in ’24 that we did in ’23.
Vince Delie: I’ll add on to what Gary said. I think from a prudent underwriting perspective, most of the transactions that we would have underwritten in 2019 would have had long term leases that go out longer than the maturity date. Gary mentioned having a shorter maturity date. What that means is that while cap rates may change and the valuation may change with a lower LTV and a longer lease term, that the debt service coverage remains intact. So it’s a lot easier to deal with a devaluation because of the rise in cap rate if you have substantial liquidity and a long-term tenant locked up. So I think that in almost every case, that’s what we would look at when we would underwrite these transactions, which gives us a great degree of confidence.
I also can tell you that most of the portfolio, the vast majority of the portfolio, sits outside of the urban office scenario. So I think that we have quite a bit of protection in that suburban office and higher growth areas is not as subject to vacancy like you see in the large cities.
Gary Guerrieri: The other thing to add to the size of the annular is 40% of the portfolio is less than $5 million in terms of loan size. You move that up to $5 million to $10 million, it’s another $17 million. So you’re pushing 60% of the portfolio is less than — almost 60% is less than $10 million. And you move that up one more level to $15 million, and you’re at 70% of the book of business. And in total, the top 25 credits average right at just a touch above $30 million. I think it’s right at $31 million. So the portfolio is very granular. I think we’ve been very prudent in taking granular hold positions across that space. And it’s really shown in the performance through what’s been a difficult time.
Vince Delie: It’s geographically diverse too, it’s spread across seven states, concentrated in one city, one specific area. Obviously, it’s something we watch. There’s definitely weakness in urban office. So it’s a good question. That helps? Are we good?
Timur Braziler: That’s helpful. Yes. I appreciate the color. Thank you.
Operator: Our next question comes from Casey Haire from Jefferies. Please go ahead with your question.
Casey Haire: Great, thanks. Good morning, guys. I wanted to follow-up on the NII guide. So Vince C, it sounds like deposit beta is going to peak at around — cumulative deposit beta peaks around 35%. Just wondering, when does that take place relative to your first Fed cut? And then what does your guide assume for deposit beta on the way down for ’24?
Vince Calabrese: Yes, I would say we would drift a little higher. We ended the year of 34.3%. I think it says in the slide. We’ll drift a little bit higher here another point or two is what we’re thinking. And then when that happens for second quarter, kind of, consistent with the margin, kind of bottoming in the first half of the year. And then what we were thinking, I mentioned the update has — it’s been 35% now twice on the upside. I think that as we look to the point when the Fed pivots and starts to reduce rates, using a similar over the medium term, right, 35% makes sense to us, but within ’24, depending on the timing of the Fed cuts, right. We get some portion of that, probably get more than half of it, but you wouldn’t get 35% all in calendar ’24.
