Q2 2021 FNB Corp Earnings Call
Good morning, and welcome to the F N b of corporations second quarter of 2021 earnings call all.
All participants will be on listen only mode.
Should you need assistance. Please see the on conference surprises and I'll start pressing the star key followed by zero.
After todays presentation, there will be knocks on your last questions to ask a question you May Press Star then 1 on you touched on for.
To withdraw your question. Please press Star then 2 please note today's the event is being recorded I would now like to teleconference over to at least the Constantine Investor Relations. This concept of <unk>. Please go ahead.
Thank you good morning, everyone and welcome to our earnings.
Conference call of F N B Corp, and the reports filed with Securities and exchange of information often contain forward looking statements and non-GAAP financial measures non-GAAP financial measures should be viewed and addition to and not as an alternative for our reported results prepared in accordance with GAAP.
And silly issues of GAAP to non-GAAP operating measure for the most directly comparable GAAP financial measures are included in our presentation material and and our earnings release. Please refer to these non-GAAP and forward looking statements disclosure contained and all related materials for 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 July 27, and the webcast link will be posted to the about us investor Relations and shareholder services section of our corporate website I will now turn the call over to Vince <unk>, Chairman President and CEO.
Thank you and welcome to our earnings call. Joining me today are Vince Calabrese, our Chief financial Officer and <unk>.
Gary Guerrieri, our Chief Credit Officer.
First I will provide a short review of the second quarter Financial result, and then I'll cover recent performance trends of our key business model before turning the call over to Gary and Vince for the remarks.
Lastly, I'll wrap up the cold on discussing the key consideration of last week's merger announcements with Howard Weil.
F&B second quarter earnings per share total 31.
Representing an 11% decrease on a linked quarter basis.
Operating net income reached a record $101 million and total revenue increased to 308.
Our performance resulted in a return on tangible common equity of 16% and growth and tangible book value per share to $8.20.
And increase of 19, 2% the.
The quarter's efficiency ratio of 56, 8% improved due to the benefit of increased revenue and continued expense discipline as we achieved the 2021 operating cost savings goal of $20 million.
Our company remains well capitalized with an estimated CET 1 ratio of 10 points year and 2% for the.
The second quarter.
Second quarter revenue was supported by record wealth management revenues and strong contributions across a number of segments, including insurance mortgage banking capital markets and SBA loans.
Many of these areas of continued to benefit from our expansion into higher growth markets.
On a year to date basis wealth management revenues increased over $6 million the <unk>.
Total wealth management, and insurance revenues decreased 26% and 8% respectively.
Looking at the balance sheet and on an annualized linked quarter basis.
F&B demonstrated strong fundamental performance as we saw a pickup and lending activity the translated into significant spot loan growth of 9% when excluding the impact of PPP loans.
On a spot basis total deposits were flat with seasonal outflows and the decline in time deposits.
Non interest bearing deposits grew to $10.2 billion on June 30.
And now comprised of third of total deposits.
This brings our loans to deposit ratio to 82, 4%, providing F&B with ample liquidity and a favorable funding mix moving forward.
Diving deeper into the wholesale bank's performance. This quarter. We are encouraged of the commercial loan activity has begun to pick up across the footprint and pipelines are healthy entering the second half of the year.
We have significant opportunities within the commercial pipelines and the Carolinas and Pittsburgh and mid Atlantic markets, which reached the highest level and the last 2 years.
Additionally, strength and the total near term pipeline gives us optimism for a strong second half for commercial loan originations.
Consistent with our comments on the April call activity levels around commercial financing as well as consumers are encouraging given the our goal to reach mid single digit loan growth on a spot basis by the end of the year.
However, I'll note the commercial line utilization rates remained well below historical levels.
We are optimistic that the utilization rates could move higher and the second half of this year.
And as remaining PPP loans are processed through the forgiveness period and the U S economy begins to accelerate as the supply chain for many industries and groups.
As we discussed on the prior call our mortgage banking business continues to see new record production volume, however gain on sale margins contracted across the industry during the quarter, reflecting the current market conditions.
In addition to mortgage banking the overall consumer pipelines have grown significantly since the beginning of the year, we have begun to experience lending growth across the consumer product set.
As the economic activity has begun to pick up we are experiencing increased loan demand and commercial and consumer banking and favorable credit trends.
With that I'll turn the call over to Gary So he can provide additional detail on asset quality Gary.
Thank you Vincent and good morning, everyone on our results for the second quarter of favorable and we are very pleased with our credit portfolio is positioned moving into the second half of the year.
Delinquency and nonperforming levels decreased meaningfully during the quarter and our net losses remain below.
The positive momentum and momentum of the broader economy and continued reopening of businesses have further contributed to the favorable results for the quarter, particularly of some borrowers and the more sensitive industries and asset classes begin to show signs of recovery.
I'll cover that and greater detail later in my remarks as far as let's walk through our credit results for the second quarter and review some of those highlights.
The level of delinquency, excluding triple P. Balances ended June at 80 bps of 9 basis point improvement linked quarter, which was driven by broad improvements across all portfolios and notably commercial and 1% for families.
The level of Npls, and Oreo also improved and the quarter at 58 basis points, representing a 14 basis point decrease from the prior quarter's X Triple C level.
Our npls decreased meaningfully down nearly $30 million during the quarter, which was driven primarily by of $21 million reduction and the commercial portfolio, including the resolution of a credit that was previously reserved for.
Net charge offs for the quarter were very low at $3.8 million or 6 basis points annualized while year to date net charge offs remained at a very solid 9 bps annualized.
Non-GAAP net charge offs, excluding triple fee balances for 7 bps, and 10 bps for the quarter and year respectively.
We recognize the 1.1 million net benefit and provision this quarter following broadly improving economic activity and positive credit quality results through June resulting in a stable reserve position at 142%, while the ex triple P and reserves.
Stands at 151%.
NPL coverage also remains very favorable at 278% due to reduced the NPL levels during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts totaled $1.5 8%.
And now I'd like to provide some additional color on our loan portfolio and give an overview of our approach to underwriting and managing risk as lending markets remain highly competitive.
Touching quickly on loan deferrals, we ended June at a level of 7% of our core loan portfolio for these levels continuing to decline as new requests have essentially ceased and borrowers the return to contractual payment schedules.
Our banking teams have also remained actively engaged with our commercial customers to stay apprised of how the broader economy and the emerging trends are affecting their operations, including the impact of supply chain disruptions labor shortages and the general future outlook for their respective industries.
These factors are all taken into careful consideration during our underwriting and credit approval processes, which is consistent with our overall credit philosophy.
We were successful and closing a number of high quality lending opportunities and the quarter and with strong borrowers that fit within our desired credit profile and we will continue to approach transactions in this manner to help us meet our growth targets, while maintaining our desired risk profile.
In closing we had a successful quarter marked by solid credit results and loan losses, which has us favorably positioned moving.
Moving into the second half of the year.
And made significant progress working down rated credits as indicated by a 15% reduction and classifieds, reflecting the tireless efforts put forth by our workout teams to reduce exposure to more sensitive industries and take risk off the table as economic conditions continue to improve.
As we look ahead to new lending opportunities our core credit principles that have served us well throughout economic cycles.
Front and center and all credit decisions, we make and.
Including consistent and disciplined underwriting across the footprint of.
Tentative and timely management of risk and proactive portfolio management to further position us for the quarters ahead on.
I'll now turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary and good morning.
Today, I will discuss our financial results and current expectations.
As noted on slide 5 first quarter EPS increased 31.
Up significantly from the prior and year ago quarters.
Looking at highlights for the quarter on and operating basis net income available to common stockholders increased $18.3 million for 22% to a record $101.5 million as total revenue increased $2.1 million for 0.7%.
Operating expenses were well controls and down 5 million linked quarter, and we saw a negative provision for credit losses due to the improved credit metrics for Gary just discussed.
The linked quarter growth and operating <unk> of $7 million for 6%.
It reflects the company's strong performance in the quarter, even without the provision benefit.
Now turning to slide 7 to review the balance sheet.
Period end loan balances, excluding triple T and increased 515 million were 9.1% annualized on a linked quarter basis through organic growth with strong contributions from book of commercial and consumer segments as the.
Economy continues to rebound.
On an average balance basis total loans decreased $56 million, reflecting accelerated triple T forgiveness during the second quarter.
Yes.
On the deposit side average deposits increased $1.1 billion or 3.9% to over $30 billion, a record high with noninterest bearing deposits comprising 33% of total deposits.
On a spot basis deposits were relatively flat given the managed decline and higher cost time deposits.
Focusing on slide 8 net interest income increased $5 million to $227.9 million is the triple T contribution increased $2.2 million of $25 million, which was offset by a $1.9 million decreased contribution from purchase accounting accretion to 5 point on that.
The underlying net interest income trends improved due to a more favorable balance sheet and mix and our continued focus on reducing deposit costs and the lower interest rate environment was evidenced by our total cost of interest bearing deposits declined 7 basis points to 24 basis points.
Reported net interest margin decreased 5 basis points to 270, this earning asset yields declined 9 basis points, which was partially offset by the 6 basis point reduction and the cost of funds.
The yield on total loans and leases remained stable at $3.51.
When excluding the higher cash balances and purchase accounting accretion and triple P impacts the underlying net interest margin would be $2.71, representing a 1 basis point increase compared to the first quarter 2021, and the second quarter in a row of improving underlying net interest margin.
Let's now look the noninterest income and expense on slides 9 and 10.
Noninterest income totaled $80 million decrease and $3 million from record levels last quarter.
We achieved record wealth management revenue of $15 million through contributions across the geographic footprint and positive market impact on assets under management.
SBA volume and average size of transactions increased during the quarter for.
And I think SBA premium revenues to $2.6 million almost double the prior quarter.
Pipelines and this business remains solid and we would expect near term SBA premium revenues to be strong.
Mortgage banking operations income decreased $8.3 million as gain on sale.
Margins tightened meaningfully in the second quarter 2021 throughout the industry.
For sale pipeline declined significantly elevated levels.
And the benefit from mortgage servicing rights impairment valuation recovery was $2.2 million lower than last quarter.
Yeah.
Noninterest expense decreased $2.4 million linked quarter on a reported basis.
When excluding $2.6 million of branch consolidation costs, and the quarter noninterest expense decreased $5 million or 2.7%.
On an operating basis salaries and employee benefits decreased $5.3 million for 4.9%.
Primarily related to the timing of normal annual long term stock awards recognized from the first quarter each year.
And outside services expenses increased $1.8 million, reflecting increases from third party technology providers legal costs and other consulting engagements.
We are very pleased with this quarter's results with record operating net income.
Accelerating sequential loan growth strong revenue growth.
Solid credit quality metrics and continued growth and tangible book value per share increasing 19 per share to <unk> 20.
Now turning to our outlook for the third quarter 2021.
Excluding triple P contribution, we would expect net interest income to be up slightly from the third quarter compared to the second quarter.
The level of Triple P contribution will be a direct function of the amount of forgiveness process during the quarter on.
Our current thinking is that we will see around $500 million of forgiveness in the third quarter.
Which would translate into of $7 million to $9 million reduction and net interest income contribution from Triple P loans. However.
However, the SBA approves forgiveness closer to second quarter levels.
<unk> and <unk> contribution would be smaller.
We expect noninterest income to be and the high $70 million area, given the diversified nature of our noninterest income revenue streams.
We expect noninterest expense to be flattish compared to operating expenses and the second quarter.
The provision for loan losses remains dependent on the level of loan origination activity and we are encouraged by the favorable credit trends observed during the first half of 2021.
Regarding our full year assumptions are loan growth total revenue and non interest expense assumptions remain unchanged with current deposit growth, reflecting the benefit of additional government stimulus as we continue to see increased liquidity and the loan to deposit ratio below historical levels.
With that I will turn the call back to Vince.
Thanks Vince.
I'd like to provide and update on the pending Howard and acquisition.
We are excited to begin the integration process with our team and we are confident that our established leadership in the mid Atlantic market will work well with the talented bankers and now.
We share of deep culture of client and community service, which should allow for a seamless transition and the coming months for all of our stakeholders.
We also expect the conversion and integration to run smoothly.
The organizations operate on the common core system.
As discussed previously our decision to selectively enter higher growth markets through a combination of de Novo location loan production offices and strategic acquisitions has FNB well positioned today.
With the Howard merger, we will grow to the number 6 deposit share and the Baltimore MSA, while adding meaningful customer density to the mid Atlantic region, which covers Maryland, and Washington D C and northern Virginia.
Our long term strategy is to best position, our company and the markets, where we have the ability to grow loans low cost deposits and fee income organically through increasing our market share over the long term and expanding the universe of clients and prospects.
If you look at our market expansion strategy and the mid Atlantic.
Our for acquisition since 2013 came at a lower relative acquisition cost with the weighted average price to tangible book of 1.5 times.
Our growth strategy and the mid Atlantic region provided access to a population of $10 million and more than 300000 businesses with revenue greater than 100000.
Since the end of 2015, our compounded annual organic loan growth for FNB in Maryland is 15%.
Furthermore.
As the company overall, we have nearly doubled our annual non interest income since 2015 from 162 million to $294 million, most of which has to do with our investment and products and services, but also bringing those capabilities into our expansion markets and broadening our client relationships.
Therefore, we are very excited about our long term potential for growth as we offer our deep product suite to Howard's customer base.
Looking specifically at some of the transaction highlights the Howard franchise increases FNB, Baltimore and deposits by $1.7 billion to $3.5 billion on a pro forma basis, while creating a combined organization of more than 41 billion and total assets and.
Additionally, the transaction carries lower execution risk given the end market synergies.
We view the transaction is financially attractive with the 4% EPS accretion with fully phased and cost savings and enhanced pro form of profitability metrics, which include the 200 basis point improvement and the efficiency ratio and an internal rate of return greater than 25%.
<unk> with our approach to capital management. The transaction is expected to be neutral to the CET..1 at closing and includes minimal tangible book value dilution of 2%.
As I noted earlier, our TBD growth this quarter alone was 2% essentially earning the TBB dilution back in 1 quarter.
Our M&A strategy hasn't changed from what we've said the last couple of quarters first and foremost our focus is on organic growth, but if opportunities arise where the target is in the market has potential for significant cost saves and carries low execution risk with minimal tangible book value dilution.
The potential acquisition becomes worthy of evaluation.
We are excited about the opportunities in front of us as our organization continues to flourish and evolve as a more diversified financial institution.
Last month, we were honored to be named at the top workplace in northeast, Ohio for the seventh consecutive year and our 30th workplace recognition overall.
Which are based solely on employee feedback.
In closing we are focused on continuing our commitment to advance our market position by gaining scale and operational efficiency and by cultivating a great culture and meaningful lasting relationships with our clients and communities, while simultaneously creating value for our shareholders.
With that I will turn the call over to the operator for questions operator.
Operator.
Thank you at this time, we will begin the question and answer session to ask a question you May press. The Star then 1 on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the case.
And sorry. Your question. Please press Star then 2.
At this time, we will pause momentarily to on some of the roster.
And just when you first question comes from Frank's for all the with Piper Sandler.
Good morning.
Just.
On loan growth.
I just want to make sure I understand the mid single digit growth expectation or guide for 2020.1.
Is that does that assume Vincent line utilization rates remained at the low levels. They are now and then there could be upside.
And that most higher is that the messaging.
Yes.
Okay.
And then some of it you know on the other side of the coin and the thing I worry about a little bit as you know I know you guys have always had such a strong credit function.
So much liquidity out there.
Presumably chasing loans that I would imagine companies banks get could get more aggressive on pricing terms and.
And terms and good banks could find themselves on the.
The sidelines to some degree so just wonder if youre seeing evidence of that in the marketplace in terms of the tighter pricing tighter terms and and just your general thoughts there.
Frank.
And try to tackle the initial response and then I'll turn it over to Gary.
And all of them.
And relative to credit and the pricing north of 90.
I can't tell you we have 10 regions. If you look at the breakdown of the growth by region, Pittsburgh and types of huge portfolio of they were up about 3%.
From a capital region, which is Harrisburg Scranton length of stay are betting.
They were up just almost 5%.
The South Carolina, which is Charleston, principally and they were up 15%.
The Raleigh was up approximately 4% and pretty decent sized portfolio.
And then we saw some growth and builder finance.
And in our SBA.
The portfolio so.
I think that day.
We have enough granularity and that was the strategy from day, 1 was to not be dependent on a single geography, where adverse selection kicks in and market trends moving in the wrong direction and we ended up booking assets.
And then come back to haunt us as you know from your long history with this company we are very conservative.
Many of the the moves that we made leading into the current situation.
And we were very proactive and discarding book.
And we considered to be risky asset classes, because we thought we were in the late term and the cycle even before the pandemic. So.
So I think we're very well positioned from a credit perspective, I think we've proven we don't have to make any bones about it.
Performed exceptionally well and back I would argue that without stimulus many of our peers might've had more substantial credit problems because of concentration and certain industries, which we don't have.
I think the given everything that we've designed within our company.
It's all working pretty well and I would suspect that those pipelines and it's going to vary from market to market and some market share.
The irrational and we're going to back away, but we can lean in and other areas to pick up the slack go ahead, Gary I'll, let you talk about the trends what Youre seeing excuse me yeah, Frank in terms of the competitive nature of it it surely is that and we're going to pick our spots with our clients.
From Kate.
From a pricing standpoint, as we have we've seen during the quarter of some great high quality opportunities for some really strong clients as I mentioned in my remarks, we're seeing more and more of those opportunities you know, there's some M&A activity going on and we will continue to deploy.
And the space and pick our spots.
The other the other thing we are seeing is it's a very good time to get rid of some assets that we don't want on the balance sheet for the long term.
Thanks are very aggressive in that space right now and.
It's 1 of the reasons why we were able to 2.
Upgrade some credits and.
More importantly get rid of some of those credits that we did and what.
During the quarter, which helped helped that classified number come down significantly.
And do also expect that to continue as we roll into Q3, so hopefully we get some additional benefit there, but we'll be opportunistic to pick our spots to take care of our clients and.
We do each and every day.
Okay, Great and then 1 last 1 of if I could just in terms of M&A.
Certainly Howard does fit the bill of what you've been talking about for the last few quarters Vince in terms of the per.
<unk> strategy or what you look for it and.
And of partner.
Wondering you know.
And I guess, maybe you never say never but just wondering your thoughts on could you see something.
On more expansionary larger on the M&A M&A side or is that kind of largely off the table for you guys just because of what we're able to do on the organic side.
Well I think we're still.
Focusing on organic growth Opportunistically, there may be opportunities that come up, but we're going to be seen.
On tangible book value dilution and the governor so that kind of rolls out certain transactions right unless we can get substantial cost take out and it fits strategically and is additive to our organic growth strategy I would pull it out.
And if it works within our strategy and I said, it pretty clearly I thought and in the prepared comments.
Going to look for those metrics that drive returns for the shareholders.
And fits into our strategy, which I think we've executed extraordinarily well.
And I reflect back to 2017, I don't think theres been a quarter where.
And we've missed what our forecasting has been so I think our employees have done an exceptional job of integrating those companies. We've done a phenomenal job growing noninterest income I mentioned that on the call its more than double.
Almost all organic and again, it's the execution of our strategy against the market expansion and the accumulation of companies that we brought on through our acquisitions and through organic growth.
So that continues to bode well for us and I think we've got a lot of work to do.
On the digital front to continue to improve our interface and the continued to drive activity from.
From a technology perspective, and that's very exciting.
So I think when you look at all of that that's pretty much.
Pretty much R.
Our M&A strategy, I think I've reinforced it and the script and.
Hopefully that's clear enough for everybody.
Great. Thank you and thanks for all the Covid.
Per share.
Thanks Frank.
Thank you and the next question comes from Michael Perito with K B W.
Hum.
Hey, good morning.
1 of them.
Couple of questions for me just on the the revenue unchanged revenue guide I think approximately $1.2 billion for the full year it seems like.
Do you guys for tracking a little ahead of that.
Start the through the first 6 months here and I'm just curious.
Outside of what's likely some conservatism around PPP forgiveness I imagine in terms of the timing of when that's recognizes is there anything else and it's in the back half of the year that debt, we should be mindful of from a revenue perspective like for like for example, the wet.
Recent while production has been strong and is there some legs for normalization, there or anything else that that could potentially.
Kind of slow the trajectory of your on from a revenue standpoint, and the back half of the year.
I think you know.
We're being conservative because we're in unchartered territory here.
And I want to be optimistic I'm, an optimistic person and you guys have accused me of that many times.
And to stay positive, but I also know that there is quite of few unknowns out there.
The changes that have gone on with the pandemic of really.
Turned some things upside down so.
I think and we achieved greater loan growth and increase and outstanding balances and the loan portfolio, absolutely, but the supply chain needs to be corrected there are a number of issues.
Particularly in the C&I segment with companies they can't they can't meet full production quotas, because they can't get supplies.
And there commodity price increases that haven't been reflected and revolver balances because they can't get the product or they're unwilling to take the risk on price volatility and the current market. So there's quite a few unknowns out there inflation inflation do when you look at the mortgage business gain on sale margins.
Came in fairly substantially we signaled debt on the last call somebody had asked and we had indicated that we saw that they were coming in and they've been varying.
So there is some volatility and the pricing there too because of the changes in the.
The 10 year interest rate and particular so.
And theres quite a bit out there that makes it difficult to forecast having said all of that I think the activity has picked up the pipelines are up substantially and it's the best pipeline, we've had and consumer small business and middle market banking and the number of years and I am hopeful that we can execute and turn that around.
And when you look at noninterest income I think 1 of the benefits of having such a diverse base of fee based businesses.
1 is up and.
And when 1 is down the other ones up so SBA is.
Really up fairly significantly well had a big leap because of some organic growth that we experienced an improvement and net asset values because of market condition that all offsets the mortgage decline. So I think you know.
And I can tell you from a capital markets perspective, we probably would've been a little more.
Inserted looking into the future, but I think with the 10 year and about a Buck 18, right now and there's now an opportunity for people to continue to fix the rates of derivatives fee income it looks like it.
Hanging in there.
Pretty solidly we've got some great syndications opportunities and our debt capital markets platform that we launched we've already seen 3 or 4 deals that we participated and so.
That's all exciting but again, it's it's.
Very difficult to forecast in this environment.
Yes.
No that makes sense I appreciate the color.
Maybe a question on the.
Kind of the liquidity position and the margin from here I mean, you guys continue to grow deposits, which I imagine and it's a good indicator of kind of overall customer growth and this quarter, particularly but.
With a lot of the stimulus playing out over the last 2 quarters, but just curious how you guys are thinking about the cash position and pace of deployment and the bond book and.
Or conversely, sitting heavier and cash and hoping that the loan growth kind of materializes and maybe there is some normalization and in deposits.
The economy continues to recover just any any thoughts there.
Yeah, I would say that on the.
Investment portfolio size and our plan from here is basically and reinvested cash flows.
Coming off of the portfolio, we're not looking to increase the size of it I mean during the second quarter, we opportunistically.
110% of cash flows for.
And a little bit.
For some opportunities and in April and late June.
And our plan from here for the rest of the year.
It's about $125 million to $150 million per month.
Just kind of for that to work and the reinvestment rates and the second quarter there were $1.21.
The rates are today.
And were down 1.110 and could even go sub losses, what Pas Wang and it doesn't make sense to do that so.
And the investment strategy is pretty much intact, and then you know the level of cash on the balance sheet debt we have the.
The main focus there is going to be quite of that and loan origination on the loan growth and the <unk>.
And half of the year and.
Thanks, Ed.
A lot of opportunities there throughout the market.
And then there is opportunity to use some of the cash too.
Once we close the transaction.
And there are some borrowings and some of them.
The deposit classes that would make sense the kind of use some of our cash there too so.
Kind of a high level and as far as the cash position.
Got it helpful. And then just 1 last question for me just regarding Howard I appreciate the additional color.
Looking at Howard from recent results it seem like over the last quarter of 2 particularly the it.
Start to really show some good organic growth despite everything going on and after of some initial slowdown after there.
Transaction, they have with Firstmerit and I was just curious I mean, I imagine thats the kind of a critical piece of this for you guys. As you mentioned trying to be additive to your Baltimore growth I'm. Just curious if you of any color you can provide on kind of the retention of that lending team and and how you kind of expect them to fit into your already growing operation and the <unk>.
Later Baltimore region.
The great question and I'm happy to answer and I think when we first set out to do due diligence on Howard and we didn't know what we would find and as we dug deeper into the information.
We became extremely confident with the quality of the people and the quality of the portfolio and I think this is 1 of the lowest credit marks we've had and believe me Gary and his team do a fairly extensive job.
Fisher, Gary the whole team evaluating risk within those targets were very seasoned the fueling acquisitions and many of us and been here for.
For a number of years Ive personally been here for I think 15 or 17 for the month.
Remember.
But theres quite a bit of due diligence that goes on we were very impressed with the people the culture with Maryann and leadership.
The company has struggled a little bit, but when you look at the opportunity for us just and the DDA accounts.
At 40000 customers and the Baltimore market.
And with our data analytics teams with our digital strategy on the consumer side that provide substantial benefit if you look at the opportunities from a mortgage lending perspective, and the market has been.
A big contributor for our success the mid Atlantic region in total.
And then mortgage banking that provides us with a tremendous amount of opportunity and.
The consumer segment relative to mortgage banking, if you look at commercial banking and legal lending limit was relatively small.
They have a.
Really we think a pretty solid customer base. They don't offer derivatives. They don't offer international bank, They don't offer and as many Treasury management services as we offer so there's a substantial opportunity which by the way. This is not all been model.
And we think over time, just like we did with the rest of the company with noninterest income growth, we are of an opportunity with that portfolio.
And Gary I don't know if you want to talk about on the credit due diligence for how we evaluated the opportunity there.
And due diligence work that the team does and as Vince mentioned.
Deep team of.
The.
The group has done many of these transactions.
And we totally re underwrote and 80% of.
On the commercial loan book at Howard.
And and checked out very very nicely Vince mentioned, the credit market 1.7%.
We also reviewed the 20% of the retail book.
And with the underwriting there evidence of lower risk underwriting so felt very comfortable really across the books the.
Philosophy or out of the commercial underwriting was very similar to.
<unk>.
So again a lot of good work done there felt very comfortable with the credit Mark and the work that the team has done at Howard.
And we feel it's a very good match from a cultural standpoint, and we also from a leadership perspective, we have strong leadership and Baltimore Baltimore has been a double digit performer for us from an organic perspective.
Rone, 15% per year since 2013, there. So we are of very strong team.
And they have very good people I would say our focus is probably a little bit further up market. Their focus is middle market and small business and fits in very well for us so there's plenty of opportunities for there.
Bankers to join our team and benefit.
Plus we are keeping the credit officer.
So he will be 1 of the senior credit officers and the marketplace because of the Gary.
Confident.
And the management team will be there tomorrow.
And so we will have a meeting with the bankers tomorrow and we're very excited about that and I think that we'll be able to convey.
Some of the things we've said today to.
And to those individuals and I think there'll be excited about the opportunities for them to cross sell additional products and services and.
And to serve their clients.
I don't remember.
Member of you've asked me anything else, but I will tell you that.
We're very excited about the opportunity to double our deposit share and Baltimore there are a number of large players there.
And number 6 deposits share with $3.5 billion and I think we nearly doubled the number 7 and so.
And then it moves up fairly dramatically from there so having that additional scale and Baltimore and the mid Atlantic region is critically important.
So.
Look what it did for us and Pittsburgh.
Stanchion accelerated our ability to go after the middle market opportunities and grow organically and Pittsburg and I think the same will happen there.
Got it helpful. Yes, the only other element was just kind of the the actual formal retention of lenders, but it sounds like.
That's still being sorted out and we are still.
Working through that believe me, we've allocated substantial retention.
We have a process that we use to evaluate talent and flight risk and we've done this a number of times.
I would say despite what everybody believes we've done a pretty good job of retaining who we wanted to retain throughout our history of acquisition. So.
I can't say anymore and that I think yes.
No debt.
That's perfect very helpful. Everyone. Thank you for for the time and taking the questions.
Thanks, Bye bye take care.
Thank you and your next question comes from Jared Shaw with Wells Fargo.
Hi, Good morning. This the team are very aware of and against the third.
He is doing.
Good.
And maybe the first question on mortgage production and then looking at whether or not you're putting those mortgages on the portfolio versus selling them.
And given the current trends should the expectation be the more of the mortgages and up on balance sheet and I guess, what would that do for mortgage banking outlook going forward and what would need to happen to really get mortgage banking revenues are higher.
Yes, I would say I guess, a few things so just to comment on the.
The activity in the quarter.
As we mentioned and our remarks, I mean, we had a significant decline and the gain on sale margin from over 100 basis points.
During the quarter mortgage rates on a 35 basis points from the second quarter after a steep run up.
Sure.
And Thats the big driver for the change.
The second quarter, and then the amount of the available pipeline dropped about 13%.
And that's helpful.
And then our MSR valuation reserve the company, we have $2.5 million and the.
The first quarter of positive recoveries and we had the <unk> 3.
So those are kind of the.
The 3.
And I kind of key variables there from a from a small production standpoint, we actually for more quarter over quarter on.
Second quarter versus first quarter, and we're really selling the.
The bulk of the loans that.
Oh, the loves and our sales of the jumbo loans, we tend to keep on balance sheet of private banking relationships and the certain programs that are more geared towards that so the kind of hold versus sell is really by the nature of the volume.
And then the overall production was 1 billion won on the second quarter.
Up from 8.3.
And.
For the full production was comparable.
I mean, as we go forward from here and as we sit here today purchase.
Activity is about 68% of the retail volume 55, and the first quarter. So that's another kind of key indicator things seem to have stabilized somewhat and as far as gain on sale margins and.
For the third quarter, we're looking at around the same level, but for some upside there depending on what happens with rates.
And it's impossible to predict but the.
The margins haven't stabilized is definitely a positive moving forward and we make that decision like I said based on the nature of the loan whether it's drilling and portfolio selling.
Okay. That's helpful. Thank you and maybe just switching over.
It seems like Charleston had another good quarter here and the second quarter and.
I know last quarter, there was a good amount of detail provided on your expansionary efforts there how does that market.
Pair of from an organic growth standpoint to to what had been going on and in Baltimore.
Confident that you can gain that market organically are there opportunities to supplement that growth through smaller M&A or just those of the smaller size of that market relative to the Baltimore and kind of D C MSA and make it easier to attract the talent and grow there organically.
Yes, I think.
And of Great question.
And when you look at Charleston, and the opportunity and Charleston wasn't it's about.
Little less than half the size of Baltimore Pittsburgh in terms of MSA. So we tried to size. It. We tried we did an analysis to see what it would take to de novo into that market and adequately cover the marketplace and we're doing that with the combination of branch expansion and.
And the ATM and ITM deployment within the marketplace some of it co branded.
ATM deployment. So I think we came to the conclusion that we could expand into the Charleston market and growth. If we had the right people.
And we were positioned properly within the marketplace from a.
Customer access perspective, and then leverage our digital tools and our analytical tools to drive additional growth and.
And that seems to be working very well I mean, when you look at the retail location that we rolled out 2 of the locations of been open for over a year and the top 25% of our branches from a production perspective.
You look at the C&I team the team that we recruited very solid individuals.
So I actually enjoy interacting with the great bankers and land Hutchinson and his team and Charleston have done a phenomenal job. They brought over a number of of key clients and then the PPP process really helped accelerate debt too because it gave us an opportunity to.
Moving on thousands of customers and the south east because some of the larger banks couldn't get the PPP loans process. So.
All of that together has worked exceptionally well for us So I think Charleston.
It's a de novo opportunity and there are others that we pursue Greenville, South Carolina Ashville.
And we've done similar strategies and they are starting to take off too so.
I think there's room for both we have to evaluate how we wanted to deploy our resources and do it in a way that provides the highest return for the shareholders and that and Charleston's particular instance, I think it makes more sense for us to go and de Novo.
Okay understood and then and just 1 last 1 if I can for for Gary.
The allowance ratio still seems relatively elevated.
And the pace of reserve releases of little bit slower than what we've seen at others I guess, how much did qualitative factors contribute to the slowing pace of reserve release, and the second quarter and what's the outlook for future of reserve releases that going on.
And you all actively trying to moderate that.
And what the model and maybe spitting out and at what level of do you think you can get back to.
Closer to a day 1 type of allowance.
Well when you look at where we sit today I mean, there and theres still exists and risk and the economy, we talked about the supply chain issues of inflation and other items.
Out of that.
You also have some some pandemic starting to pop up again, so we're going to continue to be a bit cautious with that when when you go back to seasonal day, 1 we started.
At 1.25% from an ACL standpoint.
Today, we sit at $1.51 X Triple pay so you know I would tell you that there are surely has some room to continue to move that downwards over time as we as we work through so the.
And the economy, and the pandemic and get back to some normalization.
So all told for.
Qualitatively, we are at the higher end of our scale right now.
And that generally ranges from 20% to 30%, whereas the higher and as we sit here today. So.
And there is some room there.
And when I look at the economy normalizing over time I think we're in a good spot as we sit here today.
With some future benefit to come.
Let me thank you for the questions.
And.
Thank you and the next question comes from Dave Bishop with the Seaport Research partners.
Yes, good morning, gentlemen.
Good morning.
Hey, maybe we can stay on that topic, Gary I don't know if you can quantify this but.
Assuming normalization and the and the loan growth outlook. There once we get through some of the PPP churn or so.
Would you think you'd be back the reserving on a quarterly basis at that 1 and the quarter per cent of loans. Just just curious if theres any color you can get in terms of how youre thinking about the.
Reserving on the under a more normalized basis.
Well there is lots of it comes into play of these days mix is an important part of it.
When you look at the.
Life of loan situation under Cecil.
But once once things normalize and portfolio activity normalizes.
Yes, I would feel comfortable that the economy is going to be back and a spot where you're moving very close to or at the normalization from from a provisioning standpoint.
As I just mentioned.
And.
There's still some uncertainty out there we're going to manage it appropriately and we.
We'll work it through.
Through the system as the.
Economy continues to improve and stabilize and the.
The growth starts to sort of.
The normalized.
So it'll be a quarter by quarter analysis.
Look at it each and every each and every quarter.
The only thing I would add too is that the growth we had the spot growth.
$515 million, which provided for that so that was probably $7 million or so so that negative for 1 million benefit really was kind of 8 except for that loan growth. So we always talk about we need to provide for the loan growth. So that was the.
And have in the quarter, but the underlying kind of released a little bit bigger from a cash.
On a pure provisions of Standalone.
Yes, and a lot of that was driven and it was really driven by the the.
The improvement and the credit for.
Portfolio that we talked about with reductions and classifieds and all of the credit metrics all moving in the very positive direction that really drove that debt.
And that reduction.
Got it and then in terms of the.
The loan yields look like they remain relatively stable here just.
Curious if you can provide some commentary in terms of the on.
On boarding of new loans originations of the yields this quarter, what youre seeing and is there a significant difference across the various markets and regions.
I think.
And it's amazingly similar at this point I think it's pretty competitive across the board for the feedback we've gotten from the field and this is.
And there is some pressure on credit spreads.
And the price over cost of funds.
I think debt.
And given the environment, we're in where everybody is flush with liquidity obviously that's it.
Everyone's trying to grow the loan book.
The competitive.
On a quarter over quarter basis, the yields have been.
Pretty similar I don't think this is a new phenomenon and I don't know Gary.
Add to that I mean, I think it's been sustained for several quarters.
And would agree with that.
And when you look quarter over quarter, it's it's free.
Pretty much of a fairly stable and sitting sitting where it's been here.
The occasional transaction that gets you know really pressured and as I.
As mentioned earlier, we will pick our spots with our clients and.
And the effect of the.
The higher quality credit, obviously is getting priced business.
And the market.
Yeah.
And I think as long as you can justify the returns on capital invested with cross sell opportunities ancillary products and services capital markets opportunities and it can work but.
The <unk>.
Credit spreads are definitely in.
No.
Got it I appreciate the color.
Sure.
Thank you and the next question because I'm on your on novice with D. A Davidson and company.
Hello.
Hello, and Synovus. So your line is on.
Yeah.
Moving on the next question comes from the Tommy Avago of Stephens, Inc.
Good morning, and amongst them.
Yes.
Alright any of their mortgage.
Yes.
I wanted to ask a little bit about the direct installments and the other loan categories and just wanted to get on.
Perspective on and I guess, what drove the increases there wasn't the do too.
So all of the in home equity and and it's so particularly on the auto loan side.
Gary feel for whether.
And thats due to.
Larger volumes for just the size of the loans due to the increase the car.
Prices.
Yeah. It was really driven by the home equity book the home equity book.
<unk> been very active.
Our home equity installment product.
And then.
On a very good product for us.
That we have seen good solid growth and good solid activity in the automobile book.
Growing slightly.
There is issues and the supply chain there as well.
With new inventory so in terms of that book and it's growing.
And at a much smaller pace, but it's really being driven and the home equity installment product at this point and I think as you get the.
Beginning of the pandemic people were afraid to do anything.
All of the sudden trillions of dollars of stimulus flowed into the economy.
People began individuals' consumers began to regain confidence.
And they either bought a new house and paid 20% more than they would have.
And for the pandemic, where they decided hey, I'm going to renovate my home now and that's what we're starting to see we're seeing and escalation in our direct installment portfolio in particular and the pipelines of from <unk>.
Principally because of where we are and the cycle relative to the pandemic and I think the overall effect of stimulus has led to.
The people, taking a little more risk.
In terms of improving the property and then theyre seeing property value of appreciation, which gives us added confidence right to get that done so.
All of that is kind of.
Blowing and here.
I'm not sure that we're the most aggressive lender from an LTV perspective, but I don't think we are I think it's more a function of.
The economy and demand for that product moving up.
And as of what's happening in terms of the growth that you are seeing.
And the auto space.
That's kind of seasonally driven.
And although the dealers are having trouble with.
With new vehicles.
From that standpoint.
All of our part of our business, but it's <unk>.
Impacting activity of that.
Understood. Thanks for the color there and then.
Just returning to the mortgage side just for a quick question.
There was a part of 5% linked quarter growth there and so.
And can we assume that that was due to holding the production on the books.
Yes, that's just the name.
Of the loans that we originated during the quarter. So yeah. That's all of it is just from origination activity.
Great and then 1 final 1 for me.
With regards to the Howard acquisition.
Could you give us some details on the accretion that you expect to recognize and the timeframe over which you expect to recognize that.
Yeah, I can touch on that so when you are on.
Net the.
Credit Mark accretion with the loan Mark accretion and some of the smaller items I mean, it really only total of about 20.
The 4% accretion and so on a kind of more cash accretion basis Youre looking at 3.
8%.
Total accretion and.
Terms of.
Over what timeframe and we assume a 5 year life of the loan portfolio and that's pretty much accretive the straight line. So.
On the on a net basis, its relatively small and less than like $1 million.
4% of understood Alright.
Timing wise.
Got it thank you for providing the color I appreciate it and so for me.
Thank you and the next question is from Brian Martin with Janney Montgomery.
Hey, good morning, guys.
Brian and Brian.
Hey, just 1.1 on the PPP just the timing of the forgiveness or just the recognition of the remaining $45 million do you guys have any kind of big picture thoughts on how how that plays out and how youre seeing that unfold over the next couple of quarters and into next year.
Well the.
The forgiveness that I mentioned have filter and tomorrow and this is.
And the half of $1 billion.
Most of the $45 million.
Okay.
Yeah.
For the full year.
And this is.
Contribution.
And most will be this year, we'll have some tail that will go into next year and 15%.
And by about 10, or 15%, Brian that would carry over into next year, but we would expect I mean, the pace that ESPN was forgiving they've ramped up and the second quarter.
And we would think with round 2 of starting to get forgiven, yet that would start to accelerate at some point and just on a GAAP wet so.
And if we're a little conservative and our $500 million.
Assuming for the third quarter.
More opportunity for that comes with the higher but.
The vast majority of what's left with.
Cover come through this year.
Got you Okay perfect and then just go to the margin for a minute and can you just give us any thoughts on.
The margin accretion that comes from Howard and then just.
Just on the core margin this quarter. It sounded so obviously this is the second quarter of kind of incremental increase it's just kind of youre thinking about that core margin going forward I guess.
It sounds like it's at a bottom and should continue to trend higher based on some of the commentary on loan growth and maybe utilization getting better, but just kind of the Howard and then just the core margin I think give any color Vince.
Yeah, Let me touch on the core margin and maybe I'll ask Chris to comment on the Howard impacts on our finished with that.
Just a couple of comments there so right net interest income went up $5 million.
While the trip for peak contribution was up too.
And we're down to sort of anything kind of a push there. So the growth that we saw was driven by the spot loan growth the $5.15, and we talked about.
Well as continued reductions in the cost of interest bearing deposits. So.
As we go ahead from here I mean on interest bearing deposit cost side and brought it down another 7 to 24 for the quarter the.
Spots of 22 basis points at the end of the quarter.
And we have continued benefit from CD maturities debt.
The roll down I mean, there was 160% of 200 million of month.
For the next 3 months.
On the on our books at 65% to 85 basis points.
And yet on around 50 basis points or so so that will continue to provide some benefit.
Some opportunity kind of on the on the commercial side too and I guess to put the Cds and perspective.
The total cost of that portfolio at June 32 of 84.
For that to come down another 50 basis points and so by the end of the year and and that's kind of baked into our into our guidance.
As we look ahead.
From the third quarter, excluding Triple T, which <unk> commented on it.
There's some variability there.
And would expect net interest income to be up slightly.
The strong of the loan growth is the stronger you get there and of course.
And the core NIM to kind of be flattish from here.
Here I mean, we're trading triple T for kind of the normal.
The normal loans as I would call them.
On the roll through.
But kind of flattish.
Flattish on the margin and alpine net interest income given given those factors.
The loan growth plus the continued opportunity to bring down the cost of deposits.
Yes and on.
And the impact of the the overall margin with the combination.
As you know Howard margin is higher than ours, and the low to mid threes.
So when you kind of slap them together it is going to be modestly accretive to the margin I wouldn't say a whole lot.
And part of that is also due to some of the balance sheet items that we can that we plan to execute on that Vince alluded to earlier on and so I'd say, a very modest contribution of higher margin.
Perfect. Okay, and then just the the hour of the Baltimore loan portfolio of today and I guess, how does that stand and maybe if you comment then on debt and maybe I missed them sorry.
Okay.
Yes.
When you say, how does it stand and the you're asking about the size of the portfolio.
How does the.
Yeah, how is that trending today that the Baltimore portfolio.
Yes, it's trending it's trending upwards.
Bowyer, there is $3.3 million and total.
And balances are right around 2.5 billion Brian.
Go ahead, okay, and it's been moving up nicely out of 15% right yes.
Yes, that's what it sounded like Okay, and then just the last 1 or 2 for me was just on the just.
Vince you gave a lot of color on and I appreciate it on the on the M&A.
Just to kind of understand what's happening there I mean, just the dialogue on the M&A today I guess, if you can give some color on that and then just the I'm just curious.
And you lay out what you would be looking at from an M&A perspective.
The larger transaction could you potentially consider if it met the criteria you you mentioned earlier, just try and understand where the opportunities are how big of an opportunity and you may consider if it if it was appropriate.
Yes, I don't think again I'm going to refer back to the comments that I made Brian and I think we're going to focus on minimal tangible book value dilution.
Strong irr's and we're going to evaluate what's best for the shareholders and when you look at this transaction.
This is the best way for us and deploy capital at this point and time, obviously, if we start growing.
Loans nicely that usually ends up being the highest return on capital invested so that's that's how we've looked at it.
Particular, obviously given the activity of everybody knows there's quite a bit of M&A activity going on so it doesn't take much to stumble across the conversation right. We all know of that.
And we're going to be very disciplined and how we move forward and that's.
That's again.
And I think my prepared comments kind of some of it all up.
Okay Perfect and then just last 1 was just on the buyback.
Yes, just curious how you're thinking about that today or just how you see that unfold and that's how I'd take the <unk> acquisition as I mentioned again and my comments the tangible book value dilution on the whole company basis.
And this we earned it already.
It's not going to change how we look at deployment of capital moving forward, which includes buybacks the dividend the whole ball of wax. So we're going to continue to deploy our disciplined capital management strategy that we laid out for you over the last few quarters and.
And that's still going to be part of our decision making process.
And will be offered on a ship.
Yes repurchases and so it's definitely in the.
And they are not that's not off the table.
Yes, okay perfect.
Wanted to clear of that up so thanks, guys for taking the questions.
Okay. Thank you I appreciate it and its Brian questions. Thank you.
The next question comes from Michael Young with true it's true of Securities.
Hey, Thanks for taking the question wanted to ask just a follow up on actually net charge offs of Gary.
Obviously, a lot of pieces that are moving within seasonal and loan growth that will affect provision levels, but net charge offs of 6 or 7 basis points, depending on how you look at it.
And our historically low for you or was there anything that was kind of like 1 tiny and there in terms of recovery and should we expect kind of low levels and the trend higher back to that 20 basis points to 25 basis points kind of over time or just any outlook there would be helpful.
Yes, actually Michael It went the other way.
We had we had net charge offs as you know of $3.8 million and in the quarter and it was really driven by 1 of acquired accounts that we've been working through over the last few years from the Yadkin acquisition.
That was of 4.2 million dollar write down during the quarter, so absent that and.
That was previously reserved for quite a while back.
Absent that we would of had a net recovery quarter. This quarter. So the book the book really across all of the portfolio is performing really nicely right now.
Naturally we talk about.
The charge off levels and the <unk>.
Normal.
Range of ours, and eventually I would expect that things will normalize overtime right now the positions that we've made and moving some higher risk assets classes off of the books over the last number of years.
And is really has really benefited us.
We also are sitting here with.
Outlook for more upgrades as I've mentioned earlier, which should provide some benefit going into Q3. So.
As we sit here today and I.
And communicating this regularly the portfolio.
Portfolio and the position of it we feel really good about it at the moment and.
And I will tell you I'll remind everybody we are OCC and fed regulated so we have a very professional and strong.
Oversight on our portfolio and we've gone through what several reviews since the pandemic started.
And it had been and constant.
Such with the OCC so.
And we're feeling pretty good about the credit situation here.
Gary and his team have done a terrific job.
Okay, great. Thanks for the color and my last 1 is just on PPP forgiveness can you maybe just talk about.
Qualitatively, what's going on with customers.
Happens.
Retaining.
<unk> deposits are expanding relationships and just kind of qualitative factors that we should be thinking of as this continues throughout the year.
Yes, I don't have any hard and fast facts for you on my fingertips, but there were approximately 5000 PPP loans and the first 2 rounds I don't know what the third round because.
As we kept that mostly for our customers.
Probably several hundred more debt and.
Prospect.
The 5000 or so were purely prospect.
And they were largely centered around.
And our southeast and mid Atlantic regions, because there were several large banks and it couldnt.
The PPP loans.
And the timely fashion and Fox people out so we have been capitalizing on converting those clients every PPP borrower that we had opened the depository accounts, because we had a fully automated process and it was part of our authentication.
US as well so many of those deposit balances have grown which is why.
Our demand deposits in particular, if 1 of them fairly substantially so theres been an element of retention that's gone on and the team is very focused on staying in touch with those companies and waiting for the opportunity to bid.
Bid on their credit facilities.
As they renew.
That's where we are.
Okay, well great. Thanks.
For our clients and for us.
Okay. Thank.
Thank you and then.
The question and answer session and I would like to return on the call. The Vincent Lee for any closing comments.
I'd like to thank everybody for calling in and we had great questions very detailed.
<unk> it was a solid quarter I would like to congratulate the team and thank you everybody in the field really stepped up and.
Managing expenses, taking redundant costs out of the company was the focus growing loan portfolio was a focus.
And that's all of that takes a tremendous amount of work and.
<unk>.
I'd like to thank our team for everything they've done.
The stepped up and.
It shows and the quarter. So thank you and thank you for your support and the questions great detailed questions today.
Thank you.
Thank you for the conference is now.
Okay.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.