Q3 2021 FNB Corp Earnings Call
Good morning, and welcome to the F N B Corporation third quarter 'twenty to 'twenty, one earnings call. All participants will be on listen only mode should you need assistance. Please signal our conference specialist by pressing the star can you followed by zero.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone. So try your question. Please press Star then two please note today's event is being recorded.
I would now like turn the conference over to Lisa Constantine Investor Relations Ms. <unk>. Please go ahead.
Thank you good morning, and welcome to our earnings call. This conference call a F N B Corporation and reports it files with securities.
And Exchange Commission also contain forward looking statements and non-GAAP financial measures.
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 the most directly comparable GAAP financial measure are included in our presentation materials and in our earnings release.
Please refer to these non-GAAP and forward looking statement disclosure.
And a related material reports and registration statements filed with the Securities and Exchange Commission.
Available on our corporate website, a replay of this call will be available until Tuesday October 26, 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 <unk>, Chairman President and CEO.
Thank you and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, Our Chief Credit Officer.
F&B third quarter earnings per share was <unk> 34.
Representing an increase of 10% on a linked quarter basis, and bringing year to date EPS to 94.
Our performance across our core businesses led to record revenue this quarter of 321 million up 18%.
On a linked quarter annualized basis with.
With strong underlying momentum visible on our loan growth pipeline fee income and digital customer engagement.
Let's look at each one of these core building blocks starting with longer.
Our spot loan growth, excluding the impact of PPP forget is 8% annualized linked quarter driven by a strong pick up in lending activity in both the commercial and consumer portfolios.
Commercial loan growth totaled 7% annualized linked quarter basis with positive growth in nearly every region across our footprint, notably the Pittsburgh, Cleveland, Harrisburg and Raleigh region.
Consumer lending grew over 8% annualized linked quarter led by increases in residential mortgage and indirect installment home equity.
As evidenced by the spot loan growth our teams had a strong quarter and overall loan production reached record levels as the economy continues to recover.
We saw healthy pipeline build and a slight increase in line utilization with the pipeline being up nearly 12% year over year.
In prior earnings calls, we indicated our expectation for improvement in loan demand in.
And that has now materialized.
Commercial had record production in September and the consumer pipeline jumped 27% year over year.
Mortgage activity has slowed more recently because of the decline in refinance activity due to higher interest rates due to the higher interest rate environment. In addition revenues have decreased as margin abnormal.
Overall, we are optimistic that our total loan pipeline indicate a path for sustained growth.
As we have continued to execute our strategic plan noninterest income reached a record $89 million with strong contributions from capital markets and wealth management as well as solid SBA growth.
Our emphasis on diversifying revenue streams has become even more important during a low rate environment.
Through our efforts in enhancing our product suite and expanding our services. Our noninterest income now comprises 28% of our total revenue.
Our clicks to brick strategy introduced several years ago was designed to integrate our mobile online and in branch channel for a seamless and convenient banking experience.
Our philosophy of continuing to invest in technology as a resulted in many industry, leading offering including our E store solution Center, which features a retail shopping cart experience, our mobile app and our website with videos and substantial digital content.
After launching our new website at the beginning of last year. Our website engagement has increased 13% year to date compared to the same period in 2020, which included increased usage due to COVID-19 and PPP originations.
The platform, we built with clicks to bricks has been extremely important driving the increase in adoption and usage of digital channels.
We continue to make enhancements to provide our customers with the most flexible banking options.
As demonstrated by our online application functionality that enables customers to quickly and easily apply for multiple products, including consumer deposits credit cards.
In home equity and mortgage loans.
In May we launched our digital applications for mortgages on our E store and since then 61% of all applications came through our digital channels.
And those of those applications approximately 46% were submitted outside of normal business hours on the weekend.
In addition over half of our credit card applications were made digitally in the third quarter.
Online applications for small business loans and deposits as well as auto loan will be available by year end.
And next year, we plan to launch a single unified application for virtually all F&B loan and deposit products to make the shopping experience for multiple products even easier.
New interface will reduce customers' input by eliminating redundant applications deal and.
And expand our clients capabilities to upload information in a secure formal to expedite approval.
Broader use of esignature and automated documentation and disclosures will also be added over time.
F&B recently introduced chatbot, which will apply artificial intelligence and automation to assist our customer service employees and supporting our customers. The chatbot will identify policies and procedures and provide recommended scripting to address the top 100 frequently asked question.
We are excited about both the current and upcoming enhancements to our digital platform, which will continue to drive increased client engagement and client acquisition.
And improve our operating efficiency, while differentiating differentiating F&B in the marketplace.
With that I will turn the call over to Gary to discuss our asset quality position Gary.
Thank you Vince and good morning, everyone.
Our credit portfolio ended the third quarter very well positioned following continued positive results across all of our key credit metrics.
This solid performance was marked by further improvement in the level of delinquency and nonperforming loans reductions and rated credits and low net losses for both the quarterly and year to date periods.
Additionally, improving trends across the broader economy and government stimulus have further contributed to these favorable results, including deferrals, which have reached an immaterial level of only <unk>, 2% of total loans.
Let's now review some of the highlights for the third quarter.
The level of delinquency, excluding triple T balances and then September at a very solid 71 basis points and 90 bps improvement on a linked quarter basis, reflecting a notable improvement in non accruals within the commercial book.
The level of Npls and Oreo improved to end the quarter at 49 basis points, representing a nine basis point reduction from the prior quarter's X Triple P level.
The reduction in Npls during the quarter totaled $18 million and when compared to the year ago period, when Npls and reached their peak declined by $68 million.
Representing a solid 38% year over year reduction.
Net charge offs for the quarter were very low at one 6 million or three basis points annualized while year to date net charge offs were solid at seven basis points on an annualized basis.
We recognized a $1 $8 million net benefit and the provision during the quarter. Following these improvements in our credit quality position.
This resulted in a GAAP reserve position that was down one basis points to stand at 141% with the X Triple P reserve decreasing six bps to stand at 145%.
Our NPL coverage position further improved ending September at a very solid level of 317%. Following the noted reductions in npls during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts totaled 156%.
In closing we are very pleased with the position of our portfolio moving into the final quarter of the year and the continued progress we've made to further reduce nonperforming and rated credit level.
We remain vigilant and attentive to any emerging risks and both the broader economy and within the markets in which we and our customers operate.
With the continued supply chain and labor disruptions elevated input costs and the evolving nature of the virus our approach to managing and growing our loan portfolio. In this highly competitive environment remains balanced and consistent with our time tested credit principles that have served us.
Well throughout the various economic cycles.
This foundation of sound and consistent underwriting timely and comprehensive management of risk.
And selectively pursuing opportunities that fit our desired credit profile will support our future growth objectives as we move ahead.
I'll now turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary today, I will discuss our financial results for the third quarter and provide guidance for the fourth quarter.
Overall this was a strong quarter and we're very pleased with the result.
Our continued strategic focus on diversified fee income contribution drove noninterest income to a record $88 9 million up $9 1 million or 11% linked quarter, leading to record pre provision net revenue of $138 million on an operating basis and a return on tangible common equity.
Reaching nearly 17%.
Our tangible book value per share reached $8 42, an increase of 22 or two 6% on a linked quarter basis.
Let's walk through the financials in greater detail starting with the highlights on slide four.
Third quarter EPS increased to 34.
Up <unk> over the prior quarter and <unk> from the year ago quarter.
Linked quarter basis total revenue reached a record $321 million, an increase of $13 6 million or four 4% and drove net income available to common stockholders to a record $109 5 million, an increase of $10 million or 10, 2%.
But excluding triple P, which is more reflective of the underlying loan growth period end total loans increased $463 million or seven 8% annualized on a linked quarter basis.
With commercial loans and leases, increasing $289 million or seven 4% annualized.
And consumer loans, increasing $173 million or eight 5% annualized building on a strong growth generated in the second quarter of this year.
As Vince said this loan growth was across the footprint with production level, 17% higher than last quarter, and 45% higher than third quarter of 2020.
Let's continue with the balance sheet on slide seven.
Average loans and leases totaled $24 7 billion with average commercial loans and leases decreasing $942 million, which was entirely due to lower average triple T balances as we saw an acceleration of forgiveness and ended the quarter at $694 million.
On the deposit side average deposits totaled 38 billion, an increase of <unk> 3 billion or one 1%.
Early in noninterest bearing deposit accounts.
We continue to see a shift in customer preferences for more liquid accounts in a low interest rate environment as well as maintaining larger deposit account balances than before the pandemic.
In addition, we are also seeing an acceleration of deposit accounts opened digitally.
Turning to slide eight net interest income totaled $232 4 million, an increase of $4 5 million or 2% from the prior quarter.
Moving to Triple P contribution and purchase accounting accretion net interest income increased $2 8 million or one 4%, reflecting an increase in average loans more favorable funding mix and lower deposit costs.
We are expecting a slight tailwind for net interest income excluding triple P contribution as a significant portion of our loan growth occurred near the end of the quarter.
Yeah.
Reported net interest margin increased two basis points to 272, reflecting higher tipping fee contribution of 23 basis points and a five basis point benefit from acquired loan discount accretion, which was offset by higher average cash balances that reduced the net interest margin at 26 basis points.
Excess cash balances grew to $3 7 billion at quarter end was 45% increase from June 30.
When excluding these higher excess cash balances acquired loan discount accretion and triple key impact net interest margin declined two basis points.
Now lets look at noninterest income and expense on slides nine and 10.
Record noninterest income totaled $88 9 million, increasing $9 1 million or 11, 4% in the prior quarter.
Broad contributions from each of our fee based businesses.
Capital markets income increased $5 5 million, reflecting very strong swap activity.
Solid contributions from commercial lending activity as well as contributions from loan syndication.
Debt capital markets and international banking.
Service charges increased $2 million, reflecting seasonally higher customer activity volumes.
SBA volumes and average transaction sizes continued to be strong with $2 million in premium income included in other noninterest income.
Also included in other noninterest income with a $2 2 million recovery on a previously written off other assets.
Reported noninterest expense increased $1 7 million or 0.9% to $184 2 million this quarter.
Excluding non operating items noninterest expense increased $3 4 million or one 9%.
On an operating basis, the increase was driven by salaries and employee benefits increased $2 9 million or two 8%.
Due to production and performance related commissions and incentives consistent with record levels of total revenue, which was driven by diversified strong contributions from our fee based businesses.
Overall, we produced a strong quarter and believe we are well positioned for the fourth quarter.
Now, let's turn to fourth quarter guidance on page 12.
We expect triple fee forgiveness to be $300 million to $500 million.
With the <unk> loan balances decreasing we are estimating a range of $10 million to $15 million for the triple fee contribution to net interest income.
Third to the third quarter's contribution of $27 million.
Excluding <unk> contribution we expect net interest income to be up low single digits relative to the third quarter.
Continuing to benefit from our diversified revenue base, we expect noninterest income to be in the high $70 million to $80 million for the fourth quarter.
Noninterest expense is expected to be around $180 million on an operating basis, which.
Which is subject to normal production related incentives and commissions as we close out the year.
We expect the effective tax rate to be between 19 and 19, 5%.
Lastly, I would like to quickly review, our full year 2021 guide given last quarter.
We believe we will meet our loan growth guidance of mid single digit.
We expect full year GAAP revenue to be up year over year.
Will impact the production related incentives and commissions bring in compensation related expenses slightly higher.
Full year provision is expected to continue a strong performance with incremental provision dependent on the level of loan growth.
Overall, we believe we will finish 2021 and solid earnings.
With that I will turn the call back to them.
Thanks Vince.
We're pleased to announce the Howard Bank integration is currently underway and overall everything is moving very smoothly.
We are impressed with Howard's employees and strong customer base and look forward to working with.
We are still expecting to close the transaction in early 2022.
F&B was once again recognized for our best in class digital strategy clicks to bricks, we recently.
We received a prestigious National award for our mobile banking experience.
Our continued productive investment in our top mobile offering we will soon have a new look and feel with chat support credit center mobile statements.
And F&B proprietary mobile E store, enabling product service and financial literacy to be available within the mobile app.
Other features include snap to pay which enables customers to add if you even take a picture of the bill and.
And F&B express deposit where for key select customers will be offered immediate funds availability for mobile deposit as items.
Lastly, I'd like to offer a sincere. Thank you so all F&B employee.
This quarter's performance demonstrates the dedication and drive of our employees.
It is because of each person's commitment to F&B and our clients.
That we have been able to achieve record quarterly revenue.
Our employees are the heart of our organization and I want to thank them for their continued hard work with that I'll turn the call over to the operator for questions operator.
Yes. Thank you at this time, we will begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys. So I'm sorry. Your question. Please press Star then two at this time, we are possible entirely to assemble the roster.
And this morning's first question comes from Frank Schiraldi with Piper Sandler.
Good morning.
Right.
Wondered if you could Vince you mentioned the $3 7 billion in excess cash just wondering if you could talk a little bit about your thoughts on working that down.
Over time do you expect most of these deposits to stick around what is the expectation for maybe securities build just just trying to create this to the bottom line.
Yes.
The deposits definitely has been very sticky the triple P deposits and we'll continue to have positive growth every quarter going back to the first quarter of 2020.
The goal with the cash level is really the primary goal is to deploy it to fund loans as we move forward from here, there's opportunities with the Howard merger once we close that but.
But I have $1 billion of that to work related to their borrowings.
It's an opportunity there on the investment portfolio, we're basically going to reinvest cash flows reinvested a little bit more this quarter.
During the quarter, we reinvested $621 million on cash flows of $4 53.
Some opportunities there to put some money to work.
But you know reinvestment rates at 113 are better than the 15 for earning on the cash for sure.
It's still kind of running lower than the runoff rate of $1 90 in the portfolio. So.
You may see the securities portfolio is off a little bit from here, we might invest a little bit related to Howard securities portfolio, because we get between now and actually closing that but the primary goal will be.
Put it to fund loans, and then using cash or some of the transaction in the first quarter and in the first quarter. Frank we take a full look at our whole balance sheet to see if there's other opportunities maybe quite some of that cash and other.
Other borrowings that we have on our balance sheet.
Okay.
And then just on Howard I wondered if you could remind us.
No.
With the timing of the cost saves being extracted what sort of accretion.
Should expect from that in.
2022, specifically and would that include things like you mentioned the borrowings that you could use the cash for.
Yeah.
Yeah.
Yes, I guess the overall question. If you go back to what we announced when we did the model was 4% overall, that's kind of on a full year.
Fully phased in basis Frank.
We give guidance in January we'll give we'll refresh everything as far as where they come on the balance sheet.
All of the different drivers for the full year, but that's really the most current figure behalf.
Okay.
Have you.
Just lastly on that just in terms of.
The cost saves timing I know you've talked about in the past I just don't recall when you expect those to be fully phased in by.
Yes, Frank.
We mentioned in the first of all year, we expect to get 85% of the cost saves.
By the end of the year. So we've got a big chunk of that upfront.
Some of the actions, we will take and then throughout the year will kind of bring them in and then like I said, we'll get to a 100% in the second year.
Okay, great. Thank you.
Thanks, Brian.
Thank you and the next question comes from Jared Shaw with Wells Fargo.
Hi, Good morning, this is tim or Brazil, or filling in for Jared.
Okay.
Maybe starting on the loan growth this quarter.
Two consecutive nice quarters for commercial loan growth I hear your commentary on see utilization rates spike up a little bit gaining some momentum there I guess can you talk through what the utilization rate change was during the quarter and then as you look at loan growth kind of ex the Pea.
P P headwind.
This new momentum that youre, gaining how sustainable is this into 'twenty two and maybe can we get an early look at what your expectation is for 'twenty two loan growth.
I think this is Vince to Lee who will cover the 'twenty two loan growth when we give guidance.
For next year. So I don't think we're going to dive into that right now, but if you look at the past two quarters, we've had pretty good growth across our geographies. If you recall, we have stated for some time now that our plan was to expand into multiple geographies, where we can create enough scale to <unk>.
Impede effectively and drive loan growth.
With geographic diversity, and I think that's happening we're seeing growth coming from various parts of our footprint, which covers seven states.
Area. So we're seeing some good opportunities in the Carolinas.
Charles.
Doing very well.
Spanning into Charleston, a few years ago and have a great team there.
Raleigh, and Charlotte are performing pretty well we've got.
A team in Greensboro that continues to perform well over time.
And then our traditional markets the mid Atlantic region with our expansion in Washington.
The Baltimore market contributing Pittsburgh contributing and Cleveland.
Is picking up momentum so we.
We feel pretty good about where we sit from a utilization perspective.
We've seen a little bit.
Our increased borrowing.
On credit facilities.
Four.
Are you factoring in other areas I think there's still a lot of cash sitting on the sidelines.
And we are still many of our clients are still experiencing supply chain disruption really prevents them from.
Building inventory position.
And then you have the issues with commodity pricing.
For certain borrowers to basic.
Basically you are on the sidelines because of the higher cost of raw materials.
Stockpiling raw materials for project.
And it's pretty evident.
You've read about various aspects of the economy.
But that's that's purely reflected in line utilization and then in terms of growth.
One thing I will say is that.
The pipeline has been fairly robust.
We did close quite a bit.
In the last quarter. So we're rebuilding the pipeline the pipeline as I stated in my comments is up double digit year over year. So we're up domestic about that in the commercial space on the consumer side, we have a very strong pipeline, that's up 27% year over year. So it appears that consumers of tomorrow.
Gary if you could just comment on what we funded in.
Line utilization and what we havent commitments that are <unk>.
Out there sure Vince Thanks in terms of commercial line utilization specifically to the quarter.
We saw a one 8% increase so it went from 32, a little over 32% to 34%. So almost 2%. So that was that was a positive move upward.
Touched on some of the things that that Vince mentioned and the activity and that all said.
The supply chain issues and pressures across the economy, a real so that as that is holding some of that.
I'd say a bit but.
It was good to see that that increased during the quarter.
The other thing that I did want to mention was.
We've talked about the solid loan growth, but we did experience.
We even saw some significant <unk>.
Funded closings and.
In future loan growth to come.
There were about a half a billion dollars of loans that were closed and remain unfunded.
During the third quarter.
Uh huh.
Those fundings are split between C&I as well as CRE.
That will fund up over the over the next 12 to 18.
The tail end of it over 24 months.
But that's a that's a really nice headwind for us from a loan growth standpoint, as we look ahead.
Okay.
Thank you for the color.
Maybe just switching gears and looking at some of the technology initiatives that are either already implemented or coming online over the course of the next the remainder of this year and into next year can you just remind us what your strategy is as far as partnering with third parties versus building.
Some of the platforms in house.
And as you're starting to go more towards the AI style approach for driving applications is that going to be.
As part of the underwriting gonna be handled by AI as well and if so maybe talk through that process as well as our approaches.
Control of the interface so from a proprietary perspective, we're developing the interface with the client. So our E store solution Center that I mentioned is very exciting for us and it opens the door for us to reach millions of customers across our footprint, where we may not have physical.
Physical locations and they can actually go into the website.
Pick a product put it in a shopping cart put multiple products in the shopping cart and then check out.
By processing multiple application.
And what we're doing is we're continuing to refine that we're continuing to add to that offering we are working with a variety of technology companies, both large and small to partner with to make that experience better we are developing a proprietary omnichannel application, which.
Will permit customers to open multiple products on a single application.
And that is scheduled to be launched mid next year.
I think that as we move forward, we just added.
Couple of other products, we added loan products, we stood up the mortgage.
Origination platform. So we've opened about 65% of our total application in the mortgage business. For example, digitally which includes the ability to upload information in a portal and process transaction.
That's all going extremely well.
We've launched.
Just recently, we launched the ability to do consumer loans.
We're going to stand up small business loans with a portal to upload information to help streamline processing. So all of that's being built out on the front end, we're partnering with various entities large and small.
Fiserv in some respects and then smaller Vince.
Fintech companies to help.
Deliver the products, but they are being delivered within our framework.
So our strategy is to create the interface control the interface build out the digital bank make it as easy as possible to use and keep refining it and changing it.
And I think it's been extraordinarily.
Well received by our customers and we've gotten.
And we've received a National award for the E store, VCX, which is pretty prominent award in the mobile space and when we incorporate that E store into our mobile application, which is coming out in November that will open the channel up to even more users.
No.
Web traffic's up considerably I mean, if you look at.
If you look at what we've done I mean, we've actually.
Been able to to increase.
<unk> and our mobile with our mobile app on a year over year basis really looking at the first quarter.
<unk> 20 versus the first quarter of 'twenty, one because that takes the pandemic.
Into account right.
So basically.
<unk> were up 40% and mobile banking usage were up 25% and web traffic.
We're up 29% and online banking usage, 60%, 62% and zelle person to person usage, we're averaging about our website also has the ability to schedule a.
Appointments through that shopping experience with various bankers are professionals within our company.
We're averaging about 800 appointments per month.
So it's.
Been sustained its peaked at 2700 during the pandemic and that has come down as people have.
Greater access to the branches, but it's still been.
Fairly robust.
We're averaging about 2000 deposit applications per month.
Through that site. So I think of all the things we talk about here. That's the most exciting part of what we're doing and then on the AI side, we are using.
Analytics for a whole bunch of reasons, we developed a team we have both the capabilities.
<unk> developed to process large quantities of data. So we have the people and we have the infrastructure and data management and a centralized hub.
To take information from disparate applications and process it fairly quick.
Quickly millions and millions and millions of.
Bits of information can be processed on our systems by our people and then we have the data analytics team who works with marketing they worked with credits they worked with finance to.
Utilize artificial intelligence to improve efficiency.
Using <unk> to really understand product usage and position products for sale within that E store and within the company. So all of that's going on we're also using it. Another example would be the chatbot that we developed.
And I think that.
RPC.
More pretty much plugging in to the technology that we built out and thinking of ways to use it to drive efficiency and revenue so very exciting stuff and I'll stop there sorry, Edwin on pretty long.
That's good color Vince Thank you yes.
Yes.
Thank you and the next question comes from Michael Perito with <unk>.
Hey, good morning, guys. Thanks for taking my questions. Good morning.
Most of their money.
I just have a couple of follow ups I wanted to stick on the technology side for a second there I was curious if you guys.
Have taken a look.
Or have any anything incrementally you could share about kind of how the unit economics.
Growing customers is changing as you do more digitally versus kind of the branches historically in and maybe kind of weave that answer on the cost side. I know you guys arent talking guidance next year, yet, but the efficiency ratio has been fairly flat.
You guys have managed to grow revenues a bit more than expenses. I mean is that a dynamic that you think some of these investments can expand moving forward or what are you really need rates at this point to kind of drive that efficiency ratio down further.
No I think that that those investments in technology will help us do two things as we move forward.
It will help us generate revenue more efficiently because we don't have the infrastructure. The legacy infrastructure that we had with a huge branch system. For example, we've cut off.
Over 100 branches since I've been here and have still experienced growth in some markets, we've closed branches and because of our digital.
We've actually grown deposits and loans.
<unk>.
That's to me a clear indication that our cost to originate is much lower than.
And then it has been historically moving forward and then the growth that we've seen.
Both from a depository and loan perspective.
<unk> is really aided by those investments in technology, and it's only going to get better as we become better.
As we refine that delivery channel and improve it it will become easier for consumers to engage us in.
And get the products and services that they want in a very convenient.
Indian way and marrying that with the branch people with our clicks to brick strategy is to integrate the branches into that E delivery channels. So that we have kind of concierge.
Out there that know where people are shopping on what they are looking at online and then they are able to help facilitate sales.
<unk> within the branches. So I think it's all finally, starting to come together we've spent.
Two strategic planning cycles.
Investing in these areas.
A lot of that investment is behind us I mean, obviously, there is more to come but.
A lot of the heavy lifting is behind us and it's embedded.
And our run rate, we've said that all along we've not shied away from focusing on that because I truly believe that's the future of the industry and we need to be prepared to compete in that space effectively and I think we've done a great job our people.
<unk> done a phenomenal job of keeping us in the game.
So I would just add in Fisher.
CNC opportunity to drive all the businesses through that channel, we've invested a lot like fintech getting each business Trust insurance wealth business off through that channel brings in more revenue more opportunity for customer subs to drive cost down and efficiency ratio. So that's another element of it too.
Helpful. Thank you and then on the non.
Side I know you guys provided the guide for the fourth quarter I wanted to talk about two line items, specifically, though I was wondering if you could maybe give us a little bit more color.
Around the service charge line, which saw a really nice rebound as it is there anything more to that and then just kind of a rebound in economic activity and I.
I guess number one and number two on the capital market side.
Anything new from a product or sales process going on within that or should we expect that line I mean, maybe not 12, and a half million dollars, but to be fairly robust. If your if your commercial growth continues to be positive moving forward.
There's two things there.
When you're looking.
Interesting our fees related to depository transaction, we're really growing treasury management fee income we've picked up.
Cause of the investments, we've made and the new client acquisition strategy, we're getting we're gaining momentum in the fee space for providing treasury management services.
Yes.
Commercial clients so.
A good bit of that growth is attributable to that area.
And then on the flip side on capital markets. When you look at what we've done from a capital markets perspective, we continue to build out our capabilities, we have a very.
Good team that focuses on.
Service, indicating.
Both C&I and CRE.
Loans, so we get paid to syndicate we.
We have a debt capital markets group, that's taken off and we've done a number of transactions.
Where we're able to participate and bond economics.
Because of our debt capital markets capability that we.
Some fleet and built out we're focusing on municipal finance, we've received the approvals that we need to move forward with generating fee income in public finance, we have a fairly robust government lending programs. So that goes hand in hand.
So our participation in bond economics.
We just in the public finance space will be important moving forward.
Obviously, the derivatives areas of the core.
Pretty important core piece of what we offer and we've continued to add good people across our footprint to help us participate in that activity as.
Well so capital markets is really a combination of all of that and then I can't I have to mention our FX capabilities.
We're able to compete very effectively against some of the largest players in the country and have won business in the upper middle market and large corporate space because of our capabilities.
With an FX that was another area, which we consider part of capital markets, because they do hedging spot transactions for our customers. So.
All of that together provides us with a good strong diverse sources of revenue streams within that capital markets business.
Got it helpful color. Thank you guys for taking my questions I appreciate it.
Thanks, Mike Thanks, Mike.
Thank you and the next question comes from Russell Gunther with D. A Davidson.
Hey, good morning, guys.
Hi, Russell.
But just circle back to the loan growth conversation for a second and I appreciate the mid single.
<unk> reiteration it.
It assumes about a like amount for the fourth quarter to get there and then Gary's reminder, about consistent underwriting throughout cycles.
The strong growth of the past couple of quarters that high single digit annualized number the growth of your markets you've moved into over the past few years.
With <unk> in M&A I.
I mean is there any reason just bigger picture going forward, we shouldn't begin to think about F&B is a mid to high single digit grower.
Other than mid single digits.
What would keep you from feeling more comfortable towards the higher end of that type of bridge well historically, we have been.
High single digit performer for a long period of time prior to the pandemic if you looked at the.
The average growth rate for the company, we were double digits.
Including M&A over a sustained period of time and high single digit organic.
Loan growth we stripped.
Dripped out the M&A contribution and looked at it on an organic basis, we used to report that out to the street so as.
As we move through the cycle the disruption that we've experienced which was fairly substantial.
Given the pandemic I think we're going to return to those levels.
Certainly.
Doable given the investments we've made in.
In our platform.
Really look at how we're structured for $40 billion bank to have the opportunity to compete in turn fairly large markets right, where we have a substantial share in those we consider them mid sized.
In the southeast and the mid Atlantic and the northeast we have we have the potential to do that and we were able to do that and still maintain our credit underwriting standards.
I mean.
We could grow even faster if we didn't have a great deal of discipline and I'll, let Gary.
Sid comment further on that because he is on the front end of this stuff. So I don't Gary if you want to.
Comments, yes, thanks, Rich I mean, we're seeing continued opportunities at a very good pace.
The diversification of the markets, we think is absolutely critical.
Russell to your question.
Hum.
No.
The impact of Covid.
Has us from a guidance standpoint.
At mid single range as you can see from the last couple of quarters growth has been strong.
And at eight plus percent range. So that's.
It's kind of where we'd like to be and Thats, where we expect to be and I think you'll see that.
As we move forward and put some of these issues behind us that all said there are supply chain issues that are real everyone knows that inflationary pressures labor issues.
That's all and availability as well as cost. So there is a lot of headwinds in the economy needs a continues to be worked through.
But we're very confident in our ability to grow the loan book.
We feel good about.
What we've been able to produce the last couple.
Uh huh.
Thank you guys understood on the growth trajectory and then just one kind of tangential follow up so.
The recent M&A announcement prior to that <unk> bin.
Pretty successful with the strategy as you think about the model going forward.
How do you balance.
Or how do you want a balanced L P O versus M&A in any particular market.
Since you want to move into or scale up in what's the best way to go about it.
Yeah, our focus as I've said, historically, sometimes what I say is taken out of context, but I'll try to be really clear.
We're really focused on organic growth.
On making sure the company's position to grow to provide benefits to the shareholders. So.
When an M&A opportunity comes up like powered sure.
Going to look at it.
We're going to measure it against other opportunities to invest capital and if we think it makes strategic sense for us to pursue.
<unk> that type of an opportunity.
We'll do it in the most.
Shareholder friendly way, we can so.
Returns on capital are important to us.
Historically.
We've said that repeatedly we don't have tons of excess capital.
Our strategy.
Has been to grow tangible book value per share and maintain high returns on.
Tangible common equity so we continue to focus on that and I think the digital strategy and our investments in the digital platform really.
It gives us a considerable amount of upside as an organization if we were in technology.
Technology company without any revenue people would be valuing us extraordinarily high based upon the potential alone. So I look at that and say how do we deploy capital.
Where we're going to be very cautious about what we do.
If M&A comes about it would have to be something on the smaller end.
It fits into our footprint that helps us gain efficiency or pick up clients. So we can use our investments in technology to drive revenue.
Within that customer base and that's.
That's the that's the focus of the company.
Great well that's it for me guys. Thanks for taking my question.
Yes. Thank you thanks Roger.
Thank you.
Newport Research partners.
Yes, good morning, gentlemen.
Yes.
Thanks Vince.
You answered but.
Vince maybe as you look across the various geographies in March.
Markets are you seeing any difference in term differential in terms of loan pricing or opportunities that stand out more than others.
It's extraordinarily competitive across the board.
He said that and I can tell my people I have heard that my whole career. So please don't tell me that you just have to win right. So you have to deliver.
Best products at the right time structure the deal appropriately. So we're all secure and the borrower gets what they need and accommodate them. So.
It's an extraordinarily competitive environment I think there are spots, where the pricing is a little better, but it's not materially different.
And if you look at Cleveland for example, which everybody says as a lower growth market theoretically should have less competition, it's loaded with huge competitors U S Bank Chase.
Huntington Keybanc D&C.
So that market is as competitive as Charlotte.
Which is loaded with large competitors. So we have to execute better we have to stay focused on customers. This is still a people business. So we have to make sure that our brand is aware people are aware of our brand in the marketplace.
They basically have the right people in those markets.
Markets to drive growth if you look at our strategy from a visibility perspective.
Went in negotiated.
Opportunities to named buildings in Greensboro, Raleigh, Charlotte with a 30 story office building with our name in it and Charlotte is a very cost effective way.
For us to promote our brand because we consolidated into that building and move multiple locations into one building and actually.
Expenses of Bush, right or maybe even slightly better.
We did that in a number of markets.
We bought <unk>.
Smaller banks, and then merge them together, but big.
Bank that had emerged while the operations. So we elevated our profile in all of these cities and we built out on a de novo basis, a very good we've optimized the delivery channel from our retail and commercial banking perspective in those markets. So long runway.
And I think that.
We're.
Very well positioned.
I hope.
Hopefully I answered your question.
Yes.
Yeah.
Okay.
Thank you.
Stephens Inc.
Good morning to Sami Ahmad from Brody Preston.
Hey, there.
<unk>.
Good how are you. My first question is around some of the FHFA Burns.
Hold on the balance sheet.
Sure.
Plenty of using some of the liquidity to pay down borrowings on the hardwood side, but I wanted to.
Ask according.
According to the last few days about one 1 billion.
That was swapped.
Those to mature this year and so I just wanted to ask a little bit about what the repricing dynamic as the new borrowing or replacing the old ones.
Yeah, I can tell you that.
Borrowings we have three.
And more to mature in the next four months.
There's $200 million in November.
30 basis points, and then another $100 million.
In January and February before.
So once those to mature we'll have $930 million left at $2 23, and then that piece there we will evaluate.
As part of the first quarter, the merger and really looked at our whole balance sheet. So that's what we'll be left after that $300 million matures next four months.
Understood. Thank you.
And then moving over to the fee income.
You for the color you provided or just all the different moving pieces.
Is there.
So I wanted to ask for just a little bit of clarification here.
The elevated swap.
Swap fee income is that kind of a reset to a higher run rate.
Is there is that more of a one time in nature for this quarter and it's going to step back down and if so is there any correspond.
I've said on the expense side for that.
Well I wouldn't say if you look I mean, it's definitely a record quarter for us if you look over the last seven quarters, we've had three quarters in Nevada North of 10.
And another quarter that had a 12 handle fuel itself.
It's a little lumpy because of the capital markets to derivative side.
Out of that business.
I think Vince as point with all the businesses, we've invested in international syndication and then the new debt.
Capital markets capabilities, we have which is already out of the $5 million. So far year to date in its first year of existence I think that will supplement as we go forward, but it'll be lumpy I mean, our guidance.
For.
The fourth quarter doesn't have 12, and a half in it but it still has a pretty strong number.
And baked into that forecast.
North of where we were running in the second quarter.
Got it. Thank you and then a quick last one I just wanted to ask if you could tell me what how much of the PPP.
PPC are left to be recognized.
Yes, there is $20 million.
$1 million worth of six left and then you have interest income on the remaining $700 million is flat.
$20 million of unimpeded fees that come in and then you earn about $1 million of half of $2 million of interest income on that.
For the quarter.
Understood. Thank you very much for taking my questions.
Thank you.
Yes.
Thank you and the next question comes from Brian Martin with Janney Montgomery.
Hey, guys good morning.
Alright.
Hey, just a couple quick things from me just on back to the PPP.
<unk> for just a minute it seems like most of that gets resolved. The first half of next year. You gave some guidance in fourth quarter that gets you got $20 million left that gets a good chunk of it so maybe first quarter, we're kind of through <unk>.
PPP is that fair how to think about that.
Yeah.
Yes, I think so definitely by the middle.
The ear Brian.
Vision of being totally gone.
The pace of it moves around.
Clients changes with thinking about tax return filings and when they want them. There were different tranches too. So you have to take that into consideration in the last billion came on.
Recently.
Yes, there is 576 of the seven hundreds is from round to yes. So I would say I would expect that to come in over the first two quarters of next year.
Okay.
Gotcha, Okay, Alright, and then just how 'bout Vince maybe just on the on the core the core margin can you just talk about kind of the puts and takes.
Okay.
Couple of quarters here I guess it sounds like you mentioned a little bit of a tailwind.
Maybe it was the loan growth, but just kind of.
The puts and takes you in the near term on on the core margin kind of ex the <unk>.
PPP the.
Liquidity in the accretion.
Yeah I'll comment on.
The dollar is Brian Fernando Yes.
Origin is just there's too many moving parts going into different directions with the excess cash on our balance sheet and everything but if you look at the dollars right just I'll make a few comments here.
Interest income for the quarter went up $4 5 million one $5 million of that was related to triple T and purchase accounting we found.
Only about a half of it certainly was up $2 million.
So you had $2 million.
One 3 million that was related to just kind of core loan growth the solid spot loan growth that we've talked about in the second quarter and third quarter, obviously contributes to that.
Continued to bring down the cost of interest bearing deposits.
We brought that down another three basis points during the quarter with the average for the quarter was 21 and our spot as we sit here today is 18, so theres already kind of another three basis points of benefit in the interest bearing deposit cost and then the consumer Cds continue to roll down we pick up about two basis points a month.
And mature.
So if you kind of put all those pieces in there and then.
We'll have excess cash.
Obviously as significant from a margin perspective rises we could see on that slide that we've added.
We used the margin by 26 basis points for the quarter. So I mean, as we start to deploy that.
That affects the <unk>.
<unk> for sure and it also obviously effects the dollars of net interest income was 115 basis points on that so every dollar that we put to work.
For loans, obviously is additive to the net interest income so kind of that all being said is what's baked into our <unk>.
Excluding triple P contribution.
Up low single digits in the fourth quarter versus the third quarter.
Got you Okay. That's helpful and just.
Maybe I just misunderstood what you guys said it didn't quite get it on the loan growth side, but I get the year over year pipelines were up when you look it sounded like youre given the strength this quarter in the rebuilding that youre kind of going.
Right now the.
The loan pipeline is lower today than they were at the start of last quarter or similar type of levels just linked quarter. How did the pipeline has changed it varies it varies the consumer pipeline is stronger.
It's off.
27% was up.
Substantially the commercial pipeline.
Up year over year on a linked quarter basis, it will be down because we had a huge production yes.
And as Gary indicated there's a half a billion dollars in unfunded commitments that will fund up over time within that.
Steve.
Production periods that we have.
So that's how I would look at commercial rebuild.
Consumer very strong.
And as we move into the last quarter hopefully they balance each other out and were able to capitalize on some of the larger opportunities we have in the promotion.
Plus you have the tailwind of the unfunded loans that will start to fund up so that also benefits the longer and that will carryover into next year as well so thats not just one.
Right Okay.
Perfect.
Okay. Okay, Yeah, and then just on the maybe one for Gary just on the classified I think you said the rated credits were down.
Very well.
Do you can you comment on just what happened with classified or criticized in the quarter and then maybe just talk about how.
How we should think about the reserve prospectively, given how strong credit appears to be.
Yes.
<unk> continued positive movement across the criticized categories.
<unk>.
And when you when you look at when you look at this quarter of <unk>.
<unk> strong as compared to the last quarter.
About $130 million reduction.
In Q3.
60% of that.
Of that reduction.
Was classified.
So continuing to be able to move classified assets off the books just in the normal course of other banks refinancing them. So our special assets team is continuing to take advantage of that opportunity with the underwriting.
That's being seen out there.
So that is that as a positive move and we will continue to take advantage of that in terms of.
Your question around the reserve.
I mentioned some of the headwinds in the economy before.
Supply.
Jane inflation labor costs in those issues.
Those are real as I mentioned.
Subject to the economy staying strong.
And moving forward through those issues I would expect that you'll see continued strong.
Slight reductions in the reserve.
<unk>.
Potentially normalizing as you get into late 'twenty, two and enter into 'twenty three.
We'll see how the economy holds out.
We will continue to manage.
Manage manage that as we go forward.
Naturally loan growth comes into play there as well so.
Yes.
That will continue.
Monitor on a regular basis and manage accordingly.
Okay, Perfect and then maybe just one last one if I can sneak it in just on the on the fee income I think the service charges have been a topic in the industry with I guess I saw the growth this quarter, but just as we think about that line item. It's something that continues to grow at this point or is there something.
Something where you guys are looking at what competitors are doing on the service charge line going forward.
Well it depends on what category within the service line reporting item.
Overdrafts down I would expect it to trend down.
Rolled out a product which.
Some perceived certification.
Where clients can't overdraft and its our second best product in terms of sales performance. So I.
And I expect.
Continued.
Pressure to make changes in that category for the industry not just for us.
So that's not an.
Focus we're trying to look for ways to provide we call them high value too.
So our customers and to build the revenue streams within other categories of the service charge area. So Treasury management as I mentioned is one area, where we've consistently grown.
<unk> double digit in that area, but its been muted by.
Other other.
Contributors to that category and we expect that to continue to grow there.
There are a number of other products start rolling out debit card has done really well actually rebounded pretty nicely from the pandemic.
Youre seeing interchange.
Contribution to that category.
We continue to rollout commercial parts and procurement card for our clients, that's driving interchange fees within the category.
So like our capital markets strategy, we're looking for diversification within that area.
Yeah.
The change that's that's how we would view it going forward.
Modest growth in that category based upon that the execution of our diversification strategy.
Perfect. Okay. That's helpful. Thanks, Vince Thanks for taking the questions guys I appreciate it.
Thanks, Brian.
Yeah.
Okay.
I don't know if we have any other questions.
Yeah.
Yeah.
Hello.
Hello.
As the operator is still on the line.
Yeah.
Okay.
Okay, well I'm, just going to close out the call I think we're having some technical issues.
So if somebody does have a question please call us and we will try to respond appropriately.
<unk>.
Thank you everyone for participating the call I think we had a great quarter. It was a lot of very exciting things going on for.
For us here at F N b.
I'm very thrilled about our positioning and where we sit in the quality of the portfolio and the work that our team has done.
So I'd like to thank everybody.
Body for all of their contributions here at F&B and thank you our shareholders for continuing to.
Invest in our company.
Take care everyone.
Okay.