Q2 2022 FNB Corp Earnings Call
Speaker 1: You
[music].
Speaker 1: The that.
Good morning, and welcome to the F N B Corporation second quarter 2022 earnings Conference call.
All participants will be in a listen only mode.
Should you need assistance. Please signal conference specialist by Christmas Starkey, followed by Europe .
After todays presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
Speaker 2: by zero.
Speaker 3: After today's presentation, there will be an opportunity to ask questions.
I would now like to turn the conference over to Lisa Constantine with Investor Relations. Please go ahead.
Speaker 3: Please note, this event is being recorded.
Speaker 3: I would now like to turn the conference over to Lisa Constantine with Investor Relations. Please go ahead.
Good morning, and welcome to our second quarter earnings call. This conference call.
And the reported files.
Speaker 4: Thank you. Good morning and welcome to our second quarter earnings call. This conference call of FMB preparation and the report it files for the Securities and Exchange Commission often 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 to the most directly compatible GAAP measure financial measures are included in our presentation material in our earnings release.
Session.
Forward looking statements and non-GAAP financial measures non-GAAP financial measures should be in addition to and not.
Or whatever.
Good morning.
non-GAAP operating measures and the most directly comparable GAAP measures financial measures are included in our presentation materials and our earnings release.
Please refer to these non-GAAP and forward looking.
Statements exposure.
Related materials reports and registration statements.
Speaker 4: Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Thursday, July 28th, 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 DeLee, Chairman, President, and CEO .
The Securities and Exchange Commission and available on our corporate website.
A replay of this call will be available until Thursday July 28, and the webcast link will be posted to the about us Investor Relations section of our call.
Right.
I'll now turn the call over to that silly, chairman President and CEO .
Thank you welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our chief legal officer, and Gary Guerrieri, Our Chief Credit Officer.
Speaker 3: Thank you. Welcome to our second quarter earnings call.
Speaker 3: Joining me today are Ben Calabrese, our chief financial officer.
The second quarter's earnings per share totaled 31.
Speaker 5: Gary Grairy are Chief Cretiboss.
This is up 19% wastewater.
Speaker 5: The second quarter's earnings per share totaled 31 cents on an operating basis.
<unk> continued to execute its strategic plan in the second quarter with record loan growth of one point.
Speaker 5: up 19 percent linked order.
Speaker 5: FNB continued to execute a strategic plan in the second quarter with record long growth at 1.3 billion miles of spot-faces excluding PTT.
3 billion on a spot basis, including PPE.
We maintained a favorable deposit mix in a rising rate environment.
Even as seasonal outflows occurred this quarter.
Speaker 5: We maintain the favorable deposit mix in the rising rate environment.
We achieved record revenue $336 million.
Speaker 5: Even the seasonal outflows of previous quarter.
8% reported growth in net interest income and our E businesses continued to exhibit the benefits of diversification with 5% net growth.
Speaker 5: We achieve record revenue of $336 million, with 8% win quarter growth in net interest income, and our feed businesses continue to exhibit benefits of diversification with 5% net growth...
Our expenses remain well controlled declining linked quarter on an operating basis and led to an acceleration positive operating leverage and an efficiency ratio of 55, 2%.
Speaker 5: Our expenses remain well controlled, declining link order on an operating basis, and led to an acceleration of operating numbers. Our expenses remain well controlled, declining link order
As always our asset quality remains a focus with our solid reserve coverage and net recoveries this quarter.
Speaker 5: and an efficiency ratio of 55.2%.
Speaker 5: As always, our asset quality remains focused with our solid reserve coverage and net recoveries this quarter. Profitability improves significantly in the length quarter as return on average change will come in equity as 15.5%.
<unk> ability improve significantly each quarter as we can.
Earn on average tangible common equity was 15, 5%.
We prudently managed capital because our dividend payout ratio was 39%.
Purchased one 1 million shares in the quarter.
Speaker 5: We brutally manage capital, because our given and payout ratio was 39%.
In addition to solid performance in the quarter, we commenced the rollout of our new digital E store kiosks in all F&B branches.
Speaker 5: and we purchased 1.1 million shares in the quarter.
Speaker 5: In addition to solid performance in the floor, we commence the rollout of our new digital eStore T-OST in all of the V-Ranches and announce the UB Bank Group acquisition in North Carolina. In an out-to-UB Bank Group acquisition in North Carolina.
You'd be Bancorp acquisition in North Carolina.
Our strong revenue growth included the benefit from the federal reserves increase in short term interest rates.
Speaker 5: Our strong revenue growth included the benefit from the Federal Reserve's increase in short-term interest rates.
However, it's our team's proven ability to respond and adapt to the changing economic environment that resulted in record net interest income of 200.
Speaker 5: However, it's our team's proven ability to respond and adapt to the changing economic environment that resulted in the record net interest income of $254 million.
At 35% or 11 7 billion of our deposits are noninterest bearing and 59% of our loans does that variable or adjustable interest rates.
Speaker 5: as 35%, or 11.7 billion of our deposits are non-interest-bearing.
Speaker 5: and 59% of our loans.
These factors position us well for the anticipated rising rate environment.
Speaker 5: possess variable or adjustable interest rates.
Vince Calabrese will provide additional insights on key performance drivers and deposit fees.
Speaker 5: These factors position us well for the anticipated rising rate environment.
Speaker 5: This calibration will provide additional insight on key performance drivers.
Total loans and leases, excluding PPP reached 28 billion demonstrating record linked quarter growth of one 3 billion 19, 5% annualized making this the fifth consecutive quarter positive lung.
Speaker 5: additional insight on key performance drivers and the pilot base.
Speaker 5: Total loans and leases, excluding PPP, reached $28 billion, demonstrated record-linked quarter growth at $1.3 billion for 19.5% in loans, making this the fifth consecutive quarter on the longer. On the longer. On the longer.
Building upon the first quarter spot loan growth totaled an impressive 11, 42% on a year over year basis.
Speaker 5: Building upon the first quarter, spot loan growth totaled an impressive 11.2% on a year-over-year basis.
Excluding P. P M B our acquired loans.
On a core basis commercial loans grew 504 million linked quarter with ending balances of 18 billion.
Speaker 5: excluding PPP and the Howard fire modes.
Speaker 5: on a core basis.
Speaker 5: Commercial loans through 500 or million link order, with ending balances at 18 billion.
This growth was led by Pittsburgh in the North and South Carolina markets.
Our year to date production is over 20% higher than the first half of 2021.
Speaker 5: Pittsburgh was led by Pittsburgh in the North and South Carolina market.
Speaker 5: our year-to-date production.
Current pipeline levels are healthy when compared to historical trends.
Speaker 5: is over 20% tighter than the first half of 2021.
On a spot basis consumer loans grew 795 billion linked quarter with over 400 million in residential mortgage loan.
Speaker 5: The current pipeline levels are healthy when compared to historical trends.
Speaker 5: On a spot basis, consumer loans grew 795 million in length order, with over 400 million residential mortgage loan growth. $2,300 billion in wasted arable farm homes, consumer earned? forson, per?n?n andbaseyo l ???ke m F re re re ? nd m g t s b Greetings o s o s o sichen o s o s o s o s o s o s o s o s o s h m y m m m m m million m million m million m mortgage loan growth.
Our positions first mortgage program, not an outstanding quarter accounting for 66% of that.
Speaker 5: Our Physicians First Mortgage Program had an outstanding quarter, accounting for 66% of the total residential mortgage increase linked quarter.
Total residential mortgage increased linked quarter.
This program establishes long term relationships with significant lifetime value.
From a credit quality perspective. This is one of our highest quality portfolio with credit scores of nearly 800.
This program establishes long-term relationships of significant lifetime value.
long-term relationships of significant lifetime value.
A link with the levels of five basis points.
This is one of our highest quality portfolio with credit scores of nearly 800 and the frequency levels of five basis points.
Our mortgage growth was bolstered by the success of our E store with 69% of all mortgage applications submitted digitally.
Our mortgage growth is bolstered by the success of our e-store.
The adoption rate across our digital offerings continues to steadily increase the total number of loan applications online up 45% from the year ago quarter.
with 69% of all mortgage applications submitted digitally.
The adoption rate across our digital offerings continues to steadily increase with the total number of loan applications online of 45% from the year ago quarter.
Our customers growing digital engagement also translated into increased lending activity in our traditional branch channel and contributed to record.
Our customers grow individual engagement, also translated into increased lending activity in our traditional branch channel, and contributed to wreck length of the right. right.
It was a consumer origination in our branches this quarter.
Our online and mobile E store visits at more than double since June 2021, and we continue to build upon this momentum.
It's a consumer origination. We are branches this quarter. We are branches this quarter.
Our online and mobile e-store visits have more than doubled since June 2021, and we continue to build upon this momentum.
As mentioned earlier in addition to mobile and online access we have started an initiative to supplement all FNB branches with new digital E store kiosks to enhance the consultative environment, we provide.
As mentioned earlier, in addition to mobile and online access, we have started an initiative to supplement all FMB branches.
Only interactive design empowers customers with an intuitive digital access the F&B is full range of products and services.
with new digital eSports keyoffs to enhance the consultative environment we provide.
The fully interactive design empowers customers with an intuitive digital access to FMB's full range of products and services.
As a result customers are able to easily browse and buy products and services as part of the in branch experience or continue the process seamlessly online.
As a result, customers are able to easily browse and buy products and services as part of the in-brand experience or continue the process seamlessly online.
Your mobile device or wherever and when they prefer.
The investments we've made in our digital bank have enhanced our scalability and accelerated our growth.
to your mobile device or wherever and when they prefer.
The investments we've made in our digital bank have enhanced our scalability and accelerated our growth.
Our success is also linked to the expansion of our branch in it.
Last month, we announced the acquisition that you'd be Bancorp, North Carolina based bank with approximately $1 2 billion in total assets $1 billion in total deposits and.
Our success is also linked to the expansion of our branch.
Last month, we announced the acquisition of UB Bankwork, a North Carolina based bank with approximately 1.2 billion in total assets, 1 billion in total deposits. 1 billion in total deposits.
$670 million is loans.
Approximately 40% of the deposits are noninterest bearing.
and 670 million of loans.
This acquisition increases F&B presence in North Carolina to a top 10 deposit share.
Approximately 40% of the deposits are non-interest-paired.
This acquisition increases F&B's presence in North Carolina to a top ten deposit share
In the states.
This region has proven to be a growth engine for F N b.
In the States.
Adding the low cost granular deposits will also benefit our financial performance in a rising rate environment.
This region.
has proven to be a growth engine for FMB.
Adding the low-cost granular deposits will also benefit our financial performance in a rising rate environment. This is a test for the
We are excited about our prospects and we welcome the you'd be banquet team and customers to equity.
We are excited about our prospects and we welcome the UB Bankfoot team and customers to F&B.
Overall second quarter provided solid financial results.
<unk> is well positioned in the current macroeconomic environment.
Overall, the second quarter provided solid financial results and FMV is well positioned in the current macroeconomic environment.
One of the F N B's core strength is our credit performance, which has been proven in the economic downturn in 2008 and again during the recent indented.
One of that then-be's core strength is our credit performance, which has been proven in the economic downturn in 2008, and again during the recent pandemic. And again during the recent pandemic.
Gary and our team take a proactive approach to managing the bank's credit portfolio and collectively offer decades of experience.
Gary and our team take a proactive approach to managing the bank's credit portfolio and collectively offer decades of experience.
Now I'll turn the call over to Gary to provide more detail on our asset quality and comment on the economic environment.
I'll now turn the call over to Gary to provide more detail on our asset quality and comments on the economic environment.
Gary.
Thank you Vince and good morning, everyone. Our credit results for the second quarter showed continued positive performance with our key credit metrics trending favorably as we enter the second half of the year in a position of strength.
Very.
Thank you Vince and good morning everyone. Our credit results for the second quarter showed continued positive performance with our key credit metrics trending favorably as we enter the second half of the year in the position of strength.
We saw lower past due and nonperforming levels during the quarter as well as a decline in rated credits and lower loss levels, all of which contributed to a further strengthening of our credit portfolio.
We saw lower past due and non-performing levels during the quarter as well as a decline in rated credits and low loss levels.
I'll first review, our GAAP asset quality highlights for the second quarter and later in my remarks, I'll provide an update on Howard Bank and the recently announced U D Bancorp acquisition as well as some brief commentary on the macroeconomic environment and how we're managing those potential risks.
All of which contributed to a further strengthening of our credit portfolio.
Well, first review our gap asset quality highlights for the second quarter, and later in my remarks, I'll provide an update on Howard Bank and then recently announced UD Bank Group acquisition, as well as some brief commentary on the macroeconomic environment and how we're managing those potential risks.
Let's now look at our results for the second quarter.
Total delinquency ended June at a historically low level of 58 basis points over the prior quarter, which was driven by improvements in the commercial portfolios early stage past due and non accrual.
So let's now look at our results for the second corner.
The total delinquency ended June at a historically low level of 58 basis points, down eight bits over the prior quarter, which was driven by improvements in the commercial portfolio's early stage pass due and non-improal levels.
Npls and Oreo also declined on a linked quarter basis down five basis points to end June at a solid 35 bps.
NPLs and OREO also declined on a linked quarter basis, down 5 basis points to end June at a solid 35 dips.
Net charge offs for Q2 ended in a net recovery position of 400000 or minus one basis point annualized and for the year to date period net charge offs totaled one 5 million or one basis point annualized.
Net charge-offs for Q2 ended in a net recovery position of $400,000 or minus one basis point annualized and for the year-to-date period, net charge-offs totaled $1.5 million or one basis point annualized.
We recognize provision expense of $6 $4 million, which supported strong loan growth in the quarter and also reflects lower prepayment speed assumptions and our seasonal model.
We recognize provisioned extents of $6.4 million, which supported strong loan growth in the quarter, and also reflects lower pre-payment speed assumptions in our sea so more.
This resulted in an ending June reserve of $378 million or 135% of loans at quarter end.
This represents a three basis point decrease versus the prior quarter remaining directionally consistent with our favorable credit quality results.
Our NPL coverage position remains strong at 409%.
I'd now like to provide a brief update on our portfolio and the recently announced U V Bancorp acquisition.
As it relates to Howard the credit portfolio has not had a material impact to our overall credit metrics and it continues to perform well and in line with our expectations.
We remain pleased with the transition process and continue to track the portfolio closely as is our standard practice in the quarters following an acquisition.
We also recently announced the acquisition of you'd be Bang tour, which will further position us in the Carolinas and offer additional lending and cross sell opportunities in these attractive markets.
Regarding the loan portfolio, we estimated a credit mark of one 6% at due diligence as the book continues to perform in line with our expectations with no material impact expected to our credit metrics.
We look forward to expanding our client relationships and our range of products that will be available to you be bancorp's customer base.
I would now like to turn your attention to the economy and our approach to managing risk in this environment of accelerated inflation.
Rising interest rates.
Energy costs.
Ongoing labor and supply chain challenges.
These economic headwinds remain at the forefront of our credit decisioning process to understand and mitigate economic driven risks and challenges faced by our borrowers many of our commercial banking customers have exercised interest rate hedging options as part of our derivative program, which enables them.
To reduce rate sensitivity and lowered our borrowing costs moving into this environment.
While the direction on the broader economy and competitive lending environment all remains to be seen in the quarters ahead, we remain committed to our standard practice of consistent and sound underwriting across the entire footprint as well as ongoing and proactive monitoring of our book to identify.
Early signs of current or potential future stress.
By leveraging our robust data analytics framework, we can monitor credit trends and performance metrics for all products and lines of business, allowing us to better manage emerging risks quickly and comprehensively across the entire loan portfolio.
In summary, we had a strong quarter marked by continued improvement in our credit quality.
<unk> rated credit levels solid high quality loan growth and strong positioning of our portfolio heading into the second half of the year.
That said, we continue to remain cautious on the forward looking economy as we enter a possible recessionary phase.
Our focus remains on the continued disciplined approach to our core credit fundamentals.
Served us well throughout prior economic cycles.
Now I'll turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary Good morning, everyone.
I will focus on our second quarter's financial results and offer guidance for the third quarter and full year of 2022.
Overall, our second quarter financials, capturing the strong performance of F N b.
Net income available to common shareholders totaling $107 1 million or earnings per share of <unk> 30 cents.
After adjusting for $2 million of merger related expenses net income reached $108 7 million or <unk> 31 per share.
Balance sheet growth was very strong.
When excluding Triple T.
And total loans increased $1 3 billion or 19, 5% annualized on a linked quarter basis, including an annualized increase 34% in consumer loans and 12% in commercial.
Commercial loan growth was led by commercial and industrial annualized growth of 29%, excluding Triple T Maggiore.
The majority of the quarter's growth.
It was concentrated in June which will benefit the third quarter average balance.
Additionally, commercial line of credit utilization increased 2% linked quarter with expectations that it will continue to build through the end of the year.
Consumer loan growth was driven by strong organic residential mortgage and home equity lending activity.
As Vince mentioned the physicians first mortgage program has been very successful, making up two thirds of this quarters net growth and mortgage loans.
While the physicians first program is seasonal in nature, we expect this high quality loan portfolio to continue to bill.
Another element of residential mortgage activity shifting customer preferences for adjustable rate mortgages and.
In 2021 mortgage originations were comprised of 84% fixed rate 16% arms.
The second quarter that ratio was transitioned 47% fixed rate and 53% arms as customers optimize payment size, given rising interest rates and increased home values.
On the income statement net interest income totaled a record $253 7 million, an increase of $19 6 million or eight 4% due to growth in average, earning assets and benefits from the higher interest rate environment, which was partially offset by a $5 8 million decreased contribution from Triple T.
As those balances wind down.
The net interest margin increased 15 basis points this quarter to $2 76.
An area of heightened focus this quarter and for the next several quarters as deposit betas, given the actions taken by the Federal reserve.
No. It is not an exact comparison, our cumulative deposit beta total deposits during the last interest rate hiking cycle on December 15 to December of <unk> was 24%.
It is important to keep in mind three main differences from the previous cycle.
First is that the federal reserve tightening at a much faster rate than in 2016.
Second the emergence of high cost deposit gathering syntax.
And third our deposit mix is in a more favorable position today.
Noninterest bearing deposits at 35% total deposit.
And a much lower loan to deposit ratio at 84% versus 97% at the end of 2015.
To date, we've been able to effectively manage deposit costs, while balancing deposit mix shifts that have occurred.
Turning to noninterest income and expense.
Non interest income totaled $82 2 million $3 8 million or 5% increase from last quarter.
Capital markets income was $8 5 million, an increase of 20% with solid contributions from swap fees international banking syndication and debt capital markets.
Service charges increased $3 2 million linked quarter, largely due to growth in interchange income and treasury management fees, driven by higher customer transactions and new client acquisition.
One $4 million increase in bank on life insurance reflected life insurance claims received during the quarter.
Mortgage banking operations income decreased <unk> 5 million or 8% as loan production to be sold in the secondary markets declined 11% linked quarter, given the higher mortgage rates.
Refinance activity only accounted for 21% of our second quarter salt production compared to 53% from a year ago quarter.
Reported noninterest expense totaled $192 8 million decrease of $34 7 million or 15, 2%.
On an operating basis noninterest expense decreased $3 9 million or 2.1% compared to the prior quarter.
Looting merger related expenses of $2 million in the second quarter 2022, and merger related expenses of $28 6 million and branch consolidation possible $4 2 million in the first quarter of 2022.
Given these adjustments the rest of the expense fluctuations will be given on an operating basis.
Salaries and employee benefits decreased $8 3 million from last quarters seasonally higher long term compensation expense of $6 2 million and seasonally higher employer paid payroll taxes.
Marketing increased $1 4 billion as we expanded our digital advertising and launch campaigns for physicians first program.
Positive of our diligent expense management efficiency ratio came down to 55, 2%.
A significant improvement compared to the first quarter's ratio of 67%.
A year ago quarters ratio of 56, 8%.
Excluding triple P income efficiency ratio actually improved over 600 basis points on a year over year basis.
Tangible book value per common share was $8.10 at June 30th.
An increase of a penny per share from March 31.
While Aoc I reduced the current coal.
Warner and tangible book value for common share by 72 cents compared to 57% at the end of the prior quarter, the higher level of earnings more than offset that impact.
Increased unrealized losses, yes, that's portfolio due to rising interest rates should accrete back into capital over time as securities mature or prepay.
Our CET, one regulatory capital ratio declined approximately 25 basis points to nine 7%, primarily due to the significant loan growth in the quarter as well as putting more cash to work for additions to our securities portfolio.
We would expect to manage this ratio higher throughout the remainder of the year.
Now, let's turn to guidance, which excludes the announced UV Bancorp acquisition.
Given the strong loan growth this quarter, we increased our full year guidance for loans to grow at a low to mid teens growth rate with underlying organic growth in the high single digits on a year over year spot basis.
Total deposits are projected to grow mid to high single digits on a year over year spot basis.
Full year net interest income is expected to be between one point O five 1.19 billion.
Third quarter between $278 million to $284 million.
Our guidance currently assumes 150 basis points rate increases for the remainder of the year, including 75 basis point increase this month.
Full year noninterest income is expected to be between 310 $320 million with the second quarter in the high 70 million dollar area.
The revised noninterest income guidance is due to slightly lower mortgage banking income.
Reduced market related fee income.
There is no change to our guidance for noninterest expense on an operating basis in the range of 760 $780 million for the full year $190 million to $195 million for the third quarter.
This does not include the one time expenses associated with acquisitions and branch consolidations.
Positive credit quality is expected to continue throughout 2022 with provision guided to $20 million to $40 million.
This range does not include the initial $19 1 million in provision related to Howard and is dependent on net loan growth with the remainder of the year.
Lastly, the effective tax rate should be between 18 and 19% for the full year, but is dependent on the level of investment tax credit activity.
With that I will turn the call accidents.
Thank you Vince.
In summary, our team delivered exceptional quarterly results fluid economic environment, while fulfilling a number of key strategic objectives.
Record loan growth record total revenue of.
15, 5% return on tangible common equity.
Solid efficiency ratio of 55% disciplined expense control.
In a dividend payout ratio at 39%.
Our team remains keenly focused on maintaining strong critical.
This quarter includes net recoveries and solid reserve coverage.
You can see we've got many accomplishments already in 2022, which doesn't happen without the hard work and dedication of all of our employees.
I would like to offer my sincere gratitude to our employees, who make our success possible.
With that I'll turn the call over to the operator for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, Good morning, this is TMR, Brazil or filling in for Jared.
First on the loan growth, which remains very impressive I guess, just looking at the remainder of the year. The composition of the expected guide assuming much of that is coming from the commercial portfolio, but maybe just talk through the composition.
Okay.
Yes in terms of in terms of the loan growth.
We're looking at good participation across all of the books of business each each business line participating very nicely this quarter.
Like lines continued to remain solid.
We're getting good participation across our geographies and from a from a consumer standpoint pipelines, albeit slightly down that.
That's seasonal in nature or pretty much the second quarter is really a seasonal Vince for us when you look at the consumer portfolio. The mortgage book applications are down a little bit as well as you would expect so we'll see we'll see a little slower growth there.
You know when you when you look across the board.
C&I continues to be solid CRE as well.
Some seasonal slowness in that.
Home equity and mortgage portfolio.
Okay, and then as you look at the competitive landscape in the face of rising rates or are you seeing incremental spread pressure.
As you are fighting for new business or does the.
Diversify geography products that kind of helped mitigate some of that.
Okay.
We've not seen additional spread pressure here.
Great.
Actually the diversified geography helps from that standpoint.
From a pricing standpoint, we've seen some slight improvement.
And I guess as we go through the rest of the year and how youre thinking about funding the loan growth.
I appreciate the deposit guide, obviously, but as you're looking at funding our loan growth.
The acquisition that slated to close in the back end of the year the remaining on balance sheet liquidity.
Does that all figure out is this is the expectation to kind of fund. It one for one is there incremental liquidity that you are willing to use on the balance sheet in advance of the deal closing later this year.
Any color on the funding side would be helpful.
The transaction that we closed this is Vince to Lee.
If we were able to close the transaction this year, we'll get a benefit because it's princess.
We are deposit.
It's fairly substantial for the size of the bank there is tremendous amount of granularity.
Positive funds in that portfolio or is low.
And over virtually at 10 basis points right.
Was there any one timers.
Got it.
Yeah, I mean, I think that that'll be additive.
That will help us, but you know if you look at where we are today.
At an 84% loan to deposit ratio, we have 35% at the end.
Deposits are mix is the strongest it's ever been.
Our liquidity position, while we've drawn down cash is still substantial.
No I think we're in a very good position relative to lending in.
Excuse me good returns in that space, particularly commercial.
Being in the second half of the year or so.
No I think we're in a really good place.
Okay, Quiddity perspective funding perspective, but we're not concerned.
What you saw at the end of June we had six of the excess cash still on the balance sheet. So that was $3 four at the end of the first quarter I would say use that to fund the loan growth you saw on a spot basis. So there's still ample liquidity just sitting right. There for us we continue to win depository relationships.
Clearly in the South East.
Starting to accelerate for us larger Treasury management clients in the segment. So I would expect that to continue.
Okay. Thank you and then just last for me on the Securities book, maybe talk through the purchases you were making this quarter and what youre seeing there for reinvestment yields.
Sure.
The second quarter and invested $768 million into the portfolio.
400 million higher than the cash flows.
Take advantage of the rate environment there.
We reinvested in an average rate of 327 order was $1 90 last quarter. So a significant move up there.
Well above the roll off rate of 185.
Hello.
A nice benefit there.
I mean, if you look ahead I mean duration wise, we continue to be on the shorter end and around four.
Our estimated 12 month cash flow was just under $1 billion.
Coming off of around 191, so putting stuff on at 327, they were probably put stuff on this month more like $3 50.
Okay, great. Thank you for the color I appreciate it.
Sure.
And the next question will be from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, everyone. Thanks for taking my questions.
Yeah.
I thought your are your comments on deposit betas are very interesting in terms of everything that that could impact it.
It goes this this cycle relative to prior cycles.
I'm not sure maybe I missed it but could.
Could you kind of just indicate where you think that they actually may shake out or do you or what's your best guess is or what you're budgeting for.
Given all those factors that you mentioned.
Sure.
Obviously the level of liquidity in the banking system still consideration to how this all is going to play out.
At this point I would add that we.
No pressure at all on the retail deposit side.
Really been conversations with municipal commercial customers that have started to ship bonds from money market deposits.
C d's that kind of a natural shift has been occurring.
Look at where we are so far our cumulative beta is nine.
9% on total deposits, 15% interest bearing deposits as of the end of June and what's baked into our guidance based on what we know today.
22% for total deposits from 33.
By the end of the year will be the accumulated data point.
Okay, Great I appreciate that.
And then my other question is just around share repurchases. You know you you you repurchase shares this quarter.
Capital has been has been stable.
Obviously, you have the deal coming in the fourth quarter, but you just kind of overarching thoughts on outs.
Outside of maybe the period, where you're unable to to repurchase how're.
How are you thinking about share repurchases is it more of a kind of a steady quarter to quarter amount that youre looking to repurchase or more opportunistic.
I would start with we continue to target a CET one ratio of around 10% and the level of pricing.
Come down about 25 basis points this quarter, just given strong loan growth recently.
Recent investments that I mentioned.
The higher yields those are coming out of cash zero percent risk weighting. So you have.
That dynamic happening during the quarter.
Okay had baked into our guidance, we would expect that to get back up to 10% by the end of the year, just given our higher earnings generation levels.
Yeah Yeah.
Ratio and our asset sensitive positioning.
Regarding buybacks, it's kind of the same.
We've talked about I mean, our first and best use of capital.
Annick loan growth so the level of buybacks will be dependent on the growth we see for the rest of the year, but we'll be opportunistic and we have been in the past 591 shares this quarter end.
It makes sense.
Hi on the loan growth.
Eric Bakken overall, we're going to just committed to managing capital when it's fully aligned with shareholder interest itself.
Just a constant evaluation process.
Okay, Great all right. That's all I have I appreciate the answers.
Thank you. Thank you.
The next question is from Michael Perito with K B W. Please go ahead.
Hey, good morning, guys.
Good morning.
I wanted to just kind of start with the Big picture question, and then you guys kind of talked around it in a few different ways in your prepared remarks with some of the questions that have been asked already but just like this.
This is I guess balancing this environment with the kind of the uncertainty in the back half of the year versus what what seems like like on the ground today like pretty good momentum from a loan growth standpoint, a customer growth standpoint, you know.
I guess with your well your diverse footprint.
How do you guys think about.
You know balancing those two things and are there certain areas or whether it's from a deposit beta side or a loan growth side like the credit side that you feel better about them from a market standpoint today within your footprint are there areas, where maybe you're more concerned whether that's because of real estate changes or anything like that just any any color there would be helpful.
Well first of all I think the diversification strategy that we pursue enables us to be more selective from a credit perspective that was the thesis.
Laid out from the very beginning as we gained share in markets like Pittsburgh, It becomes more and more challenging to grow portfolios and not change the risk profile and that portfolio. You know there are competitors they have.
Well entrenched here and you know, while we were able to grow fairly significantly.
Short timeframe, you get to a point, where you can hit saturation.
Good quality credits and you know our philosophy was to stay within a tight.
Underwriting a range so that we werent in consistent recycles, we did it the last time.
Yes.
Put together a number of linked quarters, where we had loan growth out in the last.
Economic.
Michael and I, we were an outlier.
And I think that we're even in a better position this time around.
Flying our credit philosophy to an even broader diversification in terms of markets that we cover.
I think that arent.
We have great bankers, we have a very disciplined sales management process, we have credit officers in the field.
Use data analytics and the tools, we put into place to manage credit risk we look at trends.
The portfolio our credit team.
Analytics side of it.
Is a very sophisticated.
We use all of that to kind of guide us and you look at the exposures that we had going into the pandemic hospitality for example, Gary and his team had already manage down those exposures, we had less than $300 million.
That exposure and we kind of looked at that portfolio and looked at what was going on in the industry.
Net thresholds based upon our capital levels, we look at all of our exposures relative to capital.
And made adjustments.
And did it in a way that didn't weren't exiting customers left and right. We just decided we were going to slow up our lending in that category. We had enough to go after geographically it continued to sustain the growth trajectory for the company. That's that's how you manage risk through a cycle.
The other side of it is we're very focused on what's happening with our customer base. I mean, we're looking at the supply chain issues, how is that going to impact growth and EBIT.
The margin growth.
If the company has more leverage.
At that look at interest rate sensitivity.
Rising rates impact certain portfolios, we look at.
Changes that are going on from a commodity pricing perspective, and how that'll impact.
Customers and then we pick what we think are great management teams to lend to.
And it sounds pretty basic but if you stick to that you don't rap.
Well, we don't we.
We manage you know pipelines and we manage opportunities, we're not necessarily managing growth in portfolios just to grow.
So I think the outcome is we ended up with.
We've always said mid to high single digit growth.
Portfolio and that's you know that's a.
Enough to sustain us in to achieve on our.
Principal investment.
That's that's.
That's the strategy and in the markets that we cover.
See you know some fairly substantial population growth in the south east.
Theres a lot of activity in the mid Atlantic region, particularly in D. C important, Maryland, we of Pittsburgh and Cleveland that have bigger industrial bases, where we see more opportunities on the C&I side.
And Charleston, South Carolina as a high growth market, we've had great opportunities there to learn principally in the real estate space, but we also see C&I.
C&I opportunities there more and more because of the changes that are going on.
Anyway, that's that's how we manage the risk and I can't say that I'm looking at a single we stay out of were not an equity sponsor lender. We don't just follow a private equity perspective.
What's going on so we tried to stay out of those riskier portfolios.
We've sold portfolios even at times, when we could have used the earning assets on the balance sheet that we were concerned about the risk. So very prudently managed I think I have all the confidence in the world and our team and I.
I believe we will be able to grow just like we have in other cycles.
Oh great.
No. It is thanks for expanding on it I appreciate that and then just secondly for me I mean, you guys are kind of in this.
Yeah.
<unk> here, where your loan deposit ratio is still low and your cash are still almost 7% of your earning assets right, where we've seen some of your peers are starting to see some upward pressure on lower deposit and we're a little bit quicker to deploy that cash elsewhere.
You know, whether it was loans or bonds, but I guess longer term right. I mean, it's hard to be competitive from a profitability standpoint with with so much with with an 80% loaded a positive 7% of earning assets and cash right. So I mean, how do you guys think about that dynamic I mean, obviously those are good things to have with the uncertain environment, but put presumably at.
Some point they need to normalized.
Roy that that you know I think you guys can't so I mean, how do you guys think about the timing of that evolution of the balance sheet, just given everything that's going on.
Well you know, we've achieved pretty substantial profitability metrics at 97%.
Loan to deposit ratio, so I'm not sure.
Depends on the interest rate environment.
What's happened and kind of globally, but I will tell you that.
Our consumer back what differentiates us from many of our peers. They are principally commercial banks, it's much much harder to grow deposits.
At certain points in the cycle when relying solely on commercial depositors.
Again.
Diversification, we have a big.
Chunk of our deposit base, which sits in the consumer bank.
We've had great success growing those deposits and the betas in those categories tend to be more favorable to the bank. So.
<unk>.
We plan on continuing to pursue that.
Pursue those strategies that we've put out there and our investment in technology.
Each store the number of deposit accounts that we're opening online has gone up fairly.
Significantly over time, so our scalability and that consumer segment is actually has improved.
<unk>.
I think we're in a good position to grow.
Deposits, which I think is.
It should be measured.
Thanks, Ken.
To grow their deposit base in a favorable way.
That's what makes them great.
So we focus on it.
To achieve better results.
That's really a principle funding source.
I don't know if you want to add anything that I would just add I mean, the spot cash if you look at it at the end of the quarter was about 4% of earning assets.
I think Vince has made the reference point to 97, and 97 was kind of our high Mark.
Asset ratio.
Lot of room between here and there so.
No I think what the deployment of the cash in the short run and then like best that our ability to generate deposits.
The geography, we added not just through acquisition, but through de Novo the bankers we've added.
Treasury management team that's out there getting wins everyday.
That the differentiator for us so that helps to fund loan growth, but in the short run you have benefit of the cash.
Deposit growth continuing as we go forward with adding new accounts not just what we have.
Balance sheet today that could benefit us for the long run we've never been dependent heavily on our wholesale fund.
So you know I think that.
There are times when cycle changes and maybe there's more of a need for it but we've never been solely.
Yeah.
Great that that was all helpful. Thank you guys for spending time on this and I appreciate the color.
Thank you.
And once again, if you'd like to ask a question. Please press Star then one.
The next question is from Russell Gunther with D. A Davidson. Please go ahead.
Yeah, Hey, good morning, guys.
Rather than anywhere else.
Just a brief follow up on the deposit beta conversation I appreciate your views as to where things could shake out by the end of the year.
And likely the bulk of fed hikes will be in by that time, but it's the later ones work their way through do you have an updated view on sort of through the cycle betas from a total in interest bearing perspective.
Well I think we have the reference point that we had.
Prepared remarks give you kind of a feel for that.
We haven't done.
So 24% in the last cycle yeah.
All right well I mean, Russell, that's one reference point that we haven't.
It's kind of getting to what we're suggesting.
Baked into our guidance for the end of the year.
Depending on who you believe I mean, the fed kind of peaks third quarter and then it starts to come down from there. So I think what happened to the beta from there is going to be kind of interesting and for us to all manage once rates start to come back down what happens to betas relative.
Our deposit rates at the time relative to where.
The fed has been.
So.
Our job is to balance it and manage it effectively I think at year end point is a good reference point to have relative to what happened last time.
We'll do our best to try to even be better than that.
Okay. No. That's helpful. Vince. Thank you and then just another follow up sort of about the asset quality conversation.
Appreciate your thoughts there results are really strong historically, a lower beta model at F N B S.
But as you've moved into growth of your minds.
Markets and increase the growth profile of the company.
Your view changed at all in terms of normalized losses, and where you think that range of charge offs could shake out over over the next year or two.
Yeah, I would I would tell you Russell with with our philosophy of it.
Insistent underwriting through the cycle.
As.
We've gone through a number of cycles.
This point.
No I would expect that our charge offs and with the diversity of the book and the amount of credit opportunities that we're seeing in choosing the highest quality opportunities.
And that in that list.
I would expect to see our normalized charge offs would be lower they were in.
We've taken some positions to move some positions from a balance sheet standpoint.
And with the consistency that we've seen in the high quality opportunities, we've seen I would expect them to be slightly lower cycle.
Thank you for that Gary.
And then just last one for me as a follow up on the loan growth discussion.
Vince you mentioned kind of a longer term mid to high single digits, but just getting back into the change in the in the growth profile with growth of your markets tend to balance that against some of the macro headwinds outlined earlier.
It's a high single digit result, something that you think is sustainable in the near term just even beyond the back half of this year, just given that diversification and growth of your markets.
Thank you that's it that's the question I wish I knew the answer I think as we look at that honestly as we look into next year.
It's going to be I think a little more challenging I am not sure how much capital.
By customers or consumers.
Depending on what's happening with the U S economy.
Now as things stand today, it looks like based on what I'm reading seeing all the other banks report there was kind of pent up demand for credit. So it kind of what just came in.
But I think theres a lot of uncertainty.
Within the customer base.
Where we're headed.
So theres a lot more caution at least I'm sensing that this is anecdotal I am sensing there's a lot more caution within the customer base about capital investment moving into next year.
My expectation would be that.
We had great results for the first two quarters from a growth perspective, but the pipelines look good.
Lower slightly because we did fun quite a bit.
I'm trying to think what's going to happen.
We move forward, that's really a question about confidence.
Confidence within the customer base.
All our customers feel particularly the commercial customers.
E N C&I.
You know.
It is the environment going to be ripe for capital investment I mean, they're going to they're going to look at that and say that's going to drive whether the borrower.
We've seen a little bit of benefit from that.
Why chain issues quite frankly.
Some of the customers are trying to deal with inventory shortfall, so they're starting to borrow a little bit we saw a slight uptick.
And utilization rates.
That is having a little extra inventory on hand, so they can continue to grow.
Because if there's supply chain issues that puts a lid on growth with those companies.
So they're trying to manage that.
You see commodity pricing it pushed up.
Some of the revolver, a little bit to the cost of raw materials has gone up pretty dramatically for most industries.
All of that's going to come into play, but I think demand.
Sure.
Moms commercial loans in particular should I think we will.
Tail off a little bit we saw that blood to come in the next year or so the big question Mark based upon.
Our feeling.
In the year.
Collectively.
I hope that helps right.
Yes.
We just manage it.
We manage it.
By credit.
Group by group.
<unk> list.
Following activity in <unk>.
Just trying to you know.
Be there for the clients so when the capital opportunity comes up we will consider.
So.
Hope that helps.
Yes, it does quite a bit thank you Vince and thank you all for taking my questions.
Thanks Russell.
The next question is from Brian Martin from Janney. Please go ahead.
Hey, good morning, guys.
Brian Good morning, Hey, maybe can you just touch on I guess, you touched I thought maybe I missed it earlier in your earlier comments, but just about the commercial pipelines I know you said the consumer were down a little bit and you just mentioned Vince now maybe a little bit more it sounds like the commercial pipelines are down a little bit I don't know if that's carrier Vince, but just kind of what you're seeing there.
Well the commercial pipelines, we just went through it with enormous funding session [laughter]. So what ends up happening is the short pipeline converts the assets on the balance sheet and then the long term pipeline. It starts to build back up again, and we look at it in two segments.
Within 90 days to close and greater than 90 days really two.
Principal areas, but when you look at it on a year over year basis, considering the growth, we've had which is mostly seasonal or pipelines or aren't whoa historic they're lower than they were at the beginning of the quarter slightly.
So let me be clear there is still opportunities within the pipeline.
You've cleared out the 90 day bucket big fundings.
Right.
Actually all of them.
Yes, its actually up slightly for commercial does that that's the total end to end.
Not that that's short term.
Yep.
Okay, and then maybe just maybe just talk a little bit about the just you talked about the bay, there's just kind of the the margin outlook given the sensitivity and kind of the rate increases. We're seeing here is just kind of how youre thinking about the near term kind of what's repricing just remind us.
Thought that there was not much to have floors out there on the on the pipeline, but just understanding the margin sensitivity here just over the next quarter or so.
Yeah, I would say a higher bar.
He has a lot of moving parts.
We didn't give guidance on margins.
S levels in all of them.
So the dollars and net interest income.
For the most helpful for us are really.
I can't I mean, it's under $100 million.
Really not even.
I'm talking about.
If you look at some of the.
Some of the key drivers members find it in the we still have that excess cash on the balance sheet and we have a slide there that.
Quantify that I mean, that's a 16 basis point drag on the margin in the second quarter.
That cash continues to get deployed at 60 basis points with went away. So is that directionally that helps there.
Nah.
Purchase accounting and triple B benefits or three in one basis point, respectively going the other way.
They're very involved at this point.
Euro.
What's the kind of stay around that level or is that 16 basis point drag goes away the benefits as a percentage for sure.
Some of the other kind of key drivers that we've talked about in the past as you know the consumer Cds.
It was about 175 to $2 25 a month.
It's boring.
From 20 to 43 basis points.
Today in the month of June where we are putting Cds on 65 70 basis.
Does that dynamic there.
If you look at the portfolio right on the C. DS we were 67 basis points ended December bottomed.
Bottomed at 55% in April and ended June at 63, so still at a very low rate but.
Definitely kind of bottomed and started to move up.
Given.
Virtual and municipal side of the house.
Loan pricing adjustments, you've made there and then I guess the last piece I would comment on is just new loans made during the second quarter.
Most came on at $3 79 seconds.
Second quarter that was $3 nine last quarter. So.
That's a nice move up it's also you know.
About the oil rates so.
Kind of some of the other drivers I would comment on.
Gotcha, Okay. No that's helpful and maybe just last one just on the on the fee income side of the house, maybe just can you just talk about.
Just kind of worthy.
The greatest opportunities out here with the two two acquisitions and then maybe just kind of the.
The mortgage outlook I mean, I guess when you look at kind of this quarters level is this kind of a floor where that level is sustainable given kind of the trends you're seeing you talked about the refinance activity and just see origination activity.
I would say.
The mortgage side.
I guess a couple of comments.
A half a million.
First quarter, the MSR valuation recovery down by $2 1 million.
So underlying number was up a million sex, but absolute level, obviously affected by lets say the mortgage business rates have moved up so so much. If you look into the next couple of quarters I mean, our guidance has that six ish number coming down to the number that has a four handle to it just given kind of expected activity here. That's all that's all baked into.
Our guidance.
As far as the overall fee income categories capital markets.
Our biggest opportunity I would say absolutely we have some great wins.
In capital markets.
Particularly the debt capital markets platform.
Yeah.
Sure sure.
Oh bus.
The slowing in the fourth.
Okay.
Yeah.
And we've done a fairly granular.
Set of businesses.
Fee income or something.
International banking had.
<unk> been doing pretty well there are some stuff in the pipeline for them capital markets as I mentioned is doing well syndication.
Thanks.
Well derivatives, we bought.
Sure I think clients are trying to hedge.
The future interest rate risk so that came in a little better than we expected.
We expect it to be activity throughout the rest of the year.
The interest rate derivatives category.
And management, New management has done very little change has been really building our interchange actually moved up if you look at the service fees most of the service fee growth.
Got you.
Smart overdrafts, it's not those traditional categories.
Interchange fees for us.
Growing back I guess what drove that.
Low levels.
Yeah, that's right.
Right.
Yeah, I was going to answer that.
Go ahead go ahead I'm sorry.
I was just going to say was that number a sustainable number given the interchange in kind of the breakdown you gave on the Treasury management and the interchange really kind of driving that growth. This level should be a sustainable level as you kind of go forward yeah. That's.
Those are.
Consistent reoccurring revenue stream.
Yes.
Particularly the T M business I mean, as we grow that business and continue to win business there.
It's additive and it's an annuity.
Interchange component is seasonal like interchange I cannot season are but the other pieces that are not right.
The other thing I would comment on too Brian is just looking at our side I mean, the wealth management side of it.
The trust business and you know that that's.
There and it'll continue to build until we get into later in the year and into next year. So that's another area, where we've been absent maybe get some SaaS.
Got you Okay. I appreciate all the help guys. Thanks for taking the question.
Okay. Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Vince Kelly for any closing remarks.
Yeah.
Yeah. Thank you I I'd like to thank everybody that participated great questions. Thank you for.
Yes, the attention and asking those great questions I also would like to thank our employees again I said in the prepared comments I meant it I mean, our people step up time and time again.
Really appreciate the effort and I'm very confident we can do well throughout the cycle and throughout the rest of the year because of the quality of the people that we have.
Thank you have a great day take care.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].