Q2 2019 Earnings Call
Well welcome to the FNB Corporation's second quarter 2019 earnings call.
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I'd now like to turn the conference over to Matt Lazaroff manager of Investor Relations Mr. lateral please begin.
Thank you good morning, everyone and welcome to our earnings call. This conference call other than the Corporation and the reports it files with 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 comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP financial measures and forward looking statement disclosures contained in our earnings release related presentation materials and in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until July thirtyth and what webcast link will be posted to the about us investor Relations and shareholder services section of our corporate website I will now turn the call individually chairman President and CEO .
Thank you Matt.
Good morning, and welcome to our earnings call. Joining me. This morning are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, Our Chief Credit Officer.
Gary will discuss asset quality and Vince will review the financial results today I'll provide second quarter highlights.
Which reflect strong performance during the first half of the year, including.
And increased profitability from multiple business units.
Ill, then provide an update on our strategic objectives and open the call up for questions.
There are three important takeaways from our second quarter highlights.
First we continue to strengthen our capital position and drive enterprise value through tangible book value growth and strong returns on tangible common equity.
Earnings per share was 29 cents on both an operating and reported basis and when considering expenses related to branch closures and a noncash charge of 1.3 million related to MSR impairment.
Earnings per share totaled 30 cents.
When considering these adjustments EPS rose, 11% compared to the year ago quarter.
Second.
This quarter's financial performance was driven by consistent operational execution was solid loan and deposit growth and record non interest income.
Highlights include growth in our capital markets fees mortgage banking revenue.
See an i. portfolio and noninterest bearing deposits.
Our expansion markets within Washington, DC, and the Carolinas have contributed nicely.
And we expect continued momentum throughout 2019.
During the second quarter FNB generated more than 2 million in syndications and interest rate derivative fee income from our new expansion markets.
Those higher growth markets also contributed significantly to mortgage banking revenue growth wealth management revenue and loan and deposit growth.
Lastly, we maintain favorable asset quality, while growing in re mixing the balance sheet.
Competitive operating in challenging interest rate environment.
As you May recall, we pursued our expansion into the southeast to provide sufficient asset growth opportunities to achieve our stated growth objectives, all while maintaining a favorable risk profile.
Additionally, our disposition of higher risk portfolios contributed to our solid credit performance.
These actions will serve our shareholders well as we move through the credit cycle.
Tangible book value per share grew to $7, an 11 cents.
Return on tangible common equity in the efficiency ratio were again peer leading.
With levels of more than 17% and 54% respectively.
The mix of the balance sheet continued to improve on an annualized linked quarter basis as average total loans increased 7%.
And deposits grew 8% which fully.
Funding needs of loan of the loan origination volume.
With solid performance across the footprint the loan growth was driven by continued cnine growth of 20% annualized.
On the funding side, we were able to hold the core margin relatively stable.
As we are focused on generating noninterest bearing and transaction deposit growth.
Successful execution of these efforts is evident with 12% annualized growth in non interest bearing balances.
Our strategy strategy to generate noninterest bearing and transaction deposit growth is of the utmost importance given the potential for margin pressure in the current interest rate environment.
Based on our growth in a number of key metro markets over the last 12 months.
We expect to have meaningful market share gains across the footprint, particularly in a number of our newer markets. When we when the comparable FDIC data is made available.
Total revenues increased 13% annualized compared to the first quarter with noninterest income increasing substantially up 58% to a record high of 75 million.
Looking specifically at fee income, we drove record capital markets and mortgage banking revenues this quarter.
Capital markets revenues were $10 million and mortgage banking results were nearly 8 million.
Capital markets experienced a 64% growth rate compared to the last quarter due in large part to several new transactions in the syndications group combined with another strong quarter for our derivatives business.
We are pleased with the solid traction they are gaining.
And we're confident this business unit will continue to produce strong contributions to our performance as we capitalize on our markets in the mid Atlantic and southeast.
Mortgage banking production increased 71% linked quarter.
And we will look to generate growth in gain on sale revenues to offset potential interest rate environment pressures and support overall revenue growth.
On the expense front second quarter operating expenses were right in line with our expectations as we accomplish the majority of our stated goal to reach at $15 per hour minimum wage by the end of 2019.
The increased salary expense is reflected in our core run rate.
These profitability levels resulted in strong internal capital generation, driving the Tc ratio to 7.32% and increasing tangible.
Per share.
13% over the last 12 months.
As you know this has been a key focus for us in recent period.
We are pleased with our ability to generate capital moving forward with added future flexibility now that we have a payout ratio of 42% for the first half of 2019.
Asset quality continued to trend very favorably as evidenced by continued solid performance and further improvement in a number of key asset quality metrics.
With that I'll ask Gary to comment on credit quality Gary.
Thank you Vince and good morning, everyone.
We finished up the first half of the year with our credit portfolio remaining very well positioned as the second quarter was highlighted by an.
Live trends and overall stable results.
On a GAAP basis, the level of delinquencies showed further improvement over the prior quarter to stand at 95 basis points.
Additionally, npls and Oreo also trended favorably down three bips to end June at 58 basis points.
Total net charge offs were solid at 16 basis points annualized with the ending reserve for the quarter at 83 basis points.
Well through the quarterly results for the originated and acquired portfolios.
Looking first at the originated portfolio delinquency ended the quarter at 66 basis points up a few bips over the prior quarter with a long term trend continuing to move in a positive direction.
Npls and Oreo remained at a solid level of 61 basis points, which ticked up slightly on a linked quarter basis, but continues to remain well positioned over the last several quarters.
Originated that charge offs for the second quarter were solid at $5.4 million or 11 basis points annualized and on a year to date basis totaled $10.2 million similarly, reflecting a level of 11 bips.
Provision expense for the quarter totaled $12.3 million and adequately covered net charge offs and organic loan growth.
As Vince mentioned earlier, we expect the solid see an i. activity that we have been experiencing to continue and.
Quarter as we are seeing contributions from across the entire footprint.
Turning next to the acquired portfolio, which totaled 3.5 billion at quarter end. The credit results were favorable and remain in line with our expectations.
Contractual delinquency continues to improve with the linked quarter decrease of $13 million to end June at 88 million.
On a year over year basis past dues have been reduced by $32 million, a 27% reduction since June of 2018.
The acquired reserve ended the quarter at $4.5 million and inclusive of the credit Mark the total loan portfolio remains adequately covered reflecting a combined ending coverage position of 1.29%.
In summary, we finished the first half of 2019 with solid credit results as our book remains favorably positioned heading into the second half of the year.
We can attribute this consistent performance to our balanced approach in which we selectively seek out high quality opportunities.
Good credits consistently and proactively and strategically manage the risk profile of the portfolio.
These core credit principles are the foundation of our credit and lending decisioning processes that we employed throughout the footprint and across each line of business.
As we move through this later stage economy, we are focused on the micro and macro economic trends to proactively manage risk and we'll continue to look for opportunities to bizet better position, our asset mix as they present themselves.
We remain steadfast in discipline to the risk focused approach that is ingrained in our culture, which continues to serve us well.
I will now turn the call over to Vince calibre. These our chief financial officer for his remarks.
Thanks, Gary and good morning, everyone.
Today, I will discuss our financial results and provide an update on our outlook for the rest of the year.
As you can see on slide three second quarter operating EPS totaled 29 cents.
As we continued our great start to the year.
The quarter fees.
Especially on the commercial side and we continue to build capital with the TC ratio, increasing 17 basis points and the quarter at 732.
Now, let's look at the balance sheet for the quarter starting on slide six.
On a linked quarter basis average loan growth totaled $380 million or 7% annualized.
Including commercial loan growth of 8% and consumer loan growth of 4%.
Growth in the commercial book was led by strong annualized growth in the CNS portfolio of 20%, while seery increased 2% annualized.
The consumer growth in the quarter was concentrated in residential mortgage up 13% and indirect auto up 5%.
Our home equity balances continued to decline as we've seen across the industry.
We were pleased with these results as we continued to see strong activity across our markets.
Turning to deposits on a linked quarter basis.
Average total deposits increased $454 million or 8% annualized reflecting normal seasonal inflows and continued growth in households, and commercial clients.
The deposit growth was spread across categories, including growth of $176 million in noninterest bearing.
$143 million in interest bearing demand deposits and $126 million in time deposits.
These results speak to our ability to continue to execute our customer acquisition strategy.
Looking at the income statement net interest income was essentially flat from the prior quarter.
For the quarter total purchase accounting accretion was $8.1 million was $7.5 million from incremental purchase accounting accretion and 600000 from cash recoveries.
This compares to a total of $9.5 million in the first quarter.
The linked quarter decrease in margin also reflected the two basis points of net margin benefit recorded in the first quarter related to the retirement of debt facilities, which I discussed in detail on the last call.
Excluding purchase accounting and the sub debt activity benefit in the first quarter. The net interest margin decreased two basis points to 309 from 311. A result, we feel good about given the current rate environment.
Let's look now at non interest income and expense on slides eight and nine.
The increase in operating noninterest income of $8.8 million was largely driven by an outstanding quarter and capital markets.
Which reached a record level of $9.9 million, including strong performances in swaps international and syndications.
We also enjoyed a very strong quarter in mortgage banking, which included a 71% increase in production volume compared to the first quarter.
We continue to see growth in wealth management were 3.5% growth in trust services, and 7.5% growth in securities commissions and fees.
Turning to slide nine operating expenses increased $7.6 million compared to the first quarter.
The primary driver was an increase in personnel expense, which reflects our April onest annual merit increases as well as commissions for revenue generating activities.
The continued progress towards our commitment to bring our minimum wage up to $15 by the end of 2019.
Good thing expense seasonally increased $1.2 million and outside services increased $1.4 million due to the timing of charges such as annual director fees.
Now I'd like to turn to our guidance for the remainder of the year.
Our growth in loans and deposits has been within our expectations for mid to high single digit growth and we continue to feel confident in those targets.
As you May recall in January we expected full year net interest income to grow low single digits compared to 2018.
As we sit here today, we expect net interest income to end up closer to flat given that we had two hikes in our guidance and the forward curve is now calling for two cuts.
As you all know the outlook for interest rates has been volatile and the shape of the yield curve isn't helping the banking industry.
While we are not as interest rate sensitive as most banks are still impacted by the inverted curve in our net interest margin has seen some slight compression.
We are confident in our ability to organically grow core deposits as we have demonstrated mid to high single digit growth.
Even with closing 46 locations since last year.
We are tracking in line with our expectations for noninterest income to growing the loan.
And for non interest expense to be flat to down 2%.
We now also expect provision expense to be in the $55 million to $65 million range, rather than 65 to 75, given that our asset quality remains very favorable levels.
Our expectations for the effective tax rate remain around 18%.
Finally, I'll give an update on Cecil.
Express on the necessary steps to prepare for a January implemented.
The focus of management and substantial progress has been made.
Bob patient.
Well when areas CISO estimates internally and expect to be prepared to share those accurately as early as October .
Based on our preliminary analysis performed during the second quarter.
Using macroeconomic conditions expected at that time, we don't believe the day, one retained earnings impact will require us to raise capital.
Another key consideration to know is that seasonal requires a balance sheet gross up of existing acquired loans on day one.
The remaining non credit discount on our acquired loans will accrete into interest income in a similar fashion as purchase accounting does today.
Overall, we think it was an excellent first half of the year and believe we are well positioned to successfully navigate the challenging interest rate environment and upcoming Cecil implementation.
Next Vince will talk about some of our growth strategies and give an update on some 2019 initiatives.
Thanks Vince.
As you May recall, we announced several major initiatives over the last year and I want to provide an update on the progress towards those objectives.
In commercial banking our teams have had a strong first half of the year with overall commercial loan production ahead of our expectations.
And very strong second quarter commercial production and Fnbs, Baltimore, Washington, DC, Cleveland, Pittsburgh and Charlotte region.
As an update to our Carolina activity, we saw another quarter of growth in average commercial loans in north and South Carolina and have seen their pipelines continue to build for the second half of the year, particularly in Raleigh, Piedmont, and Charleston, South Carolina.
For the Carolinas as a whole they continued to be above their loan production expectations through the first half of the year.
In the consumer bank, there has been tremendous progress towards ongoing optimization for both our online and physical delivery channels in the past we have used data analytics to improve customer acquisition.
The next phase is improving customer retention and gaining share of wallet.
This includes a redesigned omni channel channel online banking platform that provides a uniform experience across delivery channels.
We are targeting to roll out our new capabilities in the coming months and are excited about the new features and streamline process, we will be able to offer our customers.
The new increased functionality will simplify the online experience and create a one stop shopping digital experience that is seamless with customer experience at the branch.
These investments should provide us with organic household growth opportunities and a comprehensive offer of products through the digital channel to deepen existing relationships.
We intend to leverage our investments in data science and machine learning tools to more efficiently match clients with the appropriate products and services prevent fraud and to manage risk.
Regarding our physical delivery channel, we continue to execute our long standing ready program.
Through our ongoing optimization program, we have consolidated 46 locations since last January .
And have added two de novo locations during that time.
We expect the opening of several more de novo locations in the coming quarters and throughout 2020 with a focus on Charleston, South Carolina, Washington, DC, Northern Virginia, and Charlotte North Carolina.
We have continued recruiting bankers very successfully across our footprint.
Notably attracting key talent to expand the teams in Cleveland and just recently announced the hiring of leadership and an exceptional team of bankers in Charleston, South Carolina.
We are already benefiting from significant opportunities in those markets, notably in Charleston, where our portfolio is up 20%.
Furthermore, on the employee front I am pleased to share with you that FNB was named a best place to work in Pittsburgh for the ninth consecutive year and the best place to work in Cleveland for the fourth consecutive year.
Our employees are the heart of our organization and I want to thank them for their hard work and dedication.
We are highly focused to better serve our constituencies by listening to their future needs and providing benefit for our customers communities fellow colleagues and creating greater shareholder value.
With that ill turn the call over to the operator for questions.
Yes. Thank you well now begin the question and answer session.
The last question you May Press Star then one on your Touchtone phone.
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Well pads all entirely to assemble the roster.
And our first question comes from Jared Shaw of Wells Fargo Securities.
Hey, Jared I guess.
Larger HM pay if we it seems like the phone is skipping in and out Jared. So if you need to ask a question twice were.
We're good with that or if you have any questions about our prepared remarks.
Okay. Yeah. There was a couple of steps I think we're able to keep up with most of it.
Maybe just starting with the margin and you talked about how the initial.
Outlook for the year assumed continued rate hikes and now we're looking to.
To see rate cuts, how should we be thinking about the margin here and then sort of tied in with that.
Looking at the quarter over quarter decline in resi loans, I guess, how should we think about.
Overall balance sheet positioning or repositioning from here heading into a rate cut environment.
Yes, I would say, it's a few things on the margin.
In our original guidance as I mentioned was low single digit growth net interest income and remember that was comparing to total GAAP for 18, which included regency for eight months and also we had higher cash recoveries in this in the second quarter last year. So that was our reference point just to make sure everybody kind of has that straight.
You know what the two fed increases that we had baked in switching to cuts.
We took a fresh look we forecasted the entire balance sheet income statement and look for net interest income to be to be flattish as I said given the two rate cuts. If you look at the margin for the quarter.
First quarter to second quarter.
Justin just to kind of clarify a few moving parts just to make sure everybody has the the references straight.
For the first quarter, we had a couple basis points or million six benefit from sub debt we retired.
So that obviously didn't repeat itself this quarter and then to purchase accounting benefit. If you look at it kind of the first to second quarter than normal accretion is I would call. It declined a million for which was two basis points of margin.
Change in the quarter the purchase accounting accretion for this quarter. We think is a good run rate as you go into the next couple of quarters, so that and that should be pretty stable. As you go forward and then the other dynamic we saw this quarter was as everybody did the impact of lower one month, LIBOR, which was leading the fed cut so that declined 21 basis points from the end of the year.
Through June Thirtyth.
And we have $7.5 billion of our total loans or almost 33% that are tied to one month LIBOR.
Let's see we didnt get the corresponding benefit on the liability side. So so that's another kind of dynamic that's flowing through there even with all that to have two basis points of kind of core.
Margin compression first to second quarter feel pretty good about it and then as we look forward.
Growth in noninterest bearing deposits continued strong growth in the loan side, particularly on the commercial side.
Looking baking into two fed cuts and the impact that has on the liability side. We're looking for net interest income to be kind of flat year over year and the margin to be flattish also from kind of where the where the core would be for the current quarter.
Okay.
Okay. Thanks.
And I guess shifting over to the to the loan portfolio.
One how severe or paydowns this quarter impacting sort of period end balances and then again looking at the decline in resi loans is that something that you would consider maybe retaining more of now with the the rate expectation.
Before Gary or Vince provide additional color I thought I would I'd make a comment I think that you know.
The spot balance if you look at the spot balance.
There are adjustments for loans that were moved.
Into a saleable category, so held for sale and.
We made the decision that there was a portfolio of jumbo mortgage loans that we ultimately will exit.
We made that.
The pipeline in our mortgage company is significant it's it's very strong.
We.
Took into consideration.
The margin on those loans and the impact on Cecil. So we made the decision that we were going to exit that portfolio. That's why the spot balance when you look at it appears to be flattish is actually in line with the average balance growth when you add that back we have significant.
Production going on in the commercial bank, particularly in the CNS space with some large corporate borrowers, which we expect fundings in the third quarter as well.
So part of it is along the lines of the strategy that we mentioned before changing the mix a little bit to benefit us as we move into a period, where our reserves are changing.
In the Cecil environment as well as diversifying the portfolio. So Gary I don't know if you want to add any more to that.
I think thats, what you are seeing no I didnt.
As we've talked in the past, we're we're constantly looking at the asset mix of the portfolio as Vince as mentioned and we're going to position the portfolio of for the benefit of the organization, both financially and from a risk standpoint, as we as we look forward. So that that's what really drove the positioning there.
As Vince said there were there were a pool jumbo mortgages. We also sold some conforming mortgages or put move them into the held for sale category.
As well so again, just repositioning of the balance sheet.
As we as we look forward, yes, and I'll say that I think that will be we.
Vince reaffirmed the guidance on loan growth. So we feel pretty confident that we can make these changes and not impact our growth trajectory.
Okay. Thanks, and then just to confirm where those mortgages. Those are mortgages you had purchased.
From the warehouse SAS or pipeline or.
Given the sort of the strength and the warehouse pipeline your.
Hi, guys I related at all to the to the warehouse side or was that were those originated mortgages. Now those were those were originated mortgage loans over time and as Gary indicated the largest portion of them were jumbo mortgage loans that we felt.
They were.
Single product households, so we looked at them and said Hey, you know we have a better use of our capital we can get achieve higher returns on our capital we have Cecil coming.
The margin was relatively low and we said hey, let's let's take advantage of this opportunity with the interest rates coming down with the inversion.
Make some changes I think it was a very.
Good move for the shareholders and.
While again, we have to make difficult decisions, we could show outsized growth, but I think gary's been done a great job of managing risk and it's evident in our credit metrics and we're going to continue to do that despite the pressure.
Okay, Yeah, I would just add here this quarter included.
$108 million of conforming mortgages that were sold during the quarter and then there is about 250 of the jumbo mortgages that are into held for sale bucket at the end of the quarter that we would expect to sell in the third quarter. Thanks Vince.
Got it thanks, and then just finally from me on the.
On the capital markets income strong quarter. There is that is that you think a sustainable level with the investments you've made in that and that platform.
Well I think this quarter was an exceptional quarter.
As I mentioned in the prepared comments that we had several large syndication wins, which were.
Largely a result of either a larger balance sheet, our move into the southeast or combination of both so and our expansion in DC. So we had.
Nearly $2 million in syndication fee income.
In the quarter do we expect that to continue I mean, absolutely, but it's lumpy. So you know I think we've built out that platform. We have started to win transactions as the left lead and I would expect us to periodically have those opportunities.
That we didnt have before so again, having a larger balance sheet moving into the.
The new markets that Weve entered gives us enough opportunities to to create a fairly sizable business and we mentioned that.
Early on when we announced the deal so its finally happening.
Great. Thanks, a lot.
Thank you thanks drew.
Thank you and the next question comes from Casey Haire with Jefferies.
Yeah. Thanks, good morning, guys.
Hi, guys.
A couple more follow ups on on the NIM.
So the number one on the deposit costs.
How do you guys I mean.
They held up pretty well in the quarter CD, obviously, our time deposits up.
How do you expect those to trend.
In the back half of the year.
Well I think that on the deposit side it's been.
A lot of dynamics going on there we did have some we've had some opportunities to lower CD rates for instance over the last.
Really the last six months. So we're actively obviously managing the deposit costs. The non interest bearing deposits that weve talked about a lot is obviously critical and we've continued to have very nice growth.
In the Da's there so I think that that's another element that that's very important and we're going to continue to to focus on that I think we're going to manage that the cost of deposits diligently like we do.
Part of selling the the mortgages that we talk about putting the held for sale is to create shelf space for all of the strong loan growth that we have coming that we've talked about so.
Continuing to fund the loan growth with.
With deposits.
This is critical if you look at for the current quarter.
Loans held for investment increased $380 million.
Was more than fully funded with 454 million increase in total deposits. So.
I think that kind of relationship is important and then as we go ahead from here, we have our normal seasonal increase in municipal deposits. It happens kind of beginning of July through October , which typically generates additional 350 to 400 million and balances that seasonally come in so that's another kind of key component of it so its.
You know, it's a it's just a constant process and we're going to manage that closely we've definitely seen though some ability to reduce the.
The increase as you commented on.
Which has helped the total interest bearing checking which includes our money market in the first quarter went up 11 basis points. This quarter. It went up for so it's.
And a lot of moving parts there but.
Just a lot of focus on it.
Okay, and then just switching to the loan side.
Are we know we know what's floating rate within your portfolio, but just in terms of origination yields where are they tracking today versus the 46 in the second quarter.
Well the origination yields are very close to where they were last quarter I mean literally within a basis point so.
It does have some impact from from LIBOR moving.
There's about 10 basis points, if I look at the yield.
For the maids first quarter versus second quarter. So there is impact of LIBOR coming through there, but it literally within a basis point.
For the new origination rates.
Okay, So pretty close all right and then just just lastly.
Your NIM guide of stable in the back half does that does that assume any anyway.
Continue structural changes in the balance sheet like in the quarter and the second quarter you guys took the securities book down, which probably helped.
And then you also reduce the borrowing so im just curious if you are you guys feeling pretty good about deposit growth.
Is borrowing reductions are part of the plan here.
Just trying to get a sense for what kind of structural contributions you're going to get to keep that NIM stable.
Well I would say, we don't have any other sales.
Portfolio sales other than just corn normal production plan for the rest of the year. So I mean, thats one component of our investment portfolio.
The reinvestment rates are just not very attractive as you know so given the strong loan growth, we let that portfolio run down a little bit cash was about $80 million a month. So we are still not fully reinvesting that we're reinvesting a portion where we find opportunities and municipal investments were definitely investing in those.
But as far as the balance sheet action from here as we sit here today, we are still not fully reinvesting investment portfolio and then the other dynamics I talked about.
Just normal business growing da's and strong loan growth, but nothing else planned from a kind of balance sheet strategy managements perspective.
And that includes borrowings as well.
Yes.
Okay.
All right just last one for me tax rate.
Came in a little higher this quarter, what's the expectation for the balance of year.
Well 18 still the guide for the full year, we've talked about that we have.
Business line going after some of these tax credit transactions. So there are some that we would expect to to achieve its between the second half of the year. So that kind of brings you back down to the overall effective tax rate of 18%.
For the for the full year.
Great. Thank you.
Thanks Casey.
Thank you and the next question comes from Frank Schiraldi with Sandler O'neill.
Good morning.
On on an enabler.
Just a couple of questions just follow up Vince quick on the NIM just.
Thank you.
You mentioned that there's two rate cuts baked in now is that sort of July .
On July and the September timeframe are.
Isn't that right.
Yes, no. That's that's the time, we Havent Brian .
Okay.
And then just on fee income obviously the capital markets income was that it was was real strong and can be volatile.
But and then mortgage banking can be as well, especially seasonally but is that a reasonable run rate in the near term on mortgage banking revenues or.
Did that reflect backlog in the quarter.
I will tell you that the pipeline is extremely strong going into the third quarter. So we would expect it to be sustainable.
For a quarter or quarter and a half at least until we start to run into the seasonal downturn.
So it's it's very strong Frank.
Okay on the capital markets front, that's extraordinarily lumpy. So I think we're having good success in the derivatives area early here, but it's too soon to tell.
So I think we'll do well.
I think it's a difficult quarter to repeat.
From a capital markets perspective, because it was up 60 plus percent so.
We'll be working to rebuild that for the future.
Okay, Okay, and it just seems like the fee income guide.
If I just look at my model on that sort of mid single digit growth for the year.
And pulling back on capital markets in the third quarter, just wondering is there anything else.
Lumpy in this quarter that you would.
Pull out a run rate for the back half of the year.
No not really we had good solid performance.
Pretty much up and down the business units.
International was a little slower this quarter they have a lot of things coming so that should benefit us a little bit.
Other than that I think everybody is performing pretty well and insurance and.
Well to have good pipelines.
And they are fully staffed particularly in the new markets, they're starting to generate some significant opportunities. So I would say, it's steady and and growing.
Yes, the only thing I would add is the service charges are seasonally higher second and third quarter and they come down in the fourth quarter. Frank So that's the only other dynamic there is seasonality in that in that service charges.
Okay.
And then just finally, just just one for Gary.
This quarter, we've seen some some weakness some credit issues from a number of community banks and obviously your credit remains pristine and.
I just wondered if there is any weak patches, you're seeing or types of.
Collateral lending that you're steering clear of.
That you've seen get kind of frothy frothy here recently.
You know Frank it's really been more of the same the we have been seeing across the industry.
I will tell you there.
There's a lot of aggressive lending going on in the marketplace and that's not that's not something that is new.
It's been going on for quite a while now.
No those are transactions that.
No, we're not going to change our structure and we just walk away from them and move to the next opportunity our bankers realize that and and the support that so you know we're very we're very focused on the consistency in how we do business and how we underwrite and the portfolio continues to be positioned very well at this point and we like where we're at with them.
Okay, but geographically as well there is no no pockets that you guys are.
Starting to see get a little bit.
Frothier than others and starting to pull back from.
No we really have not it.
The business that we have.
Really across across all the markets, Yes, I think Frank when you think about our thesis on why we expanded one of the reasons as I mentioned in my comments was to diversify geographically. So we weren't reliant on a single market or a single asset class and.
We live by that were in the risk management business.
I've said, we've made hard decisions in the face of growth to to limit risk and thats not easy to do so I think the credit metrics that we have are a result of that.
That action and having that diversification so we target.
We don't target extraordinarily high growth rates.
We're trying to play in the sweet spot from a credit perspective, so that we can make good decisions and.
And keep things moving through cycles and that Gary said that repeatedly that's our philosophy, we're going to stand by it so.
Okay, great. Thank you.
Thank you. Thanks. Thanks.
Thank you and the next question comes from Michael Young with Suntrust.
Hey, Mike.
I was wondering did cut out on me could you just clarify again your fee income guidance in your provision guidance.
Sure the fee income guidance, we didnt change.
Yes.
Okay.
Provision the provision is 55 to 65, we had lower that Michael from 65 to 75, given where we came in the first half of the year. So we brought the range down $10 million.
And then the fee income is still kind of low low single digits again that compares.
2018. It includes regency for eight months, so you kind of normalize for that truly kind of mid mid single digits on an organic basis apples to apples.
Hey, Hey, Michael I saw in your comment your early comments there was a miss on.
The effective tax rate Vince do you want to comment.
Yes, I mentioned that we had.
The.
The full years at 18% six quarters. This quarter is higher than the full year, just reflective of tax credits not happening yet there are some that were that were working on.
Then we also had some impacts in the tax rate related to stock that didn't invest Anders you kind of lose a tax deduction on that so there is kind of reversal of tax benefit on that that brought that number up a little bit higher than it would normally base, but the guide for the full year is that 18, yes. That's just to give you a little more color on what happened this quarter that so yes, no. It's good point.
Okay. Thanks, and maybe just as a quick follow up on that should we expect higher tax credit amortization in future quarters, as well would that push up expenses are.
Or anything like that.
No not significantly significant yeah.
Okay and then.
My other question just goes back to kind of capital management. It sounds like you guys have a better feel now for the seasonal impact.
Going into next year.
Tcs drifting up above 7%.
Just kind of wanted to get some updated thoughts on how you're thinking about that relative to your stock valuation at this point.
Yes, I think clearly as we've said before having a lower.
Dividend payout ratio being around that 42%.
Area and understanding capital.
Moved through Seesaws are important components I think that.
We we run we believe model with lower risk profile. So we're able to operate with a more efficient capital.
Levels and I think as we move forward, where our plan is not to build capital.
Forever I mean, we we would return capital to the shareholders in some form.
So either buying back shares or or changing our dividend strategy as we move forward.
Assuming we can invest that capital and provide higher returns. So it gives us options and I know that wasn't a great answer because I kind of covered every.
Area, we could do that I think.
We didnt have that luxury in the past and it's a good place to be.
Okay, but no shift on that.
Postseason environment in terms of your targeted capital ratios that you guys want to.
Maintain on a go forward basis.
I don't think we're prepared to answer that at this point we have preliminary.
Information, obviously things can change right because or economic factors that are pulled into that analysis. So we're our comments are based upon the environment as we sit today and the balance sheet mix.
Yes, we've talked about a 7% to 7.5% range is that the operating range. We're using today. So that's kind of where we stand and then once cecil's fully disclosed and now we're kind of refresh everything at that point, obviously, but thats still a good operating range and at 732 now to Vinces point.
As we move forward, there's flexibility we didnt have in the past those are great questions and I think we'll be able to answer them a little better as we.
Into the next couple of quarters here.
Okay.
And one last one for me if I could just.
Here about the Omnichannel roll out is there any direct expense related to kind of rolling that out that would be capitalized. So will we see any jump there or Conversely, I mean should we expect any additional expense savings.
As that gets rolled out and implemented over the next couple of quarters.
Well some of it is already reflected.
In our run rate because it was a multi year build in terms of technology investments. So some of it big chunk of it is already reflected in the capex spend of the past, there's some coming but it's not it's not significant for that specific area.
There's other technology investment that's going on within the company we obviously.
Take a step back as we have through the last few years and invest in our company.
So that we can Pete can compete more effectively I think if you look at the demand deposit growth that we've had it's really an outlier that can be highly attributable to our desire to provide a more robust product set.
To consumers, both business and and.
Consumer clients so.
That those are linked together our ability to take cost out by consolidating branch locations is directly linked and having success with a with a lower attrition rate is directly linked to those investments in technology. So we're balancing that there is no significant build related to the omnichannel build out there is an expense associated with it but its not huge.
Going forward.
There are other things that we are looking at that.
Could potentially help us from an efficiency perspective.
For from a risk management perspective that.
Have offsets.
Yeah, and I would add as you know we're very disciplined in how we manage the overall income statement and expenses will continue to have opportunities, where we're looking at vendor relationships.
Our focus is generating positive operating leverage year in and year out. So yes, it's our job to find ways to kind of reduce costs in some areas generate additional revenue.
And be able to cover those things and Thats on.
All right great. Thanks.
Thank you.
Thank you and the next question comes from Austin, Nicholas with Stephens.
Hey, guys good morning, Martin anyway.
Maybe just to dovetail on that capital question.
Given that the TC ratios continue to continuing to move up can you, maybe just remind us what the the messages on on M&A.
It's been three years ago, I think this week sense here of announcement of Yadkin back in 2016, so any any comments on how you look at M&A, given where your capital position is today.
Yes, I can I can comment on that I think it's also it has also been 10 years since Vince.
Became CFO right and I became president of the bank. So we're right in that sweet spot.
And I think that.
We've now learned enough where gray enough that we we have learned great lessons.
And I think that.
The opportunity here is to benefit from what Weve built.
And we're not out given.
The market the market conditions, they uncertainty with Cecil.
No we're not out looking to do acquisitions at this point, we are solely focused on driving tangible book value growth.
Elevating our capital ratio. So we have more flexibility in working to to truly benefit the shareholders. In every way. We can so that you know there has been a keen focus on expense cuts. We've done significant branch consolidation, we continue to invest in the company because I think to extract value in the long run we have to keep investing.
And I think Gary has been extraordinarily disciplined in terms of balancing growth with disposition of assets and remixing the balance sheet. So all of that.
Pays dividends.
For our shareholders in the long run and our capital strategy as we move forward is not going to change. We we do not need to have extraordinarily high capital ratios given our business model and our goal is to return capital to the shareholders. If it's not being deployed with.
Hi returns that's that's the goal.
And not been able to achieve geographic expansion to the de Novo strategy, we've talked about so thats, how weve expanded into some newer markets choosing that avenue as opposed to the acquisition right and our de Novo strategy is working very well.
For us both with the loan production offices that we have been and the branches that were works markets new markets, we're expanding into to fill in the gap. So.
We're going to play that out for a little while see how that goes and build our own customer base.
That's really helpful. And then maybe just on the expense side as you think about that de novo strategy paired with the ability to.
Continue to consolidate branches is is it fair to say that the at least the occupancy growth number can be could be relatively.
Couldn't will not be outsized given the Nova strategy, because you will continue to.
Right size your.
Other other branches at the same time.
It seems like you've been doing over the last few quarters.
It shouldn't it shouldn't.
Shouldn't be.
But it's not an equal trade off.
New de Novo locations typically berries coming to me asking me to pay a lot more.
Because we want to be in position today.
If we're going to make that investment we want to make a good investment in it in a location. So typically there's more expense associated with opening a de Novo branch and I don't think thats unique to SMB I think others experienced the same issue.
Versus closing one branch so it's not a one for one.
Typically because you're closing branches that aren't performing and.
They're not always in the best locations. So.
But I would say that our ability to manage occupancy expense as we move forward.
Hi will.
I'll be reasonable given the de novo expansion the footprint of those new branches is smaller they are more technology.
Oriented.
The business models, a lot different today theres fewer people in those branches, because we deploy gels and other technology.
So I think that.
Yes, there's great opportunity for us we have the scale for US yes, we have the scale, we didnt have historically so.
Great opportunity for us to move into higher growth markets.
Yes that that's.
That's helpful. And then maybe just trying to square some of the margin commented that Eni guide.
Just on the accretion it sounded like expectation is for us to.
Remain in that $8 million quarter accretion level in the back half.
Plus as excess cash recoveries.
Yes, I mean, the incremental component of that as was $7.5 million. So that feels like a good run rate for the rest of the year. The cash recoveries have been kind of around that level. They move around a little bit last couple of quarters its been a basis point.
So that may move a little bit, but the seven and a half is kind of a good run rate and and in total the cash recovery here at a low number so probably around those levels as reasonable to for the rest of the year.
Got it okay, great. Thanks for taking my questions.
Thanks.
Thank you last question kind of Collyn Gilbert with KBW.
Thanks, Good morning, guys on a mall.
Good I had have been covered but just really quickly just following up on the accretion comments, so Vince 70 $571 million.
Holding at that level for this or do you have any thoughts as to how you think thats going to trend in 2020.
No I mean, we'll we'll include that Collyn right. When we do our January guidance I would say today.
Preseason so to seven and a half million referencing is that kind of normal accretion next couple of quarters feels like a reasonable level a good run rate to use I think in my prepared remarks, I commented that even in post Cecil they're still accretion that will be recorded related to the acquired loans. The way the accounting works for that and we'll obviously give you those numbers in January but I think the words I used was in a similar fashion to the way we do today, so that theres still accretion that will occur post Cecil.
Well, we'll quantify that come January I think that was a good question is that.
What you are thinking.
Collyn.
Relative to the changes on the reserve. So yes, and then just and then just the pattern of I mean, I would assume that the pattern of slowdown or paydowns would be similar in 2020.
Okay. Okay. That's helpful. And then just one last thing on the growth the loan growth. So obviously you guys are talking about.
Accelerating loan growth in the back half of the year to kind of keeping your mid to high single digit loan growth targets and the commercial trends have been good just on the on the revenue side just to make sure I'm hearing you. So.
The.
Do you expect the resi mortgage growth to kind of return back to levels that you guys had been putting up in prior quarters.
Yes.
Okay.
Okay, and what that means.
Loan growth.
Yes, both both the commercial pipeline and the mortgage pipeline are very strong.
In particular moving into the third quarter. So I would say, yes to year, if that's what you're asking about the answer was yes.
Yes, okay. Okay. Thanks for that perspective, I'm, just a little bit.
Production for the quarter was $679 million in residential mortgage.
We sold about half of that okay. So as we go forward Vince talked about the pipeline, which indicates strong production in the third quarter also so I would expect I agree with Vince said, but just to give you some numbers around that as far as what we saw there.
Disagreeing with no I agree.
She didnt put some numbers around okay.
Thank you thank you for putting math.
No problem.
Okay. That's great. That's all I had thanks guys.
All right.
Thank you and the next question comes from Russell Gunther with the did you Davidson.
Hey, good morning, guys.
Hey on the Russian here.
Hi, just a quick follow up on expenses I wondering if you could size up for us what the annual Merit contribution.
Contributed to this quarter's results and then just clarify for me whether the planned de Novos you talked about are incorporated in the expense guide for 19.
Sure. The Merit increase was just under $2 million like a million eight for the quarter that obviously becomes run rate effective April Onest and then you have a denovo as are baked into our guidance.
Okay, Great and then just last one for me.
Would you be able to kind of quantify for us what a 25 basis point cut would mean.
To the margin just trying to get a sense for it for kind of one and done for a bit.
What the impact might be if any to your Eni guide for this year.
Well I think what I, what's baked into my guidance Russell as it comes to fed cuts and I commented that I expect the margin to be kind of flattish from where it is this quarter. So I mean that kind of tells you what what the impact is.
Of the two fed cuts.
You know what I mean, our guys thats. It from me thanks very much okay. Thank you.
Thank you and the next question comes from Brian Martin with Janney Montgomery.
Hey, guys.
Hey, Brian .
Hey, most of my stuff was covered just Vince just on the on the loan growth is being.
Particularly strong going into Threeq you here can you just give a little.
Color on just where we are in particular strength is and if you're seeing any lumpiness here something like you talk on the capital markets. Some of the syndication piece being larger just kind of it is it a bit more lumpy as it pretty granular just kind of geographically I'm here.
Granularity.
Yes, I think overall it seems like it's fairly good across the board when you look at.
The Carolinas.
The Carolina markets in total are nearly equal to Baltimore, Cleveland Pittsburgh in terms of pipeline, which is pretty good for us I mean, thats a strong message. If you look at Raleigh, specifically has been under pressure the portfolio has been under pressure with large CRT takeouts principally their pipeline is the highest per loan officer in the company.
So DC has a strong.
We've built out a team in Bethesda, a couple of years ago, Theyve been doing extraordinarily well Doug.
Has been doing a great job there for us.
So they've got good things happening and then Pittsburgh has some large corporate opportunities funding up that are on that.
The margins not huge on them, but there are some volume associated with them and.
It's really across the board right and Thats whats what feels really good.
It's coming out of all of the markets.
Good see activity see an IPO activity really ramped up everywhere in some of the markets that werent producing it and the pipelines are strong.
Yes.
Credit the credit coming in seems reasonable it's not we're not stretching to do things. So I think the strategy of having good bankers and all of those markets that have local connections and.
We've done a good job of managing that production I think thats starting to pay off for us as we indicated.
Couple of years ago.
Yeah, Okay, and then just.
Matt Gary mentioned on the pay offs or someone mentioned in the past on the CRM side I guess I guess is that your expectation that that continues a scene that slow the pace of that slowdown at all seed season, we're running out of deals to we're running out of transactions to be taken out of I think Gary I mean.
I mean, it's kind of it's a little lumpy as we've talked about I mean, we have we hit a few during the quarter.
You're going to you're going to have that on a go forward basis.
As long as the credit markets hold.
You know based on based on the.
The booking are those assets the completion of them and the lease up we're not a prolific long term lender we tend to stay short we finance the construction and then maybe do a little mini Perm bridging a takeout and that's that's the business model. So I think that we'll always have payoffs, but we had an acceleration would do and pay offs there for a little bit.
I jokingly said, we're running out of transactions I think weve originated new batch so.
Thats a business that that goes on but there are periods as Gary mentioned, where there's an acceleration in the takeout.
And when you play in higher quality transactions, the ability to access capital outside the banking spaces, it's more liquids.
So we will have more of those as we go forward.
Yes.
Okay, I guess, just trying to characterize if there if they were still very elevated or if it was more normal this quarter I guess, if you I think I might be right tell me if I'm right with this number I think we're running at about $300 million in the acquired book, Yes is that right and payoffs paydowns et cetera.
So its stabilized about that left.
Okay. That's perfect and then just the last one for me was just on the.
The strength in the noninterest bearing this quarter I mean, it was here.
Any.
Yes, I guess significant.
Anything of significance in there is it certain markets or just kind of across the board just on it was.
I would say, it's three things number one it's a focus and the consumer banking, we trained everybody up. So we spent a lot of money training everyone. How they interact with customers. So it's it's some training in the consumer bank in household growth associated with that training the data analytics tools that weve developed to help us when we when we find a borrower that doesn't have a depository relationship with us. We're we're able to elevate those referrals through our.
CRM system using data analytics to help people that's helped.
Our AD campaigns, we stepped up a little bit and some of the promotions, we ran not in the DJ category, but in other categories has helped strategically.
So it's a combination I think small business and middle market banking has contributed.
And we're we're still building balances so because we have seasonal inflows not just in the municipal space, but there are compensating balances.
That.
Our funded as we move into the third quarter with some larger.
Corporate and middle market and small business borrowers. So we will see we should continue to see benefits from that so its a combination of a number of strategies and I have mentioned before I think having the branch delivery channel. Some look at it as an anchor they say you have all these branches and then.
I think when it comes down to generating activity that really plays in our favor.
So our goal was to try to optimize that delivery channel without disrupting the ability to drive customers in the door.
Okay Anyways graphically was was there any any particular market or just kind of across the board on the.
On that I mentioned in my prepared comments that we do an analysis we've looked at the FDIC data, we don't have everybody else's growth numbers.
And when we look at our own growth numbers.
Well over half of the markets have had.
Pretty sizable increases in deposits, so that that should show well.
When the overall analysis is done because when you look at a multi year period, having those increases has led to market share gains. So we did that analysis, we looked at the southeast in particular performed well again, which is there is a tailwind there because weve better economies and population growth people moving into those markets. So that has helped us.
And I think we've been able to hold on or grow in markets that aren't growing as fast.
So.
That all of that in combination helps us and I think it produces a good result in terms of non interest bearing deposit growth.
Okay I appreciate the color guys. Thanks, so much. Thank thank you thanks body care.
Thank you.
And as there are no questions at the present time I would like to return the photo management for any closing comments.
First of all I'd like to thank everybody for the time a lot of great questions. Today I am very excited about the first two quarters of the year I think we've done exceptionally well and I'd like to congratulate our team.
Across the company in all 10 of the markets that we manage everybody has done a spectacular job.
And I couldn't be prouder.
So thank you.
Thank you.
The conference has now concluded thank you for attending today's presentation.
Now disconnect your lines.
Thanks.