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spk10: Good morning and welcome to the FNB Corporation second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Lisa Constantine with Investor Relations. Please go ahead.
spk02: Thank you. Good morning and welcome to our second quarter earnings call. This conference call of FMD Corporation and the report 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 compatible GAAP financial measures are included in our presentation material and in our earnings release. 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.
spk08: Thank you. Welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. The second quarter's earnings per share totaled 31 cents on an operating basis. up 19% linked quarter. F&B continued to execute its strategic plan in the second quarter with record loan growth of $1.3 billion on a spot basis, excluding PPP. We maintained a favorable deposit mix in a rising rate environment. Even as seasonal outflows occurred this quarter, we achieved record revenue of $336 million. With 8% linked quarter growth in net interest income, and our fee businesses continue to exhibit the benefits of diversification with 5% net growth. Our expenses remain well-controlled, declining link quarter on an operating basis, and led to an acceleration of positive operating leverage and an efficiency ratio of 55.2%. As always, our asset quality remains focused with our solid reserve coverage and net recoveries this quarter. Profitability improved significantly in the Lynx quarter, as return on average changeable common equity was 15.5%. We prudently managed capital, as our dividend payout ratio was 39%, and we purchased 1.1 million shares in the quarter. In addition to solid performance in the quarter, we commenced the rollout of our new digital e-store kiosks in all F&B branches and announced the UB Bancorp acquisitions in North Carolina. 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 the record net interest income of $254 million. As 35%, or $11.7 billion, of our deposits are non-interest-bearing, and 59% of our loans possess variable or adjustable interest rates. These factors position us well for the anticipated rising rate environment. Vince Calabrese will provide additional insight on key performance drivers and deposit data. Total loans and leases, excluding PPP, reached $28 billion, demonstrating record link quarter growth of $1.3 billion for 19.5% annualized. making this the fifth consecutive quarter of positive loan growth. Building upon the first quarter, spot loan growth totaled an impressive 11.2% on a year-over-year basis, excluding PPP and the Howard acquired loans. On a core basis, commercial loans grew $504 million linked quarter, with ending balances at $18 billion. This growth was led by Pittsburgh and the North and South Carolina markets, Our year-to-date production is over 20% higher than the first half of 2021, and current pipeline levels are healthy when compared to historical trends. On a spot basis, consumer loans grew $795 million in the quarter, with over $400 million in residential mortgage loan growth. Our Physician's First Mortgage Program had an outstanding quarter, accounting for 66% of the total residential mortgage increase linked quarter. This program establishes long-term relationships of significant lifetime value. From a credit quality perspective, this is one of our highest quality portfolios, with credit scores of nearly 800 and delinquency levels of five basis points. Our mortgage growth is bolstered by the success of our e-store. 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 up 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 records of consumer origination in our 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 FMV branches with new digital e-store kiosks to enhance the consultative environment we provide. The fully interactive design empowers customers with an intuitive digital access to FMV'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 through their 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 network. Last month, we announced the acquisition of UB Bancorp, a North Carolina-based bank with approximately $1.2 billion in total assets, $1 billion in total deposits, and $670 million in loans. Approximately 40 percent of the deposits are non-interest-fair. This acquisition increases FNB's presence in North Carolina to a top-10 deposit share in the state. This region has proven to be a growth engine for FMV. Adding the low-cost granular deposits will also benefit our financial performance in a rising rate environment. We are excited about our prospects, and we welcome the UB Bank Group team and customers to FMV. Overall, the second quarter provided solid financial results, and FMV is well-positioned in the current macroeconomic environment. One of FMV's core strengths is our credit performance, which has been proven in the economic downturn in 2008 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. I'll now turn the call over to Gary to provide more detail on our asset quality and comment on the economic environment.
spk05: 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 entered the second half of the year in a position of strength. We saw lower past due and non-performing levels during the quarter, as well as a decline in rated credits and low loss levels, all of which contributed to a further strengthening of our credit portfolio. We'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 UD Bancorp 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, down 8 bps over the prior quarter, which was driven by improvements in the commercial portfolio's early-stage past due and non-approval levels. NPLs and Oreo also declined on a linked quarter basis, down 5 basis points to end June at a solid 35 bps. 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 recognized provision expense of $6.4 million, which supported strong loan growth in the quarter, and also reflects lower prepayment speed assumptions in our CISO model. This resulted in an ending June reserve of $378 million, or 1.35% of loans at quarter end, which 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 percent. I'd now like to provide a brief update on the Howard portfolio and the recently announced UB 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 UB Bancorp, 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 1.6% 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 UB 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, elevated energy costs, and ongoing labor and supply chain challenges. These economic headlines 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 lower their borrowing costs moving into this environment. While the direction of 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, reduced rated credit levels, solid high-quality loan growth, and strong positioning of our portfolio headed 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 that have served us well throughout prior economic cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk09: Vince Calabrese Thanks, Gary. Good morning, everyone. Today, I will focus on the second quarter's financial results and offer guidance for the third quarter and full year of 2022. Overall, the second quarter's financials captured the strong performance of F&B. The reported net income available to common shareholders totaling $107.1 million for earnings per share of $0.30. After adjusting for $2 million of merger-related expenses, net income reached $108.7 million for $0.31 per share. Balance sheet growth was very strong. When excluding PPP, period end total loans increased $1.3 billion were 19.5 percent annualized on a linked quarter basis, including an annualized increase 34 percent in consumer loans and 12 percent in commercial. Commercial loan growth was led by commercial and industrial annualized growth of 29 percent, excluding Triple P. The majority of the quarter's growth was concentrated in June, which will benefit the third quarter average balance. Additionally, commercial line of credit utilization increased 2% length 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 quarter's net growth in mortgage loans. While the Physicians First Program is seasonal in nature, we expect this high-quality loan portfolio continue to build. Another element of residential mortgage activity is shifting customer preferences for adjustable rate mortgages. In 2021, mortgage originations comprised of 84% fixed rate and 16% arms. The second quarter, that ratio has transitioned to 47% fixed rate and 53% arms as customers optimized 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 8.4%, due to growth in average-earning assets and benefits from the higher interest rate environment, which was partially offset by a $5.8 million decrease contribution from PPP as those balances wind down. The net interest margin increased 15 basis points this quarter to 276. An area of heightened focus this quarter and for the next several quarters is deposit betas, given the actions taken by the Federal Reserve. Knowing it is not an exact comparison, our cumulative deposit beta for total deposits during the last interest rate hiking cycle from December of 2015 to December of 2018 was 24 percent. It's important to keep in mind three main differences from the previous cycle. First is that the Federal Reserve is hiking at a much faster rate than in 2016. Second, the emergence of high-cost deposit-gathering fintechs. And third, our deposit mix is in a more favorable position today with non-interest-bearing deposits at 35 percent of total deposits and a much lower loan-to-deposit ratio at 84 percent versus 97 percent at the end of 2015. To date, we have been able to effectively manage deposit costs while balancing deposit mix shifts that have occurred. Turning to non-interest income and expense, non-interest income totaled 82.2 million, a 3.8 million or 5 percent increase from last quarter. Capital markets income was 8.5 million, an increase of 20 percent, 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. The $1.4 million increase in bank-owned life insurance reflected life insurance claims received during the quarter. Mortgage banking operations income decreased $0.5 million, or 8 percent, with loan production to be sold in the secondary markets declined 11 percent linked quarter given the higher mortgage rates. Refinance activity only accounted for 21 percent of our second quarter sold production, compared to 53 percent in the year-ago quarter. Reported non-interest expense totaled 192.8 million, a decrease of 34.7 million, or 15.2 percent. On an operating basis, non-interest expense decreased 3.9 million, or 2.0 percent, compared to the prior quarter, excluding merger-related expenses of $2 million in the second quarter of 2022 and merger-related expenses of $28.6 million and branch consolidation costs of $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 quarter's seasonally higher long-term compensation expense of $6.2 million and seasonally higher employer-paid payroll taxes. Marketing increased $1.4 million as we expanded our digital advertising and launched campaigns for our Physicians First program. Collective of our diligent expense management, the efficiency ratio came down to 55.2%, a significant improvement compared to the first quarter's ratio of 60.7% and the year-ago quarter's 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 for common share was $8.10 at June 30th, an increase of a penny per share from March 31st. While AOCI reduced the current quarter end tangible book value for common share by 72 cents compared to 57 cents at the end of the prior quarter, the higher level of earnings more than offset that impact. The increased unrealized losses in the AFS portfolio due to rising interest rates should accrete back into capital over time as securities mature or prepay. Our CET1 regulatory capital ratio declined approximately 25 basis points to 9.7 percent, primarily due to the significant loan growth in this quarter, as well as putting more cash to work through 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 UB Bank Corp 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 $1.05 and $1.09 billion, with the third quarter between $278 to $284 million. Our guidance currently assumes 150 basis points of rate increases for the remainder of the year, including a 75 basis point increase this month. Full-year non-interest income is expected to be between $310 and $320 million with the second quarter in the high $70 million area. The revised non-interest income guidance is due to slightly lower mortgage banking income and reduced market-related fee income. There is no change to our guidance for non-interest expense on an operating basis with a range of $760 to $780 million for the full year from $190 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 to $40 million. This range does not include the initial $19.1 million of provision related to Howard and is dependent on net loan growth for the remainder of the year. Lastly, the effective tax rate should be between 18% and 19% for the full year, but it is dependent on the level of investment tax credit activity. With that, I will turn the call back to Vince.
spk08: Thank you, Vince. In summary, our team delivered exceptional quarterly results in a fluid economic environment while fulfilling a number of key strategic objectives, such as record loan growth, record total revenue, a 15.5 percent return on tangible common equity, solid efficiency ratio of 55 percent with disciplined expense control, and a dividend payout ratio at 39 percent. Our team remains keenly focused on maintaining strong credit quality. This quarter includes net recoveries and solid reserve coverage. As you can see, we have had 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.
spk10: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. 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.
spk07: Hi, good morning. This is Timur Braziler filling in for Jared. First, on the loan growth, which remains very impressive, I guess just looking at the remainder of the year, the compositions of the expected guide, assuming much of that is coming from the commercial portfolio, but maybe just talk through the composition.
spk05: Yeah, in terms of the loan growth, we're looking at good participation across all of the books of business. Each business line participated very nicely this quarter. Pipelines continued to remain solid. We're getting good participation across our geographies. And from a consumer standpoint, the pipelines, albeit slightly down, that's seasonal in nature pretty much. You know, the second quarter is really a seasonal quarter. for us when you look at that consumer portfolio. The mortgage book applications are down a little bit as well as you would expect. So we'll see a little slower growth there. But when you look across the board, the CNI continues to be solid, CRE as well, with some seasonal slowness in that home equity and mortgage portfolio.
spk07: Okay, and as you look at the competitive landscape in the face of rising rates, are you seeing incremental spread pressure as you're fighting for new business, or does the diversified geography product set kind of help mitigate some of that?
spk05: We've not seen additional spread pressure here of late. Actually, the diversified geography helps from that standpoint. But from a pricing standpoint, we've seen some slight improvement there.
spk07: And I guess as we go through the rest of the year and how you're thinking about funding the loan growth, I appreciate the deposit guide, obviously. But as you're looking at funding that loan growth, you know, and the acquisition that's slated to close in the back end of the year, the remaining on-balance sheet liquidity, How does that all figure in? Is the expectation to kind of fund it one-for-one? Is there incremental liquidity that you're 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.
spk08: The transaction that we close is advanced to lease. If we're able to close the transaction this year, we'll get a benefit because it's principally a deposit play. The deposit portfolio is fairly substantial for the size of the bank. There's a tremendous amount of granularity. The cost of funds in that portfolio is low. We're bringing it over initially at 10 basis points. I think that'll be additive. That will help us. But, you know, if you look at where we are today, we're sitting at, you know, an 84% loan-to-deposit ratio. We have, you know, 35% demand deposits. Our mix is the strongest it's ever been. Our liquidity position, while we've drawn down cash, is still substantial. You know, I think we're in a very good position relative to, you know, lending and achieving good returns in that space, you know, particularly commercial. in the second half of the year. So I think we're in a really good place. From a liquidity perspective, funding perspective, we're not concerned.
spk09: I would just add, at the end of June, we had 1.6 million of the excess cash still on the balance sheet. So that was 3.4 at the end of the first quarter. We obviously used that to fund the loan growth. It's all on a spot basis. There's still ample liquidity just sitting right there for us.
spk08: We continue to win depository relationships, particularly in the southeast. That's starting to accelerate for us, larger treasury management clients in the commercial segment. So I would expect that to continue.
spk07: 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 you're seeing there for reinvestment yields.
spk09: During the second quarter, we invested $768 million into the portfolio. It's about $400 million higher than the cash flows to take advantage of the rate environment that was there. We reinvested in an average rate of $327 per quarter. That was $190 last quarter, so that's a significant move up there. And it's well above the roll-off rate of $185, so a nice benefit there. And if you look ahead, I mean, duration-wise, you know, we continue to be on the shorter end. We've been around four. Our estimated 12-month cash flow is just under a billion dollars. We'll be coming off around 191. So putting stuff on at 327. They were probably putting stuff on this month more like 350. Okay, great.
spk07: Thank you for the call. I appreciate it. Thank you.
spk10: And the next question will be from Daniel Tamayo with Raymond James. Please go ahead.
spk01: Good morning, everyone. Thanks for taking my questions. I thought your comments on deposit betas were very interesting in terms of everything that could impact this cycle relative to prior cycles. I'm not sure maybe I missed it, but could you kind of just indicate where you think that they actually may shake out or what your best guess is or what you're budgeting for, given all those factors that you mentioned?
spk09: Sure. Obviously, the level of liquidity in the banking system is still a consideration to how this all is going to play out. At this point, I would add that we have no pressure at all on the retail deposit side. clearly been conversations with municipal commercial customers that have started to shift funds from money market deposits into TDs. That kind of natural shift has been occurring. If you look at where we are so far, our cumulative beta is 9% on total deposits, 15% on 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 and 33% We're just going to deposit by the end of the year. We'll be the team of the data at that point.
spk01: Okay, great. I appreciate that. And then my other question is just around share repurchases. You know, you repurchased shares this quarter. Capital has been stable. You know, obviously you have the deal coming in the fourth quarter, but just kind of overarching thoughts on, you know, outside of maybe the period where you're unable to repurchase? How are you thinking about share repurchases? Is it more of a kind of a steady quarter-to-quarter amount that you're looking to repurchase or more opportunistic?
spk09: I would start with we continue to target a CET1 ratio around 10% in the level we've been discussing. It did come down about 25 basis points this quarter. It's given strong loan growths. increased investments that I mentioned, take advantage of the higher yields, and those are coming out of cash at the 0% risk weighting. So you have that dynamic happening during the quarter. As we look ahead and we fake 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, down the dividend payout ratio, and our overall asset-sensitive positioning. Regarding buybacks, it's kind of the same thing. I mean, our first and best use of capital is organic loan growth. So, the level of buybacks will be dependent on the growths we see for the rest of the year. But we'll be opportunistic, as we have been in the past. We did buy a million and one shares this quarter, and the opportunity to make sense in the loan growth. And overall, we're going to just commit it to managing capital in a way that's fully aligned with shareholder interest. So, it's a constant evaluation process.
spk01: Okay, great. All right, that's all I have. I appreciate the answers. Thank you.
spk10: The next question is from Michael Perito with KBW. Please go ahead.
spk04: Hey, good morning, guys. Morning. I wanted to just kind of start with a big picture question, and you guys kind of talked around it in a, a few different ways in your prepared remarks and some of the questions that have been asked already. But just like this – I guess balancing this environment with, you know, kind of the uncertainty in the back half of the year versus what seems like on the ground today, like pretty good momentum from a loan growth standpoint, customer growth standpoint. You know, I guess with your diverse footprint, how do you guys think about – you know, balancing those two things, and are there certain areas, whether it's from a deposit-based side or a loan growth side, like the credit side, that you feel better about 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 color there would be helpful.
spk08: Well, you know, 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 yesterday. that we laid out from the very beginning. As we gain share in markets like Pittsburgh, it becomes more and more challenging to grow portfolios and not change the risk profile in that portfolio. There are competitors that are well entrenched here. And while we were able to grow fairly significantly in a short timeframe, you get to a point where you hit saturation for good quality credits. And our philosophy was to stay within a tight underwriting range so that we weren't inconsistent with cycles. We did it the last time. And we put together a number of linked quarters where we had loan growth throughout the last economic cycle. And we were an outlier. And I think that we're even in a better position this time around applying our credit philosophy to an even broader diversification in terms of markets that we cover. And, you know, I think that we have great bankers. We have a very disciplined sales management process. We have credit officers in the field. We use data analytics and the tools we put into place to manage credit risk. We look at trends within the portfolio. Our credit team is on the analytics side of it. is 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 managed down those exposures. We had less than $300 million in exposure. And we kind of looked at that portfolio and looked at what was going on in the industry and said, thresholds based upon our capital levels. We looked at all of our exposures relative to capital and made adjustments and did it in a way that weren't exiting customers left and right. We just decided we were going to slow up our lending in that category, and we had enough to go after geographically to continue to sustain the growth trajectory for the company. That's how you manage risk through a cycle. The other side of it is, you know, 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 even create margin growth, particularly if the company has more leverage? We look at that. We look at interest rate sensitivity. How will rising rates impact certain portfolios? We look at changes that are going on from a commodity pricing perspective and how that will 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 and you don't grab for growth, we don't. We manage pipelines and we manage opportunities. We're not necessarily managing growth and portfolios just to grow. So I think the outcome is we end up with as we've always said, mid to high single-digit growth in the portfolio, and that's, you know, that's enough to sustain us and to achieve our principal investment. You know, that's the strategy. And in the markets that we cover, we see, you know, some fairly substantial population growth in the southeast. You know, there's a lot of activity in the mid-Atlantic region, region, particularly in D.C. and Portland, Maryland. You know, we have Pittsburgh and Cleveland that have bigger industrial bases where we see more opportunities on the CNI side. You know, in Charleston, South Carolina, the high-growth market, we've had great opportunities there to lend principally in the real estate space, but we also see CNI opportunities there more and more because of the changes that are going on there. 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, we're not an equity-sponsored lender. We don't just follow private equity perspective of what's going on. So, you know, we try to stay out of those riskier portfolios. And we've sold portfolios even at times when, you know, we could have used the earning assets on the balance sheet because 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 believe we'll be able to grow just like we have in other cycles.
spk04: I hope that helped. 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 enviable position here where the loan deposit ratio is still low and your cash is still almost 7% of your earning assets, right, where we've seen you know, some of your peers are starting to see some upward pressure on the loan deposit and we're a little bit quicker to deploy that cash elsewhere, you know, whether it was loans or bonds. But, you know, I guess longer term, right? I mean, it's hard to be competitive from a profitability standpoint with so much, with an 80% loan deposit, 7% of earning assets in 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 presumably at some point they need to normalize. the ROE that I think you guys can. 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?
spk08: Well, you know, we've achieved pretty substantial profitability metrics at 97% loan-to-deposit ratio. So I'm not sure. It really depends on the interest rate environment and, you know, what's happening kind of globally. But I will tell you that, you know, our consumer bank, what differentiates us from many of our peers, they're principally commercial banks. It's much, much harder to grow deposits at certain points in the cycle when you're relying solely on commercial depositors. So we, again, have diversification. We have a big chunk of our deposit base which sits in the consumer bank. And we've had great success growing those deposits. And the betas in those categories tend to be more favorable to the bank. So I think That's, you know, we plan on continuing to pursue that, you know, pursue those strategies that we put out there. With our investment in technology, the e-store, the number of deposit accounts that we're opening online has gone up fairly significantly over time. So, our scalability in that consumer segment is actually, has improved, right? So, I think we're in a good position to grow deposits, which I think is how banks should be measured. Good banks can grow their deposit base in a favorable way. That's what makes them great. So we focus on it, try to achieve better results, and that's really a principal funding source. I don't know if you want to add anything.
spk09: 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. So, 97 was kind of our high mark for loan-to-deposit ratio. There's a lot of room between here and there. So, I think with the deployment of the cash in the short run and then, like Vince said, our ability to generate deposits, the geography we've added, not just through acquisition, but through DeNovo, the bankers we've added, the treasury management team is out there getting wins every day. I think that differentiator for us. So that helps to fund the loan growth. But in the short run, you have the benefit of the cash and the deposit growth continuing as we go forward with adding new accounts, not just what we have on the balance sheet today that could benefit us for the long run.
spk08: We've never been dependent heavily on a wholesale fund. So I think that there are times when cycle changes and maybe there's more of a need for it that we've never been solely dependent on.
spk04: Great. That was all helpful. Thank you, guys, for spending time on those, and I appreciate the color.
spk08: Thank you.
spk10: And once again, if you'd like to ask a question, please press star and 1. The next question is from Russell Gunther with D.A. Davidson. Please go ahead.
spk06: Yeah, hey, good morning, guys. Good morning, Rob. 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, you know, the bulk of Fed hikes will be in by that time. But as the later ones work their way through, do you have an updated view on sort of through-the-cycle betas from a total and interest-bearing perspective?
spk09: Well, I think we have the reference point that we had from the remarks to give you kind of a feel for that. 24% the last cycle. Yeah. So, I mean, Russell, that's one reference point that we have. And, you know, kind of getting to what we're suggesting into our guidance for the end of the year, depending on who you believe, I mean, the Fed kind of peaks in the third quarter and then starts to come down from there. So I think what happens to the data from there is going to be, kind of interesting and for us to all manage is once rates start to come back down, what happens to the beta is relative, given where deposit rates are at the time, relative to where kind of the Fed has moved to. So our job is to balance it and manage it effectively. I think that your end point is a good reference point to have relative to what happened last time, and we'll do our best to try to even be better than that.
spk06: That's helpful, Vince. Thank you. And then just another follow-up sort of on the asset quality conversation. Appreciate your thoughts there. Results are really strong historically, you know, a lower beta model at FNB. But as you've moved into growth of the markets and increased the growth profile of the company, has your view changed at all in terms of, you know, normalized losses and where you think that range of charge-offs could shake out over the next year or two?
spk05: I would tell you, Russell, with our philosophy of consistent underwriting through the cycles, which has gone through a number of cycles at this point, as you know, I would expect that our charge-offs, and with the diversity of the book, And the amount of credit opportunities that we're seeing and choosing the highest quality opportunities in that list, I would expect to see our normalized charge-offs be lower than they were in the past. We've taken some positions to move some positions from a balance sheet standpoint. And with the consistency that we've seen and the high-quality opportunities we've seen, I would expect them to be slightly lower through the cycle.
spk06: Thank you for that, Gary. And then just last one for me as a follow-up on the loan growth discussion. You know, Vince, you mentioned kind of a longer-term mid- to high-single digits, but just getting back into the, you know, change in the growth profile, growth of your markets, trying to balance that against some of the macro headwinds outlined earlier. Is 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.
spk08: That's a good question. I wish I knew the answer. I think as we look at this, honestly, as we look into next year, It's going to be, I think, a little more challenging. I'm not sure how much capital will be deployed by customers or consumers, depending on what's happening with the U.S. economy. As things stand today, it looks like, based on what I'm reading, seeing all the other banks report, there was kind of penned-up demand for credit. So the flood just came in. But I think there's a lot of uncertainty there. within the customer base about where we're headed. So there's a lot more caution. At least I'm sensing that. You know, this is anecdotal. I'm sensing there's a lot more caution within the customer base about capital investment moving into next year. So, you know, my expectation would be that, you know, we had great results in the first two quarters from a growth perspective. The pipelines looked good. You know, they're lower slightly because we did fund quite a bit. But then, you know, I'm trying to think what's going to happen as we move forward. You know, that's really a question about confidence. You know, confidence within the customer base, how our customers feel, particularly the commercial customers, both CRE and CNI, on, you know, Is the environment going to be right for capital investment? I mean, they're going to look at that and say, that's going to drive whether they borrow or not. You know, we've seen a little bit of benefit from, you know, the supply chain issues, quite frankly. You know, some of the customers are trying to deal with inventory shortfalls, so they're starting to borrow a little bit. I mean, we saw a slight uptick in utilization rates. Some of that is, you know, having a little extra inventory on hand so they can continue to grow, right, because if there's supply chain issues, it puts a lid on growth for those companies. So they're trying to manage that. You see, you know, commodity pricing, it pushed up some of the revolvers a little bit because 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 for – Loans, commercial loans in particular, should, I think, will kind of tail off a little bit. We saw the flood come in, and then next year is a big question mark based upon how we're feeling later in the year, collectively. I hope that helps. We manage it, you know, quickly. We manage it credit by credit, group by group. We have prospect lists and calling activity, and we just try to be there for the client so when the capital opportunity comes up, we'll finally consider banks and try to deliver.
spk06: So I hope that helps. Yeah, it does quite a bit. Thank you, Vince, and thank you all for taking my questions. Thanks, Russell.
spk10: The next question is from Brian Martin from Jannie. Please go ahead.
spk03: Hey, good morning, guys. Good morning. Hey, maybe can you just touch on, I guess you touched, I thought maybe I missed it 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, so I don't know if that's Gary or Vince, but just kind of what you're seeing there.
spk08: Well, the commercial pipelines that we just went through, enormous fundings, session so what ends up happening is the short pipeline converts assets on the balance sheet and then the long-term pipeline starts to fill back up again we look at it in two segments uh within 90 days to close and and greater than 90 days really two principal areas but you know when you look at it on a year-over-year basis considering the growth we've had which is mostly seasonal our our pipelines aren't low historically They're lower than they were at the beginning of the quarter slightly. So let me be clear. There's still opportunities within the pipeline. It's just that you've cleared out the 90-day bucket with big fundings.
spk09: Right.
spk08: It's actually up slightly. For commercial. But that's the total end-to-end pipeline, not the short-term pipeline.
spk03: Yep. Okay, and then maybe just talk a little bit about the, just you talked about the beta. It's just kind of the margin outlook given the sensitivity and kind of the rate increases we're seeing here, just kind of how you're thinking about the near term, kind of what's repricing. Just remind us, I thought that there was not much that had floors out there on the pipeline, but just understanding the margin and sensitivity here just over the next quarter or so.
spk09: Yeah, I would say higher. I mean, the market has a lot of moving parts. You know, we do give guidance on margin, just between cash levels and all of this. So, you know, the dollars in net interest income, you know, I think are the most helpful. The fours are really insignificant. I mean, it's under $100 million of money for it. It's really not even something to talk about. If you look at some of the, you know, some of the key drivers, remember, Brian, that we still have that excess cash on the balance sheet, and we have a slide there that quantifies that. I mean, that's a 16 basis point drag on the margin in the second quarter. So if that cash continues to get deployed, that 16 basis points will go away. So again, directionally, that helps the percentage. Purchase accounting and triple P benefits are three and one basis point, respectively. It's not going the other way. They're very low at this point, and triple P will go to zero. And the purchase accounting will probably stay around that level So as that 16 basis point drag goes away, the benefits of the percentage for sure. You know, some of the other kind of key drivers that, you know, we've talked about in the past is, you know, the consumer CDs, you know, there's about 175 to 225 a month that are maturing from 22 to 43 basis points. And, you know, today, the month of June, where we are, we're kind of putting CDs on around 60, 65, 70 basis points. So there's that dynamic there. If you look at the portfolio rate on the CDs, we were 67 basis points at the end of December, 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 a little bit, given the commercial and municipal side of the house, some pricing adjustments that we've made there. I guess the last piece I would comment is just new loans made during the second quarter. Those came out at 379. Second quarter, that was 309 last quarter. So, you know, that's a nice move up. It's also, you know, all about the portfolio rate. So kind of some of the other drivers I would comment on.
spk03: Gotcha. Okay. No, that's helpful. And maybe just last one, just on the On the fee income side of the house, can you talk about just kind of where the greatest opportunities are here with the two acquisitions and then maybe just kind of the mortgage outlook? I mean, I guess when you look at kind of this quarter's 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 the origination activity.
spk09: I would say, you know, on the mortgage side, you know, I guess a couple comments. You know, it was down a half a million from the first quarter. The MSR valuation recovery down by 2.1 million. So the underlying number was up a million six, but the absolute level obviously affected just by the current state of the mortgage business having moved up so much. If you look into the next couple quarters, I mean, our guidance has that six-ish number coming down to the number that more has a forehandle to it, just given kind of expected activity here. That's all baked into our guidance. As far as the overall income categories, I mean, capital markets are a big opportunity, I would say.
spk08: Absolutely. We have some great wins coming in capital markets. Particularly the debt capital markets platform that we created should help us offset the slowing and the closing. And we've got a fairly granular set of businesses that provide the income for the company. I mean, international banking has been doing pretty well. There's some stuff in the pipeline for them. Capital markets, as I mentioned, is doing well. Syndication, derivatives. Well, derivatives we thought would be slower. I think, you know, clients are trying to hedge, you know, the future interest rate risk. So that came in a little better than we expected and I would expect there to be activity throughout the rest of the year in the interest rate derivatives category. Treasury management's done very well.
spk09: Interchange has been really building that up.
spk08: Interchange actually moved up. If you look at the service fees, most of the service fee growth, it's not overdrafts. It's not those traditional categories. It's interchange fees for us growing back, I guess. We're growing back from Those levels. Yeah.
spk03: Yeah, I was going to ask.
spk08: Go ahead. Go ahead. I'm sorry.
spk03: No, I was just going to say, was that number a sustainable number given the interchange and kind of the breakdown you just 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.
spk08: Those are pretty consistent in reoccurring revenue streams. Yeah. particularly the TM business. I mean, if we grow that business and continue to win business there, it's additive and it's an annuity.
spk09: The interchange component is seasonal.
spk08: The interchange will be seasonal, but the other pieces of it are not, right?
spk09: The other thing I would comment on, too, Brian, is just looking at our slide. I mean, the wealth management side of it – Trust income this quarter has impacts just on market valuations on assets under management. But underneath, we have record organic sales activity occurring in the trust business. And, you know, that's there, and that will continue to build and help get it to later in the year and to next year. So that's another area where we've been having some really good success.
spk07: Gotcha.
spk03: Okay. I appreciate all the help, guys. Thanks for taking the questions. Okay, thank you.
spk10: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Vince Delle for any closing remarks.
spk08: Thank you. I'd like to thank everybody that participated. Great questions. Thank you for giving us the attention and asking those great questions. I also would like to thank our employees again. I said it in the prepared comments. I meant it. I mean, our people step up time and time again. So I really appreciate the effort, and I'm very confident we're going to do well throughout this cycle and throughout the rest of the year because of the quality of the people that we have. So thank you. Have a great day. Take care.
spk10: And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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