F.N.B. Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to the FNB Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. 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 Haidu, Manager of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to our earnings call. This conference call of FMB Corporation and the reports it files The Securities and Exchange Commission often contain forward looking statements and non GAAP financial measures. Non GAAP financial measures 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 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.

Speaker 1

A replay of this call will be available until Thursday, July 27, and the webcast link will be posted The About Us, Investor Relations section of our corporate website. I will now turn the call over to Vince Silly, Chairman, President and CEO.

Speaker 2

Thank you, and welcome to our Q2 earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer and Gary Guerrieri, our Chief Credit Officer. FNB reported 2nd quarter net income available to common stockholders of 140,400,000 We're $0.39 per diluted common share on an operating and reported basis. This brings the total year to date operating earnings per share to 0.79 dollars a 39% increase over the same period in 2022. Operating pre provision net revenue increased 51% year to date, resulting in an improvement in the efficiency ratio to 50% And an increase in operating return on tangible common equity to 19.1%.

Speaker 2

Average total loans increased 2.1% linked Quarter to over $31,000,000,000 commercial loan balances benefited from solid production primarily in the Pittsburgh, Harrisburg And North and South Carolina markets. Average deposits totaled over $34,000,000,000 a 1.3% decrease from the first Quarter largely due to seasonal deposit outflows caused by tax related payments and the impact Well, the inflationary macroeconomic environment on our clients. Despite the acceleration deposit competition caused by the recent banking disruption. The mix of non interest bearing deposits to Total deposits at June 30 remained relatively stable at 32%. The loan to deposit ratio was 92.7% Our strong deposit mix was a result of the focus on fostering relationships with our customers and serving as their primary bank.

Speaker 2

Over the past several years, we've enhanced our product suite and digital capabilities, grown our exceptional team of bankers and strategically expanded our market presence to offer best in class experiences for our customers that build convenience, trust and a stable deposit base. For example, we recently launched the common account application In our award winning Easter, where we intend to be the 1st bank to offer a single universal application for the majority of our products and services, Enabling customers with the ability to apply for multiple products simultaneously, utilizing advanced technology, including artificial intelligence and machine learning. The eStore common app delivers a more efficient and secure application process With sophisticated data capabilities to offer customized product recommendations that cater to specific customer needs. By pre filling numerous fields, the common application minimizes customer keystrokes and significantly reduces the amount of time needed to Please an application for multiple products. The first phase of the common application, which we launched last month, Includes all consumer loan products.

Speaker 2

Consumer deposit products will be added by the end of 2023 And business products will follow shortly after in the first half of twenty twenty four. The streamlined process has led to an increase Over 170% in online applications for the month of June compared to a year ago and we expect this number to continue to increase as we actively promote the capability. Outside of digital, we have continued to invest in our fee based services offering. We are now expanding our award winning treasury management platform with strategic priorities to drive organic growth, Increase revenue and generate low cost deposits. This quarter alone, clients of our new integrated payables solutions product executed nearly $1,000,000,000 of payments, while simultaneously benefiting from check outsourcing and reduced fraud risk.

Speaker 2

We've also leveraged integrated payables to continue to grow our commercial card revenue, which has a 19% compounded annual growth rate Over the past 3 years, we continue to expand through deeper penetration with commercial and small business clients. These investments in our comprehensive set of products and services continue to help FNB grow non interest bearing deposit accounts and further diversify Our fee based income streams, providing customers with high value services. FNB continues to steadily increase market share. This quarter's 12% spot loan growth year over Has been achieved while adhering to our consistent and conservative underwriting guidance. Risk management remains an integral part I will now turn the call over to Gary to comment in more detail on our asset quality and credit risk.

Speaker 2

Gary?

Speaker 3

Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining near historically low levels. Our performance for the period reflects total delinquency that ended the quarter at 75 basis points, NPLs and OREO at 47 basis points and net charge offs at 11 basis points. Criticized loans were down 1 basis point quarter over quarter and classified assets were down 16 basis points. I will cover these asset quality highlights for the quarter in more detail, followed by an update on our office portfolio.

Speaker 3

Let's now walk through our credit results. Total delinquency increased 15 basis points in the quarter And NPLs and OREO as a percent of total loans were up 9 basis points compared to the prior quarter. The increase in NPLs in OREO was primarily attributed to a single $32,000,000 C and I loan placed on non performing status. At quarter end, we reserved for approximately 40% of our exposure. This credit surfaced right at the end of the quarter from an emerging issue between our borrower and their primary business partner.

Speaker 3

Net charge offs for the quarter totaled $8,700,000 or 11 basis points on an annualized basis, with 8 basis points reflecting the use of previously established specific reserves. Total provision expense for the quarter stood at $18,500,000 providing for loan growth and the previously mentioned specific reserve, offset by releases from the reduction in classified loans. Our ending funded reserve increased $9,300,000 in the quarter and stands at 413,000,000 For a solid 1.32 percent of loans, reflecting our strong position relative to our peers. We remain committed to consistent underwriting and strong credit risk management to maintain a balanced, well positioned portfolio throughout economic cycles. We proactively review and stress test portfolios On an ongoing basis, including in the current quarter, where we performed a full company wide stress test consistent with prior years.

Speaker 3

We were pleased with the outcome of the results As it confirms that our diversified portfolio and proactive credit risk management enables us to withstand various Economic downturn scenarios. Regarding the office portfolio, Delinquency remains very low at 26 basis points and criticized loans remained below 10% with no negative migration in the quarter. We renewed all commercial real estate loans secured by office That matured in the quarter with no downgrades required. We have and will continue to proactively manage This portfolio on a loan by loan basis as part of the in-depth reviews we regularly perform. In closing, asset quality metrics remain near historical lows and we continue to generate diversified loan growth in attractive markets.

Speaker 3

We closely monitor macroeconomic trends and the individual markets in our footprint And we'll continue to manage risk proactively and aggressively as part of our core credit philosophy, which has served us well throughout various economic I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Speaker 4

Thanks, Gary, and good morning. Today, I will focus on the 2nd quarter's financial results and offer guidance updates for the remainder of 2023. 2nd quarter net income available to common shareholders totaled $140,400,000 to $0.39 per diluted common share on both an operating and reported basis, Bringing total year to date operating earnings to $0.79 per share. On a spot basis, loans and leases ended the quarter at 31,000,000,000 Growing $681,000,000 or 2.2 percent linked quarter. Consumer loans increased $517,000,000 with Strong seasonal contributions from the Physicians First mortgage program.

Speaker 4

Commercial loans and leases grew $164,000,000 or 0.8 percent with loan spreads improving from the Q1 levels. Investment portfolio decreased slightly to 7,200,000,000 as we redeploy cash to support loan growth. The total securities portfolio remains at a fairly even split AFS and HCM with 47% in available for sale and a duration of 4.5 years at quarter end. Total deposits ended the quarter at $33,800,000,000 a decrease of $365,000,000 linked quarter or 1.1 percent, primarily due to seasonal deposit outflows and tax related payments and the impact of the inflationary macroeconomic environment. The deposit mix continued to shift this quarter as customers moved $586,000,000 into time deposits, Partially offsetting the decline of $273,000,000 in interest bearing demand deposits and $383,000,000 in non interest bearing demand deposits.

Speaker 4

As of June 30, non interest bearing demand deposits comprised 32% of total deposits compared to 33 At March 31st, while the banking industry disruptions clearly accelerated deposit competition, We still expect the mix of non interest bearing demand to total deposits to remain above pre COVID levels. The loan to deposit ratio increased to 92.7% during the quarter, reflecting strong loan growth and the seasonal effect of tax payments on our deposits. Revenue totaled $410,000,000 driven by net interest income of 329,000,000 And stable non interest income benefiting from our diversified fee businesses. 2nd quarter's net interest margin was 3.37 with the quarterly decline expected to slow as the month of June was 3.34. Yield on earning assets increased 26 basis points to 4.94 due to higher yields on loans, investment securities and interest bearing deposits with banks.

Speaker 4

While the cost of funds increased 46 basis points to 164 as the cost of interest bearing deposits Increased 47 basis points to 197. We continue to actively manage our total deposit costs, which ended the quarter at 147, Bringing the total cumulative deposit beta to 27%. We expect to end 2023 in the mid-30s. Turning to non interest income and expense. Non interest income totaled $80,300,000 a 1% increase from a solid first quarter level.

Speaker 4

Service charges increased $1,400,000 or 4%, reflecting strong treasury management services and interchange fees, Offsetting the overdraft practice changes that F and B implemented in the Q1 of 2023. Dividend on non marketable securities increased $1,400,000 or 33%, reflecting higher FHLB dividends due to additional borrowings. Insurance commissions and fees decreased $1,800,000 or 23% due to normal seasonality and strong overall production in the Q1. Our Wealth Management business continued to generate strong contributions with combined revenue of $17,700,000 up 12% on a year over year basis. Non interest expense totaled $212,000,000 Decrease of $8,000,000 or nearly 4% from last quarter.

Speaker 4

Salaries and employee benefits decreased 6,300,000 primarily from seasonal compensation that occurred in the Q1, partially offset by normal annual merit increases in the 2nd quarter and higher commissions driven by better than expected contributions from our mortgage banking and fee based businesses. Efficiency ratio equaled 50.0 percent given the strong revenue and well managed expenses. Our capital ratios remained solid throughout the quarter with the CET1 ratio at our 10% targeted level. Our TCE ended the quarter at 7.47 and when adjusting for our health maturity investment marks equaled 6.8%, which we expect to remain higher than peer median levels. We also repurchased 2,300,000 shares during the quarter at a weighted average price of $10.80 Tangible book value per common share was $8.79 at June 30, An increase of $0.13 per share from March 31, largely from the higher level of earnings, offsetting the increased impact of AOCI, which reduced tangible book value by $0.99 per share compared to $0.87 at the end of the prior quarter.

Speaker 4

Let's now look at the 2023 financial objectives, starting with the balance sheet. On a full year spot basis, We maintain our previous guide for loans to increase mid single digits year over year. Total deposit balances are revised to end 2023, Down low single digits relative to the December 31, 2022 spot balances. We expect year end levels to be flattish The June 30 level of $33,800,000,000 as seasonality should become a tailwind in the second half of twenty twenty three. Full year net interest income is expected to be between $1,280,000,000 and $1,320,000,000 with the Q3 of 2023 between $313,000,000 at $323,000,000 Our guidance currently assumes a 25 basis point rate hike next week, then flat for

Speaker 2

the remainder of the year. The decrease

Speaker 4

in guidance from last quarter is largely related to our expectation for higher deposit betas driven by strong competition for deposits and continued mix shift We still expect the ratio of non interest bearing demand to total deposits to remain above pre COVID levels. Full year non interest income is expected to be between $315,000,000 $325,000,000 with the 3rd quarter expected to be around $80,000,000 This upward revision incorporates the benefit of our diversified fee based income strategy. Full year guidance for non interest expense on an operating basis is expected to be at the high end of our prior guidance $835,000,000 to $855,000,000 largely due to higher commissions tied to better than expected fee income. The 3rd quarter non interest expense is expected to be between $210,000,000 to $215,000,000 Full year provision guidance remains $65,000,000 to $85,000,000 and is dependent on net loan growth and potential CECL model related builds from a softer macro Lastly, the effective tax rate should be between 20% 21% for the full year, which

Speaker 2

Thanks, Vince. FNB achieved another solid quarter. Our financial performance stands out because of our innovative suite of products and services, Our philosophy enables us to serve our customers through business cycles in ways other competitors cannot. We were currently recognized in Forbes 2023 Global 2000 and America's Best in State Banks With the latter award based on customer feedback, showcasing the impact our employees have on our performance. Our capital position remains strong with CEP1 at our targeted operating level of 10%, While supporting loan growth and share repurchase activity in the quarter, the tangible book value per share continues to grow, totaling $8.79 this quarter, up 8.6% year over year.

Speaker 2

As we look to the second half of the year, We remain uniquely positioned to capitalize on disruption and are poised to continue to drive shareholder value.

Operator

We will now begin the question and answer session. On your touch tone phone. Our first question comes from Daniel Tamayo from Raymond James. Please go ahead.

Speaker 5

Good morning, guys. Thanks for taking my question. Good morning, Dan. Good morning. I guess first just on the Sorry, non interest bearing deposit balances.

Speaker 5

I'm not sure if I heard you. Did you have an explicit Assumption baked into your guidance for where those end up at the end of the year. And I know you mentioned they would end up above pre COVID. I was just Wondering if you had a little more detail on where about you're kind of thinking that that could land? And then Also just kind of within the quarter, if you had any comments on the cadence of the mix shift, if it Slow throughout the quarter, if there was any kind of pattern we might pick up on there?

Speaker 5

Thank you.

Speaker 4

Yes, I would say, the non interest bearing deposits, we do not have a specific target. As a percent of deposits, we mentioned we're 32, Down from 33%. Pre COVID, we were kind of 26% or so and not looking for us to migrate down to that in the short run, which is We expect to remain higher than that. In my mind the target would be 30 handle if we can keep a 30 handle as we move forward. We do have seasonal municipal deposits that kind of build from here through October November period that will affect that non interest bearing line item.

Speaker 4

And it's a big focus in the company. It's been for 15, 16 years, large growing non interest bearing deposits, retail, Commercial municipal as well as small business units are very much a significant focus here. And the shift has changed, right?

Speaker 2

I mean the second part of that question What's happening as we move forward with the deposit mix?

Speaker 4

Yes, the mix shift into CDs, I mean, it's still been pretty heavy, but it's definitely I would say on the retail side, the request for matching others rates has definitely slowed From where it was a few quarters ago, on the commercial side, it's still very active as you would expect with every bank on I think we've done a very nice job retaining our customers and adding others in the disruption in the marketplace.

Speaker 2

And I know we keep mentioning this, but part of the reason, I think our performance is going to show very well relative to others When you look at the non interest bearing category, in particular, because as I've said on numerous calls, our strategy has been to focus on client Primacy to be the primary bank for our customers. The deposit base, particularly the non interest bearing Deposit basis supported by compensating balances that are paying for treasury management services and Embedded balances that exist with the float and consumer and small business accounts. I think our people have done a pretty good job of continuing that and that's what's really helping us support Our non interest bearing deposit base.

Speaker 4

The other thing I would add to, as far as kind of a proof point for the mix shift happening during the quarter, Thanks, Paul. If we went through the quarter, if we look at the margin, the margin with everything that all the banks did for liquidity purposes in March, From March to April, our margin went down 9 basis points to a 3.40 level and then we were down 3 basis points from April to May and 3 from May to June. So Clearly, there's been a slowing impact to the margin statistics that also runs through the net interest income.

Speaker 5

That's great color. Appreciate all that. And then maybe changing gears here for my second question just on expenses. Just curious, assuming we get through the year, you're kind of at Top of the guidance that implies the quarterly run rate maybe and just correct me if I'm wrong here around the 2.13 mark or so. But wondering if you see any kind of opportunities to reduce expenses going forward given the pressure on the top line?

Speaker 4

I mean, we've had cost savings target every year, 4th or 5th year Having meaningful cost savings targets for this year, dollars 9,000,000 and we'll keep that as we switch through the year. I mean, we run we have a 50% So it's not like there's excess cost to take out, but we continue every day to manage the expenses whether it's renegotiating Contracts, particularly one of the things rolling through expenses is just inflationary impacts, contracts that have CPI clauses It kind of kicked in over previous quarters. We're actively going out to those vendors to look at renegotiating those contracts And get something back for us, with TPI where it's been at times, we've had some significant increases there. Process improvement is a big focus in the company throughout, so there continues to be opportunity there. So it's every day, Danny, that we're managing the expense side of it.

Speaker 4

We're disciplined and we're We're continuing to pursue ways to kind of optimize our facilities, space optimization, which is just a constant growth. So that's something extra kind of baked into what we do every day.

Speaker 5

Understood. Well, thanks for taking my questions. Appreciate it.

Speaker 4

Thank you.

Operator

Our next question comes from Jared Shaw from Wells Fargo. Please go ahead.

Speaker 6

Hi, good morning. This is Timur Braziler filling in for Jared. Maybe just following up on that line of commentary for deposits With the prepared remark of kind of mid-30s beta by year end, I mean that seems like a Pretty conservative number. I mean, data increased 5 percentage points this quarter. You're assuming one more hike here.

Speaker 6

Is there an expectation that just given how well your deposits have performed so far that there's going to be some element of a lag following The last rate hike or should we assume that kind of once the Fed is done barring any Kind of additional mix shift, the cost is going to kind of slow as well.

Speaker 4

Yes, I would say, I mean, I think our teams continues to do in managing deposit costs in an especially challenging Environment, the balancing act there since post failure has been quite an effort throughout our company on the commercial side and the retail side With the Fed continuing to raise rates, I think that the one more move that everybody expects to happen in February, I mean February, Next week, I don't think it just stops. I think there is as I mentioned a little bit earlier, there continues to be a lot of competition on the commercial deposit side and We've done a great job retaining our customers for sure and retaining deposits. So, but I think there's some probably carry on that happens As you go through there for some period of time. But I mean we the beta at 27, we originally guided in April to mid-twenty, so it's Couple of points higher than 25 kind of used the midpoint of that. So based on what we know now and our forecast and how we're managing it, The mid-30s, higher than the low-30s that we kind of guesstimated I would say in April, but I think that's a figure that Reasonable assessment, if we can do better, that would be

Speaker 6

great. Okay, great. And then maybe switching gears to the loan growth, I guess two questions. Number 1, the resi growth in the Physicians First program just Continues to fire on all cylinders. Resi is now approaching almost 20% of the loan book.

Speaker 6

I guess, A, who's taking on mortgages right now? Is this purchase? Is this kind of refi activity? How much more room is there to run-in resi? And then as we look ahead, what's kind of the mix shift or the mix of loan growth going

Speaker 2

1st of all, the borrowers in the Physicians First program are Some of our best credit profiles, right? So they it tends to be positions that are well established They're upgrading their home. Most of the business that we do is purchase money. So the vast majority, not just Physicians first, but across our entire footprint has been historically skewed towards purpose money. That's been our strategy.

Speaker 2

I would expect as we move forward, we've kind of changed the focus a little bit so that we're producing more Saleable product, the Physicians First loans tend to be balance sheet oriented. So the rest of the book Has been moving we've been moving more in a direction of producing salable product, which should help us manage the balance sheet. As we move forward with the comment about the concentrations, we're perfectly we're aware and capable of adjusting, could include Sales and other avenues, but we also monitor concentrations. But I think overall, very high quality borrowers, particularly purchase money. And the game here is to make sure that we circle back or on the front end Of origination, that's why we developed the eStore, is to offer multiple products and services to that group, Particularly wealth management, brokerage, insurance, fee based, high quality fee based businesses.

Speaker 2

And then when we look at we end up also getting opportunities on the business side with the practices And offering treasury management services and loan products to help facilitate the build out for acquisition Practice. Rod knows over time and Rod knows over time as well. So given that that's pretty much our strategy With the mortgage book, I will say our goal has been to find originators that really do focus in our network into The new home purchase market versus relying on refinance activity for production. So that's been how we've looked at it for a long time.

Speaker 4

Yes, I mean 97% of the originations were purchased, so There's very little refi. That will pick up again when rates come down. But as we sit here today, it's virtually all purchase.

Speaker 6

Okay. And then just last for me, maybe one for Gary. We're in this Period right now where everybody is expecting some sort of credit event in the back end of this year or 2024. I guess As you're going through your kind of everyday review of the loan book, does anything change with this expectation And for some sort of credit event or is it kind of business as usual as you're reviewing those loans? Are you trying to be more proactive?

Speaker 6

Are you I know you're reviewing all the loans, all the CRE loans that are coming due this year and next, but is there an element of wanting to be more proactive and maybe putting aside additional allowance With this broader sentiment out there or does nothing really change?

Speaker 3

Yes. Tim, I mean for us, I would tell you that nothing really changes. We're very aggressive risk managers and our program Doesn't change from a move in the economy. So, excuse me, We're going to continue to manage the book portfolio Loan by loan in some cases, as we've talked about in the office book with the issues going on in that space at this point, but No, no real change as far as our risk management practices are concerned. Just continue to Stay ahead of it, which is important from our perspective.

Speaker 6

Great. Thank you for the questions.

Speaker 7

Thank you.

Operator

The next question comes from Frank Schiraldi from Piper Sandler. Please go ahead.

Speaker 8

Good morning. Just a couple of for me on capital. Vince, I You noted you're kind of right at your CET1 target targeted ratio. Just wondering, I would assume, Including the AFS book, given the size of the bank, that's kind of less of a concern for you guys and maybe some of the larger banks out They might see changes in capital rules. But just wondering about your priorities here, if we could see those That CET1 ratio dipped down a little bit through growth and you guys were a little bit more aggressive in share buybacks than I had in my model.

Speaker 8

Just Wondering how you think about it here. Is it just more opportunistic at this point on buybacks?

Speaker 4

Yes, I would say so Frank. I mean we've established that 10% as an operating target for us. We're right at 10.0. We're not going to manage 10.0 every quarter, but given the strong earnings for the quarter as well as where the stock was trading, we We mentioned that's kind of the key word. So we were opportunistic.

Speaker 4

We'll continue to be opportunistic as we go through the year. If you look at we have a slide we added in here Looking at CET1 ratio and TCE ratio kind of as reported and then with the marks and I think you can see the CET1 ratio at least at March, right, we were 10.0, 10.1 for the peers. When you add in AFS, We're 9.3 versus 8.9 and then we've added AFS and HTM or 8.6 versus 8.3. So those are all Comfortable levels and better than peers and similarly on the TC ratio you can on Slide 7 you can see the impact there. So, I mean given the risk profile of the balance sheet we're Very comfortable with that 10%.

Speaker 4

The strong earnings generation supported our asset growth and did enable us to be opportunistic. We expect to Kind of gradually build CET1 in the second half of the year based on our current forecast. We're going to put the money to support loan growth first as we always do. And then where there's opportunities or if the loan growth is a little bit slower than what's in our model, we'll be more active.

Speaker 8

Okay. All right. Great. And then just Vince, just a follow-up on the deposits. You mentioned the seasonality of the muni deposit dollars.

Speaker 8

Just wondering, just for modeling purposes, if you can help with remind us the size in the past of those kind of flows and the expected costs maybe of those relative to the rest of the book.

Speaker 4

Yes, I mean for peak to trough, we We usually use $300,000,000 to $500,000,000 in kind of the normal flow from down in the Q1 and then up through kind of the October, November timeframe. We haven't disclosed Costs specifically on those, I mean, we've talked about where we're pricing. We have some promotional CD rates that we instituted in May that are out there kind of 5% for 13 month CD, 4.75 for And I'm on CD and so far we've generated about $400,000,000 in CDs since the beginning of May with About 2 thirds of that being brand new money to the company. So and some of the municipal customers will take advantage of that too.

Speaker 2

In almost every, right, we're the primary treasury management provider. We're not just Remitting them to raise hot money with us. So it's less likely that they'll migrate into those higher cost And if there's seasonality, particularly with ad valorem tax collection and other activities that go on that are seasonal, The amount of treasury management fees increase at this point in time, so they tend to leave more demand deposits to cover the cost of that increase in operations. So that so there's a lot of things going on with that portfolio. It's not just

Speaker 8

Okay. So I guess some of that will Come in as non interest bearing. Just kind of curious if it's going to really impact that kind of non interest bearing trend In a big enough way for us to kind of see it next quarter, but maybe not.

Speaker 2

I don't think it's going to have a dramatic impact. It's hard to say though based upon earnings credit rates and what type of investment rate they can get, Whether the folks managing those balances at those entities decide to use free balances or benefit from Investing, so that's all part of it. But I just wanted to make clear that we're not just Basically taking deposits, high yielding products, not what we do.

Speaker 4

The bulk of the money I referenced will really

Speaker 9

come through DDA side. They collect

Speaker 4

So that will flow through the non interest bearing line, just to clarify that.

Speaker 8

Okay, great. That's what I was curious on. Thank you, guys.

Speaker 4

All right. Thank you.

Operator

Our next question comes from Michael Perito from KBW. Please go ahead.

Speaker 9

Hey, good morning, everybody. Thanks for taking my questions. I wanted to start and this Question admittedly might be a quarter or so early here, but I was wondering if you could give us a little color a little more color on Like the incremental CD growth, the type of duration and as you guys think about that moving forward, at what point does that turn from kind of Headwind to tailwind, and what's your experience kind of in uncharted territories here, but is that something you would hope if your rate Forecast proves to be accurate that if the environment cools off, you would be able to kind of roll some of that forward Lower, obviously competitively the CD rates right now are probably the most competitive it's been in memory, recent memory. But Curious how you guys think about that dynamic in the margin as we look ahead to next year at this point?

Speaker 4

Yes, that's exactly how can we think about it, Mike. The average term of the CD portfolio is 10 months right now. The 2 specials that I mentioned that we have are 13 months and 7 months CD. So very short, the idea being there that like you said, it's very competitive now, but if rates start to come down mid year, second half of next year,

Speaker 6

And we

Speaker 4

have an opportunity to reprice those lower. So that's exactly distracting.

Speaker 9

Got it. And then just as you guys think about all the disruption in the industry, I think one of the reasons, at least in my opinion, that you guys Have weathered the storm so well, it's just the diversity of the franchise, both line of business, geographic. You had some really large, well respected Players that are no longer around, just strategically, is there anything on your roadmap that might be new or pulled forward where there's opportunities maybe like on the private banking side or in some of these other small business niche businesses that These banks had large market share and that you guys are looking at that we should be mindful of as we think about 2024 and 2025 growth opportunities?

Speaker 2

I don't think there's a specific business line from other banks that we would be interested in. I mean, we would have Pursued that long ago. We've always said that we were different. We had been compared to those banks that are in our relative size range, right, At least a couple of years ago. So they were peer in our peer group.

Speaker 2

They were benchmarked against them by analysts. I think their model was vastly different than what we do. We've said that over time, if you go back and look at the old earnings call transcripts, I've said it over and over again. We tend to focus on building relationships in the middle market, handling Consumers, kind of midstream consumers, we do have a private banking effort. We do have The Physicians First program, which is focused on higher income Consumers, but we cater to the broad spectrum of consumer and small business.

Speaker 2

And that's really that's been our focus. We focused on investing in product capabilities to help us broaden the returns on capital that we deploy with consumers and Businesses, that doesn't sound like a very sexy model, but we've tried to manage risk by diversifying Fine geographically, we said that repeatedly. Gary spends lots of time with his team, Tom Fisher, Gary, the whole team analyzing concentration So that there's granularity within the portfolio.

Speaker 4

And then I think

Speaker 2

if you go back and look at the earnings Transcripts even before all this happened, I said we are a very strong consumer franchise With a granular deposit base, our deposit mix was very favorable. And quite frankly, I think that is really paramount to the valuation of

Speaker 9

a bank. I think if you're going

Speaker 2

to evaluate the value Financial institution, you want to look at their deposit base. So I think I don't see us really changing. I do think With the exit, they are in our businesses as well, right? So the exit of those players From a competitive perspective, we'll help us. And I think from a wealth perspective, doing loans to High net worth individuals, commercial lending in certain markets, people Be able to benefit from the disruption that's occurred.

Speaker 4

Most opportunities to pick up bankers too.

Speaker 2

Absolutely. Hiring people, we've had no issue Attracting talent. So actually people reach out to us all the time and that's not the way it was historically. So I think our Staying power and conservatism really puts us in a strong position. That's why I said it in my comments.

Speaker 2

As we move through the cycle to compete more effectively, we have to put it in capital capacity, a great product set. And I think from a I said it before and I'll say it again, I think that our investment in technology, what we're focusing on for us is Spot on. It's improving the ability for clients to purchase multiple products and services through us In a very efficient way, so we continue to focus on the e store and that's why the consumer applications are up as much as they are. I think as we add deposits in November to that platform, that's really going to help us 1 platform with 1 application. So that's the most exciting part, I think as we move forward.

Speaker 2

It's using AI and the digital tools that we put in place to make a better experience for the clients. Anyway, that's

Speaker 9

No, it's really helpful color. Thank you, guys. And then just last question for me. I was just curious if you were willing to maybe share or find some thoughts about The kind of the next phase of bank M and A here, Vince, I mean, it's pretty apparent that there's going to be some more consolidation on the heels of this event. Just curious What you're seeing out there, it seems very slow and kind of regulatory headwinds at this current juncture, but just also maybe a comment on What you think that next iteration of consolidation could mean for F and B from an opportunity standpoint, if at all?

Speaker 2

Well, I said I made a comment on one of the calls that I wouldn't want to be an investment banker and everybody just went crazy at this point. So I'm not

Speaker 9

going to make any

Speaker 4

I

Speaker 2

will say it might be a good time in the future to be an investment banker because there are a lot of banks that are struggling For a variety of reasons, as we move through this cycle, I think when we come out the other end, There will be things to look at. I don't think we're there yet. I think if we were to be active in M I'm not suggesting that we are. We're kind of internally focused right now. We stick to the tried and true strategy of Focusing on in market deals where we could get cost saves that are immediately accretive to earnings and have Very limited tangible book value dilution and returns on capital that are well above our cost of capital.

Speaker 2

That's our we've said that forever. That's What the Board expects, we're very disciplined around that. And I think it shows in our performance that we've stayed true To

Speaker 4

that strategy,

Speaker 2

I think the current M and A market is very challenging still. There's a lot of banks that probably would like to sell themselves, but I don't know that the deal works from a mathematical perspective, financial perspective. So, we've been focusing principally on building out our e delivery channel, the e store that I mentioned And then augmenting that channel across our 7 state footprint with the deployment of ATMs and ITMs. So we feel that that's a better way for us to go in very cost effectively bridge our physical delivery channel With the ATMs, branded ATMs and then push our digital products to that customer base and we've had some good So we're going to stay focused on that de novo strategy and the deployment of ATMs and Continue to drive consumers and small businesses then. Anyway, that's my view on M and A.

Speaker 2

No sarcastic headlines, So.

Speaker 9

No, I appreciate it's interesting time. So your thoughts are helpful. Thank you, Vincent. Thank you guys for taking all my questions.

Speaker 4

Thanks, Mike. Thanks.

Operator

Our next question comes from Russell Gunther from Stephens. Please go ahead.

Speaker 7

Hey, good morning guys. Wanted to follow-up on comments that Gary made earlier.

Speaker 10

Just be helpful if you're able

Speaker 6

to share some of the assumptions that went into the Company wide stress test you performed this quarter. It sounds like that's something you do this time every year. It would be interesting Just get some kind of broad strokes around assumptions, particularly CRE price declines. Is there anything you guys could elaborate on?

Speaker 3

Yes, it's pretty much our normal stress test review, Russell, from the assumption perspective. From a result perspective, charge offs came in A little lower than they did the past review. And in terms of The economic forecast, a little higher provision around the forecast. In terms of The ACL, it covered those potential losses by more than 50% In the worst case, 9 quarter scenario, so just a standard review, which we do on a pretty regular basis, and It came out better than we expected and better than the prior reviews.

Speaker 7

That's helpful, Gary. Thank you.

Speaker 6

And then just switching gears for my last question here on the securities portfolio. Just any appetite to restructure

Speaker 4

I would say, Historically, we've looked at that and it's a zero sum game. So we like the portfolio that we have. The cash flow is at pretty healthy level. $800,000,000 over the next 12 months, about 12% of the portfolio. That's rolling off at 41 and today we're reinvesting in that kind of 540 level.

Speaker 4

So given the structure of the portfolio, I Our team, Scott and his team have done a very nice job creating the portfolio, so you don't have significant extension risk or contraction risk. And with where we are today, the opportunity is there to cash flow every month. I mean for the second quarter, We reinvested about 2 thirds of the cash flows, dollars 135,000,000 or so into the portfolio. The portfolio did shrink a little bit, some of the funds to fund the loan growth that we've been there. But during the quarter, we reinvested at 529, today it's 540, Last quarter, Q1 was 5.10.

Speaker 4

So we'll continue to opportunistically invest there. As we look ahead, Kind of the general plan will be to hold the portfolio about the same level as it was at the end of June as we go forward. Again, being opportunistic with where we invest. So far we've been able to put $82,000,000 to work at $540,000,000 for the 3 year duration. So I think the strategy of the It's a good sound portfolio and I think the strategy makes a lot of sense for us.

Speaker 7

No, it makes sense. Vince, thank you very much for the color.

Speaker 4

Thank you.

Operator

Our next question comes from Manuel Neves from D. A. Davidson. Please go ahead.

Speaker 10

Hey, good morning. Just to kind of follow-up on that, can you give a little bit more Color on where you stand with borrowings and kind of decision making and the process? I know you had it laddered out a little bit And you gave kind of an update last quarter. Just kind of want to hear where you stand with borrowings today and with the cash on the balance sheet as well?

Speaker 4

Yes, I mean, as we sit here today, we still have about $1,200,000,000 of what I would call excess cash. We put that In the March timeframe, given the market disruption that occurred, like I said that affected our net interest margin statistic It went down from kind of that March to April timeframe that I talked about, but the dollars of NII kind of close to a push to that. We talk about it regularly. For now, we're going to keep $1,200,000 right, Scott?

Speaker 10

Okay. If I jump back to loan growth for a bit, It seems like the perspective is on the consumer side as purchase comes down and you're doing more gain on sale business, the consumer growth might Decline a bit across the back half of the year, also on seasonality, just kind of what are the trends there on an outlook? And then What are you seeing right now commercially?

Speaker 2

Yes, I think you nailed it on the mortgage book. I mean we're expecting it to Tail off a little bit towards the end of the year. But I do think commercial is up, the pipelines are up about 12% Across the board, good activity in the Carolinas, little slower than previous years, but still good solid This is where our geographic diversification really helps us, right? Because I think the Mid Atlantic has slowed, D. C.

Speaker 2

And Baltimore is a little slower. Pittsburgh is still Pittsburgh is just chugged along. Cleveland Pittsburgh and then the South is still experiencing we're experiencing elevated pipelines. But like I said, I It's a little slower than it has been in the past. But it's substantial enough

Speaker 3

to

Speaker 2

provide us with the opportunities to hit our guide. And that's why we reaffirmed our guide for the year. So as we So Anyway, that's kind of the look. I think from a C and I perspective, there's probably a little more activity On the C and I side, obviously CRE is a little slower. Yet we're not a player in the large office Space, urban, large office, we're not really a player there.

Speaker 2

So what we're seeing is a little different than what others may have chased. But that's where we are.

Speaker 10

What's the current size of the Physician First Portfolio and is there any updates possible on kind of success on cross sell or anything like that that you could share?

Speaker 2

Yes, I don't have statistics at hand to share with you.

Speaker 9

I mean

Speaker 2

that portfolio continues to grow. It was north of $750,000,000 in total. I don't have the exact number in front of me,

Speaker 9

Yes, it's around like $1,500,000,000 of provisions for 4 weeks.

Speaker 2

Yes, that's globally. That's I'm referencing what we originated in our program versus What we hold on our balance sheet. We hold on our balance sheet larger, Jerome. That's just all positions and the mortgage. Yes.

Speaker 2

Not just physicians in the Physicians Program. So the total portfolio would be $1,500,000,000 originated through our specific program About $750,000,000 to $800,000,000 But I think the again, I think We're going to be focusing as we move forward on more saleable product. So we should be able to bring balances down. And those customers have we've really just started to scratch the surface in terms of how we go after Cross sell opportunity, so I don't have good statistics for you. We're very early on, particularly With the aggregation of those products in the e store and come November when we add the depository products, What's going to happen is when somebody originates a mortgage loan, even through the Physicians First program, they're going to be able to purchase the insurance And depository and other consumer loan products on the same platform At one time with one application, insurance isn't going to come until a little later, but deposits and loans will be there end to end By November.

Speaker 9

Yes. For physician loans made this year, I mean, we're talking about 90% plus have Multiple products, out

Speaker 6

the door of our deal.

Speaker 10

That's great. And I guess my last question is, As we see NII and given your rate assumptions that can change very quickly. But given NII and NIM guidance, do we think that NII could bottom out Like early next year, what are kind of thoughts around that

Speaker 3

given that this is a little bit

Speaker 10

of a hypothetical for next year?

Speaker 4

Yes, I would say, I mean the margin in NII probably bottoms kind of 4th to 1st quarter kind of based on our current Forecast and what we're thinking and then we'll start to build there. Obviously the earning asset growth that we have right is a key factor in there and helping to I would say over the kind of that 4th to 1st is based on what we see today, like you said, it could change quickly. That's kind of where we would see things kind of bottoming out.

Speaker 10

Thank you. I appreciate the time.

Speaker 9

Thank you. Thank you.

Operator

And our next question comes from Brian Martin from Janney Montgomery. Please go ahead.

Speaker 7

Hey, good morning guys. Most of my stuff was just answered there with the loans and the margin, but just one more on the margin, Vince. I guess, Does the pace of March it sounds like the funding cost pressure is slowing so that the rate impact of Going forward, so the margin should be less and less. So if you are dropping in Q4 or Q1, then The rate of decline in the margin should be maybe a bit more this quarter, maybe a bit less in the Q4 and kind of tailing off. Is that how to think about it given your outlook on rates?

Speaker 4

Yes, I would say, I mean, I mentioned the 3 basis points a month the last couple of months. So what's baked into our guidance would probably be in that, I don't know, 3 to 4 a month. We move forward from pretty much slower pace than the 19 basis points that it was down 1st to second quarter, so that's what's baked into our guidance. And then bottoming in that kind of 4th to 1st, Brian, and then starting to install the building there.

Speaker 7

Got you. Okay. And then just on the liquidity part and just deposit growth in general, I know you talked about maybe the non interest bearing being a bit lower, but just As far as the contraction and you talked about the seasonality this quarter on deposits, what's your outlook on deposits here? I mean, if you maintain that liquidity as your expectation of those deposits with seasonality grow a bit this quarter? I know you kind of gave the guidance for the full year, but just Thinking about deposits in aggregate, not just the non interest bearing bucket.

Speaker 4

Yes. I mean what we commented on is kind of flat from June to the end of the year, Just given the municipal deposits that flow through there and I think our if you look at our data, I mean all the peers aren't out yet, but our deposit decrease The H8 data, I think show very well and I think the non interest bearing changes from some of the stuff I've read At the better end of things for sure in the prior quarter compared to those that are out so far. So Yes.

Speaker 7

Okay. And just on the liquidity, when you actually maybe look at using that to fund the loan growth as opposed to just holding it for a bit, What's kind of the outlook on that liquidity?

Speaker 4

Yes, really just for now,

Speaker 9

I mean we're going to hold

Speaker 4

it Brian where it is. I mean we're earning 5.15 on it, Right, Scott. It's about 25 basis points next week. So it's really not costing us to keep it and just given the environment, we don't have a set date. I ask Scott all the time.

Speaker 4

We're going to start to deploy it, but for now we're going to maintain that $1,200,000,000 And like I said, it's from an NII standpoint, it's not hurting us.

Speaker 7

Yes. You got it. Okay. And then maybe just the last 2 was, it sounds like with the loan growth, the pipelines are up a bit, but still Maybe a tepid on the commercial side. The buyback, I guess, is that something I guess this current level type of Repurchases could continue for the near term if you're the earnings are there and you're willing to take the capital maybe a bit lower if you've got the Credit quality after this trust test, is that fair how to think about the buyback going forward, certainly expecting that to be opportunistic?

Speaker 4

Yes, I think that's the key word. It's really opportunistic. And if the loan growth is a little slower than what's in our forecast, we could become more active. From a capacity standpoint, we still have plenty under our authorization, dollars 140,000,000 of capacity Authorized and still could be used by. So we'll continue to be optimistic and we've managed that full alignment with shareholder interest And we'll continue to do that.

Speaker 7

Yes. Okay. And then and maybe just the last one. I think, Gary, you mentioned last quarter that you might after you've done the stress test that You might think about doing making some sales on selective sales on the office side. I guess any updates on that?

Speaker 7

I guess, if you've kind of gone through things, Any changes to your outlook there, still potential that that may occur?

Speaker 3

Frank, we don't have anything in our Q at the moment. So really, really nothing that is teed up for a later year sale. It's always part of our quiver that we have to take action. So we'll continue to look That as we move through the year, see if anything needs to be put into that category here before the end of the year, but nothing right now.

Speaker 7

Got you. Okay, perfect. I appreciate the update. Thanks for taking the questions.

Speaker 4

Thanks, Brian.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Vincent Dley for any closing remarks.

Speaker 2

I'd just like to thank everybody for the questions, for the interest in FMB and thank our shareholders For the continued support, we're looking forward to the second half of the year. I think there's some great opportunities for us to execute and perform well. And I'd also like to thank our employees who are so dedicated and Always get us through difficult times, good times where we've got very engaged and dedicated employees and I wanted to thank them as well for everything

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
F.N.B. Q2 2023
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