F.N.B. Corporation (FNB) Q2 2022 Earnings Report, Transcript and Summary

Good morning and welcome to the F.N.B. Corporation Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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.

Thank you. Good morning and welcome to our second quarter earnings call. This conference call of F.N.B. Corporation and the reported files with the Securities and Exchange Commission also contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly compatible GAAP measure -- 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 Delie Chairman President and CEO.

Thank you. Welcome to our second quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. The second quarter's earnings per share totaled $0.31 on an operating basis, up 19% linked-quarter. FNB 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 linked 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 a focus with our solid reserve coverage and net recoveries this quarter. Profitability improved significantly the linked quarter as return on average tangible common equity was 15.5%. We prudently manage 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 FNB branches and announced the UB Bancorp acquisition 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 noninterest-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 betas. Total loans and leases excluding PPP reached $28 billion, demonstrating record linked-quarter growth of $1.3 billion or 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 linked-quarter with over $400 million in residential mortgage loan growth. Our Physicians 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 portfolio 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 [Technical Difficulty] 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 FNB 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 FNB'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 to process seamlessly online the 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 branches. 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% of the deposits are non-interest bearing. 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 FNB. 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 Bancorp team and customers to FNB. Overall, the second quarter provided solid financial results and FNB is well-positioned in the current macroeconomic environment. One of FNB's core strength 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. Gary?

Thank you, Vince and good morning, everyone. Our credit results for the second quarter showed continued positive performance with our key credit metrics trending favorably as we enter the second half of the year in a position of strength. We saw lower past due and nonperforming 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 UB 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 eight bps over the prior quarter which was driven by improvements in the commercial portfolios early-stage past due and non-accrual levels. NPLs and OREO also declined on a linked-quarter basis down five 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 CECL 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%. 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 challenge. These economic headwinds remain at the forefront of our credit decisioning process to understand and mitigate economic driven risks and challenges faced by our borrowers. Many of our commercial banking customers have exercised interest rate hedging options as part of our derivative program, which enables them to reduce rate sensitivity and 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.

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 financials captured the strong performance of FNB. The reported net income available to common shareholders totaling $107.1 million, or earnings per share of $0.30. After adjusting for $2 million of merger-related expenses, net income reached $108.7 million or $0.31 per share. Balance sheet growth is very strong. But excluding PPP period-end total loans increased $1.3 billion or 19.5% annualized on a linked-quarter basis including an annualized increase of 34% in consumer loans and 12% in commercial. Commercial loan growth was led by commercial and industrial annualized growth of 29%, excluding PPP. 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% linked quarter with expectations that it will continue to build through the end of the year. Consumer loan growth was driven by strong organic residential mortgage and home equity lending activity. As Vince mentioned the Physicians First mortgage program has been very successful making up two-thirds of this quarter's net growth in mortgage loans. While the physician's first program is seasonal in nature we expect this high-quality loan portfolio to 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. In the second quarter that ratio has transitioned 47% fixed rate and 53% ARMs, as customers optimize payment size given rising interest rates and increased home values. On the income statement, net interest income totaled a record $253.7 million, an increase of $19.6 million or 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 decreased contribution from PPP as those balances wind down. The net interest margin increased 15 basis points this quarter to 2.76%. An area of heightened focus this quarter and for the next several quarters 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%. It's important to keep in mind, three main differences from the previous cycle. First is that the Federal Reserve 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% of total deposits and a much lower loan-to-deposit ratio at 84% versus 97% 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 or $3.8 million or a 5% increase from last quarter. Capital markets income was $8.5 million, an increase of 20% with solid contributions from swap fees, international banking, syndication, and debt capital markets. Service charges increased $3.2 million linked-quarter largely due to growth in interchange income and treasury management fees driven by higher customer transactions and new client acquisition. The $1.4 million increase in bank home life insurance reflected life insurance clients received during the quarter. Mortgage banking operations income decreased $0.5 million or 8% as loan production to be sold in the secondary markets declined 11% linked-quarter given the higher mortgage rates. Refinance activity only accounted for 21% of our second quarter sold production, compared to 53% in the year ago quarter. Reported non-interest expense totaled $192.8 million a decrease of $34.7 million or 15.2%. On an operating basis non-interest expense decreased $3.9 million or 2.0% of 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 billion as we expanded our digital advertising and launch campaigns for our Physicians First program. Reflective 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 PPP income efficiency ratio actually improved over 600 basis points on a year-over-year basis. Tangible book value per common share was $8.10 at June 30, an increase of $0.01 per share from March 31. While AOCI reduced the current quarter-end tangible book value for common share by $0.72 compared to $0.57 at the end of the prior quarter, the higher level of earnings more than offset that impact. Increased unrealized losses in the AFS portfolio due to rising interest rates should accrete back into capital overtime, as securities mature or prepaid. Our CET1 regulatory capital ratio declined approximately 25 basis points to 9.7%, primarily due to the significant loan growth in the quarter, as well as putting more cash to work in 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 Bancorp acquisition. Given the strong loan growth this quarter, we increased our full year guidance for loans to grow at a low to mid-teens growth rate, with underlying organic growth in the high single digits on a year-over-year spot basis. Total deposits are projected to grow mid- to high single digits on a year-over-year spot basis. Full year net interest income is expected to be between $1.05 billion and $1.09 billion with the third quarter between $278 million 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 noninterest income is expected to be between $310 million and $320 million with the second quarter in the high $70 million area. The revised noninterest income guidance is due to slightly lower mortgage banking income reduced market-related fee income. There is no change to our guidance for noninterest expense on an operating basis with a range of $760 million to $780 million for the full year from $190 million to $195 million for the third quarter. This does not include the onetime expenses associated with acquisitions and branch consolidations. Positive credit quality is expected to continue throughout 2022 with provision guided to $20 million to $40 million, this range does not include the initial $19.1 million 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 which is dependent on the level of investment tax credit activity. With that I will turn the call back to Vince.

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% return on tangible common equity, solid efficiency ratio of 55% with disciplined expense control and a dividend payout ratio at 39%. 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 got many accomplishments already in 2022 which doesn't happen without the hard work and dedication of all of our employees. I would like to offer my sincere gratitude to our employees who make our success possible. With that I'll turn the call over to the operator for questions.

Thank you. [Operator Instructions] And the first question will be from Jared Shaw with Wells Fargo Securities. Please go ahead.

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.

Yes. 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. Our pipelines continue 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. The second quarter is really a seasonal expense for us, when you look at that consumer portfolio. The mortgage book applications are down a little bit as well as you would expect. We'll see a little slower growth there. But when you look across the board, the C&I continues to be solid, CRE as well, with some seasonal slowness in that home equity and mortgage portfolio.

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 products that kind of help mitigate some of that?

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.

And I guess, as we go through the rest of the year and how you're thinking about funding the loan growth, appreciate the deposit guide obviously. But as you're looking at funding that loan growth 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 that expectation to kind of fund at 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.

The transaction that we closed -- this is Vince Delie. If we're able to close the transaction this year, we'll get a benefit because it's principally a deposit point on the portfolio is fairly substantial for the size of the bank. There's tremendous amount of granularity. The positive funds in that portfolio are -- is low. We're bringing it over usually at 10 basis points growth. Yes. I mean, I think that that will be additive that will help us. But if you look at where we are today, we're sitting at 84% loan-to-deposit ratio. We have 35% in deposits. Our mix is the strongest, it's ever been. Our liquidity position while we've drawn down cash, is still substantial. I think we're in a very good position, relative to lending and seeing good returns in that space particularly commercial lending in the second half of the year. So I think we're in a really good place, from a liquidity perspective, funding perspective but we're not concerned.

I would just add at the end of June, we had $1.6 million of kind of the excess cash still on the balance sheet. So that was $3.4 million at the end of the first quarter. We obviously, use that to fund the loan growth all on a spot basis. So, there's still ample liquidity just sitting right there for us.

We continue to win depository relationships particularly in the Southeast. That's going to accelerate for us, larger treasury management clients in the convertible segment. So, I would expect that to continue.

Okay. Thank you. And then just last for me on the securities book. Maybe talk through the purchases you were making this quarter, and what you're seeing there for reinvestment yields?

During the second quarter we invested $768 million into the portfolio. This is about $400 million higher than the cash flows, to take advantage of the rate environment that was there. We reinvested at an average rate of 3.27% quarter. That was 1.90% last quarter. So as you look and move up to the -- and it's well above the roll-off rate of 1.85%, so nice benefit there. And then if you look ahead, I mean duration wise, we continue to be on the shorter end and 4%. Our estimated 12-month cash flow is just under $1 billion be coming off around 1.91%. So putting stuff on at 3.27%. They were probably putting stuff on this month more like 3.50%.

Okay, great. Thank you for the color. I appreciate it.

And the next question will be from Daniel Tamayo with Raymond James. Please, go ahead.

Good morning, everyone. Thanks for taking my question.

Good morning, Daniel.

Yes. I thought your comments on deposit betas are very interesting with -- in terms of everything that could impact those -- 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.

Sure. Obviously, the level of liquidity in the banking system still generation to how this all is going to play out. At this point I would add that we've no pressure at all on the retail deposit side, really been conversations with municipal commercial customers that have started to ship, loans from money market deposits into CDs, that kind of natural mix shift has been occurring. If you look at where we are so far, our cumulative betas 9% on total deposits, 15% on interest-bearing deposits as of the end of June. And then what's baked into our guidance based on what we know today, 22% for total deposits and 33% interest-bearing deposits by the end of the year will be the cumulative beta point.

Okay, great. I appreciate that. And then my other question is just around share repurchases. You repurchased shares this quarter. Capital has been stable. Obviously, you have the deal coming in the fourth quarter, but just kind of overarching thoughts on outside of maybe the period where you're unable to repurchase how you're 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?

I would start, as we continue to target a CET1 ratio around 10% than the level we’re testing, it did come down about 25 basis points this quarter, given strong loan growth increased investments that I mentioned, gets advantage of higher yields. Those are coming out of cash at a 0% risk weighting. So you have that dynamic happening during the quarter. As we look ahead and what’s baked into our guidance, we would expect that to get back up to 10% by the end of the year, just given our higher earnings generation levels down the dividend payout ratio and our overall asset-sensitive positioning. Regarding buybacks, it's kind of the same as we talked about. I mean, our first and best use of capital is organic loan growth. So the level of buybacks will be dependent on the growth we see for the rest of the year. But we'll be opportunistic, as we have been in the past. We did buy million-one shares this quarter and opportunities to make sense, I mean, eye on the loan growth, we shared back. And, overall, we're going to just committed to managing capital in a way that's fully aligned with shareholder interest. So just a constant evaluation process.

Okay, great. That’s all I have. I appreciate the answers.

Thank you.

Thank you.

The next question is from Michael Perito with KBW. Please, go ahead.

Hey, good morning, guys.

Good morning.

I wanted to just kind of start with a big picture question. And you guys kind of talked around it in a few different ways in your prepared remarks and some of the questions that have been asked already. But just like this -- just, I guess, balancing this environment with the 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. I guess with your diverse footprint, how do you guys think about balancing those two things? And are there certain areas, or whether it's from a deposit beta side or a loan growth side like the credit side that you feel better about, 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.

Well, first of all, I think the diversification strategy that we pursued enables us to be more selective from a credit perspective. That was the thesis 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 have the well entrenched here. And while we were able to grow fairly significantly in a short time frame, 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 I -- 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 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 deals with the analytics side of it is very sophisticated. We use all of that to kind of guide us, and if 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 have 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 set thresholds based upon our capital levels, we look at all of our exposures relative to capital and made adjustments and did it in a way that didn't weren't exiting customers left and right. We just decided we were going to slow up our lending in that category. We had enough to go after geographically 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 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 in EBITDA and margin growth typically if the company has more leverage. We look at that, we look at interest rate sensitivity on 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 our great management teams to lend to, it sounds pretty basic, but if you stick to that and you don't wrap 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 to sustain us and to achieve our principal investment. So that's the strategy in the markets that we cover. We see some fairly substantial population growth in the Southeast. There's a lot of activity in the Mid-Atlantic region particularly in D.C., and focus [ph] Maryland. We have Pittsburgh and Cleveland that have bigger industrial bases where we see more opportunities on the C&I side. In Charleston, South Carolina is a high-growth market. We've had great opportunities there to lend principally in the real estate space, but we also see in C&I opportunities there more and more, because of the change in changes that are going on. Anyway, that's how we manage the risk. And I can't say that I'm looking at a single, but we stay out of -- we're not an equity sponsor lender. We don't just follow private equity irrespective of what's going on. So we try to stay out of those riskier portfolios. And we've sold portfolios even at times when we could have used the earning assets on the balance sheet that we were concerned about the risk. So, very prudently managed. I think I have all the confidence in the world in our team and I believe we'll be able to grow just like we have in other cycles. I hope that was helpful.

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-to-deposit ratio is still low and your cash is still almost 7% of your earning assets right where we've seen. 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, whether it was loans or bonds. But I guess longer term, right, I mean, it's hard to be competitive from a profitability standpoint with so much -- with an 80% lower 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 generate 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?

Well 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 what's happened kind of globally. But I will tell you that our consumer bank which 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 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 -- we plan on continuing to pursue that. We do those strategies that we put out there. 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 not a bank 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 to try to achieve better results. And that's really a principal funding source. I don't know if you want to add anything.

Yeah. No, 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 made a 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 [indiscernible] short run and then like Vince said, our ability to generate deposits, the geography we added not just through acquisition, but through de novo, the bankers we've added, treasury management team is out there getting wins every day. I think that's a differentiator for us. So that helps to fund the loan growth. But in the short run, you have the benefit of the cash and deposit growth continuing as we go forward with adding new accounts, not just what we have on the balance sheet today that could benefit to us for the long run.

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, but we've never been solely.

Great. That was all helpful. Thank you guys for spending time on those and I appreciate the color.

Yeah. Thank you.

[Operator Instructions] The next question is from Russell Gunther with D.A. Davidson. Please go ahead.

Yeah. Hey, good morning guys.

Good morning, Russell.

Just a brief follow-up on the deposit beta conversation. I appreciate your views as to where things could shake out by the end of the year. And likely the bulk of Fed hikes will begin 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?

No. Well, I think we have the reference point that we had in the prepared remarks give you kind of a feel for that.

I remember we haven't sell 24% of the life cycle.

Yeah. So I mean I mean Russell that's one reference point that we have and 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 or quarter and then starts to come down from there. So I think what happened to the beta from there is going to be kind of interesting and for us to all manage, once rates start to come back down, what happens to the betas 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 our year 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.

Okay. That's helpful, Vince. Thank you. And then just another follow-up sort of on the asset quality conversation. I appreciate your thoughts there. Results are really strong, historically a lower beta model at FNB. But as you've moved into growth for the markets and increase the growth profile of the company, has your view changed at all in terms of normalized losses and where you think that range of charge-offs could shake out over the next year or two?

Yes. I would tell you Russell with our philosophy of consistent underwriting through the cycles, which has – we've gone through a number of cycles at this point as you know, I would expect that 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 in the cycle.

Thank you for that, Gary. And then just last one for me is a follow-up on the loan growth discussion. Vince you mentioned kind of a longer term mid- to high single-digits. But just getting back into the change in the growth profile of growth in 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 for that question. I wish I knew the answer. I think as we look at the – 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 customers or consumers, depending on what's happening with the US economy. As things stand today, it looks like based on what I'm reading, seeing all the other banks report, there was kind of pent-up demand for credit. So it kind of – the flood just came in. But I think there's a lot of uncertainty within the customer base about where we're headed. So there's a lot more caution at least I'm sensing that. This is anecdotal. I'm sensing, there's a lot more caution within the customer base about capital investment moving into next year. So my expectation would be that we had great results in the first two quarters from a growth perspective. The pipelines look good. They're lower slightly because we did fund quite a bit. But then I'm trying to think what's going to happen as we move forward, that's really a question about confidence. Confidence within the customer base, how our customers feel particularly the commercial customers both CRE and C&I on – is the environment going to be right for capital investment. They're going to look at that and say that's going to drive whether they're borrowing. We've seen a little bit of benefit from the supply chain issues, quite frankly, some of the customers are trying to deal with inventory shortfall, so they're starting to borrow a little bit. We saw a slight uptick in utilization rates, some of that is having a little extra inventory on hand so they can continue to grow. But if there's supply chain issues, it puts a lid on growth for those companies. So they're trying to manage that. You see commodity pricing it pushed up some of the revolver 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. .:

Yes. It does quite a bit. Thank you, Vince and thank you all for taking my questions.

Thanks.

Thanks, Russell.

The next question is from Brian Martin from Janney. Please go ahead.

Hey, good morning, guys.

Hi, Brian.

Good morning.

And 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 pipeline. 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.

Well, the commercial pipeline that we just went through an enormous funding session. So what ends up happening is the 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. Within 90 days to close and greater than 90 days really with few principal areas. But when you look at it on a year-over-year basis considering the growth we've had which is mostly seasonal 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 big funding.

Right.

It's actually up slightly for commercial. That's the total end-to-end pipeline not the return pipeline.

Got it. Yes. Okay. And then maybe just can you just talk a little bit about the -- just you talked about the betas just kind of the margin outlook given the sensitivity and kind of 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 to have floors out there on the pipeline, but just understanding the margin and sensitivity here just over the next quarter or so.

Yes. I would say, it's higher. I mean margin has a lot of moving parts. We gave guidance on margins cash levels and all the tone. So the dollars of net interest income I think are the most helpful. The floors are really insignificant. I mean, it's under $100 million of money for really not even something we talk about. If you look at 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 that cash continues to get deployed that 16 basis points will go away. So again, directionally that helps the percentage purchase accounting and PPP benefits or three and one basis point respectively going the other way. They're very low at this point and PPP is zero the count price will probably stay around that level. So is that 16 basis point drag goes away benefit to the percentage for sure. Some of the other kind of key drivers that we've talked about in the past is the consumer CDs about 175 to 225 a month maturing from 22 basis points to 43 basis points. And today the month of June where we are we're kind of putting CDs on around 60 65 70 basis points. So that dynamic there. If you look at the portfolio rate on the CDs we were 67 basis points at the end of December bottom to 55 in April and ended June at 63. So still at a very, very low rate, but it definitely kind of bottomed and started to move up a little bit given virtual and municipal side of the house growing adjustments that we've made there. And then I guess the last piece I would comment on is just new loans made during the second quarter. Those came out at 379 second quarter that was 309 last quarter. So that's a nice move up. And it's also all above the portfolio rate. So kind of some of the other key drivers I would comment on.

Got you. Okay. No that's helpful. And maybe just last one just on the fee income side of the house. Maybe just can you just talk about just kind of where the kind of 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.

I would say on the mortgage side, I guess, a couple of comments. We were down $0.5 million from the first quarter. The MSR valuation recovery down by $2.1 million, so the kind of underlying number was up $1.6 million, but the absolute level obviously affected just by truncated mortgage business rates haven't moved up so much. As you look into the next couple of quarters, I mean, our guidance has that six-ish number coming down to a number that more as a four-handle to it just given kind of expected activity here. That's all baked into our guidance. As far as the overall fee income categories, I mean, capital markets is our biggest opportunity I would say.

Absolutely, we have some great wins coming in capital markets, particularly the debt capital markets platform created should help us offset the slowing in the – and we've got a fairly granular set of businesses that provide fee income for the comp. I mean, international banking. They've been doing very while. There's some stuff in the pipeline for them. Capital markets as I mentioned is doing well syndication, while derivatives we bought lower, I think clients are trying to hedge 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 year the interest rate derivatives category. And management has done very well.

Interchange has been really building that.

Yeah. 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. Its interchange fees for us growing on back, I guess with rolling that closer levels.

Yeah, I was going to ask – go ahead.

I'm sorry.

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. Those are consistent in reoccurring revenue stream.

Yeah.

Particularly, the TM business, I mean, as we grow that business and continue to win business there. Its additive and it's an annuity so.

Interchange component is seasonal.

Interchangeable is seasonal, but the other piece is there not, right?

The other thing, I would comment on too, Brian is just looking at our slide. I mean, the wealth management side of it, cost 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 that's there, and that will continue to build and help get into later in the year into next year. So that's another area, where we've been having some mega success.

Got you. Okay. I appreciate all the help guys. Thanks for taking the question.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Vince Delie for any closing remarks.

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 can 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.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.