Good morning, and welcome to the F.N.B. Corporation Q2 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Lisa Constantine with Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to our Q2 earnings call. This conference call of F.N.B. Corporation and the reports filed 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 comparable 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 28, 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 Vincent J. Delie, Jr., Chairman, President, and CEO.
Thank you. Welcome to our Q2 earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerreri, our Chief Credit Officer. The Q2 earnings per share totaled $0.31 on an operating basis, up 19% linked-quarter. F.N.B. continued to execute its strategic plan in the Q2 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 continued to exhibit the benefits of diversification with 5% net growth.
Our expenses remained 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 in the linked-quarter as return on average tangible common equity was 15.5%. We prudently managed capital as our dividend payout ratio was 39%, and we purchased 1.1 million shares in the quarter. In addition to solid performance in the quarter, we commenced the rollout of our new digital eStore kiosks in all F.N.B. 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. 35% or $11.7 billion of our deposits are non-interest bearing and 59% of our loans possess variable or adjustable interest rates. These factors position us well for the anticipated rising rate environment. Vince Calabrese will provide additional insight on key performance drivers and deposit 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 H1 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 5 basis points.
Our mortgage growth is bolstered by the success of our eStore, 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 record consumer origination in our branches this quarter. Our online and mobile eStore 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 F.N.B. branches with new digital eStore kiosks to enhance the consultative environment we provide. The fully interactive design empowers customers with an intuitive digital access to F.N.B.'s full range of products and services.
As a result, customers are able to easily browse and buy products and services as part of the in-branch experience, or continue the process seamlessly online through their mobile device for wherever and when they prefer. The investments we've made in our digital bank have enhanced our scalability and accelerated our growth. Our success is also linked to the expansion of our branch network. Last month, we announced the acquisition of UB Bancorp, a North Carolina-based bank with approximately $1.2 billion in total assets, $1 billion in total deposits, and $670 million in loans. Approximately 40% of the deposits are non-interest bearing. This acquisition increases F.N.B.'s presence in North Carolina to a top 10 deposit share in the state. This region has proven to be a growth engine for F.N.B..
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 F.N.B.. Overall, the second quarter provided solid financial results, and F.N.B. is well positioned in the current macroeconomic environment. One of F.N.B.'s core strengths is our credit performance, which has been proven in the economic downturn in 2008 and again during the recent pandemic. Gary and our team take a proactive approach to managing the bank's credit portfolio and collectively offer decades of experience. I'll now turn the call over to Gary to provide more detail on our asset quality and comment on the economic environment. 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 H2 of the year in a position of strength. We saw lower past due and non-performing levels during the quarter, as well as a decline in rated credits and low loss levels, all of which contributed to a further strengthening of our credit portfolio. We'll first review our GAAP asset quality highlights for the second quarter, and later in my remarks, I'll provide an update on Howard Bank and the recently announced 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 8 basis points over the prior quarter, which was driven by improvements in the commercial portfolio's early-stage past due and non-accrual levels. NPLs and OREO also declined on a linked quarter basis, down 5 basis points to end June at a solid 35 basis points. Net charge-offs for Q2 ended in a net recovery position of $400,000 or minus one basis point annualized. 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 3 basis points 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 challenges. These economic headwinds remain at the forefront of our credit decisioning process to understand and mitigate economic-driven risks and challenges faced by our borrowers.
Many of our commercial banking customers have exercised interest rate hedging options as part of our derivative program, which enables them to reduce rate sensitivity and 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 H2 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 Q3 and full- year of 2022. Overall, the Q2 financials capture the strong performance of F.N.B., with 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 was very strong. When 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 Q3 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 Physicians 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 Q2 , that ratio has transitioned to 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 2015 to December 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. 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, a $3.8 million or 5% increase from last quarter. Capital markets income was $8.5 million, an increase of 20% to solid contributions from swap fees, international banking, syndication, and debt capital markets. Service charges increased to $3.2 million linked quarter, largely due to growth in interchange income and treasury management fees driven by higher customer transactions and new client acquisition. The $1.4 million increase in bank-owned life insurance reflected life insurance claims received during the quarter. Mortgage banking operations income decreased $0.5 million or 8% 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 Q2 sold production compared to 53% in the year ago quarter.
Recorded 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% 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 Q1 2022. Given these adjustments, the rest of the expense fluctuations will be given on an operating basis. Salaries and employee benefits decreased $8.3 million from last quarter's seasonally higher long-term compensation expense of $6.2 million and seasonally higher employer paid payroll taxes. Marketing increased $1.4 million as we expanded our digital advertising and launched campaigns for our Physicians First program.
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 a year-ago quarter's ratio of 56.8%. Excluding PPP income, the 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 to 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. The increased unrealized losses in the AFS portfolio due to rising interest rates should accrete back into capital over time as securities mature or prepay.
Our CET1 regulatory capital ratio declined approximately 25 basis points to 9.7%, primarily due to the significant loan growth in the quarter, as well as putting more cash to work through additions to our securities portfolio. We would expect to manage this ratio higher throughout the remainder of the year. Now let's turn to guidance, which excludes the announced UB 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 and $1.09 billion, with the Q3 between $278-$284 million. Our guidance currently assumes 150 basis points of rate increases for the remainder of the year, including a 75 basis point increase this month. Full- year non-interest income is expected to be between $310 and $320 million, with the Q2 in the high $70 million area. The revised non-interest income guidance is due to slightly lower mortgage banking income and reduced market related fee income.
There is no change to our guidance for non-interest expense on an operating basis with a range of $760 million-$780 million for the full year and $190 million-$195 million for the Q3 . This does not include the one-time expenses associated with acquisitions and branch consolidations. Positive credit quality is expected to continue throughout 2022, with provision guided to $20 million-$40 million. This range does not include the initial $19.1 million in provision related to Howard and is dependent on net loan growth through the remainder of the year. Lastly, the effective tax rate should be between 18% and 19% for the full- year, but is dependent on the level of investment tax credit activity. With that, I will turn the call 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 had many accomplishments already in 2022, which doesn't happen without the hard work and dedication of all of our employees. I would like to offer my sincere gratitude to our employees who make our success possible. With that, I'll turn the call over to the operator for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. 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 composition of the expected guide, assuming much of that is coming from the commercial portfolio, but maybe just talk through the composition.
Yeah. In terms of the loan growth, Timur, you know, we're looking at good participation across all of the books of business. Each business line participated very nicely this quarter. Pipelines continued to remain solid. We're getting good participation across our geographies. From a consumer standpoint, the pipelines, albeit slightly down, that's seasonal in nature, pretty much. You know, the second quarter is really a seasonal trend 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.
You know, 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. 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. From a pricing standpoint, we've seen some slight improvement there.
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 expectation to kind of fund it one for one? Is there incremental liquidity that you're willing to use on the balance sheet in advance of the deal closing later this year? Any color on the funding side would be helpful.
Well, the transaction that we close eventually, if we're able to close the transaction this year, we'll get a benefit because it's principally a deposit play. The deposit portfolio is fairly substantial for the size of the bank. There's tremendous amount of granularity. The cost of funds in that portfolio are, it's low. We bring it in over potentially at 10 basis points, I think, right? It was cost plus-
Approximately 10 plus 31 basis points .
The combine rate is approximately 41 basis points. I think that that'll be additive. That will help us. You know, if you look at where we are today, we're sitting at, you know, an 84% loan- to- deposit ratio. We have, 35% demand 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, you know, lending and achieving good returns in that space, you know, particularly commercial lending in the H2 of the year. I think we're in a really good place.
Okay, great.
From a liquidity perspective, funding perspective, we're not concerned.
I would just add, I mean, at the end of June, we had $1.6 billion of kind of the excess cash still on the balance sheet. That was $3.4 billion at the end of the Q1 . We obviously use that to fund the loan growth. It's all on a spot basis. There's still ample liquidity just sitting right there for us.
Yeah. We continue to win depository relationships, particularly in the Southeast. That's starting to accelerate for us, larger treasury management clients in the commercial segment. I would expect that to continue.
Okay. Thank you. 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.
Sure. During the Q2 , we invested $768 million into the portfolio. It's about $400 million higher than the cash flows to take advantage of the rate environment that was there. W e reinvested at an average rate of 3.27% this quarter. That was 1.90% last quarter. A significant move up there. It's well above the roll-off rate of 1.85%. Nice benefit there. If you look ahead, I mean, duration-wise, w e continue to be on the shorter end. We've been around four. Our estimated 12-month cash flow is just under $1 billion. We'll be coming off at around 1.91%. Putting stuff on at 3.27%. Today, we're probably putting stuff on this month more like 3.50%.
Okay, great. Thank you for the color. I appreciate it.
Yes.
The next question will be from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, everyone. Thanks for taking my questions.
Good morning.
Yeah. I thought your comments on deposit betas were very interesting in terms of everything that could impact this cycle relative to prior cycles. I'm not sure maybe I missed it, but could you kind of just indicate where you think that they actually may shake out or what your best guess is or what you're budgeting for, given all those factors that you mentioned?
Sure. O bviously the level of liquidity in the banking system is still a consideration to how this all is going to play out. A t this point, I would add that we've no pressure at all on the retail deposit side. We've really been having conversations with municipal commercial customers that have started to shift funds 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 beta is 9% on total deposits, 15% on interest-bearing deposits as of the end of June. What's baked into our guidance, based on what we know today, 22% for total deposits and 33% for interest-bearing deposits by the end of the year will be the cumulative beta at that point.
Okay, great. Appreciate that. My other question is just around share repurchases. You know, you repurchased shares this quarter. Capital has been stable. O bviously you have the deal coming in the Q4 , 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 if we continue to target a CET1 ratio around 10% than the level we've been discussing. It did come down about 25 basis points this quarter, just given strong loan growth and increased investments that I mentioned, take advantage of the higher yields. Those are coming out of cash as a 0% risk weighting. You have kind of that dynamic happening during the quarter. As we look ahead and have 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, putting down the dividend payout ratio and our overall asset sensitive positioning. Regarding buybacks, it's kind of the same we talked about. I mean, our first and best use of capital is organic loan growth.
The level of buybacks will be dependent on the growth we see for the rest of the year. We'll be opportunistic as we have been in the past. We did buy 1,001 shares this quarter and opportunities make sense. Keeping an eye on the loan growth. Convert back. O verall we're going to just commit it to managing capital in a way that's fully aligned with shareholder interest. Just a constant evaluation process.
Okay, great. All right. That's all I have. I appreciate the answers.
Thank you.
The next question is from Michael Perito with KBW. Please go ahead.
Hey, good morning, guys.
Morning.
I wanted to just kind of start with a big picture question, and you guys kind of talked around it in a few different ways in your prepared remarks and some of the questions that have been asked already. Just like this, I guess balancing this environment with, the kind of uncertainty in the back half of the year versus what seems like on the ground today, like pretty good momentum from a loan growth standpoint, customer growth standpoint. You know, I guess with your diverse footprint, how do you guys think about, balancing those two things?
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 pursue enables us to be more selective from a credit perspective. That was the thesis that we laid out from the very beginning. A s 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. T here are competitors, they have, you know, they're well-entrenched here. W hile we were able to grow fairly significantly in a short timeframe, you get to a point where you hit saturation, for good quality credits. O ur philosophy was to stay within a tight underwriting range so that we weren't inconsistent through cycles. We did it the last time.
We, you know, we put together a number of linked quarters where we had loan growth throughout the last economic cycle. W e were an outlier. 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. 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 uses the analytics side of it.
It is very sophisticated. We use all of that to kind of guide us. 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 had less than $300 million in exposure. 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 looked at all of our exposures relative to capital and, you know, made adjustments. D id it in a way that we weren't exiting customers left and right. We just decided we were gonna 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 gonna impact growth and EBITDA and margin growth, particularly if the company has more leverage? We look at that. We look at interest rate sensitivity. You know, how will rising rates impact certain portfolios? We look at changes that are going on from a commodity pricing perspective and how that'll impact customers. We pick what we think are great management teams to lend to.I t sounds pretty basic, but, if you stick to that and you don't grab for growth, we don't. We manage, pipelines, and we manage opportunities.
We're not necessarily managing growth and portfolios just to grow. 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 enough to sustain us and to achieve our principal investment goals. T hat's the strategy. In the markets that we cover, we see, fairly substantial, you know, population growth in the Southeast. T here's a lot of activity in the Mid-Atlantic region, particularly in D.C., in portions of Maryland. W e have Pittsburgh and Cleveland that have bigger industrial bases where we see more opportunities on the C&I side. 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 C&I opportunities there more and more because of the changes that are going on there. Anyway, that's how we manage the risk. I can't say that I'm looking at a single. We stay out of. We're not an equity sponsor lender. We don't just follow private equity irrespective of what's going on. W e try to stay out of those riskier portfolios. We've sold portfolios even at times when, we could have used the earning assets on the balance sheet because we were concerned about the risk. 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.
Great.
Hope that helped.
No, it is. Thanks for expanding on it. I appreciate that. Just secondly for me, I mean, you guys are kind of in this, enviable position here where, you know, 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-to-deposit and were a little bit quicker to deploy that cash elsewhere, whether it was loans or bonds. I guess longer term, right, I mean, it's hard to be competitive from a profitability standpoint with so much, with an 80% loan-to-deposit, 7% of earning assets in cash, right? I mean, how do you guys think about that dynamic?
I mean, obviously, those are good things to have with the uncertain environment. Presumably at some point they need to normalize, right, the ROE that, I think you guys can. 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, you know, what's happening kind of globally. I will tell you that, our consumer bank, what differentiates us from many of our peers is they're principally commercial banks. It's much, much harder to grow deposits at certain points in the cycle when you're relying solely on commercial depositors. 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. The betas in those categories tend to be more favorable to the bank.
I think that's, we plan on continuing to pursue that, you know, pursue those strategies that we put out there. With our investment in technology, the eStore, the number of deposit accounts that we're opening online has gone up fairly significantly over time. Our scalability in that consumer segment has actually improved, right? I think we're in a good position to grow deposits, which I think is how a bank should be measured. You know, good banks can grow their deposit base in a favorable way. That's what makes them great. You know, we focus on it, try to achieve better results and, that's really a principal funding source. 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 the level reached at approximately 97 basis points was kind of our high-water mark.
Yeah
For loan- to- deposit ratio. There's a lot of room between here and there. I think with the deployment of the cash in the short run, and then like Vince said, our ability to generate deposits, the geography we've added, not just through acquisition, but through de novo, the bankers we've added. Treasury management team is out there getting wins every day. I think that differentiator for us. That helps to fund the loan growth. In the short run, you have the benefit of the cash, and the deposit growth, continuing as we go forward with adding new accounts. It's not just what we have on the balance sheet toda that could benefit us, for the long run.
We've never been dependent heavily on a wholesale fund. 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 dependent on it.
Great. That was all helpful. Thank you guys for spending time on those, and I appreciate the color.
Yes, thank you.
Once again, if you'd like to ask a question, please press star then one. The next question is from Russell Gunther with D.A. Davidson. Please go ahead.
Yeah. Hey, good morning, guys.
Good morning, Russell.
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. Likely, you know, the bulk of Fed hikes will be in by that time. 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 points that we had from prepared remarks to give you kind of a feel for that. I remember because it really happened then.
24% the last cycle.
Yeah. I mean.
Right.
I mean, Russell, that's one reference point that we have and, you know, kind of getting to what we're suggesting into our guidance for the end of the year. Depending on who you believe, I mean, the Fed kind of peaks Q3 and then starts to come down from there. I think what happens to the beta from there is going to be kind of interesting and for us to all manage is once rates start to come back down, what happens to the betas relative, given where deposit rates are at the time, relative to where kind of the Fed has moved rates to. Our job is to balance it and manage it effectively.
I think that your endpoint 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.
Thanks. No, that's helpful, Vince. Thank you. Just another follow-up sort of on the asset quality conversation. Appreciate your thoughts there. Results are really strong historically, a lower beta model at F.N.B.. As you've moved in to grow through 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?
Yeah. I would tell you, Russell, with our philosophy of consistent underwriting through the cycles, which we've gone through a number of cycles at this point . I would expect that our charge-offs and with the diversity of the book and the amount of credit opportunities that we're seeing and choosing the highest quality opportunities in that list, I would expect to see our normalized charge-offs be lower than they were in the past. W e've taken some positions to move some positions from a balance sheet standpoint. With the consistency that we've seen and the high-quality opportunities we've seen, I would expect them to be slightly lower through the cycle.
Thank you for that, Gary. 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 with growth of your markets, trying to balance that against some of the macro headwinds outlined earlier. I s a high single digit result something that you think is sustainable in the near term, just even beyond the back half of this year, just given that diversification and growth of your markets? Thank you.
That's a question. I wish I knew the answer. I think honestly, as we look into next year, it's going to be, I think, a little more challenging. I'm not sure how much capital will be deployed by customers or consumers, you know, depending on what's happening with the U.S. economy. You know, 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. M y expectation would be that, we had great results the first two quarters from a growth perspective. The pipelines look good. T hey're lower slightly because we did fund for quite a bit. I'm trying to think what's gonna happen as we move forward. T hat's really a question about confidence.C onfidence within the customer base, how our customers feel, particularly the commercial customers, you know, both CRE and C&I, is the environment gonna be right for capital investment? I mean, they're gonna look at that and say, that's gonna drive whether they borrow.
We've seen a little bit of benefit from, the supply chain issues, quite frankly. S ome of the customers are trying to deal with inventory shortfalls, so they're starting to borrow a little bit. We saw a slight uptick in utilization rates. Some of that is, you know, having a little extra inventory on hand so they can continue to grow, right? Because if there's supply chain issues, it puts a lid on growth for those companies. They're trying to manage that. You see, commodity pricing has pushed up some of the revolvers a little bit because the cost of raw materials has gone up pretty dramatically for most industries.
All of that's gonna 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's a big question mark based upon how we're feeling later in the year, collectively. I hope that helps. You know, that's. We just manage it, you know, truthfully, we manage it credit by credit, group by group. You know, we have prospect lists and complete calling activity, and we just try to, you know, be there for the clients so when the capital opportunity comes up, we're one of the considered banks and try to deliver. Hope that helps.
Yeah, it does quite a bit. Thank you, Vince, and thank you all for taking my questions.
Thanks, Russell.
The next question is from Brian Martin from Janney. Please go ahead.
Hey, good morning, guys.
Brian, good morning.
Maybe can you just touch on it. I thought maybe I missed it earlier in your earlier comments, but just about the commercial pipelines. I know you said the consumer were down a little bit, and you just mentioned, Vince, now maybe a little bit more. It sounds like the commercial pipelines are down a little bit. I don't know if that's Gary or Vince, but just kind of what you're seeing there.
Well, the commercial pipelines, we just went through an enormous funding session. What ends up happening is the short pipeline converts the 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 the two principal areas. You know, 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. Let me be clear. There's still opportunities within the pipeline.
Right.
It's just that you cleared out the 90-day bucket with big fundings.
Right.
The commercial pipeline is actually up a little.
Up. It's actually up slightly.
For commercial.
that, you know, that's the total end-to-end pipeline, not the-
Got it.
short-term pipeline.
Yeah.
Okay. 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 the rate increases we're seeing here. Just kind of how you're thinking about, you know, the near term, kind of what's repricing. Just remind us. It's I thought that there was not much that had floors out there on the pipeline, but just understanding the margin and sensitivity here just over the next quarter or so.
Yeah. I would say higher. I mean, the market has a lot of moving parts. You know, we give guidance on margins due to some cash levels and all of the competing fees. So, you know, the dollars in net interest income, I think are the most helpful. The floors are really insignificant. I mean, it's under $100 million of sitting the money for us. It's really not even something to 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.
As that cash continues to get deployed, that 16 basis points will go away. Again, directionally, that helps the percentage. The purchase accounting and PPP fee benefits are 3 basis points and 1 basis point respectively. It's going the other way. They're very low at this point, and PPP fee will go to zero, and the purchase accounting will probably stay around that level. As that 16 basis point drag goes away, the benefit to the percentage for sure. You know, some of the other kind of key drivers that, you know, we've talked about in the past is, you know, the consumer CDs, about 175-225 a month are maturing , from 22 basis points to 43 basis points.
Today, look at the month of June and where we are, we're kind of putting CDs on around 60 basis points and 70 basis points. T here's that dynamic there rolling through. If you look at the portfolio rate on the CDs, you know, we were 67 basis points at the end of December, bottomed at 55 basis points in April and ended June at 63 basis points. S till at a very low rate, but it's definitely kind of bottomed and started to move up a little bit given the commercial and municipal side of the house with some pricing adjustments that we've made there. I guess the last piece I would comment is just new loans made during the second quarter. Those came out at 3.79% second quarter. That was 3.09% last quarter.
You know, that's a nice move up. It's also, all about the portfolio rate. Kind of some of the other key drivers I would comment on.
Gotcha. Okay. No, that's helpful. Maybe just last one, just on the, on the fee income side of the house, maybe just can you just talk about, just kind of where the, you know, 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 comments. You know, we're 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 current state of the mortgage business rates kind of moved up so much. If you look into the next couple of quarters, I mean, our guidance has that six-ish number coming down to a number that more has a four handle to it, just given kind of expected activity from 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 that we've created should help us offset, you know, the slowing in the local system. We've got a fairly granular set of businesses that provide fee income for the company. I mean, international banking has been doing pretty well. There's some stuff in the pipeline for them. Capital markets, as I mentioned, is doing well. Syndications, derivatives. Well, derivatives we bought slower, I think. Clients are trying to hedge, you know, the future interest rate risk. That came in a little better than we expected, and I would expect there to be activity throughout the year in the interest rate derivatives category.
Treasury management.
Treasury management's done very well.
Interchange has been really building nicely.
Yeah, interchange actually moved up. If you look at the service fees, most of the service fee growth is not overdrafts. It's not those traditional categories. It's interchange fees for us, growing, coming back, I guess. It's growing back from low levels.
Yeah.
And that's-
Yeah, I was going to ask.
Go ahead.
Go ahead. I'm sorry.
No, I was just gonna 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 pretty consistent in recurring revenue stream.
Yeah.
Particularly the TM business. I mean, as we grow that business and continue to win business there, it's additive and it's an annuity.
The interchange component is seasonal, right? That's kind of.
The interchange will be seasonal, but the other pieces of it are 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, the trust income this quarter has impacts just on market valuations, on assets under management. Underneath, you know, we have record organic sales activity occurring in the trust business. T hat's there, and that'll continue to build and help get into later in the year into next year. That's another area where we've been having some really good success.
Gotcha. Okay. I appreciate all the help, guys. Thanks for taking the question.
Okay. Thank you.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Vince 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. Really appreciate the effort, and you know, I'm very confident we're going to do well throughout this cycle and throughout the rest of the year because of the quality of the people that we have. 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.