F.N.B. - Q1 2023
April 20, 2023
Transcript
Operator (participant)
Good morning, welcome to the F.N.B. Corporation Q1 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing Star, then 0 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please note this event is being recorded. I would now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.
Lisa Hajdu (Manager of Investor Relations)
Thank you. Good morning and welcome to our earnings call. This conference call of F.N.B. Corporation and the report it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as alternative for, our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP 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 Friday, April 29th. The webcast link will be posted under the About Us Investor Relations section of our corporate website.
I will now turn the call over to Vince Delie, Chairman, President and CEO.
Vince Delie (Chairman, President, and CEO)
Thank you. Welcome to our Q1 earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. F.N.B. reported Q1 net income available to common stockholders of $144.5 million or $0.40 per diluted common share. On an operating basis, EPS grew 54% over the Q1 of 2022. Operating free provision net revenue increased 68% from the year ago quarter as we managed a positive operating leverage of 21%. The overall success of F.N.B.'s financial performance was due to the consistent execution of our previously stated strategic initiatives. For example, we set out to diversify income and rely on various sources to maintain performance. This quarter, F.N.B. reported record wealth management revenue of $18 million on a linked quarter basis, contributing to our stable non-interest income.
We also strive to be our customers' primary operating bank. Through our deep customer relationships and granular deposit base, we were able to maintain stable average deposit balances. Our philosophy of maintaining consistent and prudent underwriting standards regardless of the macroeconomic environment contributed to FNB growing average loans 3.6% from the quarter without compromising on asset quality. The Q1 also had positive momentum on several key performance metrics, including return on tangible common equity of 20%, return on average assets of 1.4%, and a tangible common equity ratio of 7.5%, one of the highest levels in company history.
We are pleased with this quarter's results and believe it validates the aforementioned execution of our strategy, especially our conservative and diligent balance sheet management with ample capital and liquidity to withstand the adversity in the industry in a more challenging economic environment. The recent bank failures, however idiosyncratic in nature, have placed a spotlight on the importance of liquidity in maintaining a diversified and granular deposit base, conservative and prudent balance sheet management, solid capital levels, and sound risk management policies and governance. These practices have always been integral to F.N.B.'s long-term strategy and are ingrained in our enterprise risk management program, which includes regular liquidity stress test analysis, capital stress testing, CECL reserve model analysis, and diligent proactive credit monitoring. As I previously mentioned on multiple calls, I mean, we foster close relationships with our customers and remain focused on being their primary operating bank.
In addition to prioritizing high-touch service, we have made strategic investments in our digital technology, treasury management platform, and payment solution capabilities, which enables our customer privacy. The Q1 deposit levels through the industry disruption are a testament to the success of our focus on growing client relationships, with deposits ending the quarter at $34.2 billion, a slight decline of 1.7% from the prior quarter, outperforming the HA deposit data for small and large banks. Between March eighth, when the industry volatility began and quarter end, our deposit balances were essentially flat, declining 0.7%, primarily due to seasonal outflows from normal wholesale and retail customer activity. Another strength is the diversity of our deposit base throughout the different customer segments, with consumer account balances comprising the largest segment of total deposits at 41%.
The consumer segment is comprised of approximately 1 million accounts, with the median consumer deposit balance at quarter end around $5,000. Additionally, since March eighth, we experienced a net increase in the number of accounts across all customer segments. Positioning FNB as a benefactor as deposit inflows are restored to normal levels and customers diversify funds between banks. Because of the granularity in our deposit base, FNB ended the quarter with approximately 76% of deposits either insured by the FDIC or collateralized, which exceeds the peer median for the 50 banks in the KBW Bank Index it mirror edges. If necessary, we also have available liquidity to fund up to 170% of our uninsured and non-collateralized deposit balances as of March 31, placing FNB in a very strong liquidity position.
F.N.B.'s investment portfolio philosophy is also conservative by nature with respect to duration and risk. We manage to an average duration of between 3-5 years and have historically maintained a fairly even split between Available-for-Sale and Held-to-Maturity. At the onset of the current banking industry disruption, F.N.B. management activated our contingency funding plan. Our team's response was swift in working diligently over the weekend to ensure that our board of directors were briefed, employees were reassured of our stability, and customer-facing personnel began proactive client outreach with talking points regarding the strength of our balance sheet, including F.N.B.'s capital and liquidity position on a relative and outright basis. In addition, we bolstered our liquidity position by increasing cash on the balance sheet by nearly $1 billion.
Through the financial crisis, pandemic, and now the banking industry disruption, F.N.B. has earned our customers' trust. We promise to uphold that trust as we have positioned the company to outperform the industry in a wide array of potential economic and industry scenarios. Credit continues to remain as one of our strengths. I am very pleased to once again report a solid credit position with low delinquency at 60 basis. I will now turn the call over to Gary to give more details on our asset quality and our consistent management of credit risk. Gary?
Gary L. Guerrieri (CCO)
Thank you, Vince, and good morning, everyone. We ended the quarter with our credit portfolio well-positioned and our asset quality metrics remaining near historically low levels. Our performance for the period reflects total delinquency that ended the quarter at 60 basis points, NPLs and OREO at 38 basis points, and net charge-offs at 18 basis points. Criticized loans were up moderately at 19 basis points quarter-over-quarter, although down 55 basis points year-over-year and still at historically low levels. I will cover these GAAP asset quality highlights for the quarter in more detail, followed by some insight into our credit strategy we use to manage the loan portfolio throughout economic cycles. Let's now walk through our credit results. Total delinquency declined 11 basis points in the quarter, maintaining the historically low delinquency levels seen in previous quarters.
NPLs and OREO were down 1 basis point compared to the prior quarter, with 55% of our NPLs in a contractually current payment status. Net charge-offs for the quarter totaled $13.2 million or 18 basis points on an annualized basis, with 11 basis points reflecting the use of previously established specific reserves. Total provision expense for the quarter stood at $14.9 million, providing for loan growth and charge-offs that did not have a previously established specific reserve. CECL-related model builds were moderate at approximately $4 million. Our ending funded reserve increased $1.7 million in the quarter and stands at $403 million or a solid 1.32% of loans, reflecting our strong position relative to our peers.
When including acquired unamortized loan discounts, our reserve stands at 1.49%, and our NPL coverage position remains strong at 356%. We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced, well-positioned portfolio throughout economic cycles. We proactively review and stress test portfolios on an ongoing basis, including in the current quarter, where we performed an in-depth review of commercial real estate loans maturing in 2023 and 2024. We were pleased with the outcome of that exercise and did not have any risk rating changes, which was not unexpected as we maintain a diversified commercial real estate portfolio backed by strong sponsors and low LTVs. Regarding the office portfolio, delinquency remains very low at 27 basis points and criticized loans are below 10%.
Our top 25 office exposures average $28 million, and 43% of the loans are less than $5 million. We have and will continue to aggressively manage this portfolio on a loan-by-loan basis as part of the in-depth reviews we regularly perform. In closing, we had a successful quarter marked by the strength and favorable positioning of our credit portfolio as we continue to generate diversified loan growth in attractive markets. We closely monitor macroeconomic trends and the individual markets in our footprint, and we'll continue to manage risk proactively and aggressively as part of our core credit philosophy, which has served us well in softer economic times. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Vincent J. Calabrese (CFO)
Thanks, Gerry. Good morning, everyone. Today, I will focus on the Q1 financial results, provide some color on our balance sheet management activities during the banking disruption in March, and offer guidance updates for the remainder of 2023. Q1 net income available to common shareholders totaled $144.5 million, or $0.40 per share, with record revenue contributions, seasonally higher expenses, and continued solid asset quality performance. Total earning assets reached an all-time high, ending the quarter at $39.3 billion, with a $352 million quarterly increase driven by loans and leases growing $418 million, or 5.6% annualized. Commercial loans increased $222 million, or 4.7% annualized, driven by the continued success of our strategy to grow high-quality loans across our diverse geographic footprint.
While commercial production was slightly lighter than the Q4, reflecting normal seasonality, attrition improved and loan pipelines increased sequentially after the robust loan production last quarter. Consumer loans increased $196 million linked quarter, or 7.3% annualized, as growth in residential mortgages of $292 million was partially offset by decreases in average direct home equity installment loan balances, consumer lines of credit, and indirect auto loans. Given the high-rate environment, organic growth in residential mortgage reflects customers' continued preference for adjustable rate mortgages, as well as the continued success of our Physicians First mortgage program, both of which we currently keep in portfolio. Investment portfolio remained stable at $7.3 billion, with 46% classified as available for sale.
When including the fair value marks in our AFS and HTM portfolios, our CET1 ratio is above the peer median calculated on the same basis, and we remain well capitalized. Duration of our securities portfolio at March 31st is 4.5 years, and inclusive of our cash position is 3.9 years. Total deposits ended the quarter at $34.2 billion. The decrease of $580 million linked quarter, or 1.7%, largely due to normal Q1 seasonality. In fact, since March 8th, deposits were relatively flat, with a slight 0.7% decline due to normal outflows from wholesale and retail customer activity. Vince mentioned earlier our median consumer deposit balance was $5,000 at the end of March.
In looking at the total deposit portfolio, our average account balance is approximately $30,000, which is well below Silicon Valley Bank's average of $1.1 million and Signature Bank's $508,000. We are also lower than our peer median as of year-end. The deposit mix did shift this quarter, with time deposits increasing $1.1 billion as customers move funds out of money market accounts to take advantage of higher CD rates. As of March 31st, our mix of non-interest-bearing deposits remained strong at 33% of total deposits, down slightly from 34% at year-end. The loan-to-deposit ratio remained at a comfortable level, ending the quarter below 90%.
In light of the banking industry disruption, we decided to bolster our on-balance sheet liquidity position by increasing short- and long-term borrowings by about $1 billion in the aggregate, bringing our excess cash position to $1.3 billion at quarter end. Looking at the income statement, record quarterly revenue of $416 million was driven by net interest income totaling $337 million, a linked quarter increase of $1.8 million, or 0.5%. The net interest margin expanded 3 basis points as the earning asset yield increased 39 basis points, with loan yields up 42 basis points, while the cost of funds increased 38 basis points. Certainly, managing deposit costs in this rate environment continues to be a significant focus.
Spot interest-bearing deposit costs ended the quarter at 171, with the quarterly average coming in at 150, reflecting the ongoing diligent work by our team. Total cumulative deposit rates ended the quarter at 21.8%, within our prior guidance of 22%. Turning to non-interest income and expense, non-interest income totaled $79.4 million, a slight decrease of 1.5% from the Q4 of last year. Wealth management reached a record $18 million, with a quarterly increase of $2.4 million. Mostly split between securities commissions and fees driven by strong annuity revenue and trust services primarily from strong organic growth seasonality.
Higher production and contingent revenues led to a $30.3 million or 73% linked quarter increase in insurance commissions and fees, while mortgage banking operations income increased $2.1 million linked quarter, reflecting a 5% increase in sold mortgage volume and improved gain on sale margins. Capital markets income decreased $3.2 million due to reduced syndications and swap fees from very strong levels in the Q4 of 2022. Service charges in the quarter decreased $2.9 million, largely reflecting the expected decline in overdraft and non-sufficient fund charges due to our previously announced fee program changes given the current competitive environment.
Operating non-interest expense totaled $218 million, an 11% increase from the Q4, largely reflecting normal seasonality, combined with the addition of the Union expense base for a full quarter and the impact of the previously announced increase in the FDIC insurance assessment rate. Salaries and employee benefits increased $17 million, of which approximately $12 million was related to normal seasonal compensation activity, including $6.7 million of long-term compensation and seasonally higher employer-paid payroll taxes. The remaining $5 million increase is primarily from reduced salary deferrals given lower loan origination volumes and the addition of the acquired Union expense base. Even with these expense items, the efficiency ratio remained at a favorable level of 50.6%. Our capital ratios ended the quarter at levels that are expected to be at or above peer median.
Tangible book value per common share was $8.66 at March 31st, an increase of $0.39 per share or 4.7% from December 31st, largely from the higher level of earnings and the decreased impact of AOCI, which reduced to current quarter end tangible book value by $0.87 per share compared to $0.99 at year-end. As Vince mentioned, our TCE ratio is one of the highest in company history at 7.5%. To demonstrate the strength of this level amidst the industry disruption, TCE adjusted for our HTM unrealized losses equaled 6.9%, which is 50 basis points higher than our peer median using reported year-end levels. Let's now look at the 2023 financial objectives, starting with the balance sheet.
On a full-year spot basis, we maintained our previous guide for loans to increase mid-single digits year-over-year. Total deposits are projected to end 2023 at a similar level as of December 31, 2022 spot balances, although we do expect a continued shift in the deposit mix given the current rate environment. Full year Net Interest Income is expected to be between $1.315 billion and $1.365 billion, with the Q2 between $325 million-$335 million. Our guidance currently assumes a 25 basis point rate hike in May, then flat for the remainder of the year. The modest decrease in guidance from last quarter is largely related to our expectation for higher deposit betas given the current banking industry environment.
If rates were to come down this year, as the forward curve currently is projecting, that could lead to modest upside to our NII forecast. Full year non-interest income is expected to be between $305 million and $320 million, with a slight upward revision reflecting our Q1 beat relative to our previous guidance. Q2 is expected to be in the mid $70 million range with continued benefits from the diversified revenue strategy. Full year guidance for non-interest expense on an operating basis is $835 million-$855 million. The adjustment is to account for the higher Q1 expense levels, but the remaining 9 months are expected to be consistent with our prior guidance. Q2 non-interest expense is expected to be between $205 million-$210 million.
Full year provision guidance remains $65 million-$85 million and is dependent on net loan growth, potential CECL model related bills from a softer macroeconomic environment. The effective tax rate should be between 20% and 21% for the full year, which does not include any investment tax credit activity that may occur. I will turn the call back to Vince.
Vince Delie (Chairman, President, and CEO)
Our conservative business practices have positioned F.N.B. to sustain solid performance during turbulence in our industry. We ended the Q1 with a strong capital position and stable deposit base and are confident that we are poised to capitalize on this foundation in the months to come. F.N.B.'s financial performance is directly correlated to maintaining our superior culture. We are proud of our differentiated culture and the awards we have received for our industry leadership in employee and client experiences. In 2023, F.N.B. was selected as a Celent Model Bank for omni-channel retail delivery for our proprietary eStore. One of America's best banks by Forbes. Top Workplaces USA by Energage. A Greenwich Excellence Award winner for client service for the 12th consecutive year.
We also continue to be honored for our commitment to diversity and inclusion as one of America's greatest workplaces for LGBTQ Plus, a Best of the Best company by three diversity publications, and a Women's Choice Award winner for women and millennial women. FNB earned these awards through the hard work and dedication of our employees who share our commitment to our values and mission. Thank you to our team for cultivating an environment that succeeds at creating shareholder value while respecting one another and winning together.
Operator (participant)
We will now be-
Vince Delie (Chairman, President, and CEO)
Mistake I made up here.
Operator (participant)
We will now begin the question and answer session.
Lisa Hajdu (Manager of Investor Relations)
I think it's because you're human and not an AI machine.
Vince Delie (Chairman, President, and CEO)
Be an AI machine.
Lisa Hajdu (Manager of Investor Relations)
All right. That one's great. Is there anything you would like to re-record?
Operator (participant)
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. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Frank Schiraldi of Piper Sandler. Please go ahead.
Frank Schiraldi (Managing Director, Senior Research Analyst)
Morning. Vince, you mentioned the negative carry, or you mentioned the additional liquidity on the balance sheet. Just wondering what the negative carry is on that, and is that a primary driver of the lower NII guide or is it more the mix shift? I guess you now have accelerating a bit into time, it seems.
Vincent J. Calabrese (CFO)
The negative carry, Frank, is really like 10, maybe 10, 15 basis points. It's not that significant because, we're earning our excess cash position. We're still at $1.3 billion. We're earning 4.90% on that. I think the borrowers we took down were around 40 or so. It's not a big negative carry. It's kind of just a mix shift and stuff continuing to roll, given current deposit rates.
Frank Schiraldi (Managing Director, Senior Research Analyst)
Okay. I'm just kind of curious, I don't know if you have this, granularity there in front of you, but, as you think about the mix shift that's baked into your guide, what does that sort of assume in terms of non-interest-bearing levels as a percentage of total deposits by the end of the year?
Vincent J. Calabrese (CFO)
It comes down slightly between now and the end of the year. It's not significant. As you know, that's a big focus in the company. Our account acquisition strategy and lending strategy is always revolved around bringing in the operating accounts. You know, those continued efforts continue to bring in new accounts. During this disruption period, we've actually net added accounts. As a percentage, we talk about customer primacy. You know, what we mean by that is we're the principal operating bank or we're the disbursement bank for consumers and businesses. If you look at the granularity in the consumer book, that we mentioned on the call in the prepared comments.
Frank Schiraldi (Managing Director, Senior Research Analyst)
Right.
Vince Delie (Chairman, President, and CEO)
There's, that's pretty sticky. You know, there's not a lot of places to go to earn more on $5,000. I don't know that it is impactful enough for people to move their money around. That tends to be their principal operating account for us. You know, they're going to keep cash in there to cover items that are presented for payment, and it's where, direct deposit is credited to. On the business side, as we've said historically, if you look at the concentration of 17% of the deposits that we have in the commercial segment, a good bit of that is tied directly to services.
You know, compensating balances where you gain an earnings credit that sits in a non-interest bearing bucket and again, tends to be sticky because customers prefer using balances to pay for services versus paying cash fees. You know, that's all embedded into that non-interest DDA category. We feel pretty good about, having a good solid base and at a minimum, we feel we'll outperform others who may be, relying on more transaction, more transient balances. I think it shows basically, if you look back historically, you can see it in our performance relative to other banks in that category.
Frank Schiraldi (Managing Director, Senior Research Analyst)
Okay. All right. I appreciate that. Yeah. Then just lastly, as a follow-up, just a question for Gary on credit. You know, in the, in your slide deck, you talk about the average LTVs. I think it's in the office book, specifically in the low sixties. I'm guessing, I assume that's largely value at origination of these loans. Just wondering, as you've gone through this in-depth portfolio review, what that's sort of telling you, if you can share what that's telling you about where, value has moved in some of your markets in terms of the underlying property, in sort of percentage terms? Thanks.
Gary L. Guerrieri (CCO)
We've updated various appraisals, Frank, on properties in that space. We've seen reductions, generally speaking, in the 15% to high teen range into the 20s.
We did have one that had some leasing issues that got into the 30s. But so far at this point, that's the range that we have been experiencing. That's pretty much been across the board with the ones that we've had to update.
Frank Schiraldi (Managing Director, Senior Research Analyst)
Okay, great. I appreciate that. Thanks.
Vincent J. Calabrese (CFO)
Frank, just to clarify on the negative carry question. I forgot we had some portion of what we took down with two-year money at, like, 4.40%. kind of all in the additional liquidity, which really had no negative carry kind of all in on a flat basis.
Frank Schiraldi (Managing Director, Senior Research Analyst)
Okay. Thank you.
Vincent J. Calabrese (CFO)
Thanks.
Operator (participant)
The next question comes from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo (VP and Equity Research Analyst)
Thanks. Good morning, everyone. Maybe first, on the operating expense guidance, if you could just give me an idea of what drove the overall outlook higher given, I guess my overarching thought that with the outlook down that should drive a decline in incentive compensation.
Vincent J. Calabrese (CFO)
Yeah, I can comment on that, Danny. I mean, expenses for the quarter, on an operating basis came in at $218 million. Our range from January was $210 million-$215 million. You know, $3 million above the high end of that range. Half of that variance was just lower deferrals on loan origination costs due to lower consumer loan volumes than what we had planned. That was kind of half of that $3 million difference. The rest of it was really a handful of kind of one-time items. If you look at our guidance for the Q2, $205 million-$210 million, you that compares to a $218 million figure. That's consistent with our original guidance that we gave in January.
In fact, the 9 months, as I mentioned in my prepared remarks, is unchanged from what we had said before. It's really just a combination of lower FAS 91 deferrals, half of it, and then some one-time items. As we move forward, depending on how the year plays out, there is commission incentive comp is variable, right? Depending on how much revenue we create, that'll be up or down. That is a swing item or a variable expense that will vary depending on when it's ultimately. It's really just it was $3 million above the high end of the range, so it's not that significant. The guidance forward, we'll manage expenses diligently as we always have.
Daniel Tamayo (VP and Equity Research Analyst)
I appreciate that. Sorry, I missed the your comment in the prepared remarks on the on the stable from prior guidance the rest of the year, but thanks for that. Then, and then maybe a couple for Gary here on credit first. The office portfolio, appreciate all the incremental detail there. Just wondering if you had a breakdown of, I know you mentioned it's spread across the footprint, but what properties are in, what cities or urban versus suburban? Any way that we could get more detail into kind of the type of city that those offices are in?
Gary L. Guerrieri (CCO)
Well, I mean, the majority of the larger office facilities are in the metro cities, Daniel. You know, as mentioned in the remarks, I mean, 43%, almost half of that book's under $5 million. They're kind of scattered in suburban markets for the most part. In terms of those appraisals, we had one with leasing issues in Pittsburgh that came down. We had one in the Carolinas that came down. You know, it's pretty much across the board.
Vince Delie (Chairman, President, and CEO)
Gary, just to clarify, like you said, the vast majority of our CRE exposure is suburban in nature. I know you said metro markets, but we tend not to finance on a long-term basis large office facilities other than our own. I mean, we don't, we're not in that business, right?
Gary L. Guerrieri (CCO)
No. With the average being $28 million, I mean, that kind of speaks to the top 25 at $28 million speaks to.
Vince Delie (Chairman, President, and CEO)
Right.
Daniel Tamayo (VP and Equity Research Analyst)
You know, the type of the type of properties and locations. We have, very little urban, big city center type of office properties. Very little.
Vince Delie (Chairman, President, and CEO)
Our LTVs are very conservative. I think, a portion of the portfolio that's in construction, fund up basically is typically secured by leases. You know, we don't do a lot of spec or hardly any. You know, that's backed up by leases. The LTVs are gonna be a little higher on the construction pieces of the portfolio versus what we have in our book because we tend not to keep large exposures. You know, we underwrite them to a permanent take down. I just wanna make sure everybody understands that in the makeup of the numbers on the slide that we present for non-owner occupied CRE.
Daniel Tamayo (VP and Equity Research Analyst)
Okay. Terrific.
Vince Delie (Chairman, President, and CEO)
Right.
Daniel Tamayo (VP and Equity Research Analyst)
Thanks for that, Vince and Gary.
Vince Delie (Chairman, President, and CEO)
Yep.
Daniel Tamayo (VP and Equity Research Analyst)
Lastly, just to follow up there on not on office, but in, I guess, the macro outlook overall, the reserves came down in the quarter, which was a little bit surprising. Just curious on your thoughts on the driver there of reserves down and then your thoughts on the overall macro outlook, I guess, relative to last quarter.
Gary L. Guerrieri (CCO)
Yeah, actually, dollar reserves were not down.
The reserve was down from 133 to 132, so it was down 1 basis point. Still at $403 million. You know, we used some specific reserves that I mentioned in the, in the, in the prepared remarks, in terms of that 1 basis point. You know, we look at it as flattish. You know, when you...
Daniel Tamayo (VP and Equity Research Analyst)
Yeah.
Gary L. Guerrieri (CCO)
When you include the unamortized loan discounts at $149, I mean, our reserve position compared to peers is very strong.
Okay.
Vincent J. Calabrese (CFO)
I think over peers in 20-25 basis points, if you look at our coverage level and versus the peers,that's a significant buffer over and above where others have been carrying their reserves.
Daniel Tamayo (VP and Equity Research Analyst)
Understood. I got you. All right. I appreciate all the color. That's it for me. Thanks, guys.
Gary L. Guerrieri (CCO)
Yeah, thank you.
Vince Delie (Chairman, President, and CEO)
Thanks, Dan.
Gary L. Guerrieri (CCO)
Thanks.
Operator (participant)
The next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Timur Braziler (VP and Senior Equity Research Analyst)
Hi. Good morning. This is Timur Braziler filling in for Jared. Maybe just continuing the last line of questioning on the allowance ratio. I mean, to your point, it is quite elevated compared to peers. I guess how much of pending recession reserve is already embedded in your numbers? I guess if we do end up in a more punitive macro environment, does that 25 basis point buffer kind of hold true as the rest of the group catches up, or is some of that already embedded in your more cautious starting point?
Gary L. Guerrieri (CCO)
Yeah, Timur, we've taken a cautious position ever since we got into 6 months into COVID. We felt very strongly that it was going to be a, an issue for quite some time. We did not release reserves, as, other institutions did during that timeframe in large sums. We've, looked at it from a standpoint that we wanted to maintain those reserves based on what we saw coming down the road. We get into, what appears to be naturally a softer economic timeframe. We've been able to maintain those reserves. They're well within our ranges of being quantitative versus qualitative. It's an analysis that we go through each and every month.
Actually, we rerun the reserve every week, based on, based on the changes in the portfolio week to week. You know, when you look at that position, we feel good about where we are, and we're gonna continue to manage it accordingly.
Timur Braziler (VP and Senior Equity Research Analyst)
Okay, great. Then Gary, one more for you, just following up on the line of questioning regarding the office book. I guess you laid out 13% maturity in 23, 11% in 24. I guess for those loans that are coming up for kind of maturity or refi cycle, what's the new rate that they would be rolling into? I guess what's the confidence in kind of the underlying occupancy and underlying trends that there is the ability to absorb the higher interest rate that they'd be rolling into?
Gary L. Guerrieri (CCO)
Yeah. We just did a deep dive on every single one of those larger credits during the quarter. We had no downgrades, as I mentioned in the remarks, around those credits. We managed them on a regular basis on a loan-by-loan basis. So that most recent review, which reflected no downgrades, took into consideration, those maturity walls and the ability to reset generally in the 7% range. You know, we've got that built into those particular situations. I'll also mention that, LTVs generally in the 60s. Naturally, some of that's gonna take a hit when you have some leases roll out.
The sponsorship is extremely strong across that book and, we feel that it's very manageable, based on the most recent review, which reflected no downgrade, as I mentioned.
Timur Braziler (VP and Senior Equity Research Analyst)
Great.
Vince Delie (Chairman, President, and CEO)
Hey, Gary. Gary, the question that came up about our reserves relative to peers. I think it's helpful to mention, that our criticized classified loan ratios are typically higher than the other banks because of our aggressive gradation. It doesn't necessarily translate into, net charge-offs. If you look at over a long period of time, F.N.B. versus the peers, we tend to run higher but then have lower charge-offs throughout the cycle. That's a function of our credit people being very aggressive and proactive in downgrading credits, which results in a higher reserve position. The gradation really matters within the portfolio. Other institutions could have delays in their assessment of risk, and they won't see the same level of reserves until the very tail end of a crisis.
You know, it should be viewed as a positive, not a negative. I just want to make sure everybody understands that. Am I on task here, Gary?
Gary L. Guerrieri (CCO)
No, I would agree with everything you said there, Vincent. I mean, we're very aggressive, around the management of risk ratings, as you mentioned. This portfolio is front and center, for certain, and it has been for quite some time.
Timur Braziler (VP and Senior Equity Research Analyst)
No, that's a good color. I appreciate that. Maybe one for Vince Calabrese. On slide 15, the interest rate sensitivity, it looks like the shock to both the 100 up and the 100 down, increased. I'm just wondering what the dynamic is that NII benefits in both an up-upside and a downside scenario.
Vince Delie (Chairman, President, and CEO)
You want that one?
Scott D. Free (Treasurer)
Sure. This is Scott Freed, the Treasurer. You know, it's the inverted yield curve has kind of created a unique circumstance where with the deposit rates finally moving up in the down scenario, now we'll start to get benefit of moving those balances a little faster than up.
Timur Braziler (VP and Senior Equity Research Analyst)
Okay, got it. Then just last for me, any thoughts around the buyback? Banks are kind of all over the place in terms of continuing it, pausing it. You guys are active in the Q1. I'm just wondering if you can give any color as to what was repurchased kind of subsequent to March 8th and then what the outlook is for the buyback going forward.
Scott D. Free (Treasurer)
Well, I'd like to start out by saying if you look at our capital position relative to others, we stand out because of the limited AOCI impairment and conservative management of our investment portfolio. Thank you, Scott, who's sitting here with us. I think that puts us in a different position. You know, we're already, CET1, we're already where we're targeting, right? We expect capital appreciation to continue to advance those capital ratios. That gives us a little bit more flexibility than others. Having said that, we're still very cautious because of the environment that we're in. You I'm not quite sure how things play out throughout the rest of the year.
You know, I'm a little bit cautious because I feel that we are headed into a recessionary period, and we're seeing some slowing down in the economy in various sectors. We're getting mixed signals, but because of that, we're going to proceed very cautiously. We do have the capacity to do it if we desire to do so and if it's beneficial to the shareholders. Vince, I don't know if you want to add any color to that, but.
Vincent J. Calabrese (CFO)
No, I would just say, I mean, the 10% target that we've talked about, we still think is very appropriate, but given the risk profile of the balance sheet. You know, as we move forward, we do, as Vince said, expect that to kind of gradually build from here. You know, we have capacity. I mean, we'll be thoughtful about repurchasing. We repurchased in the 13th. Once we get comfortable with the environment, we'd like to be repurchasing in the 11th, obviously. I think there's definitely interest in having some of that deployed as we go through the year. It's just going to be kind of a matter of when.
Vince Delie (Chairman, President, and CEO)
Just to confirm, none of the quarter repurchase activity happened once the market disruption started. It was all before that.
Scott D. Free (Treasurer)
Right.
Vince Delie (Chairman, President, and CEO)
I will say again, we're in a different position than others, fortunately. We have options. You know, we'll be very careful about how we execute those options, but we do have the capacity to do it. Others do not. That's why you're getting mixed responses.
Timur Braziler (VP and Senior Equity Research Analyst)
Right. Great. Thank you. Appreciate all the color.
Vince Delie (Chairman, President, and CEO)
Yep.
Scott D. Free (Treasurer)
The only other thing I would add, Timur, too, is on the asset sensitivity, just to add to what Scott was saying. You know, if you look at the numbers, it's very close to neutral. The numbers plus or minus, are not significant like they may have been, nine or 12 months ago. We do get that slight benefit, whether it's a plus or minus, but you're kind of starting to triangulate around kind of neutral position there.
Operator (participant)
The next question comes from Michael Perito with KBW. Please go ahead.
Michael Perito (Managing Director, Equity Research)
Hey, good morning, guys. Thanks for taking my questions. You guys have hit most of it. I guess just, one kind of, bigger picture question around loan growth here. You know, you guys have talked a lot about the credit side, but I guess what about in terms of the funding side? I mean, is there a scenario that could impact your appetite for incremental loan growth here? I mean, obviously, I think in response to recent events, the CD growth kind of across the industry has surged. You know, I would imagine that will continue to a certain extent. Maybe not quite as severely as it did, over the last 30 days of the quarter.
Is there a scenario where, he funding, if it sustains at the kind of like the current beta increase and higher cost CDDs, where that could impact your appetite to book new loan growth?
Vince Delie (Chairman, President, and CEO)
Well, I think our guidance is pretty conservative for us given the markets that we're in. If you look at our deposit base and our liquidity position, the mix of our deposits, we have a lot of avenues to drive liquidity that still creates a scenario where, it's accretive to book loans. I don't think we're going to be impacted like others might be. I think you're spot on across the industry, but that's what differentiates us again. You know, our conservative nature. The fact that, the company's been positioned with the deposit base that it has and, our conservative credit underwriting standards gives us the ability to continue to lend through the cycle very selectively.
You know, while demand may fall off, there'll be fewer players out there looking to originate. I think, the last cycle we went through, we saw it. We may have an opportunity to increase share in the markets that we've expanded into relative to a number of competitors. I don't see us in a position where we have to pull back. You know, I've told our employees that they should be very happy that they work here, particularly if you're in the lending business. You know, while it's difficult during good times because we tend to be a little more conservative, our ability to sustain our lending activity through the cycle is real, and Gary's philosophy about credit is real.
We stay within a narrow band, and we don't try to, outgrow ourselves during frothy times and take on undue risk. During times like this, we're in the market supporting our clients and growing share. I think that's utopia for a commercial banker. I wouldn't say that's the case for everyone. You know, as you look across the broad spectrum of banks, everyone's in a different position. F.N.B. is in a very sound position relative to achieving our guidance.
Michael Perito (Managing Director, Equity Research)
That's helpful, Vince. Thanks. Then, not to put the cart in front of the horse here, but just as you guys think about that relative strength, right, and we get through these next couple quarters and, maybe hopefully finally get a better idea of whether we're going into a recession or maybe things stabilize, what have you. How does that translate to, I mean, I think one of the reasons that you guys are in this position is just 'cause of diversity of the franchise line of business. You got geography. You know, M&A obviously historically has been a big part of achieving that diversity. As there's dislocation, you guys are kind of strongly positioned here. What type of opportunities longer term do you think could stem from, for F.N.B. from all this dislocation?
Vince Delie (Chairman, President, and CEO)
Well, I certainly think the industry is going to change. I think the landscape's going to change, because of what's gone on. You know, there will be pressure on others. As we move through this cycle, we're gonna stay pretty focused on managing risk, making sure we have ample liquidity, pricing our funding appropriately, right? Not worrying too much about growth, worrying more about margin as we move through this portion of the cy-economic cycle. I do think that there will be opportunities on the other end of it. I don't know what they are. I will tell you, though, that we've also done a terrific job. Our team has done a great job of building businesses from the ground up.
If you look at our non-interest income, which performed pretty well this year, reflecting on the prepared comments, Vince mentioned the wealth management business, and we've had good success in insurance. We have a very granular, diversified group of businesses that generate fee income for the company, that's largely been grown organically. You know, we'll continue to focus on building out our capabilities within those groups to drive fee income, which is an annuity benefit to the earnings. We're going to stay focused on our digital strategy. I think, the award that we received for the eStore was fairly substantial. There were the largest banks in the world applied, to be recognized, and we were selected. You know, our strategy is different.
We are very focused on continuing to add features to that and continuing to penetrate the customer base that we have and the prospects that we have in the seven states that we operate in, which are pretty good states to be in. I think that's the focus as we move forward. I've already gone over, our M&A strategy. We've talked about it before. You know, I think for now we're just pausing, and we're gonna wait to see what shakes out. I think we will come through this in a position of strength, so we'll have plenty of opportunities down the line.
Michael Perito (Managing Director, Equity Research)
Right. No, that makes sense. I appreciate you guys providing on the call today. Thank you.
Vince Delie (Chairman, President, and CEO)
Yep. Thanks, Mike. Appreciate it.
Scott D. Free (Treasurer)
Thanks, Mike.
Operator (participant)
The next question comes from Russell Gunther with Stephens. Please go ahead.
Russell Gunther (Managing Director and equity research analyst)
Hey, good morning, guys.
Vince Delie (Chairman, President, and CEO)
Hey, Russell.
Russell Gunther (Managing Director and equity research analyst)
I just wanted to-
Vince Delie (Chairman, President, and CEO)
Morning.
Russell Gunther (Managing Director and equity research analyst)
Hey, just a quick follow-up. You guys mentioned the liquidity steps taken in the quarter and excess cash. Just remind us of your target level of whether it's cash to assets, and has that bogey changed at all intra-quarter, even just for the near term?
Vince Delie (Chairman, President, and CEO)
I mean, we've been managing that cash position, fluidly over the last year and a half or so, I would say that we took down about an extra $1 billion or so of liquidity, where we brought in liquidity just given the uncertainty in the environment and just given our conservative nature. That was $1 billion we wouldn't have otherwise taken, right? We thought that was the smart thing to do and conservative thing to do in this environment. When we look at what we put on, our total wholesale funding today, about $3 billion, and about a third of it is two years, a third is one year, and the other third is inside of six months.
Kind of put a ladder together and we use that kind of over time to kind of fund what we organically create as far as the lending side. I mean, that really, that billion is a reference point that you could use.
Russell Gunther (Managing Director and equity research analyst)
That's helpful, Vince. Thank you. Just a follow-up to the NII guide. You mentioned the, you know, slight step down due to higher deposit beta assumptions.
Have you guys quantified what you think the deposit beta through the cycle will be? Has that increased? Do you care to put a target on that?
Vince Delie (Chairman, President, and CEO)
We have our quarterly target, in the slide. I would say that, now, so far, just to remind everybody, right as we have on the slide, our cumulative beta for total deposits was 21.8% at the end of the quarter. You know, we had guided to 22%, so pretty close to that. It was, remember, 16.3% at the end of the year. You know, as we look ahead we're projecting kind of mid-20s total deposit basis at the end of the Q2.
You know, while the end of the year feels very far away, I mean, our current thoughts, and I'll call them thoughts for year 1, will be kind of low 30s for total deposits as far as the cumulative data through the end of this year.
Russell Gunther (Managing Director and equity research analyst)
That's great. Okay, Vince, I appreciate that. Last one for me. Gary, you guys have been conservative and de-risked the portfolio in a couple of ways over the past, two to three years. Do you see any opportunity or appetite for further de-risking as you look out into the environment ahead?
Gary L. Guerrieri (CCO)
You know, as we look at the portfolio today, Russell, naturally there are, softer economic times ahead. We're not looking at any significant de-risking at all at the moment, because we're pleased with the position of the portfolio. Naturally, we're extremely cautious on the office sector, as we have been for quite some time now, and we continue to review, that book on a loan by loan basis. You know, we'll in the normal course of business, potentially, move an asset or two or a small segment of them, but we have nothing teed up at this point.
Russell Gunther (Managing Director and equity research analyst)
All right. Thanks, Gary, and thank you all for taking my question.
Vince Delie (Chairman, President, and CEO)
Yes, thank you very much.
Gary L. Guerrieri (CCO)
Sure. Thanks.
Operator (participant)
The next question comes from Brian Martin with Janney. Please go ahead.
Brian Martin (Director and Senior Equity Research Analyst)
Hey, good morning, guys. I'd say most of my stuff's been answered, but just a couple things. Maybe, Vince Calabrese, just on the margin, I mean, I guess can you talk about where the March margin was, kind of what the steps you talked about with the liquidity, just kind of what's the starting point, if you will, for next quarter?
Scott D. Free (Treasurer)
Yeah. The March margin, Brian, was 3.49%. That's kind of our entry point into the, into the Q2
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay. Just kind of the puts and takes from here, I guess, as you look into 2022, kind of with the guide you've given.
Scott D. Free (Treasurer)
I guess one thing too to point out that's important is with the excess cash that we have, right? The additional liquidity that we grabbed, $1 billion, that obviously affects that ratio, right? You know, the Net Interest Income comes down a little bit. The ratio gets affected by that kind of excess liquidity position, you know, while it's there. I'm sorry. Say, what was your second question again, Brian?
Brian Martin (Director and Senior Equity Research Analyst)
Yeah, no, I was just saying just to kind of think about that, you know, that margin, if, you know, the stepping, you know, the stepping point into the next quarter, 3.49% is kind of the starting point. Just as it ties to the guidance. I mean, I guess, is your expectation that the margin percentage is relatively flat from here? I know you talked about with rates being down, you could see a little bit of a benefit, but just near term, you know, the next quarter or two?
Scott D. Free (Treasurer)
I think you just talked about net interest income. I mean, it comes down a little bit from here and then would build into the Q3 and Q4, kind of giving our earning asset growth, as we move into the third and Q4. I mean, the margins fluctuates a lot and with the noise in the balance sheet, it's just harder to talk to the margin piece, Brian. The net interest income.
Brian Martin (Director and Senior Equity Research Analyst)
Yeah.
Scott D. Free (Treasurer)
I think
Brian Martin (Director and Senior Equity Research Analyst)
Okay. As far as just that excess liquidity, Vince, I mean, what's the plan? How long do you plan? Do you just plan to keep that for a bit? Will some of it exit or just how are you thinking about that then?
Scott D. Free (Treasurer)
Well, that's what I was saying. A third of it is kind of 6 months or less, and then a third is 1 year, a third is 2 years. Probably just let that, you know, we're not gonna prepay it. Just let that naturally kind of get absorbed as we move through time.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay. I missed that part, so. All right. Then just the pipelines and the loan pipelines in the quarter. I missed what you guys said there on the commercial side. Maybe that was Vince, as far as where they're at or just kind of how they're trending here.
Gary L. Guerrieri (CCO)
I think, you know, the pipelines are a little softer than they've been historically. At the same time, I don't think that we're out as aggressively knocking on doors, and I think that the demand has fallen off a little bit, kind of unilaterally, kind of across the board. I will tell you that the short-term pipelines look pretty decent. You know, our 90-day. We measure it 90 days and then beyond 90 days. Beyond 90 days looks a little softer. The 90-day pipeline looks a little more solid. There's a higher percentage of fundings coming through in that pipeline, which means there's less junk in it. I think people are a little more focused. You know, I... It, it's a, it's a mixed bag as I look across all of the markets.
You know, some of the markets in Carolina are down. Some have better pipelines. South Carolina looks pretty good. You know, Charlotte, looks good short term and is probably building their long-term pipeline. Cleveland and Pittsburgh, are doing okay. You know, it's kind of all over the board, which tells me there's a lot of caution out there in the customer base. You know, it's not us. It's not due to a lack of effort on the calling side. I think it's more about what the client's doing, and there's less demand from our existing customers for CapEx spend at this stage in the cycle, which is probably a good thing.
Right. A little more caution in the portfolio. What we're also seeing is, you know, utilization rates are flat. No one asked that question, so I'll offer it up. I think, you know, basically, as we look at the C&I book, and Gary, you can chime in if you'd like to, but, you know, I think a lot of our customers have not been building inventories. They've actually been leading inventory, and, you know, moving their short-term assets to cash as we move into a slower economic period. We're starting to see reductions in line balances.
I think after the disruption that occurred in the banking industry, a number of companies, you know, it gave them a heightened awareness about where they are, and they took cash and, you know, basically paid down revolver debt because they're, you know, paying a much higher interest rate than they're receiving. You know, a lot of that's gone on over the last few months, and it's a little hard to forecast out through the end of the year. I would expect us to be, you know, in line with our guide. It's gonna be, you know, it's gonna be a fight to get there, right?
Yeah. I would.
Vince Delie (Chairman, President, and CEO)
Go ahead.
I would agree with, you know, the customer's position on managing inventory downward. We're pretty much seeing that across the board. Naturally, they built up some inventory during the supply chain issues. They've moved through some of that, and, you know, with caution ahead from, you know, from an economic standpoint, and a potentially slow down there. They are very focused on their inventory positions, and I would expect that to continue to move down as we go forward.
Brian Martin (Director and Senior Equity Research Analyst)
Perfect. Thank you for all the color. Just on the new origination yields, just, I don't know if Gary or whomever, but just kind of where are those at today on the loan front?
Vince Delie (Chairman, President, and CEO)
I think-
Gary L. Guerrieri (CCO)
You know.
Go ahead.
No, go ahead, Vince.
Vince Delie (Chairman, President, and CEO)
You got the specific numbers. I mean, I have generalities.
Gary L. Guerrieri (CCO)
I can make a high-level comment here, then any color you wanna add. Just new loans made during the Q1 came on at 6.31%. For comparison, that was 5.70% in the Q4. That's total. Total new loans.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay, perfect. Maybe Gary, just you mentioned early on the call just the criticized level. Did you say that that was up modestly in the quarter? I think you said down year-over-year, or was it, do I have that wrong as far as which criticized assets did?
Gary L. Guerrieri (CCO)
It was up 19 basis points quarter-over-quarter, Brian, down 55 basis points on a year-over-year basis with a $5 billion larger balance sheet. You know, they're at near low record levels, you know, from a criticized standpoint still today.
Brian Martin (Director and Senior Equity Research Analyst)
Okay. Just the increase, was there anything specific that kind of drove the increase, or is it just, you know, just a lot of things in there? Just anything you would point to given all the things you've all the disclosures you've added on credit?
Gary L. Guerrieri (CCO)
Yeah. Not really. It was kind of just general.
Brian Martin (Director and Senior Equity Research Analyst)
Okay.
Gary L. Guerrieri (CCO)
No, nothing specific.
Brian Martin (Director and Senior Equity Research Analyst)
Gotcha. Okay. Just the last one for me was on the capital markets revenue. I think you talked aboutsyndications and being a little bit lower. Any thoughts on, I guess the expectation would be that is,you see a little bit of volatility in that, but it should trend higher as you go throughout the year.
Vince Delie (Chairman, President, and CEO)
Yeah. I think if you look at how we performed this quarter, it's pretty consistent with, It's kind of our baseline performance, right?
Brian Martin (Director and Senior Equity Research Analyst)
Okay.
Vince Delie (Chairman, President, and CEO)
you know, I think that'll all depend on how everything shakes out as we move forward. I mean, obviously on the structural side of syndications, if we're leading, if we let lead, it's gonna depend on CapEx need, M&A activity. There's a bunch of factors that go into driving fees on that category. I would expect some things to come up over the next few quarters that will benefit that area because we do have a fairly significant hauling effort syndication side. I would also expect derivatives. You know, as we move through the cycle and you see, a number of companies burn through their old fixed rate program, I would expect to see them re-upping, particularly with the inversion in the yield curve.
I mean, there's hope that we can sustain or grow those numbers. I think that's reflected in our guide. You know, I actually thought they did pretty well in the Q1, which is typically seasonally lower.
Brian Martin (Director and Senior Equity Research Analyst)
Yeah.
Vince Delie (Chairman, President, and CEO)
I think we're good. From a wealth perspective, we're doing extraordinarily well producing new net asset values. Growing net asset values, compliance in the, in the southeast in particular, and in the Mid-Atlantic. I would expect that to continue because we've beefed up staffing down there over the last few years and have, better penetration. I'm expecting that to do a little better than previous years in terms of organic growth. That should help us in the long run. Mortgage, there's, quite a bit of uncertainty about where we're headed from a gain on sale perspective because of where rates are. You know, again, we're new to many of the markets.
We have great people, now, great originators, we're spread across a pretty vast geography with diversification, with, lower relative share in many markets. We should be able to sustain that. We, we feel pretty good about our guide in that.
Brian Martin (Director and Senior Equity Research Analyst)
Yeah. No, that's.
Vince Delie (Chairman, President, and CEO)
Right.
Brian Martin (Director and Senior Equity Research Analyst)
Understood. Okay. Well, thank you for taking the questions, and thanks for all the added disclosures on the office book and the series book. It's very helpful.
Vince Delie (Chairman, President, and CEO)
Yeah. Thank you.
Gary L. Guerrieri (CCO)
Thanks, Brian.
Vince Delie (Chairman, President, and CEO)
Questions. Yep. That concludes the questions. I want to thank everybody for participating. Thank you for your thoughtful questions. Very, very detailed, and hopefully, we were able to answer. You know, we put out quite a bit,, I'd recommend reading through the disclosures that we put out. I thought our team did an excellent job getting the information out to the street. I'd like to thank you and thank our employees here and the shareholders for standing with us. You know, we're going to do well as we move through this on a relative basis. I know it because we are, we've got a great team here. Thank you for participating. Take care. We'll see you.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.