FNB
#Good morning and welcome to our quarterly earnings call.
Joining me today are <UNK> <UNK>, our Chief Financial Officer, and <UNK> <UNK>, our Chief Credit Officer.
I will provide highlights from the quarter and cover some strategic developments since our last call.
<UNK> will review asset quality, and <UNK> will provide further detail on our financial results and an update to our guidance for the rest of the year.
<UNK> will then open the call up for any questions.
We were very pleased with the quarter\
Thanks, <UNK>, and good morning, everyone.
Today I will discuss the second quarter's operating performance and reaffirm our guidance for the remainder of the year.
Looking now at results for the second quarter, total average organic loan growth was a solid $249 million, or 8.8% annualized on a linked quarter basis due to growth in both the commercial and consumer portfolios.
This loan growth comes despite increased competition as F.
N.
B.
continues to benefit from the increased number of prospects in our metro markets of Pittsburgh, Cleveland, and Baltimore as well as solid results in our Pennsylvania community markets.
As you may recall from prior calls and as <UNK> mentioned earlier, expansion into these metro markets has enabled us to deliver sustainable high-quality loan growth while maintaining our underwriting standards.
On a linked quarter basis, average commercial growth totaled $151 million, or 9.6% annualized.
The linked quarter growth in the consumer portfolio totaled $93 million led by organic growth in mortgage and indirect auto loans.
Average growth in indirect auto loans was $30 million and continues to be a solid business for us across our footprint.
On a linked quarter basis, organic growth and total average deposits and customer repos totaled $217 million led by strong DDA growth and higher average savings balances.
The growth in DDA balances of $140 million, or 21.2% annualized was due to solid organic growth and seasonally higher business account balances.
Total growth in transaction deposits and customer repos total $229 million, or 9.4% annualized.
Additionally, we launched a new premium sweep deposit product in June that provides F.
with more favorable treatment for FDIC insurance premiums relative to customer repos.
At the end of the quarter our funding position continued to strengthen as 79% of total deposits and customer repos were transaction based.
From a total funding perspective, our relationship of loans to deposits and customer repos was stable at 92%.
Net interest income increased $1.9 million, or 1.5% reflecting solid organic loan growth and one more day in the quarter.
Net interest income levels compared to the prior quarter included $1.7 million of benefit from accretable yield adjustments equal to the level of benefit realized in the first quarter.
The core net interest margin narrowed 4 basis points to 3.39% reflective of the low interest rates and competitive environment for new loan originations.
Looking now at non-interest income and expense, core non-interest income was 24% of total revenue and, as <UNK> mentioned earlier, includes benefits from the previous investments made in several fee-based business units.
These investments reflect the strategic focus to diversify our fee income stream and lessen our dependence on net interest income and consumer banking fees.
As you know, consumer banking fees continue to be an industry-wide focus having been impacted by regulatory constraints and evolving consumer behavior.
Core non-interest income increased $1.5 million, or 4.1%.
Our mortgage business had a great quarter.
Total mortgage revenues increased $700,000 driven by the record origination volume that I mentioned earlier.
Wealth management also had a great quarter as total wealth management revenue, which includes security commissions and trust income increased $800,000, or 10%, benefiting from the incremental lift in the Baltimore and Cleveland metro markets.
Insurance fee income declined due to normal seasonality from the timing of annual policy renewals and seasonal contingent fee revenue received during the first quarter.
Non-interest expense excluding acquisition costs increased $1.5 million including higher OREO expense, higher accruals for variable-based incentive compensation, and seasonally higher marketing costs.
These items were partially offset by lower FDIC insurance expense and seasonally lower occupancy costs.
The second quarter efficiency ratio was 56.0% compared to 56.6% and 57.3% in the prior and year-ago quarters.
We continue to generate positive operating leverage with disciplined focus on expenses through initiatives such as vendor relationship management and branch network rationalization.
This year we consolidated an additional five locations bringing the total number of locations consolidated since 2010 to 58, which represents nearly 20% of our total branch network.
Regarding income taxes, our overall effective tax rate for the quarter was in line with our expectations at 31%.
Regarding our outlook for 2015, as I mentioned earlier, we are reaffirming our prior guidance issued on the April call.
As you will recall, at that time we updated our net interest margin guidance for revised market expectations of a delayed Fed interest rate move and a continue low interest rate environment.
We anticipate continued slight quarterly narrowing from the second quarter core margin of 3.39% for the last two quarters of 2015.
Earlier in June, we completed our first public disclosure of our DFAST stress testing results.
We are very pleased with the results, which demonstrates the value of operating a lower-risk business model.
All projected minimum capital ratios exceed the regulatory minimum thresholds as well as the well-capitalized thresholds.
These results are a proof point of the strength of F.
's enterprise risk management infrastructure and are consistent with our long-term investment thesis and capital management philosophy.
In summary, we are excited about the positive revenue and efficiency trends for the first half of 2015.
With solid organic loan and deposit growth, a more diversified core fee income stream, positive operating leverage, and a number of strategic accomplishments.
The strategy of expanding into new markets to generate sustained organic growth has proven to be key to our success, admit a challenging operating environment for the overall banking industry.
We are confident in our team's ability to leverage these new opportunities as our expansion strategy continues to serve us well.
Now I would like to turn the call over to the operator for your questions.
Yes, we would ---+ I mean, in the short term we'd be just paying off borrowings and then we would use those funds to fund the loan growth that we expect encourage you to go forward.
The exact utilization will be kind of in that direction, and we haven't firmed up exactly what we're going to do yet, but directionally, that's what we would end up doing.
It's a nice source of deposits with the metro markets that we have and, at some point, you know, the economy really starts to lift off, the loan growths should even accelerate more, and having that deposit source of funding will be important as we go forward.
Sure, we've talked about the TCE ratio being comfortable in a range from 6.5% to 7%.
Obviously, that ratio gets affected by rates moving up and down.
It was a little higher at the end of the first quarter because rates had come down and it's at 6.93% here.
So that range of 6.5% to 7% we're comfortable operating in.
With the earnings that we're generating and retaining, there's plenty of capital there to support the organic loan growth that we're guiding to.
So very comfortable where we are and as we did the stress testings results that were published and very comfortable with the impact of the stress test on our ---+ all of our capital ratios and the projected minimums that we would have, kind of, worst-case numbers throughout the nine quarters or as I said in my remarks, above the minimums and above the well capitalized.
So very comfortable with where the capital stack is right now.
