Fnb Corp/Pa/ Q1 FY2022 Earnings Call

Hello, and welcome to the F.N.B Corporation First Quarter 2022, Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I now would like to turn the conference over to Lisa Constantine, Investor Relations. Ms. Constantine, please go ahead.

Thank you. Good morning and welcome to our earnings call. This conference call of F.N.B Corporation and the reports it files with the Securities and Exchange Commission often contain a forward-looking statement 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 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 Tuesday, April 26, and the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Thank you and welcome to our first quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. FNB began 2022 with solid fundamental performance and the full integration of the Howard Bank acquisition. We're pleased that the deal metrics associated with Howard came in at or better than planned with a positive impact on our capital ratios. Howard added $1.8 billion of loans to the balance sheet, bringing our total assets to $42 billion. In fact, on a combined basis, FNB had strong loan pipeline growth in the Mid-Atlantic region, up 13% year-over-year, and 61% linked quarter. Our expectation is that the Mid-Atlantic region will continue to grow with the exceptional employees and new clients who joined FNB. Additionally, we expect to receive revenue benefits from FNB's more robust product set as we offer these services to the existing customer base already in the market. Earlier this month, FNB's Board of Directors approved a new $150 million share repurchase program, providing additional flexibility to effectively manage capital and benefit our shareholders. FNB reported first quarter GAAP earnings per share of $0.15 and $0.26 on an operating basis. Revenue increased 3.4% linked quarter, led by net interest income increasing 5%. We remain well positioned to grow net interest income given the strategic steps we undertook to position our balance sheet and benefit from the current interest rate cycle. These include favorable deposit mix changes and investing in a short-term securities portfolio. We remain well positioned with $16 billion of assets that are tied to short-term rate indices. Loans increased $2 billion or 8.2% when excluding PPPs. While Howard contributed to the growth, commercial loan production was more than $1 billion, up 30% year-over-year. As we look ahead, pipelines have rebuilt from our strong growth in the fourth quarter and are up 23% quarter-over-quarter. This gives us additional confidence in our mid-to-high single-digit organic loan growth guidance for the full year. Our fee income businesses contributed another solid quarter at $78 million, essentially flat to the last quarter. Wealth management continued to produce record results with revenues increasing $1.1 million linked quarter or nearly 30% annualized, driven primarily by record organic sales activity. Mortgage banking income increased $700,000 linked quarter to $7 million amid significant interest rate volatility. While rising mortgage rates are expected to reduce refinance activity, we are confident our diversified geographic footprint and consistent commitment to the home purchase and new construction market will help us outperform the industry. In fact, nearly 80% of our originations this quarter were for purchase money mortgages. FNB's investment in technology has also enabled us to efficiently bring in more mortgage clients with 66% of our mortgage applications submitted through our online e-Store. As we continue to grow our balance sheet, we remain vigilant in examining the current macroeconomic environment of high inflation, supply chain disruption, and geopolitical unrest. We have proactively assessed the risks and activated plans given the current environment. Our credit team is continually monitoring the industries that are potentially affected by the rising interest rates. Higher food, oil, gas, and commodity prices, and supply chain disruption. We will continue to assess the environmental risks and adjust our strategy appropriately to ensure consistent performance while addressing the needs of our key stakeholders. I will now turn the call over to Gary to discuss overall credit performance and the steps his team has taken to position our portfolio.

Thank you, Vince. And good morning, everyone. Our first-quarter results remained strong and we are very pleased with the continued favorable positioning of our credit portfolio as evidenced by our key asset quality metrics. The quarter also marked the successful completion of the Howard Bank acquisition, which I am pleased to report came over slightly better than expected and did not have a material impact on the overall credit portfolio. I will provide some additional color on the transaction, including the Day 1 and Day 2 impacts to the reserve levels, which I will touch on later in my prepared remarks. Let's first review our GAAP asset quality results for the quarter. As I have mentioned previously, we entered 2022 with our credit portfolio in a position of strength, and with the newly acquired Howard loan book now reflected in our total consolidated results, we saw only slight increases in our delinquency and NPL levels as compared to our very low year-end results. The level of delinquency ended March at a very solid 66 basis points, reflecting an increase of 5 basis points driven entirely by Howard. And exclusive of that acquired book of loans, delinquency would have decreased slightly compared to the prior quarter. NPLs and OREO also reflected a small increase on a linked-quarter basis against very low year-end results with the GAAP level up 2 basis points to end March at 40 basis points, which was again due to the absorption of Howard's portfolio. Net charge-offs for the quarter were very low at $1.9 million or 3 basis points annualized, as we continue to track at historically low levels over the past several quarters. We recognized provision expense of $18 million for the quarter, including the $19.1 million initial provision for non-PCD loans associated with the Howard acquisition. With the additional Day 1 PCD gross up of $10 million, our ending reserve position stands at $371 million or 1.38% of loans at quarter end. Acquired PCD loans were relatively low and represented just over 10% of the Howard loan book. Absent the Howard transaction and the associated provision and gross-up activity, our reserve level would have been down slightly compared to December, which is consistent with the favorable credit quality trends we've seen. Our NPL coverage position remains strong at 365%. Regarding Howard's loan portfolio, we are very pleased with the successful conversion of the book and the ongoing tracking and monitoring our teams continue to perform to help us better manage risk during this transition phase. Howard's credit book performed slightly better than we were expecting leading up to the conversion with our loan risk profile and credit concentrations all remaining satisfactory. We look forward to the additional lending opportunities and access to the expanded customer base within our Mid-Atlantic footprint, which helps support our overall loan growth objectives and provides us with deeper opportunities for our other fee-based services. I would like to congratulate the team for their tireless efforts to close the transaction and expand our position in this highly desirable market. I would now like to briefly touch on recent global and macroeconomic activity that we have been monitoring, including the potential effect on our borrowers and the markets in which we operate. With the ongoing challenges of widespread inflation, elevated input costs, supply chain disruptions, labor shortages, and geopolitical influences, we are focused on these factors in our underwriting and in our credit discussions to address and mitigate these risks upfront. While we have not seen any material impact to our credit portfolio at this time, we remain vigilant and have tailored our credit decisioning approach to address the impact that these various factors could have on a borrower's EBITDA and margin levels, including the effects of fluctuating operational and supply costs, as well as potential interest rate sensitivities that may lead to increased borrowing costs. That said, we have been very proactive in utilizing interest rate instruments to provide borrowers the option to fix their borrowing costs and reduce their sensitivity to the rising rate environment. In closing, we remain very pleased with the position of our portfolio and the successful acquisition of Howard Bank. And we've remained focused on the year ahead to manage our growing credit book through a potentially softer economic environment. Maintaining our strong credit culture stands front-and-center, and we are well prepared and remain proactive in our approach to quickly identify and better manage emerging risks in our loan portfolio. Our disciplined credit framework is built on a foundation of consistent underwriting, tenant risk management, and selectivity of high-quality lending opportunities, all of which has served us well and positions us for the year ahead. I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.

Thanks, Gary. As Vince mentioned, we're very excited about the Howard acquisition and the potential this deal offers to continue growing our fee-based revenues. After the merger closing date, total deposits were both $1.8 billion, with 43% of deposits in non-interest bearing accounts. In terms of significant items, first-quarter had $28.6 million in merger-related expenses, $19.1 million of initial provision for non-PCD loans, and $4.2 million in branch consolidation costs. In conjunction with the acquisition, FNB issued a little over 34 million shares of common stock at $12.99 in exchange for 18.9 million shares of Howard common stock. Going forward, Howard will be included in all of our reported numbers, including guidance as they are now part of FNB. With that, let's turn to slide five, and discuss the first quarter financials starting with the highlights. First quarter reported EPS totaled $0.15 and $0.26 on an operating basis after adjusting for the Howard-related items and branch consolidation costs previously noted. But excluding PPP and Howard loans as of the acquisition date, which is more reflective of underlying loan growth, period-end total loans increased $259.7 million or 4.3% annualized on a linked-quarter basis, including an increase of $81.7 million in commercial loans and leases, and $178 million in consumer loans. Average loans excluding PPP and Howard increased $440 million or 7.4% annualized. Let's continue with the balance sheet on Slide 7. First quarter average securities reached $7.0 billion, an increase of $469 million from the prior quarter as we increased our investing activity to take advantage of the higher interest rate environment. Securities growth coupled with the loan growth contributed to a 3.9% increase in total average earning assets. Average deposits excluding Howard totaled $31.7 billion, an increase of 7.8% year-over-year, reflecting continued organic growth in households and account balances, partially offset by a decline in time deposits given customers' preferences to move funds into liquid accounts. Turning to Slide 8, net interest income totaled $234.1 million, an increase of $10.8 million or 4.8% from the prior quarter, primarily due to growth in average earning assets and initial benefits from the higher interest rate environment, partially offset by the $4.2 million decreased contribution from PPP. Our net interest margin increased six basis points to 261, reflecting the early stages of benefiting from upward movement in interest rates. Total impact of PPP, purchase accounting accretion, and higher cash balances on net interest margin was a reduction of 13 basis points for the quarter, similar to the 14 basis-point reduction last quarter. Now let's look at non-interest income and expense. Non-interest income totaled $78.3 million, essentially flat from the prior quarter. We have previously mentioned the strategy of investing in our diversified fee-based businesses, and this quarter again demonstrates its importance. For example, insurance commissions and fees increased to $2.3 million linked quarter, offsetting the capital markets decrease of $2.4 million, as it reverted from elevated levels in the fourth quarter. We expect our diversified fee income strategy to be advantageous as we continue along the economic cycle. Reported non-interest expense increased $45.8 million or 25.2% linked quarter. On an operating basis, non-interest expense increased $13.9 million or 7.7% to $194.6 million, excluding merger-related expenses and branch consolidation costs from the current and prior quarters. On an operating basis, salaries and employee benefits increased $8.1 million or 7.8% linked quarter, primarily related to normal seasonal long-term compensation expense of $6.2 million in the first quarter of 2022 as well as seasonally higher employer payroll taxes. Also, included in the quarter total is a little over two months of salaries and benefits for the Howard employees that joined F.N.B. Occupancy and equipment increased $3.1 million or 10.1%, primarily due to higher seasonal utilities costs. Bank shares and franchise taxes increased $2.3 million due to the recognition of state tax credits in the prior quarter. The efficiency ratio equaled 60.7% compared to 58.7%. The higher efficiency ratio resulted from nearly $20 million of lower triple fee and purchase accounting accretion income versus a year ago. Excluding PPP and PAA, our efficiency ratio would have improved around 220 basis points year-over-year. We expect improvements in this quarter's efficiency ratio moving forward with a positive impact from expected rate hikes and synergies in revenue and expense associated with Howard. Tangible book value per share decreased linked quarter to $8.09, primarily related to $202 million or $0.57 per share and accumulated other comprehensive loss as of March 31, 2022, reflecting the impact of higher interest rates on the fair value of AFS securities. This compares to $52 million or $0.19 negative impact at the end of the prior quarter. Increased unrealized losses in the AFS portfolio due to rising interest rates should come back into capital over time as securities mature or pre-pay. During the first quarter of 2022, the company repurchased 2.2 million shares of common stock, at a weighted average share price of $13.25 for a total of $29.8 million. To date, FNB repurchased $111 million under the program approved in September 2019. Earlier this month, our Board approved a new $150 million share repurchase program, continuing to provide FNB with a tool to optimize capital management and enhance overall shareholder returns. Now let's turn to guidance on Page 12. We expect loans to increase in the low double digits to low teens with underlying organic growth in the mid-to-high single digits on a year-over-year spot basis. Total deposits are projected to grow high single digits on a year-over-year spot basis. Full-year net interest income is expected to be between $1.0 billion and $1.04 billion, with the second quarter between $249 million to $253 million. Our base guidance currently assumes 125 basis points of rate increases for the remainder of the year, including a 50 basis point increase in May. Full-year non-interest income is expected to be between $315 and $330 million, with the second quarter around $80 million. The revised full-year guidance is due to slightly lower-than-expected market-related fee income. There is no change to our full-year guidance for non-interest expense with a range of $760 to $780 million on an operating basis for the full year, and $190 to $195 million for the second quarter. This does not include the one-time expenses associated with the Howard Bank acquisition. Positive credit quality is expected to continue throughout 2022 with provision guided to $20 to $40 million. This does not include the initial $19.1 million of provision related to Howard and is dependent on net loan growth experience throughout the year. Lastly, the effective tax rate should be between 17.5% and 18.5% for the full year, which assumes no changes to corporate income tax rates and is dependent on the level of investment tax credit activities. With that, I will turn the call back to Vince.

Thanks, Vince. We've worked hard to build a strong differentiated brand, including our commercial lending and wholesale banking businesses. Our knowledgeable team and investments in products and technology result in a commercial banking experience that is unique for its high level of convenience and sophistication. Our commercial business ranges from large corporate clients to small business lending, including highly specialized industry verticals, creating an opportunity for FNB to surpass the needs of most clients. Thus far in 2022, FNB has been named as one of America's Best Banks and World's Best Banks by Forbes, received 17 branch excellence and Best Brand Awards, and was recognized as a top workplace USA by Energage for a second consecutive year. These awards add to an extensive list of honors that FNB has received for its differentiated culture and business model, which focuses on doing what is right for its clients, communities, and employees, and ultimately benefiting our shareholders. For example, FNB is increasing our closing costs assistance grant to $5,000 in April 2022, advancing our commitment to borrowers in low-to-moderate-income communities. We also enhanced our mortgage product offerings through Fannie Mae and Freddie Mac to provide additional access for homeowners with income at or below the area median income for their markets. Our goal is to ensure all stakeholders benefit from the products and services that we offer. Our first-quarter results provide a solid foundation for us to continue building momentum throughout 2022. As always, our performance is a testament to our team and I thank each employee for their dedication and contribution. With that, I'll turn the call over to the Operator for questions.

Yes, thank you. At this time, we will begin the question-and-answer session. Please note that we will pause momentarily to assemble the roster. And the first question comes from Frank Schiraldi with Piper Sandler.

Good morning. Vince, you mentioned a strong confidence in the loan growth expectations for the year and that the current pipeline has increased by 23% compared to the previous quarter. I would like to clarify whether this refers to the commercial pipeline. Could you elaborate on the reasons behind this increase? Does it indicate improvements in supply chain issues, or is it more related to seasonal factors? I would appreciate further context on this notable rise in the pipeline from the last quarter.

I can address that. It's quite broad-based. If you examine the distribution of our pipeline, we have a chart for comparison that illustrates the trends. Almost every region of the company has experienced growth in their pipeline from the previous quarter. As a reminder, the fourth quarter was a record production period for us. Typically, after strong closures, the pipeline may shrink slightly as bankers focus on finalizing transactions. However, we are now shifting back to prospecting and accommodating borrower requests, which allows the pipeline to build again. Additionally, the first quarter is generally slower due to the lack of financial results from corporate borrowers, as many companies finalize their capital expenditure plans during this time. We are pleased with the growth in the Mid-Atlantic region, which is up 13% year-over-year and 61% quarter-over-quarter, boosted significantly by the Howard acquisition, which added critical mass and scale, as well as some excellent bankers who are content with our systems. We see significant opportunities in our fee-based businesses, which should help us penetrate that customer base, especially in wealth markets. In Charlotte, we’ve seen a 33% increase year-over-year and 52% quarter-over-quarter, indicating robust activity in the Southeast. My recent visits to Charleston and Raleigh confirmed that both markets are performing well, and our brand is well-received. We’ve established a presence in Greensboro, Charlotte, Raleigh, and Charleston with prominent signage and effective delivery channels, and we're beginning to see transactions close in those areas. We have also expanded into Asheville, North Carolina, which is starting to gain traction, as well as Greenville, South Carolina, where we plan to increase our presence. Historically, small business banking has lagged in growth due to portfolio consolidations during acquisitions, but it is now stabilizing and beginning to grow across our footprint. We’re noticing some improvement in our small business lending activity. When analyzing line utilization rates within the company, we observed a significant decline in utilization, with commercial borrowings decreasing post-pandemic. After the early months of the pandemic in 2020, many businesses opted to hold cash, benefiting from stimulus measures that reduced their balances. Unforeseen events, including supply chain disruptions, hindered growth and expansion for many companies, but we are starting to see a rebound. Though the overall utilization rates have not significantly risen across our portfolios, there is growth in the middle market now. This indicates that we’re moving past supply chain issues. While concerns about the war in Ukraine persist, businesses appear to be returning to normal operations. However, we remain cautious, monitoring the credit landscape for potential supply chain disruptions, rising oil and gas prices, and their impact on certain industries. On the whole, we're not noticing significant weakness in our portfolio; in fact, credit quality remains stable. I hope that addresses your question comprehensively.

Thank you, that was helpful. As a follow-up, considering your strong confidence in loan growth, is there any possibility of increasing the buyback? Given that bank stocks have dipped a bit since the first quarter, should we expect the buyback to potentially increase? Should we approach this differently than we did before the first quarter?

I believe our guidance on loan growth is reasonable. We're expecting mid to high single-digit growth, which allows us to support that growth with internally generated capital and share buybacks. This is the reason the Board authorized the buyback program. We want to maintain flexibility in driving shareholder value and supporting the stock price, especially if we encounter a decline. The company has performed well over the past few years, which instills confidence in the Board regarding the buyback program. When examining the company’s financial performance, it has remained strong even during challenging periods, and the actions taken by Gary and the credit team alongside our commercial bankers demonstrate that we have effectively positioned ourselves to navigate these challenges successfully, further boosting confidence in the buyback. Additionally, looking at our capital ratios, I believe we are at around 10%. From a regulatory capital standpoint, we are in a solid position. Overall, I think we are in a good position, Frank, which leaves us with options.

Thank you. The next question comes from Michael Young with Truist Securities. Your line is live.

Sounds like he is on a horse.

All right. Well, moving on. The next question will come from Daniel Tamayo with Raymond James.

Good morning, guys.

Hey there. How are you?

Morning.

Doing well, thank you. Maybe first on the mortgage-banking outlook. You gave some good color on continuing to expect that to be, I should say, outperforming the industry going forward. But maybe if you could provide a little more detail on how you're thinking about how we should be thinking about sizing that revenue stream going forward, or are you still expecting that to increase from here or flat or how from an overall perspective do you see revenue trending from here?

I'll let Vince answer that question. In my initial remarks, but as before, I will tell you that the pipeline has shifted as we've indicated. We are very well positioned across the Southeast and the Mid-Atlantic in some fairly dynamic housing markets. So we have an opportunity to benefit more heavily from purchase money mortgage origination. I think our current pipeline is sitting at around 90%. So we purchase money. So we did make that shift, which provides some support. That's why I indicated in my prepared comments that we should outperform the industry. We're not as dependent on refinance activity, and we are spread across including broad geographies in some very attractive markets. About 50% of the franchise is in very stable, more stable markets, which gives us some stability. We're able to maintain a lower growth trajectory, and then half of it sits in more dynamic, higher growth markets, where we're seeing more housing starts and a lot of activity. But go ahead, Vince. I don't know if you want to give them a little bit more color on the top line and what our expectations are.

Yes. No, I would say for the quarter you saw the results that we were up a little bit from a low last quarter. We were thinking it was going to be low. The purchase versus refi mix as Vince mentioned positions us well to focus on purchase there. For the quarter, we were 77% and now it's up to the refi last quarter going down to 5% of the total. So kind of the way our business is built is very well positioned and the activity on the purchase side has still been very strong. But if you boil it down to mortgage banking income, that's a function of how much you sell and how much your portfolio depends on the nature of the originations. We've definitely seen some shift to customers wanting to get arms seven, six months, it’s not one anymore. And in 10-year and six-month loans. So we've started seeing some movement towards that. So we've started to portfolio, which leads towards higher net interest income and a little bit less gain on sale on that. If you boil it all down, I would expect mortgage banking to move up from here from the first quarter. We're entering this the seasonal second and third quarters that are kind of high, but around the level to a little bit higher from here would be the best way to characterize it. And it's really going to be a function of the mix of those originations. But they're still very healthy, the applications are very strong, and the purchase market continues to be strong. So that helps to support the activity there.

There is a significant amount of activity in the consumer lending sector compared to mortgage lending. Outside of the mortgage bank, we are experiencing a surge in pipelines, and we currently have one of the strongest pipelines we've ever had. This uptick is due to considerable pent-up demand and the capacity to execute various construction projects. We have noticed increased demand across all areas of our operations. This increase may lead individuals to take out consumer loans secured by real estate, which they can later consolidate into larger mortgage loans. Overall, there is considerable activity, and we are optimistic about our positioning for purchase money opportunities and growth in specific segments of our business.

That's great information. Thank you for sharing that. Now, shifting the focus to net interest income, we are currently in a different rate outlook compared to last quarter, and you've adjusted the guidance accordingly. How should we approach or what is your perspective on the change in the bank's sensitivity to rates following the recent hike and looking ahead to your forecast for the end of the year? Is there any anticipated impact? Are you expecting any variations regarding loan betas, particularly in terms of what can be repriced on the loan side? Also, could you remind us if your projection for deposit betas is still in the 40% to 50% range by year-end?

I want to highlight a few elements included in our guidance. We have factored in an additional 125 basis points for rate hikes. If rates increase more than anticipated, there is potential for us to exceed our projected range. I understand that everyone is using their own interest rate forecasts for modeling. Therefore, the range may have some upside based on where we ultimately end up. Our loan rates remain robust, with nearly 50% of our total loans linked to three-month rates or lower, including prime. This accounts for $13 billion, or 48% of our total loans, which benefits us as rates rise. Our cash position is advantageous, currently sitting at approximately $3 billion to $3.2 billion, previously earning 50 basis points and now earning 40. We expect this to increase by 50 basis points when the Fed adjusts rates, which will also be beneficial. Although this cash is not yet allocated to loans, it still provides a benefit. Additionally, we have leveraged higher rates in the past quarter to enhance our investment portfolio, which supports our overall margin. The Paycheck Protection Program push is nearly over; if we exclude PPP, our loan yields were up five basis points as we maintain our business operations. Regarding deposit betas, the level of liquidity in the banking system is uncertain for all of us. I believe we will face more pressure as the Fed continues its moves, particularly concerning commercial deposits that might react earlier in this process. Based on our analysis and expectations for the quarter, we project total deposit costs to be around 25%, and approximately 40% for interest-bearing deposits by year-end.

Terrific, that's all I had. Thanks for all of that.

Thank you.

Thank you. And the next question is from Michael Young with Truist. Please go ahead, Mr. Young. Your line is live.

Hey, can you hear me?

We can now.

Okay, sorry about that. Having some technical issues here this morning, I apologize.

You sounded like you were running around on a horse the first time. We just had a clicking noise, but glad to have you on the call.

Yes. Maybe Vince, I wanted to walk through the fee income side. Obviously, a lot of big swings this quarter with the MSR value adjustment can have big moves in insurance to the upside, and capital markets to the downside. It sounds like a slight weakening in the outlook, but is that more mortgage-driven or are you seeing some things in some of the other business lines that you think will be a little weaker as we move throughout the year?

It’s a mix of various areas showing declines. The mortgage banking fee income is likely going to be tough to match last year's strong performance. We’ve structured our fee-based businesses to ensure that when one area isn’t performing well, others can compensate. The guidance reflects some of these adjustments, as you pointed out. In capital markets, from a derivative standpoint, interest rate hedging saw many clients take advantage of products during a period of low rates, so that business has decreased slightly. However, we’ve launched our debt capital markets platform, which is generating good activity and we anticipate a solid year there. We’ve also invested in our international banking platform and added new products, projecting growth. Our SBA platform has shown impressive growth and is picking up speed after being integrated into our overall calling activities. These developments should help offset declines in the mortgage and derivative sectors. We also depend on net asset values; if the market remains stable, we could benefit from organic growth. We are finding promising opportunities in DC and Baltimore with the Howard portfolio, which initially lacked product offerings. Additionally, we’re seeing activity in the Carolinas, particularly in Charleston, Asheville, and Greenville, alongside our private banking initiatives.

So Howard will be additive, just across the base.

Oh, yes. So if you added quite a few households, nice little commercial bank that fit in well culturally with us. So the people there did a nice job and we were able to take cost out but still keep the vast majority in the front line people. So we've added to our teams and those folks are doing really well.

And they didn't have the same product set that we have gotten the test on the fee side is significant, given the quality of the customer base that Howard has really across-the-board wealth management, cap markets, insurance, mortgage, so there's opportunities across the different fee-based revenue categories. And that'll be additive.

So while there are challenges, we're not trying to be anxious. It's going to be tougher in mortgage banking this year, it's going to be tougher in capital markets, particularly center around hedging. But I think the guidance that we gave you, we feel confident about because of our ability to drive the income in those other areas.

I think that's important too, right? So the quarter's 78, our guide for next quarter is around 80 and then 315 to 330. So obviously we feel diversification within the fee-based categories that we're comfortable with those guidance ranges you gave out which is higher than per quarter level.

Okay. Thank you.

Thank you. And the next question is from Brody Preston with Stephens, Inc.

Hey, good morning, everyone.

Hey, Brody.

I wanted to follow up and thank you for the information about the securities book. Could you clarify if you mentioned $134 million per quarter in cash flows that you are reinvesting, Vince? Additionally, can you provide some insights on what the new yields look like that are being added to the book compared to what is rolling off in the re-pricing process?

The 12-month cash flow that we estimated at $1 billion and that's rolling off the yield of 174. If you look at where we're putting money to work, so far this quarter we've invested $150 million so far in April at yields closer to 3%. New purchases are still within that kind of 3.5 to 4 duration, a little bit on the higher end of that, but still within that framework. That's your moving parts there, Brody, if that answers you.

Got it. That's helpful. Thank you. And I just wanted to ask on the timing of the hikes that you all are modeling. I know you have the 50 in May, but beyond that, where's the additional 75 coming in from a timing perspective?

It's pretty much one for meeting Brody after that.

Got it. Thanks Chris. Did have one follow-up on the capital markets business. Could you remind me? I know you have a lot that goes into it, but could you remind me what the big drivers are from a revenue perspective within capital markets?

Absolutely. We have syndications in both large commercial real estate and commercial and industrial sectors. We also have a significant derivatives practice that mainly deals with interest rate derivatives, but we can also handle commodity-based derivatives. Additionally, we operate a debt capital markets platform where we engage in bond economics for public bond offerings, which started last year. These are the main areas generating most of the revenue in capital markets. The syndications can be unpredictable since larger syndications yield higher payments compared to best efforts arrangements. The debt capital markets are also inconsistent, as participating in larger deals may result in syndication income and bond economics if a company issues public debt or is part of a syndicate. Those are the businesses we focus on.

Thank you for that. I have two final questions. The first one is about expenses. Can you provide some insight into what factors might lead you to be at the lower or higher end of the expense guidance? Are there any specific items that come to mind that could influence this?

We carefully manage our expenses, and this has been a consistent focus for many years. In our guidance for 2022, we set a target of $10 million in cost savings. We still expect to realize savings from Howard, and part of that has already occurred as planned. Commissions related to production can fluctuate based on business activity, which adds variability from quarter to quarter. However, we will continue to maintain tight control over our expenses. The guidance range for the full year is fairly narrow, with key factors influencing it. We've discussed previously our ongoing efforts to automate processes as part of RPA, which helps us improve efficiency. There are further opportunities to enhance our operations, but overall, the guidance remains within a tight range.

My last question is a follow-up for Vince. I appreciate the insights on the deposit Betas you're modeling, which you mentioned is at 40% for interest-bearing accounts. That seems consistent with the last cycle. I wanted to understand the interest-bearing deposit Beta trends from the previous cycle and what factors are leading you to believe that Betas will remain close to that historical level. Many people thought that, given the industry's overall improvements in liquidity, reduced loan-to-deposit ratios, and increased cash and securities balances, Betas might lag behind last cycle, at least in percentage terms. However, your assumption indicates that you expect them to be comparable. Can you provide any insights as to why you hold this expectation?

I would say that previously we indicated a target around 50% based on historical trends, but the current liquidity situation is quite different. We are starting off with a target of 40%. As mentioned earlier, we're taking a conservative approach with our Betas to enhance the overall earnings for the company rather than taking unnecessary risks. There is an element of conservatism integrated into our approach. Even at the 40% mark, we're still within the previous quarter's range. The pace of changes and significant 50 basis point adjustments require us to manage the situation carefully, as our customers are becoming more aware of these changes. Overall, we're aiming for the 40s, which is below the 50s, and we're factoring in a conservative strategy in our assessment.

Got it. Thank you very much for taking on my questions and for giving us all the time this morning, guys. I appreciate it.

Okay. Thank you.

Thanks, Brody.

Thank you. And the next question comes from Brian Martin with Janney Montgomery.

Hey, guys. Thanks for taking the questions. I have a couple of follow-ups. Vince, can you talk about the current yields on new loans and where they stand today?

The new loans in total I would say came on at 309 during the quarter, and that was 291 last quarter. So clearly a nice move up. The overall spot portfolio rate, ex-PPP, that sounded like $180 million, increased 10 basis points to 322. So that's all-in figures there.

Got you. Okay. That's helpful. And then just a couple of other housekeeping. The line of credit leases the line utilization. It didn't sound like that moved up a lot this quarter. Is that fair or is it pretty similar to what it was last quarter, but the expectation is this going to move higher or is that kind of what I'm hearing?

I believe that with our debt capital markets platform, we engaged in some larger transactions that were not funded yet, which generated income for us. We anticipate those will fund at some point. We have larger commitments with lower borrowings attached. Furthermore, if we analyze the various segments, we noticed growth and expansion in certain areas, particularly small business and middle market banking on the commercial and industrial side. We also added some substantial construction yields and large corporate transactions, which kept our performance relatively flat or slightly down. However, if we exclude those transactions, we observed an increase in utilization. I don’t have the precise figures, but that was the trend we noticed.

Got you.

I would add, overall, if you look year-over-year, it didn't really move up above 3 points from the first quarter of last year to the first quarter of this year. And then, it's pretty stable for where it was at the end of the year, in that mid-30s.

I would expect it to continue to move up over time. It was running in the 42% to 44% range historically. We expect it to get back there at some point.

Okay. Regarding the Howard expense savings, is the second quarter primarily a clean quarter due to the back-office consolidation? How should we view that clean expense quarter?

Yes. So like we said in the announcement, we expect cost savings to be greater than 50% and we're well on track on getting the 85% phase-in that we talked about during 2022. I mean, Howard really didn't add that many expenses for the quarter. I mean, we're talking less than mid-single-digit million type number. So I think we've got a pretty good handle on the expenses, and we're all looking out for the rest of the year.

Brian, I would think it would take some more like the third-quarter till you kind of get clean or try to force it. I mean, second-quarter, yes.

We're running from dual branches right now as we're doing some renovations. If that finishes up during the summer, we'll see the last bit of the tail come out.

That's helpful. Considering the caution regarding certain items you mentioned, particularly the reserve coverage amidst some of the disruptions this quarter with Howard, how do you view the reserve levels? Given your outlook on credit quality appears quite strong, with some caution, where do you anticipate the reserve coverage may trend in the upcoming quarters?

In terms of the reserve, I mean, we've been very cautious throughout the pandemic and didn't have any large releases, as you're aware. With the headwinds that we see out there with inflation, supply chain transportation costs, and higher interest rates, those things, as we've talked, we're cautious about them, and they do have the ability to impact borrowers that are on the lower end of the liquidity range or higher end of the leverage range. We were flat in the quarter at 138, even including bringing Howard on. We're comfortable with that level right now and we'll continue to watch it all play out as we move forward, just by it's only 3 basis points of charge-offs. The other thing that's going to play a role there, is loan growth. We've talked about that a good bit today, and that has its impact. So I would tell you that we're looking at the guide being 20 to 40, as it surely come in on the low end of that guide based on the strength of the book right now. Surely it can, but I would expect with all the headwinds, we'll be cautious around those items as we move forward.

Got you. Thanks, Gary. And then just one last question, Vince Calabrese. Last quarter, you mentioned liquidity levels and possibly reducing that in half by year-end. It seems like you're still at a similar liquidity level right now. Is that still your expectation or how are you currently thinking about this?

It's hard to say. The deposits keep growing, PPP registered another $180 million of forgiveness and that goes into the coffers too, so I would think that's probably too low at this point. We'll see how the year plays out, Brian, but we've already started moving down, and we've been saying that for six quarters now. Those deposits are quickly fast growing. I would think we'd start to slowly bring that number down, but the pace of it is just hard to say with certainty.

Yeah. Okay. Thank you for taking the questions, guys.

Thank you.

Thanks, Brian.

Hey, guys, sorry to hop back in like this. Just one quick question. Could you remind me how much you have left in PPP fees going forward? I know the portfolio is smaller. I just want to make sure I'm understanding what you have left.

$3.5 million.

Thank you. That does conclude the question-and-answer session. I would like to turn the floor to Vince Delie for any closing comments.

Thank you for your thoughtful questions. I really appreciated them and I’m glad we were able to address many of them. If we didn't get to your question, please reach out. We’ve posted detailed data, and we're here to guide you through it. We value your support and are looking forward to the work ahead. Although it was a solid quarter, we recognize there is much to accomplish, and we plan to execute on that. I want to express my gratitude to our employees for a strong start, and we will continue to work on your behalf. Thank you all for joining the call. Take care.

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