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Edited Transcript of FNB.N earnings conference call or presentation 23-Apr-20 12:15pm GMT

Q1 2020 F.N.B. Corp Earnings Call

PITTSBURGH May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of F.N.B. Corp earnings conference call or presentation Thursday, April 23, 2020 at 12:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary Lee Guerrieri

F.N.B. Corporation - Chief Credit Officer

* Matthew J. Lazzaro

F.N.B. Corporation - Manager of IR

* Vincent J. Calabrese

F.N.B. Corporation - CFO

* Vincent J. Delie

F.N.B. Corporation - Chairman, President & CEO

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Conference Call Participants

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* Brian Joseph Martin

Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts

* Broderick Dyer Preston

Stephens Inc., Research Division - VP & Analyst

* Casey Haire

Jefferies LLC, Research Division - VP & Equity Analyst

* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Frank Joseph Schiraldi

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the F.N.B. Corporation First Quarter 2020 Quarterly Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Matt Lazzaro. Please go ahead.

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Matthew J. Lazzaro, F.N.B. Corporation - Manager of IR [2]

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Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports filed 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 it 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 earnings release, related presentation materials and our 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 April 30, and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate website.

I will now turn the call over to Vince Delie, Chairman, President and CEO.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [3]

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Good morning, and welcome to our earnings call. On today's call, I'd like to address 3 key topics. First, I'll begin by providing an update on how we are navigating our business due to COVID-19 pandemic while supporting our employees, customers, communities and shareholders. Secondly, I'd like to briefly comment on a few points about our first quarter financial performance. And finally, I'd like to revisit several key strategic initiatives and programs.

Our company's existing pandemic preparedness plan and ongoing pandemic exercises enabled FNB to stay at the front of this escalating crisis. Dating back to 2018, our management team went through a pandemic simulation and collaborated with our business continuity team to develop a formal pandemic response plan. During this process, sustainability was thoroughly evaluated and ultimately formed the foundation of the comprehensive plan currently in place. Additionally, our ongoing commitment to invest in our digital channels and technology played a critical role in our ability to provide convenient banking options for our customers who were not able to leave their homes.

Our investments in technology also enabled us to build and establish an automated process to handle nearly 15,000 business applications for the SBA Paycheck Protection Program in just 1 week's time. Our efforts resulted in approving and processing 75% of those applications in the first round of funding, representing $2.1 billion in loans. We anticipate processing the remaining applications during the second round of funding.

As I mentioned, when Phase 1 of FNB's technology initiative called clicks-to-bricks began, we had previously introduced online appointment setting and we're able to quickly make specialized COVID-19 content and offerings available in our solution centers. We tapped into the strength of our established communication channels for both customers and employees, keeping both audiences informed of any updates. Our employees' response to this crisis has been exceptional. Their professional, compassionate, positive and resilient attitudes have been a bright light in helping each other, our customers and our communities while navigating these unprecedented times.

Protecting the health, safety and financial well-being of our employees remains critical as we find ways to address any impact to their health or the health of their families. For example, FNB provided our team with up to 15 days paid leave and also expanded our existing paid caregiver leave program. Additionally, to assist with any possible financial hardships resulting from the coronavirus, FNB provided a special assistance payment to essential employees working on the front line and in our operations areas, who ensure that our customers continue to receive vital financial services.

We also leveraged our IT infrastructure by making accommodations to give employees the ability to work remotely where appropriate. To date, we have approximately 2,200 colleagues working remotely, which represents about half of our workforce and largely nonretail positions. This capability also speaks to our investment in technology and IT infrastructure.

As we focus on our communities, the FNB Foundation committed to provide $1 million in relief in response to COVID-19, benefiting food banks and providing essential medical supplies. Many of our employees began reaching out to our clients and our communities to provide support. At our Pittsburgh headquarters, FNB's vendor management team has been using our vetting process to assist Allegheny County and quickly researching new vendors offering medical supplies and services to combat COVID-19.

With respect to our retail branches, we have focused on drive up services and closed our lobbies, reverting to appointment-only practices, which are supported by the appointment setting capability within our clicks-to-bricks platform. As you can imagine, the monumental commitment of our leadership team and employees to operate in this challenging environment required a sustained 24/7 effort.

I'd like to commend our employees for the actions they've taken to execute and abide by our safety measures while continuing operations. With these key priorities and actions in place, let me pivot and comment briefly on our first quarter performance.

Given all this happened in a noisy quarter, our underlying core performance remains solid. Our philosophy is to maintain our approach to risk management through varying economic cycles and serve as the primary capital provider to our clients. While FNB, like many banks, will be subject to a difficult economic environment, this philosophy and the actions we have taken to strengthen our balance sheet and reduce risk should position FNB well as we move through the current crisis.

Looking at the quarter's results, GAAP EPS of $0.14 included $0.15 of bottom line impact from significant items, primarily related to COVID-19 and the adoption and implementation of CECL and the corresponding reserve build under these macroeconomic conditions.

Top line results were solid as revenue increased to more than $300 million, driven by strong loan and deposit growth and positive results across our fee-based businesses. Average commercial loans grew $225 million or 6% as we saw activity pick up in late March, particularly in C&I with growth of 17%. I'll note, there was limited impact to average balances from anticipated liquidity draws.

Compared to the first quarter of 2019, average deposits increased 5% with growth in noninterest-bearing deposits of 7%, leading to an improved funding mix. The net interest margin expanded to 3.14%, supported by strong loan growth, a 7 basis point improvement in total cost of funds and higher accretion levels compared to the prior quarter.

The fundamental trends in noninterest income were strong with capital markets revenues of $11 million, setting another record in the first quarter. Insurance and mortgage banking income also had strong underlying performance. Due to the significant shift in the interest rate environment, our noninterest income includes $7.7 million of impairment on mortgage servicing rights. Excluding changes in MSR valuations, mortgage banking income totaled $6.7 million, up more than 50% from the first quarter of 2019 with significant pipelines moving forward.

On a core basis, expenses remained stable compared to the fourth quarter, and disciplined expense management will continue to be a top priority as we move beyond this crisis. Vince and Gary will provide more detail on the implementation of CECL and additional details on the financials in their remarks.

With that, I'll turn the call over to Gary.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [4]

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Thank you, Vince, and good morning, everyone. We closed out the first quarter of 2020 with our credit portfolio remaining in a satisfactory position in the midst of the current global challenges that have come as a result of COVID-19. The first quarter also marked the adoption of the CECL accounting standard, which, as I communicated last quarter, brings additional changes to the reporting of credit quality metrics. I will also review the steps we are taking to monitor the book and manage the emerging risks while continuing to meet the credit needs of our borrowers and the communities in which we operate.

Let's now review our first quarter results. The level of delinquency at March 31 totaled 1.13%, up 19 basis points over the prior quarter and included a temporary uptick in early stage, a majority of which has already been brought current. NPLs and OREO totaled 64 basis points, a 9 basis point increase linked quarter. This increase does not reflect credit deterioration, but rather changes in nonaccrual reporting moving from the former PCI pool accounting to the new CECL standard. Net charge-offs remained low at $5.7 million for the quarter or 10 basis points annualized.

Provision expense for the quarter totaled $48 million, of which $38 million relates to a reserve build for adverse macroeconomic conditions tied to COVID-19. The ending reserve stands at 1.44%, up 15 basis points compared to our day 1 CECL reserve of 1.29%, providing NPL coverage of 256% at quarter end. It's worth noting that inclusive of unamortized loan discounts, our period ending reserve represents 66% of our 2018 DFAST severely adverse scenario charge-offs.

Our teams have been working tirelessly over the last several weeks, meeting with borrowers, reviewing credits, tracking performance metrics and administering government-backed lending programs as part of our response to the COVID-19 crisis. We entered the crisis with our credit portfolio in a position of strength due in large part to our core credit philosophies that I have discussed with you before, including consistent underwriting, proactive management of risk, attentive and aggressive workout and a balanced asset mix spanning our entire footprint. We have taken many actions over the last several years to maintain a lower risk profile to position our book to withstand various economic cycles and adverse conditions similar to those we are currently experiencing.

Over the last 4 years, we have sold approximately $700 million in loans to proactively derisk the balance sheet, a large portion of which were higher risk acquired loans that we were able to move off the books at a financial benefit to the company. We've also historically limited our exposure to highly sensitive industries like travel and leisure, food and accommodation and energy, with exposure to these 3 industries remaining very low, totaling only 3.8% of our loan portfolio.

As it relates to relief programs, we were able to quickly mobilize our credit teams to review and approve payment deferral plans for qualified borrowers, which to date totals approximately 6% of our loan portfolio. As an SBA preferred lender, we have also been working diligently to support our small business borrowers in securing PPP financing that is fully backed by the SBA. The volume and key performance metrics for these relief programs are monitored daily through a specialized set of reports developed in response to COVID-19.

Using our holistic credit systems, we have been tracking daily utilization rates, deferral activity, PPP loan volume and borrower impact assessments which are broken down further to allow us to monitor our credit portfolio by line of business, loan product, geography and the industry. In addition to expanded analytics, we have also leveraged our existing allowance and DFAST frameworks to conduct scenario analysis and stress testing, including select loan portfolios. All of the actions taken will help us manage through the challenging conditions faced by the industry today.

Above all, I would like to take a moment to recognize our team of bankers and credit support staff for all of their hard work and dedication to help meet the credit needs of our customers and communities during this challenging time. We'll continue to draw on the leadership and experience of our credit and banking teams to manage through this challenging environment as we have in past cycles.

I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [5]

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Thanks, Gary, and good morning, everyone. Today, I'll cover our results for the first quarter and provide an update on the current environment.

As noted on Slide 9, first quarter GAAP EPS totaled $0.14, which includes $0.15 of significant items. The TCE ratio ended March at 7.36%, reflecting 16 basis points of CECL adoption impact and another 15 basis points for the $48 million of after-tax items. These significant items are listed in the reconciliation tables with the biggest piece being the COVID-19 related reserve build of $38 million during the first quarter. We used a pandemic-driven recessionary scenario in evaluating the macroeconomic projections.

Let's start with a review of the balance sheet on Slide 14. Linked quarter average loan growth totaled $278 million or 5% annualized, attributable to commercial growth of 6% and consumer growth of 2%. The average commercial growth includes less than 1 percentage point annualized for COVID-19 related increases in commercial line utilization that occurred in the month of March.

Continuing on the balance sheet slide. On a linked-quarter basis, average deposits were relatively flat as normal seasonal outflows impacted average balances. On a year-over-year basis, average deposits were up $1.2 billion or 5.2%. From an overall liquidity standpoint, we are comfortable with our current position including the benefit of opportunistically accessing the debt capital markets to raise $300 million in holding company liquidity at very attractive spreads on February 20. We also executed a portion of our previously announced share repurchase program, buying back 2.4 million shares prior to March 12, representing 0.7% of our total shares outstanding.

Turning to the income statement on Slide 15. Net interest income totaled $233 million, up $6.2 million or 2.7% from last quarter. The net interest margin expanded 7 basis points to 3.14%, driven by solid average loan growth, lower cost of funds and higher discount accretion levels now that we are in a CECL environment. During the first quarter, the higher discount accretion offset the pressure on variable rate loan yields given the significant decline in the short end of the curve. On the funding side, the total cost of funds decreased 7 basis points to 1.01% from 1.08%, reflecting lower borrowing costs as well as a shift in funding mix and a 10 basis point reduction in the cost of interest-bearing deposits.

Slides 16 and 17 provide details for noninterest income and expense. There continues to be strong performance in capital markets, mortgage banking, insurance and trust as well as for operating noninterest income as a whole. As Vince noted earlier, we are consistently receiving positive contributions from our fee-based businesses, which diversifies our revenue base and helps to mitigate the impact of a volatile interest rate environment.

Looking at the first quarter, noninterest income totaled $68.5 million, a 7.4% decrease from last quarter due mainly to the impact from the $7.7 million MSR impairment given the moon down in interest rates. Excluding the impairment, non-interest income increased $2.2 million or 3%, with capital markets posting a record $11.1 million, increasing 29% from the fourth quarter, driven by strong origination volume.

Turning to Slide 17. Noninterest expense on a run rate basis remained stable compared to fourth quarter levels. This excludes $2 million of expenses associated with COVID-19, $8.3 million of branch consolidation costs and $5.6 million of expense related to changes in retirement provisions for new grants under our long-term incentive program that do not affect the total cost of the grants but do affect the expense recognition timing.

Bank shares and franchise taxes increased $1.7 million, reflecting the recognition of a $1.2 million state tax credit in the prior quarter and higher year-end 2019 bank capital levels, while other increases and decreases essentially offset each other. The efficiency ratio equaled 59% compared to 56% as the other unusual or outsized items increased the current quarter's efficiency ratio by over 3 percentage points.

Regarding guidance, the outlook we shared in January is no longer relevant given the impacts of the COVID-19 pandemic on the overall economy and the uncertainty around the length of time it takes to recover. However, in the spirit of transparency into our short-term forecast, we are providing our current directional outlook for the second quarter of 2020 on Slide 18 based on what we know today which is subject to change given the very fluid situation we are all managing through.

We expect second quarter net interest income to decline mid-single digits from first quarter levels as the net interest margin reflects a full quarter's impact of the current interest rate levels. We expect average loan balances to be up mid- to high-single digits, reflecting higher March 31 spot balances and $2.1 billion of PPP loans from the initial phase of the program that are expected to fund during the quarter. The second phase of the program would be additive to these figures as we strive to accommodate all of our customers that want to participate. We expect expenses to be flat from the core level of $178 million this quarter. We expect our core fee trends to continue from solid levels in the first quarter with service charges expected to decline due to COVID-19 impacts on certain products and services. We expect the effective tax rate to be around 20%.

With that, I will turn the call back to Vince.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [6]

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Thanks, Vince. I'd like to touch on several initiatives that stand out as we move forward.

In January, we launched our new interactive website designed with enhanced functionality that creates a one-stop shopping and interactive digital experience, online appointment setting, a streamlined account opening process and deploying interactive teller machines throughout our footprint are just a few of the functionalities that our clicks-to-bricks digital strategy affords us. Combined with our network of nearly 40 ITMs and 550 ATMs and our robust award-winning mobile application, we are well-positioned to continue to provide service to our customers through multiple channels and meet their needs during this time of social distancing and economic challenges. We've invested heavily in our mobile and online platform which is critical during a time of limited operations in the physical channels. Mobile deposits are up more than 40% in the last 2 weeks of March compared to the year ago period and pre COVID-19 first quarter levels. FNB will continue to build out our digital capabilities as previously planned.

To protect our customers and communities from economic disruption, FNB was one of the first banks to develop a structured deferral program and announced several measures to support customers who may be enduring financial hardships and were directly impacted by COVID-19. Furthermore, we instituted an outreach program and activated an outbound calling initiative to contact thousands of customers across all business units during the crisis, ensuring their needs were being met. We also continue to participate in the previously mentioned Paycheck Protection Program and elevate -- and evaluate other COVID-19 related federal government relief programs to determine their suitability for our customers and communities.

Regarding our outlook, liquidity and overall capital position, we consistently run stress tests for a variety of economic situations, including severely adverse scenarios that have economic conditions like current conditions. Under these scenarios, our regulatory capital ratios remain above the threshold and we are able to maintain appropriate liquidity levels, demonstrating our ability to continue to support all of our constituencies under stressful financial conditions. As we gain more clarity on this evolving health pandemic and the resulting challenging economic environment, we will continue to update you on key business drivers and expectations.

In closing, I'd like to express how proud I am of our team's efforts during this very difficult time to identify new and creative ways to connect with those in need. This is an unprecedented time for our nation and our industry. Our mission has always been to improve the quality of life in the communities we serve. Now more than ever, we must work together to support those impacted by this public health crisis. As such, I want to again say thank you to our employees and all those serving on the front line in our communities who are making a difference as we navigate through this together.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jared Shaw with Wells Fargo Securities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [2]

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Maybe first on the margin. Walk us through some of the moving parts as you look out into second quarter. I would think that with the strong growth in PPP, that, that would offset some of the pressure in second quarter. I guess maybe on the PPP, are you accounting for those fees or do you anticipate to account for those fees through NII? And then what is the blended fee rate on the $2.1 billion that you have there?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [3]

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Sure. I can make a few comments, Jared. So just kind of walking through the outlook for the net interest income going forward. As we've talked about in the past, the changes in 1-month LIBOR and prime have a significant impact on our net interest income and margin. If you look at where our average LIBOR was for the last couple of quarters and projection for this quarter, it was 1.84% in the fourth quarter, 1.68% in the first quarter and projected to be around 0.70% on average for the second quarter. We have $8.5 billion in LIBOR-based loans and another $2.9 billion that's prime-based loan. So the projected move down obviously impacts those loan portfolios.

Now offsetting the impact, we continue to reduce the rates on our interest-bearing deposit costs, as we've talked about. We're projecting another 33 basis point reduction in the second quarter from first quarter levels. And then we will have benefits, as you mentioned, from the PPP program as we fund this quarter. Now the $2.1 billion, you'll have -- our average fee rate, we're estimating is around 3% is how that would kind of calculate out when you go through the tiering. The spread is 65 basis points. So kind of an all-in margin is around 2% to 2.25% for those loans. The way we're going to account for it is you put them on the loan system kind of loan by loan. So it's accreted in over a 2-year period. And then once the loans are forgiven and paid off, you would bring in the remainder of the fees into interest income at that point in time.

And then lastly, the last piece I would comment on too is just the accretion that we had this quarter running through in kind of a CECL environment versus the pre-CECL environment. So it was about $17 million in this quarter. It's up about $7 million from the fourth quarter. So that contributed to the first quarter. I don't expect it to be quite at that level in the second quarter, but I don't know because it's a function of prepayments. And with -- under the CECL accounting, there's a lot more variables that get factored into that with prepayments being a big contributor. So I still expect it to be a meaningful contributor in the second quarter, just not quite at that -- as high as that $17 million. If you looked at the last third and fourth quarter of last year, we were running 10 to 12 basis points from accretion. It's probably a reasonable run rate, subject to change based on what happens with prepayments during the quarter.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [4]

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Jared, a couple of other points on the PPP program. Our -- of the 15,000 applications that we brought in, we have kind of originated an average loan size of about $180,000. So we're on the lower end of the spectrum in terms of size. We have more small businesses coming through that pipeline. We still have 25% that are still out there. That totals about $650 million that we processed and are ready to be processed in round 2 once the funds are available. And we would expect some additional fundings on top of that, just in the spirit of transparency. We've also funded about 90% of the $2.1 billion already. So they're closed and on the books.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [5]

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On the loan growth this quarter, did I hear you right? Did you say that there was only 1% of the growth was from increased line utilization? Or was that line utilization went up 1%?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [6]

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No, it was 1% on average, right? So line utilization occurred later in March that we would have had. So on average, the -- it's 1% of that 5% growth that I mentioned, the average balance growth.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [7]

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Jared, I can add to Vince's comments there. Our usage was running around 42%, a little over 42% prior to the COVID impact. It peaked at just under 47%, as businesses built some cash positions. We're already back down to 43.8%. So it's really getting close back to a normalized level at this point.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [8]

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But we really don't have a significant amount of large corporate exposure that essentially was funded up either to put liquidity on their balance sheet or to back up commercial paper offerings. We don't have a tremendous amount of that in our portfolio. So the liquidity draws were much lower than what others would have reported.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [9]

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Okay, great. And then just finally for me, the -- sorry. On the deferrals, you said that 6% of total loans are in deferral. Are you seeing any concentration in either category of loan or geography?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [10]

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Right now, we're at about 5%. We expect with the pipeline to be at about 6% or just a touch over 6% based on the pipeline that we have. In terms of those deferrals, we're seeing those in the industries that you would expect; restaurant, travel, tourism. Those books are very small from our perspective as we've strategically, really not had to focus on lending into that space, as we've talked in the past, so it's really concentrated kind of there.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [11]

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And if you look at the dispersion of deferrals, it's all -- it's pretty similar across the loan types in terms of percentage of the size of the portfolio, right, Gary? I mean it's ranging around 2.5% -- 2% to 2.9%. It's pretty much where it is. So it's pretty consistent. We're not seeing a spike in 1 particular area.

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Operator [12]

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Our next question comes from Frank Schiraldi with Piper Sandler.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [13]

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Just curious on -- if you can give any more detail, Gary, around stress testing. And if we sort of think about the baseline outlook, how loss expectations stack up to the last cycle to 08'-09' at the Legacy Bank, but I guess, every -- excluding Florida from back then?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [14]

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Yes. Frank, what I would say to you is that we have been very proactive and strategically have derisked the balance sheet over the last number of years, like I mentioned earlier, and we're coming off some very solid charge-off levels over the last 18 months. Naturally, the world has changed. We expect that consistency in the underwriting that we talk about with you all the time on the front end to play a meaningful role as we go forward here. In terms of charge-offs, all banks are going to experience credit deterioration as is typical in any downturn. And this one is rather severe at this point.

In our last stress test, we remained well capitalized and expect to be able to fully execute our business plan from a charge-off standpoint under those adverse scenarios. And to the extent that the forecasted economic conditions under the CECL methodology are worse, then COVID-19 conditions are at this point that we used at March 27 date. So we're using some very current COVID information around our modeling. We would expect any potential reserve build to occur from normal levels based on movements from this point in time. So from a loss perspective, we're not going to forecast losses as we go forward. But we do expect the portfolio to perform as well as possible through the cycle that we're dealing with right now based on the consistency that we've talked about in the underwriting.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [15]

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Yes. And if you go to Page 13 in the deck, Frank, there's a comparison on FNB's performance, our net charge-offs over average loans back historically. Gary, maybe you could comment on that. I mean it does exclude Regency and the Florida portfolio that we divested.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [16]

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Yes. So back in the 2009 and '10 great recession that we all experienced a number of years ago. On Page 13, you see FNB's performance through that cycle. This is basically the core bank. At that point in time, it did exclude -- it does exclude Florida and Regency as those portfolios are now no longer a part of the company's balance sheet. That consistent underwriting that we had in place back then remains today. And we do expect that, that will allow us to perform better than the industry as a whole as this cycle moves through itself.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [17]

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Okay. And then just back to the margin and NII guide for 2Q, Vince. So does that include any accretion in NII expectations? Or I don't know, have you left yourself enough -- wide enough range there? Just curious.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [18]

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No, it would include my comment earlier about kind of 10 to 12 basis points. If you look at the third and fourth quarter kind of run rates, which were pre CECL, I would expect that to be kind of more normal run rate next quarter, right? Again, it's a function of prepayments, though. If prepayments end up being high again, we would have more. So I think that's kind of -- it's kind of a reasonable number, I would say, Frank. And I truly won't know until you -- kind of quarter plays itself out. But there's definitely that kind of 10 to 12 in there for the second quarter. That's baked into our number. And then also, I should clarify too that we mentioned the $2.1 billion in the PPP activity. That's on the books for 2 months of the quarter. So you don't have [$2.1 billion], you have 2/3 of that, just from a modeling standpoint. And that's included in the number too into the target.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [19]

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But I guess what wouldn't be included is if they are only on the books for 2 months, well, I guess it's late in that quarter. So you don't have anything from the 3% being accelerated because some of this stuff is going to be forgiven, nothing like that is in 2Q?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [20]

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No. No. It's just -- what it would include is normal accretion within that 2-year time frame. It's going to probably -- that forgiveness process is probably going to get you through June 30. There's going to be a process.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [21]

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I would expect it would get you beyond June 30, Frank. So you probably look at the third quarter event there starting with the forgiveness items to go through.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [22]

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Yes. So I don't have any acceleration to that fee in my number, Frank. It's just kind of normal accretion for 2-year period.

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Frank Joseph Schiraldi, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [23]

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And then just finally, what is your expectation for LIBOR in this guidance? Is it just sort of steady state from here?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [24]

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Well, I mentioned in my earlier comments that 70 basis points is kind of what we're projecting. I mean we're in the -- I think we're in the high 50s right now. So for the quarter, on average, 70, we started the quarter a little bit higher. So that's what's baked into our numbers.

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Operator [25]

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Our next question comes from Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [26]

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I wanted to start, maybe, Gary, with just the additional COVID-19 reserve that you put up this quarter. Can you just talk about sort of the assumptions that went into that, the macroeconomic assumptions and any weightings that you used or management overlays to arrive at that number?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [27]

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Sure. I can give you an overview of that. We're using a pandemic recession scenario where we see significant deterioration in the economy upfront. With slight improvement later in the year and then a continued economic weakness throughout 2021. We're not taking into account in our analysis any of the government stimulus programs around our modeling. So there's no benefit from any of that. We review and incorporate really about a dozen variables, just like we always have in the DFAST modeling scenarios that we continue to run and those variables include a few examples I'll give you such as the Dow, housing, consumer confidence levels, GDP and unemployment are a number of the examples there. But that's really what's driving our models and the analysis that we've done around the portfolio.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [28]

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And I would assume that was time-stamped kind of end of March. So commissions maybe have worsened a little bit since then. If we stay on kind of a similar trajectory, that would require more reserve build potentially next quarter, just depending on where we stand?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [29]

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Well, we continue to run these scenarios. We've run them as recent as the last couple of days. Based on the update. Again, our model was run as of the March 27 time frame. And as of our most recent run with the updated data, it's really not a material difference, albeit slightly, but nothing material based on just simulated models that we're running.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [30]

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Okay. And Gary, I think you've done a great job on the slide here breaking out kind of all the COVID-sensitive industries, et cetera. Are there any areas that we should be particularly watchful over that you think may have more near-term risk than others, whether it be less liquidity, less cash or more severely impacted collateral?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [31]

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Yes. I would say that from an industry standpoint, naturally, restaurants are severely impacted. Hotels are severely impacted. Energy is in a tough spot right now, also being impacted. These are some of the categories, specifically hotels and the energy, we do have a small restaurant book and some very good clients there. We stopped lending into the hotel space 4.5 years ago. It was a strategic decision, and it's proven to be a very good one. We've got some assets, as we've talked in the past, from the acquisitions. We've derisked that portfolio and not been active in lending into that at all. As for energy, I mean you can see by the slide deck, I mean we're not an energy lender. We got a few customers that are very sound and -- as well as a few publicly traded entities there that continue to perform well. But those are the industries that I would be initially concerned about as we're in the early stages here. And with all the uncertainty that everyone is still facing, that have the potential to become more problematic at a faster pace. Again, strategically, we've positioned ourselves and made decisions over time to maintain very, very small portfolios there. And I think that's going to pay dividends for us as we move through this cycle.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [32]

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And I think in the past, we disclosed our energy-related exposures back a few years ago, right Gary? When there was a downturn. I think it was about 3, maybe 4 years ago. We've cut that exposure in half. So -- I mean I think it's pretty evident that we've not been active in these areas. I think you should comment on the retail exposure as well because as you look at operations in the current environment, I mean it's difficult for many retailers. If you look at the granularity of our book as well, on the retail side, there are some segments within retail that are going to continue to perform, right? Grocery, there's a number, I mean.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [33]

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Yes. And I think that's an important point as well, Vince, because that -- naturally, there are concerns there. A key point here, the grocery, gas station, automotive, that makes up 2/3 of our retail C&I book. So that's a heavy dose of it. A number of those industries have remained open as essential industries. So we feel fairly good about the position of our retail book coming into this as well as working its way through a soft spot here from an economic standpoint.

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Operator [34]

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Our next question comes from Casey Haire with Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP & Equity Analyst [35]

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I guess first question on the second quarter guide as it relates to the balance sheet. Is the -- should we just assume that earning assets track loan growth here? Because the securities book was flattish and deposits were down. Just trying to get a sense as to what kind of balance sheet we can expect in the second quarter?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [36]

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Yes. It will probably be a little lighter than that because the investment portfolio, we actually shrank during the quarter just given reinvestment. I think we reduced it almost $200 million -- $191 million during the first quarter. So my guess is the cash flow on that is $1.6 billion over 12 months. So I would expect that to kind of run down a little bit from there, again, a function of prepayments. I mean we're doing some investing, just not fully reinvesting the cash flow. So the earning assets would be a little bit lower than that.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [37]

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I think you want to remember that the balances, the depository balances for us are seasonal. That particularly we see as outflows. Yes. So it will build over time.

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Casey Haire, Jefferies LLC, Research Division - VP & Equity Analyst [38]

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Yes. Understood. And just on the loan growth, I mean because $2.1 billion is -- I mean that's 7% of the earning asset base in the first quarter here. And I know you had some line draws towards the end of the quarter. So you're bleeding in positively on a core loan growth basis into the second quarter. But what is the expectation for -- and it sounds like that utilization has come down. So I guess my point is, what is the core loan book? What's the expectation for core FNB loans outside of PPP in the second quarter?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [39]

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Yes. I think it's a little tough to tell at this stage in the game. I mean I think we've got a good solid customer base. We're not seeing a lot of movement. I don't think anybody is really eager to move at this point. So I would expect us to -- I would expect the balances that we have today to be pretty solid. I think that the pipeline is still pretty good. But like I said, we're kind of in a standstill because you can't really visit prospects. I know that we are winning business in the marketplace for a number of reasons. I think our execution on PPP was extraordinarily good relative to what I've seen. We had a capture rate on our customers alone of 80%. We had about 10% new customers when we opened it up to new customers initially. So the execution has been good, and the comments have been pretty favorable. So I would expect, after this all starts to settle down later in the year, that there will be an acceleration in activity. I don't know what else -- I don't know if you want to add anything, Gary?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [40]

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Yes. I mean, Casey, we will -- and we've seen some good, steady business throughout the last month, 1.5 months from our client base. I mean they're still investing, specifically around some certain investments that they had planned. A few of them have temporarily held those off, but we've seen some pretty decent lending activity right through the last 1.5 months or so at this point.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [41]

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And it's -- obviously, you have to be careful because we're in the midst of a crisis. And we understand the impact that could have on financial performance of the borrowers. So we're being cautious. But we're -- I think we're positioned pretty well as we move through this crisis on the other side.

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Casey Haire, Jefferies LLC, Research Division - VP & Equity Analyst [42]

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Understood. And the TCE ratio at 7.40% at the quarter. I know that PPP could put some pressure on that, and it's -- it carries a 0 risk weighting, but you guys are a little bit more levered than most on that ratio. What is your appetite? How low are you willing to get that ratio -- let that ratio go?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [43]

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Well, we're supposed to be growing that. So that was our strategy prior to the crisis. I think we're -- again, I think our capital position relative to the risk in the portfolio is good. I think that we've mentioned, we've stressed our capital position in a variety of scenarios including the pandemic scenario that Gary mentioned. So I feel pretty good about that. I would expect, as we move into the future, to see an acceleration in the benefit of the fee income really helping us in the third quarter in terms of capital build because I think that you'll see an acceleration, and hopefully, and forgiveness on these loans as people comply with the requirements that will be laid out. I mean they're not out there yet, but will be laid out. So I think all of that keeps us in a pretty good place from a TCE perspective and tangible book value per share perspective. Vince, I don't know if you want to add anything? Or have I missed anything?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [44]

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Yes. I would just add that -- a couple of things. I mean absent the PPP impacts, we would expect that ratio to be solely building on a quarterly basis to your point, that it was building. So I think it's important to remember that. That's kind of went underneath. The temporary impact of the $2.1 billion brings us down just under 7%. We're comfortable with that for all the reasons that Vince mentioned and the strength of the balance sheet. And then whatever happens in Phase 2 now as far as the funding, that would incrementally bring you down from there. But $2 billion brings you from basically 7.36% to 6.95%. So it's about 21 basis points or so for $1 billion worth of those loans. And again, they're temporary. And as you know, they don't affect the regulatory ratios at all, but they do affect the TCE ratio. So we're comfortable with that temporary level and then kind of rebuilding from there once those loans go back off the books.

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Casey Haire, Jefferies LLC, Research Division - VP & Equity Analyst [45]

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Okay. Just last one for me. Gary, apologies if I missed this in your -- on your script, but the forbearance and the modifications, can you just give us a sense, has that -- at 6%, is that -- has that reached a peak and similar to the line draws that they peaked and then they came back down? Just trying to get a sense for the pace of forbearance.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [46]

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Yes. Just to clarify, Casey, we're at about 5% right now. And with the pipeline, we're anticipating that it's going to get to just a touch over 6%. It has slowed dramatically at this point. We do expect a continued trickle there, but it has slowed dramatically from a commercial borrower perspective. We're still working through some of the mortgage portfolio at this point, but that has also slowed as we sit today.

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Operator [47]

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Our next question comes from Russell Gunther of D.A. Davidson.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [48]

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Just a couple of follow-ups. Gary, so -- for you, I appreciate all the granularity. Just wanted to circle back on the COVID-19 sensitive exposure, as you called out restaurant, hotels, energy. Anything you could share from an underwriting perspective as to where LTVs and debt service coverage stands? And then the follow-up would be, you mentioned internal stress test that you're performing. Just curious as to type of loss rates you would be assuming within those 3 at-risk buckets as well?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [49]

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Yes. In terms of the industries, from an LTV standpoint, generally speaking, you're going to see 70%, low 70% range around LTVs around those spaces. And that's going to run fairly consistent across our portfolio. What was the second piece of the question, Russell?

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [50]

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Just any detail you could share, Gary, in terms of the internal stress testing that you mentioned in your comments and assumed loss rates within some of the more at-risk portfolios?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [51]

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Okay. Vince is going to cover that.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [52]

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Yes. I would just say, Russell, I mean that we wanted to put that 66% out there. So just to restate what was in Gary's notes. So if you include the unamortized loan discounts, our period-end reserve at March 31 is 66% of the severely adverse charge-offs over 9 quarters from the last stress test that we did, just to put it in perspective that it's a significant reserve against those charge-offs. And we haven't really disclosed all the different pieces of the different loss rates. But what I can tell you is we hit it very hard in that severely adverse scenario and have every time we've done it.

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Operator [53]

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Our next question comes from Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [54]

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Just to stick to the credit discussion for a second. So if we kind of assume, Gary, you mentioned kind of 6% of the -- you're seeing in terms of deferrals right now? I guess that's like $1.4 billion. Do you know how much of those deferrals would be included in that, I guess, roughly $3.5 billion of sort of COVID-sensitive loans that you classified in Slide 11?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [55]

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Yes. In terms of the deferred loans in the retail IRE book, it's a total of $470 million. The food and accommodation is about $75 million. And let me find the lodging here. The lodging is about $175 million and the retail right at about $145 million.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [56]

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Okay. And then the rest is just like, I'm guessing just smaller granular numbers.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [57]

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That's correct, Collyn.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [58]

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Okay. Okay. All right. That's helpful. And then I just wanted to clarify, Vince, on the news, just to make sure I've got these numbers right. So the actual accretion dollar amount that you guys saw this quarter was what, if we compare that to like the $9.6 million you guys saw in the fourth quarter?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [59]

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Yes. It was $17 million -- $17.1 million.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [60]

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Okay. Okay. So then on a core NIM basis, is that -- I guess that would imply maybe then the core NIM fell about 4 bps in the first quarter, is that right? So core NIM would settle out at like 2.90?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [61]

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Yes. If you excluded that, I mean it's kind of all in there, right, as we go forward in the CECL environment. So the $17 million, I'm trying to think of -- hang on a second. Yes, I guess that's about 3 to -- what is it, 5 to 6 basis points would be -- $8.8 million is 3 basis points of margin, so. Yes, it's around 5 basis points or so.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [62]

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Okay. Got it. Okay. And then just lastly, on kind of the loan growth discussion. And trying to reconcile, Gary, kind of your comment about the pipeline and you still have some customer activities still flowing through. But yes, obviously, there's a lot of activity that also has come to kind of a screeching halt. But then just thinking about kind of, I guess, capital markets, it sounds like you -- I mean you obviously had a good quarter in capital markets this quarter. And it sounds like the expectation there based on your guidance is that, that -- those levels should hold into this quarter. So I'm just trying to understand, I guess, you're seeing there's a visible pipeline there that would cause you to say that? Or just trying to reconcile maybe the thought that activity would start to slow pretty meaningfully there. So just trying to understand why you still have -- go ahead.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [63]

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Yes. I think you have to look at fee income in total, Collyn, because the mortgage bank is -- their pipeline is huge. So when they took the big impairment, I don't anticipate -- I'm not sure what's going to happen with interest rates. I don't want to forecast. But I would expect that their fee income in the next quarter would be significantly higher. And then you have the SBA business outside of the PPP program that had a pretty solid pipeline going into this situation. And then there's a lot of activity. The first 2 months of March were pretty darn good from an origination perspective for us across the geographies. So I would expect that capital markets activity would continue into next quarter. I can't predict at what level, but I would expect it to continue because there are a number of companies that would like to fix their debt, and there are several deals that we were working through from a syndications perspective. So again, there's a lot of uncertainty. We're trying to do the best we can with the forecasting, but we were looking pretty good going into this. We'll see what happens as it all shakes out.

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Operator [64]

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Our next question comes from Broderick Preston with Stephens Inc.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [65]

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I just want to circle back on the PPP fee income -- the PPP income recognition. So I just want to better understand why it would, I guess, be pushed out to 3Q because just from an accrual accounting perspective, you did most of the activity here early in the second quarter and then there's the 8-week period which gets us to sort of the beginning weeks of June. And so I would think that you would have a sense for, at least for round one, what's been utilized by June and so what will be forgiven? And just so why wouldn't you accrue for that in 2Q as opposed to 3Q?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [66]

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Well, there's a process. They still have to put out the guidelines on the forgiveness as to how that process is going to work, Brody. So you're really not going to know with certainty that every single loan will get that forgiveness. They're a 100% guaranteed, so from a risk standpoint, you're covered there. But from a kind of loan accounting standpoint, you can't really bring in the unamortized or unaccreted fee until the loan is forgiven and paid off. So since you don't know with certainty that all 100% of those are going to be forgiven when they go through the still to be defined SBA process, that's why. And we'll accrete some of it in, but the full amount really doesn't come in until the loan is truly paid off and then you would bring it in.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [67]

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And I'd say given the size of our client coming through, I mean the last batch that we funded was under $100,000. So I think that there's going to be a bigger delay. We have more small businesses that we brought through here. Our average is way lower than many out there. So the timing of when that -- they prepare the information to get the forgiveness in the queue on the process that we don't have yet is a big question mark. So I think for us, it's going to be maybe a little slower because the customers aren't as sophisticated, right? So it might take them a little longer.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [68]

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Well, plus there's an 8-week period that's baked into that, Brody, right? So you first have to wait till after 8 weeks and then you have to follow whatever the process is that the SBA lays out as far as how it's going to work. So that gets you through June 30 and gets into the third quarter.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [69]

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Yes, right. And that's why -- yes, they're matching the fee up with the loan on a per loan basis. And then kind of baking it into the yield, I guess, so it will show up.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [70]

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Right. Okay. That's helpful. And then just wanted to -- just want to go back. Gary, you said you're at 5% of loans on deferral right now, expect to get up to about 6%, just given what's in the pipeline. So that's about $1.4 billion. You all, I guess, in the slide deck, you're starting with 90-day deferrals for these customers, right? FASB and the regulators have sort of given leeway to get up to 180 days deferral period. Do you expect to go there for the bulk of these loans? Or are you seeing -- I guess, like if you could give some color on the type of borrower that's taking advantage of the deferrals? Are you seeing a mix between borrowers that actually need it and maybe some borrowers that are pretty strong and maybe just want some extra liquidity?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [71]

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We are seeing that. And what I can tell you, Brody, is a significant piece of the -- significant percentage of the commercial borrowers which we've offered interest-only payments to essentially deferring the principal only or a full deferral, we are very heavy on the interest-only side of that equation. So the borrowers are choosing north of 70% of the time to pay the interest and just defer the principal. So I think that speaks to the quality of the borrower and the portfolio that's looking for deferrals here. I think they are looking for -- to preserve cash and deferrals are available. So they're taking advantage of that appropriately. As far as the 180 days concerned, we will support borrowers that need it for an additional 90 days. So we will be working with those borrowers as we go forward. I would expect the restaurant industry would be an industry that would need an additional 90 days as potentially that hotel industry as well. So primarily, I think they're going to be heavily focused there.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [72]

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Okay. That's great color. And I guess the reason I'm asking is just that I'm trying to gauge whether or not you would expect to see a significant increase in your accrued interest receivable line item, which just based on the fact that 70% of your commercial borrowers are continuing -- are asking for IO. I'm assuming that you don't expect to see your accrued interest receivable to move significantly higher?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [73]

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And some of it will be capitalized into the loan too.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [74]

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Right. Right. No, no, we don't.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [75]

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Okay. Just -- because I guess I'm wondering, like with some of these borrowers, like where you're accruing interest or maybe you're not necessarily receiving it, that will get capitalized into the loan balance, maybe on the back end, but I'm assuming that, that would flow into accrued interest receivable in the interim, correct?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [76]

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Well, not if you're capitalizing it. If you're capitalizing it, it becomes part of the loan balance.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [77]

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Okay.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [78]

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Essentially, it's funding...

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [79]

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Right.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [80]

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Yes. You're funding it and then packing it on to the end of the loan, accruing interest on a higher balance over a period of time.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [81]

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That's right.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [82]

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That's what's happening.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [83]

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Albeit small, it is right.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [84]

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Smaller, but -- it is a small piece, but it is a bit higher. Yes.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [85]

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Okay. And you had -- you mentioned that the 60 -- the current reserve would be 66% of the 2018 DFAST in the severe loss scenario. So that's severe loss sort of fits to about $520 million, perhaps just doing the math. Is that a 1-year loss scenario or is that spread out over multiple years in that stress test?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [86]

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So that's over 9 quarters. The way you do the stress testing. That cumulative loss is over a 9-quarter period.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [87]

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So it sounds like just based on that and just given what the PPNR run rate is that you wouldn't even need to dip into the reserve because PPNR would more than cover the losses. Is that fair to say?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [88]

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I'm not sure I'm following you, Brody. Can you restate that?

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [89]

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Yes. Like your PPNR levels are more than adequate at that level over that time to cover those losses if you provision for it every quarter where you wouldn't necessarily need to dip into the reserve?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [90]

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Oh, I see what you're saying. Yes. Well, it depends on how the economy plays out.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [91]

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How it plays out.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [92]

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Let's hope that.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [93]

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Yes.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [94]

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Right. Right. And then Vince, you mentioned an interesting stat. Mobile deposits being up 40% in the last 2 weeks. And I know that the situation is fluid, but that's a pretty big number. And so I just wanted to better understand. Has anything happened in the last month or so that's changed how you're thinking about your footprint? Are there any geographies where customer behavior has surprised you in terms of mobile adoption during this time frame? Or you hadn't previously considered branch cutting and now maybe you're thinking about it?

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [95]

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Well, we've cut a lot of branches. In fact, we cut 16 leading up to this. We probably would have left them open had we not already gone down the path. What I'm finding -- what's interesting is that we're still seeing about 65% (sic) [66%] of the normal volume in the branches from a transaction perspective. So what that's telling me is that while people are willing to use remote capture, and that's remote capture end-to-end. So that could be small businesses. Instead of going to the branch, using their device in their office. It's mobile, people using their mobile device, like I mentioned, and we increased the limits to permit more checks to flow through there. I would expect and what we've witnessed is a number of customers that may have been older that weren't using our online and mobile products are now signing up for it. So we're walking them through it in the branches. So I would expect adoption of those products to be accelerated. We've significantly reduced the number of branches. I think we're getting to the point where the diversion of those branches is good. And if we continue to cut at this rate without making some sort of capital investment in the delivery channel, it will begin to erode our ability to grow. So we -- and we're looking at that. And what I mean by that is we're going to have to be strategic about closures. You may have to build a new facility and take 2 out in an area where we can accommodate a consolidation, but it requires CapEx spend. That's where we are, I think, in the evolution of branch closures.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [96]

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Okay. And then a couple of real quick ones that I have on...

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [97]

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The other thing I will mention is we also saw a significant uptick in ITM transactions, obviously. So we have about 40 ITMs, the interactive teller machine, where you can actually speak to a human being, cash a check down to a penny. They've been -- the utilization on those has increased in the last several weeks. Again, the more comfortable consumers become using these devices and the equipment, I think, bodes well for the future in terms of utilization, which could lead to more efficiency in the branches from an HR perspective. So there's other ways to look at it. But it's a good question, and I appreciate the question.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [98]

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Yes. And then one last one for me just with capital. I'm just assuming the buybacks are on hold? I'm sorry if you said that, I missed it.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [99]

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The buyback is on hold. I think Vince mentioned in his prepared comments, we acquired about $25 million worth of shares prior to everything in floating and then we put it on hold to preserve capital.

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Operator [100]

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Our next question comes from Brian Martin with Janney Montgomery.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [101]

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Most of my stuff has been covered, but just -- maybe I just -- on the -- back to the PPP for just a minute, Gary, or I guess, maybe, Vince, I'm sorry. The -- if you talk about the 3% rate and you talk about $2.1 billion, just so I understand the -- what you're talking about as far as when the benefit is realized or how you guys are thinking about it, just given there's not a lot of disclosure on it or how you're going to do that. If you take 3% and you're talking $60 million, and you kind of -- as you recognize it the next couple of quarters or just kind of what you guys are thinking about, can you give any sense for just how that $60 million, just on the fee part, not the spread part would, as you're thinking about it today would flow-through from a high-level perspective? How much of the benefit in the second and third quarter -- or in third and fourth quarter?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [102]

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Yes. It would come in over the 2 years, Brian, absent stuff, once it's forgiven, then you would bring in whatever is left. It's accounted for loan by loan. So basically, the figure you quoted, the 60-ish, which is what the math would work out to be, it just gets spread over the 2-year period, which is the life of the loans, the stated life of the loans, I guess I should say. And then what we were saying earlier is that the way the process we expect it to work, the loans are not going to be forgiven until you get into the third quarter when they would get paid off. And then we would bring whatever is left on each loan that's forgiven, you would bring that into income during the third quarter. So I quoted like 2-point -- 2.25% kind of all in yields that we would have is what was kind of baked in for the second quarter.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [103]

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Got you. Okay. That's helpful. And then just on the -- I guess, as it relates to the balance sheet and capital, I mean Gary, you talked about the loans you sold, the assets you sold over the last couple of years. Is there anything, I guess, you would consider, I guess, is that something you guys are thinking about now, any other asset sales here going forward? Or is that not really something you're thinking about today?

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [104]

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Yes. We're constantly looking at the balance sheet, Brian, and we don't have anything positioned at all that we have any interest in selling at this point. That being said, we're always looking at the mortgage portfolio. So if there would be anything, it would just be a normal type of mortgage pool that would be sold, but nothing other than that.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [105]

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And It would be a challenge. I mean we sold those portfolios during a more robust time. So I think -- and we were able to get out of those exposures, in most cases, at a premium. And I go back, I reflect back on the calls. I know we were under tremendous pressure to grow revenue, but Gary made the strategic decision to exit certain classes -- asset classes. Hospitality was a large component of those loans that were sold, and they were past credits in many instances. So we -- I think we've taken a big bite out of the apple in terms of risk management. And if you look back, getting out of Regency, moving away from certain mortgage products that we decided to sell, looking at the credit portfolios, the acquired portfolios that had a heavy concentration in hospitality and other areas that we didn't have an appetite for, we packaged and sold. And we sold them at a time when you could get a gain on the sale because there was more certainty at that time. Credit spreads were narrower. I hope that answers.

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Gary Lee Guerrieri, F.N.B. Corporation - Chief Credit Officer [106]

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Yes. The other thing I would add around that, Brian, is our workout team. We've really strengthened it over the course of the last 2, 2.5 years, and they have been doing some tremendous work moving assets off the books that we want off the books. And we're seeing that continued today. So we're benefiting from that as well. And that's something that is a core focus of the company and will continue to be.

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Brian Joseph Martin, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [107]

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That's it. Okay. No, that's helpful. And I think that looks like a great move. So just the last one for me was just on the fee income part. Just 2 questions. Did I hear you right -- I know the service charges were down this quarter, but you would expect them to go down further. And just if you gave any color on, just given the market conditions, kind of how you're thinking about the wealth of the trust business today, if that's also comes under pressure, you already saw some of that. Are you seeing any of that?

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Vincent J. Calabrese, F.N.B. Corporation - CFO [108]

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Last part, and I'll go back to the forecast.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [109]

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Go ahead.

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Vincent J. Calabrese, F.N.B. Corporation - CFO [110]

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Okay. All right. Yes, I can -- I guess what I would say, the guidance that we have there is just expecting kind of core noninterest income to be stable from where we were except for the weaker service charges. I mean we do expect -- we've seen some increased waivers, not a big number, I mean less than $1 million that we've seen in, say, the first 4 weeks of this. So there's some impact there. And then there's just less activity. So the comment was that expecting to see weaker service charges on the deposit transaction. So that will kind of run against what's happening in the other businesses. We're still looking for strong contributions. When you look at the noninterest income slide that we have in the deck, I mean we could see the movement up year-over-year versus the fourth quarter and trust, insurance, securities commissions, capital markets was all very strong. I mean the percentage growth versus both fourth quarter and first quarter a year ago is up very nicely. And we've invested in those businesses. We've continued to build out the teams there. So I think those contributions are -- have been very important to mitigate the interest rate impacts. And then mortgage, we would expect, without an MSR impact this quarter, we would expect that number to kind of come back to a normal good solid level in the second quarter.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [111]

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But from an earnings perspective, if you're speaking about net asset values declining because of the overall market decline, I would not expect that to be meaningful or material, right? So on an earnings perspective, I'd say it's not going to be material.

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Operator [112]

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This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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Vincent J. Delie, F.N.B. Corporation - Chairman, President & CEO [113]

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Well, first of all, I'd like to thank everybody for the thoughtful questions. I hope you found the information valuable. We've tried to provide additional information on the credit portfolio so that everybody could have a better understanding of how we ran our model or what methodology we were using to run our model and where our exposures could potentially be. I think we're in a pretty good place. And I appreciate everybody's thoughtful analysis and questions, and I just hope that everybody stays safe, and we'll look to see you next time. So next quarter, hopefully, we'll have more clarity on where we stand economically. So thank you very much. Take care.

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Operator [114]

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