Q4 2020 F.N.B. Corp Earnings Call
Hello, and welcome to the F N B Corp, fourth quarter, 'twenty 'twenty quarterly earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please don't often specials are pressing the starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your touch on fall.
To try your question. Please press Star then two.
Please note today's event is being recorded I would now teleconference over to Matthew Lazzaro manager of Investor Relations.
Please go ahead.
Thank you good morning, everyone and welcome to our earnings call. This conference call are F&B Corp. In the reported volume.
<unk> Exchange Commission often contain forward looking statements and non-GAAP financial measures non-GAAP financial measures should be viewed in addition to and not as 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 Zero day, 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 Exchange Commission and available on our corporate website. A replay of this call will be available until January 27, and the webcast link will be posted about us investor relations and shareholder services section of our corporate website I will now turn.
The call over to Vincent Lee Chairman, President and CEO.
And welcome to our earnings call. Joining me. This morning are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, Our Chief Credit Officer.
Gary will discuss asset quality and Vince will review the financials.
Today I'll touch on our 2020 financial highlights review last year's accomplishments and wrap up with a discussion about our strategic objectives.
We will then open the call for questions.
First I would like to highlight some key metrics from our 2020 financial results.
<unk> substantial challenges, resulting from the pandemic management took significant actions to protect our employees and preserve shareholder value implementing measures to improve efficiency and increase profitability as we navigated the pandemic.
Looking at the fourth quarter F&B reported operating earnings per share of <unk> 28.
And operating return on tangible common equity increased to 15% building on the upper quartile returns relative to peers through the first nine months in 2020.
Turning to the income statement for fiscal year 2020.
F&B reported record total revenue of $1 2 billion operating net income of $314 million and operating earnings per share of <unk> 96.
While building significant credit reserves to address economic risk associated with the pandemic.
These profitability levels resulted in strong internal capital generation driving our tangible common equity and the CET one ratio to the highest levels in decades, and increasing tangible book value per share by 5% to $7 88.
Because of our performance in the prudent risk management culture.
<unk> continued to pay an attractive dividend.
Our portfolios continued to expand with full year average loan and deposit growth of 11% and 14% respectively.
This growth was due to the resiliency of our bankers and the success of the Paycheck protection program.
With balanced contributions across our legacy footprint and added growth in our southeastern markets.
Our leadership team prioritized a number of financial objectives during fiscal year 2020 designed to drive long term resolve.
Reflecting on the 2020 operational initiatives, we laid out last year's letter to our shareholders. We made significant progress towards those objectives in spite of a difficult operating environment.
We set out to deliver peer leading returns on tangible common equity and drive internal capital generation and growth in tangible book value per share.
Our 2020 return on average tangible common equity of 13% and 5% growth in tangible book value continued to track above others in the industry.
Sustaining this trajectory through execution of this strategy should increase our relative valuation over time compared to peers.
In tandem with delivering this financial performance in a challenging environment, we set out to protect our attractive dividend, while optimizing capital deployment.
For the full year, we paid out $165 million in cash dividends and repurchased nearly $40 million of stock under our current stock repurchase program.
Returning over 200 million directly to shareholders.
From a capital planning perspective, we've now surpassed our previously stated target and completed the adoption of seasonal.
Both leading to enhanced flexibility to optimize capital deployment in this environment.
During the second half of the year, we took significant steps to enhance future risk adjusted return through prudent balance.
Alex sheet action, notably the auto loans sale in November reducing exposure to COVID-19 sensitive industries and the prepayments of higher cost liabilities.
These actions reduce overall credit risks reduce future interest expense.
And provides us with more liquidity moving forward.
In the fourth quarter, we resumed the inaugural F&B share repurchase program. After activity was also in the first quarter due to uncertainty related to the pandemic.
When considering the total capital consumed.
By the dividend and share buybacks combined.
We are pleased to report an increase in year end capital levels.
Approximately 25% of the total shares repurchased were below tangible book value.
Resulting in accretion to that metric.
The overall arching goal of our organization is to grow revenue by prudently, increasing our loan and deposit portfolio, all while maintaining superior credit quality and F&B is risk management culture through the cycle.
During a difficult operating environment, many of our teams exceeded loan and deposit origination targets, while improving our funding mix through a focus on bringing in low cost deposits.
As a proof point loans continued to grow even when excluding the impact of PPP and the auto loan portfolio sale on.
On the deposit side. In addition to an improved deposit mix noninterest bearing deposits surpassed $9 billion to end the year as a percentage of non interest bearing deposits our percentage of non interest bearing deposits increased to 31% up meaningfully from 24% five years ago.
F&B is in a very strong liquidity position with a loan deposit ratio of 87% to fund future loan growth with strength in capital and enhance liquidity.
Diversification and growth in our fee based businesses, namely capital markets mortgage banking wealth management contributed significantly to our record total noninterest income.
Our fee based businesses had an outstanding year with many groups setting all time records for revenue.
In 2020 capital markets mortgage banking wealth management achieved revenue of $39 million $50 million and $49 million respectively.
The strong performance was driven by decreased contribution due to our geographic expansion strategy.
In providing value added solutions to borrowers.
We continue to look for ways to diversify our fee income stream by executing on strategic initiatives, such as growing the mezzanine finance group and enhancing F&B debt capital markets capabilities.
Total operating noninterest income exceeded $300 million and 202020.
Through our continuous investment in both our digital and physical delivery channel, we aspire to provide our customers with intuitive and efficient solution to meet their banking needs.
On the digital front adoption rates from mobile banking users have increased exponentially in 2020 attributable to 18% growth in new users added to the platform in the last nine months.
Looking back over the last five years, we have now consolidated 111 branches.
Opened 12 de novo branches in attractive markets and expanded our ATM capabilities to exceed 800 locations.
These actions enable F&B to optimize our overall footprint with limited disruption for our customers.
We are diligently investing in technology and risk management infrastructure by operating platforms in the retail bank and improving the customer experience.
We continue to evaluate our distribution network regarding consolidation effort as we announced 21 consolidations to take effect in 2021.
Building on F&B strategy to grow its market presence, particularly in Metropolitan Baltimore, and Washington D. C. We entered an agreement with Royal farms Ah regional convenience store, operator that enables us to connect cash distribution services with a robust online and mobile banking offerings.
Providing convenient access to essential banking products and services throughout a broader geographic region with the deployment of more than 200000 ATM locations in the mid Atlantic region.
In addition to withdrawals transfers and balance inquiries.
From the Royal farms, ATM will also feature check and cash check and cash deposits and capabilities to provide customers with even greater flexibility and increased access to broader product offering.
As evidence of successful execution of our growth strategy. According to the most recent FDIC data, we experienced deposit growth and 50% of 53 msas across our footprint.
<unk> achieved top five share position and nearly half of those MSA further illustrating our ability to compete effectively in our markets against a broad spectrum of competitors.
Additionally, we strive to continue to manage costs and improve efficiency.
This is evidenced by F&B, achieving our stated 2020 cost savings goal of $20 million.
In addition to achieving the 2020 target F&B also achieved its roughly $20 million cost target from 2019.
When including our plan to reduce an additional 21 million in expenses during full year 2021 in total this amounts to more than 60 million of expense reduction over the three year period.
Because of our proactive expense management initiatives, our efficiency ratio remained at a good level at 56%. Despite pressures on net interest income and a challenging rate environment and continued capital investment in technology.
Our strategy is proven through varying cycles as evidenced by the solid performance and continued focus on improvement in many key asset quality metrics.
To expand on this topic I'll ask Gary to comment on credit quality Gary.
Thank you Vincent good morning, everyone. Our credit portfolio continued to perform in a satisfactory manner.
The fourth quarter, and we are very pleased with the position of our portfolio as we move into 2021.
Our key credit metrics showed improvement across a number of categories. After we took steps during the quarter to proactively reduce exposure to borrowers most impacted in this COVID-19 sensitive environment, which drove a reduction in the level of delinquency and NPL.
Specifically, we were more successful in further reducing our limited exposure to the hotel and lodging industry by nearly 20%, which improved our position in those hardest hit asset class that now stands at only one 3% of the loan portfolio exclusive of Triple T loan balances.
Let's now review some of the highlights covering both the fourth quarter and full year results.
Some commentary around COVID-19 sensitive portfolios and deferrals.
Yes.
Turning first to credit quality the level of delinquency came in at a very good level of one point or 2%, representing a five basis point improvement over the prior quarter and one excluding triple PD Lone volume delinquency would have ended December at one point 11 Pearsall.
The level of Npls, and Oreo totaled 70 basis points, an improvement of six bps linked quarter, while the non-GAAP level, excluding triple P loans stood at 77 basis points.
We saw very positive Oreo sales activity this quarter, which contributed to the $10 million linked quarter reduction for an ending Oreo balance of $8 million, a historically low level.
Additionally, we were successful in moving several credits off the books during Q4 to proactively derisk the balance sheet, thereby further reducing NPL levels.
Net charge offs for the quarter were $26 4 million or 41 basis points annualized which reflects the actions taken to strategically move the select COVID-19 sensitive credits off the books.
Rising previously established reserves.
Our GAAP net charge offs from the full year came in at a very solid 24 basis points.
Provision expense totaled $17 million for the quarter ending December with our reserve position at 143%.
Excluding triple T loan volume the non-GAAP ACL stands at 156% or a five basis point linked quarter decrease again due to the reductions in exposure across these COVID-19 impacted sectors.
When including the remaining acquired unamortized discount our total coverage stands at one 8%.
The NPL reserve coverage position also remains favorable at 213%, reflecting a slight improvement linked quarter.
I'd now like to provide you with an update on our loan deferral levels and COVID-19 sensitive industry exposure.
As it relates to our borrowers requesting payment deferral, one 7% of the loan portfolio, excluding triple fee was under a COVID-19 related deferral plan at December 31.
As I mentioned earlier, we made significant progress during the quarter to further reduce the limited exposure, we have to higher risk segments, including travel and leisure food services and energy.
On a linked quarter basis exposure to higher risk segments declined by nearly $90 million.
So standard only three 1% of the total loan portfolio.
The primary driver of the decrease was led by a $65 million reduction in hotel exposure, which as noted earlier in my remarks stands at only one 3% of our total loan portfolio.
Now the deferrals and the three higher risk segments ended the year at only 7% down from the prior deferral level of 29% at the end of the third quarter.
In closing we are very pleased with the progress made going into the final quarter of the year in this COVID-19 sensitive environment with our credit metrics ending at very satisfactory levels as we enter 2021 very well positioned.
We continue to closely monitor our book and remain focused on managing risk in October impacted sectors. As we work to further reduce portfolio exposure to these higher risk industries that continue to face uncertainty in the current environment.
As we move into a new year, we look forward to an improving economy and an expanded lending opportunities ahead.
I'll now turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary and good morning.
Dan will discuss our financial results and discuss some of our current expectation.
As noted on slide five fourth quarter operating EPS totaled <unk> 28.
An increase of 8% compared to the third quarter.
Full year 2020, operating EPS totaled <unk> 96.
After adjusting for $46 million of significant items.
While this year brought unique economic challenges, we are well positioned to adapt to the environment and provide strong internal capital generation.
Vince mentioned, we increased our tangible book value per share 788, an increase of 5% from 2019.
Despite a volatile year for equity markets, our combined dividend yield and share repurchases.
So thats above peer median level.
Looking at 2021, we are confident that debt returning to generating core positive operating leverage on a quarterly basis will lead to better overall performance compared to 2020.
Let's review the fourth quarter, starting with the balance sheet on page 10.
Average balances for total loans decreased one 6% from the third quarter largely due to the previously mentioned indirect auto sale of $500 million was completed in November 2020.
Linked quarter Triple T balances decreased $377 million on a spot basis as we received forgiveness remittances from the SBA throughout December.
Commercial loan volume utilization rates of 32%, which is about 8% or half a billion dollars in funded balances below what we would characterize as a normal level, creating upside for loan growth as the economy improves.
Turning to deposits average deposits grew 2% with 4% growth in interest bearing deposits and 3% growth in noninterest bearing deposits.
She offset by an 8% decrease in time deposits.
This continued total deposit growth provided ample liquidity and afforded us the opportunity to pay down an additional $300 million.
<unk> borrowings with a rate of $2 35 during the fourth quarter.
Putting the FHFA debt extinguishment from the third quarter, a total of $715 million in borrowings were terminated during the year with expense savings that will continue through 2022.
As Vince noted F&B is in a very strong position to fund future loan growth.
Strengthen capital and enhance liquidity.
Turning to the income statement net interest income increased $7 3 million or three 2% compared to the third quarter.
And the net interest margin increased eight basis points to $2 87.
Triple T loans added 17 basis points to the net interest margin in the fourth quarter as the level of net interest income from Triple T increased $8 8 million compared to the third quarter.
Offsetting three basis points of negative impact from higher average cash balances and.
And three basis points of lower purchase accounting benefit on acquired loans.
Interest bearing deposit costs improved 12 basis points to 43 basis points and on a spot basis, we're down another seven basis points to 36.
Let's now look at non interest income and expense on slides 13 and 14.
Operating noninterest income totaled $81 million when excluding the $12 3 million loss on <unk> debt extinguishment.
Mortgage banking income remained strong with $15 million with large contributions from the mid Atlantic and Pittsburgh regions and our results benefited from above average gain on sale margins compared to historical levels.
For the full year of 2020 mortgage banking increased 57%, reaching a record $50 million.
Wealth management increased 5% from the third quarter due to the expanded footprint and positive market impact on assets under management.
Capital markets wealth management mortgage banking and insurance our businesses, we've strategically invested in over the last five years, providing diversified revenue streams that have served us well in this low interest rate environment.
In the aggregate revenue from these businesses increased $32 million or 24% to $162 million for the full year of 2020.
Looking on slide 14, noninterest expense totaled $199 3 million, an increase of $19 1 million or 10, 6%.
Which included $10 5 million of branch consolidation expenses and $4 7 million from COVID-19 related expenses in the fourth quarter of 2020.
Compared to $2 7 million of COVID-19 expenses in the third quarter.
Excluding these COVID-19 branch consolidation expenses noninterest expense increased $6 6 million or three 7%.
Primarily driven by higher production related commissions and incentives as well as $2 million in outside services.
Ratio of tangible common equity to tangible assets increased five basis points.
724% compared to September 32020, with net Triple P loan balances negatively impacting the December 31, and September 32020, TCE ratios by 45% 56 basis points respectively.
Average as a year ago quarter. The ratio decreased 35, 34 basis points due primarily to the triple P loan impact and a 2020 day, one <unk> adoption impact.
On a linked quarter basis, our CET, one ratio improved to an estimated nine 9%.
FNB strategy to optimize capital deployment.
Increased over 40 basis points from year end 2019.
Turning to our outlook.
Offer quarterly guidance for the first quarter of 2021.
High level expectations for the full year of 2021.
I will note that our assumptions do not take into account the impact of recently announced stimulus programs.
For the first quarter, we expect period end loans to decline low single digits relative to December 31.
Assuming approximately $700 million of additional forgiveness of Triple P loans in the first quarter.
Excluding triple P. In purchase accounting, we expect first quarter net interest income to be at a similar level compared to the fourth quarter.
We expect continued solid contributions from fee based businesses with continued strength in capital markets and mortgage banking, resulting in total noninterest income in the mid to high $70 million range.
We expect expenses to be down slightly compared to the fourth quarter operating level.
For the full year of 2021 on.
On a full year basis, we expect total revenues to decline low single digits as topline organic growth is offset by reduced contributions from purchase accounting compared to 2020.
We would expect loans to grow in the mid single digits from the end of 2020, excluding impact of triple fee forgiveness net of.
Any new Triple <unk> originations.
I'll note. This does not account for any additional government stimulus and assumes some level of line of credit utilization increased throughout the year as the U S. Economic conditions are expected to improve.
Where we stand today.
We would expect transaction deposits, excluding triple T and stimulus to increase mid single digits from year end 2020.
We expect full year provision for credit losses to be in the $70 million to $80 million range based on our current macroeconomic assumptions.
We expect full year expenses to be down slightly from the $720 million operating level in 2020, as we execute on our expense savings target of $20 million, while continuing to invest in technology and infrastructure from 2021.
Lastly, we expect the effective tax rate to be around 19%, assuming no change to the statutory corporate tax rate from 21%.
I'll now turn the call back to Vince.
Thanks Vince.
Throughout the last year, we continued to focus our efforts on optimizing our online and physical delivery channel to improve the customer experience improve operational efficiency as well as investing in our infrastructure and technology.
Our commitment to reinvesting a portion of our cost savings initiatives and our digital delivery channel was instrumental in our success, serving our clients and growing loans deposits and fee based business.
F&B will be adding a number of features to our mobile app in the first quarter, providing an improved offerings declined.
Once again, we received national recognition by S&P global for having a top mobile application in terms of features and functionality for banks in the northeast regional banking space.
As consumer preferences continue to evolve our investment and our digital platform will enable us to reach new households, and our expanded footprint.
Moving forward, we are focused on increasing the number of interactions through our online and mobile channels. We are confident our digital offering robust omni channel presence and innovative customer interface will provide multiple ways for our clients to utilize our complete offering of FNB products and services.
Before turning the call over to the operator I would like to thank our team for all their hard work dedication and determination as we worked through margin most difficult and challenging operating environments of our lifetime.
Their efforts resulted in a safer work environment and the preservation of shareholder value and positions our company for better outcomes as we move into 2021.
We expect the resilient U S economy to perform at a higher level, because the effects of expecting stimulus and the rollout of the vaccine take whole accelerating business activity and economic growth as we move through the year.
We will continue to serve our constituencies by actively engaging with communities investing and our dedicated employees and working continuously to deliver greater shareholder value.
Operator.
Yes. Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
Speakerphone, please pick up your handset before pressing the keys.
Sorry. Your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
Yes.
And the first question comes from Frank Schiraldi with Piper Sandler.
Good morning.
Alright.
Just wanted to ask first just stuck on buybacks.
So.
You bought back some shares in the fourth quarter I'm, just wondering how you would characterize the buyback opportunity here with with shares having recovered to higher levels and then also your thoughts on.
I believe you kind of thought you would get to an 8% TCE ratio ex PPP over the next few quarters I Wonder if there's any change to that as well.
Sure Frank I could comment on that just.
Just from a capital perspective as you saw on the slides we ended the year with a CET one ratio at nine nine and our TCE ratio of seven seven excluding PTC bulk.
Both good levels and as you mentioned, we did comment we expect to move past 10 and eight <unk>.
First half of 2021.
As you know we've taken actions to bolster our capital position to take it to the levels that are really high for us.
Within our kind of forecast and guidance for cap ratios to kind of gradually build from here and then as far as the repurchase activity.
We've done nearly 40.
Out of the 150 program that was authorized in the fourth quarter, we're going to continue to be opportunistic. We think the valuation is still very attractive at these levels.
What we did buyback was reflective of the confidence in the strength of balance sheet overall credit profit profile. We had in during the fourth quarter, we were able to buy back 25 percentage of those below tangible book value, which is nice from a accretion to that measure. So I mean, we're going to be opportunistic.
It's going to be a function of loan growth and see how loan growth goes from gross home growth slows and theres more opportunity to do that but it's definitely going to be a tool we have and we'll look to deploy it as we go through the year.
Gotcha, Okay, and then just secondly on the expense side of things.
$20 million.
And expense savings targeted for 2021.
Guys have done a nice job paring expenses over the past few years, and so $20 million is sort of like par for the course actually for you guys.
And I wondered if maybe there is more opportunity given the tough given the tough rate environment, but also the acceleration in the digital channel to maybe see further.
Cost saves in 2021 or would any further.
Saves likely just be reinvested. Thanks.
Hey, Frank this is Vince.
It becomes more difficult when you look at it in aggregate at $60 million over three years.
We've done a pretty good job despite the headwinds.
Margin.
Cutting cost each year. So we have a process that we've actually set up inside the company to continuously look for cost savings opportunities.
I wouldn't rule out that we could do additional I would say we keep looking.
The timing of that cycle puts us.
Pretty much $20 million, a year and Thats, what thats, what we initially set out to do over a multiyear period.
We're well down the path of accomplishing that that's why we've included it in R. R.
Our guide.
<unk> guide for the year.
But theres always an opportunity to look at a number of areas within the company to drive additional efficiency.
I think as we look at this year.
Pared back our branch network fairly significantly that was the comment in my prepared comments I mentioned 111 branches.
We continue to look for opportunities to pair back where we feel we have the ability to retain customers.
I think the move with the ATM distribution enhancing our ATM delivery channel, particularly in the mid Atlantic debt in the Ohio market from the last 12 months this will help us.
Leverage our digital channels to attract new customers, which gives us the ability to.
We eat out lower performing branches right and not lose the coverage of the marketplace.
That's the overarching strategy, but I would say that we continue to focus on it obviously, we'd love to see our efficiency ratio below 55%.
He has been our target was to be around 50, hopefully in the long run and some of that comes with revenue growth to in the final half of this I was going to tell you that we feel very confident about the markets that we've entered we're seeing good success in those higher growth markets.
Hopefully our growth trajectory starts to improve as the economy improves.
And we start to see outsized revenue growth contributions from those markets, which will.
Obviously help the efficiency ratio.
We're not just bulk Greg Onyx growth.
We're focused on driving top line.
Revenue.
Got it and then sorry, just quickly just wanted make sure I heard Vince Calabrese right on the Triple Pete did you say that was added 17 basis points total sales <unk> and if so just could you remind us what <unk>.
Plus concert.
Contribution was.
Yeah.
Yes, the fourth quarter.
Alright.
Yes.
At 17 basis points to the fourth of six six basis points to the third quarter with the contribution.
Okay. Thank you.
Thank you.
The next question comes from Casey Haire with Jefferies.
Yes, thanks, good morning, guys.
I wanted to touch on the on the loan growth guide.
Mid single digits.
Just can you just give us some color on it sounds like its I am assuming its going to come from the higher growth markets.
But on a product basis CRE was it was pretty strong.
And we've seen others.
Chose CRA CRE momentum as well just given the concerns there.
Whats driving that strength and then also Vince Calabrese, you mentioned line credit utilization.
Is backstopping some of those.
And I'm, just trying to square that with what's obviously.
Very flush liquidity situation.
Among among borrowers just from a little more color on the loan growth.
What day.
The southeastern markets in particular, and the mid Atlantic region, they have fairly substantial pipelines.
Overall pipeline is down slightly I think 8%.
On a year over year basis, but the quality of the pipeline I think is better.
And we spent more time sorting out where real opportunities are.
I'd also say that the pipelines in the southeastern markets are fairly robust I mean, Charleston is doing exceptionally well.
Standard in Asheville, North Carolina, and we're seeing some good activity in Nashville, both from our CRE and C&I perspective.
The mid Atlantic region still.
Moving the right direction, some growth potential than our legacy markets, we're expecting to pick up in the second half of the year. They are more industrial base and the Midwest.
We're expecting to see more C&I opportunities Gary I don't know if you want to add to that Youre seeing the book.
We are seeing the opportunities to come over.
I think as you mentioned rich the southeast has been more active than the other than the other regions at this point seeing some new opportunities we brought on a few new bankers.
They've been active so we're seeing some very nice new opportunities with some new names.
Are those all of those new bankers that we brought onboard very very solid with experienced bankers in those markets.
In terms of the line of credit utilization Casey, we did see it bottom.
In the fourth quarter, it actually moved up.
A half a percent.
Into the into the mid 32 range. So we are expecting as the economy improves over over the next year.
In the latter half we will see some growth.
From a from a utilization standpoint, with our industrial base. So thats kind of the expectation there keep in mind. There is a lot of cash on corporate balance sheets sitting on the sidelines. So we're going to have debt.
Go through several sales cycles to complete that.
Cash some of its stimulus driven so there is.
I'd say the second half of the year is when youll start to see.
Expansion on the revolvers from a balance perspective.
Great. Thank you I appreciate the color on the Triple P and the purchase accounting.
Is there a way to quantify what.
What the country contribution will be in.
In 2021 for those items.
So we can get a better sense of what the core revenue outlook Quickbooks looks like.
Yes, let me go through some of the pieces because there's a lot of moving parts in there so for.
For the fourth quarter net interest income was $2 34, right TPP contribution was 31 up from 22 in the third quarter. So reflects that forgiveness of debt.
About $400 million that we had in kind of updates on our assumptions for.
So the PC debt purchase credit deteriorated accretion.
Related to seasonal with $9 million down two from the third quarter. Okay. So from a $11 million so kind of all in if you look at net interest income.
<unk> Triple T and purchase accounting.
95, which is up slightly from 194, so just kind of underneath this activity.
The NIM.
The other item that we had also is just the cash position right. So the cash position will reduce the margin by about.
Three basis points so.
All of these kind of contributes to our confidence that we are at an inflection point for the kind of underlying NIM.
When you look ahead to the first quarter, we think the net interest income excluding again, PPP and purchase accounting will be relatively stable, even with a couple fewer day or states that you have in the quarter.
Simple peak contribution, we expect to be 20% to $25 million, assuming $700 million of forgiveness.
And then purchase accounting probably comes down another couple of million dollars $7 million to $8 million or so so those are kind of the key moving parts as far as the.
Purchase accounting and PPP and then just to come from other kind of key drivers just for everybody for me to touch on the interest bearing deposit costs. We mentioned in the slides came down 12.
43 basis points.
Ended the quarter on a spot basis at 36, so that kind of gives us a seven basis point head start to the first quarter and Theres still some more opportunity there on the business deposits side.
The consumer Cds continue to roll down.
We have maturities of $2 $75 million to $300 million a month from the first quarter those.
Those are kind of coming off at around 151, 6% New Cds are coming on at 19 basis points. So that continues to create opportunity.
The rate paid side.
And then the new loans that we made during the quarter.
From a pure kind of coupon standpoint came on at $3 21.
Which was the basis points higher than the portfolio yields so that stabilization obviously helps on the loan side and then lastly, the reinvestment rates in the securities portfolio, our 91 basis points during the quarter, excluding from T bills that we had.
Budgeting purposes.
That's that's rolling off at $2 28.
Little bit of a headwind there.
But I think the loan yield stabilizing and new ones in relation to the portfolio helps as well as the continued opportunity on the deposit side. So sorry for the long answer, but I wanted to kind of go through all of those key drivers.
That's great very helpful. I appreciate it.
Well make anybody bumped located Casey.
We originated in the first day 1900, PPP applications were roughly $400 million.
Just started we just launched our portal.
So we're in day to now but so.
So we will be adding putting net that in our guidance that's not in the guide.
So I understood understood that'll be coming on the balance sheet.
Got you Okay, and then just last one from me a question for Gary So the $70 million to $80 million provision.
Obviously, you guys have your seasonal forecast.
I'm, just wondering what that what.
What the loss.
Regression looks like for 2021, and where were the the ACL ratio lands.
At the end of the year with that kind of provision guidance.
Okay.
We've done a lot of work across the portfolio.
<unk> reviewed a lot of credit.
<unk> a significant amount of credit.
In the latter half of the year with our normal reviews.
From then plus what we've done on top of that.
With the three deep dives around the Covid impacted portfolios and one of the things that we did as mentioned we took some actions in the fourth quarter to reduce our exposure to what we call the higher risk assets in those COVID-19 impacted sectors, and we really feel good about the books coming into the new year.
So our reserve levels at year end were at solid levels of charge offs for the full year came in at 24 basis points.
And we feel really good about the work we've done and the positioning of the book.
So our expectations.
We look forward.
Subject to loan growth around the portfolio.
We're expecting.
Charge offs to be in.
What we would call normal ranges.
<unk>.
With some guys there.
And we feel good about debt provision guide in 2021.
Expectations that the economy will continue to improve so a lot of work as we go out into it.
And we feel good about the information that we have forward with you.
Great. Thank you.
Thanks Keith.
Thanks. Thank.
Thank you and the next question comes from Jared Shaw with Wells Fargo Securities.
Hey, good morning, guys.
Sure.
Maybe just sticking with the the credit discussion.
When you look at the guide for that $70 million to $80 million of allowances and what we saw this quarter how much of a qualitative overlay did you have to utilize.
Uh huh.
Yes, Sir.
Keep the provision where it was and is to your comment about improving expectation for the economy do we should we assume that that qualitative overlay declines over the over the year.
Really do see some significant reduction in net allowance ratio.
Yes.
With the end of the year review of the ACO.
We did utilize some qualitative overlay based on the position of the book that said the majority.
Our ACL is quantitative.
But there is qualitative overlay.
As the economy improves we will continue to manage that appropriately the metrics.
We utilize new Jared with an improving economy.
Coming into play in Q4.
Also improvement in unemployment housing GDP as well as the markets. So generally we're looking at a gradual steady improvement unemployment will continue to decline as it is just over 6% and our forecast horizon.
GDP growth about 4% next year and three in the year. After so I mean, that's those are some of the some of the inputs into the into our ACO that I can give you.
We feel good about the position of it at this point.
Okay and then.
On the PPP with the second round.
I guess I know, it's excluded from your guidance, but looking at the $2 5 billion you were able to put on in the first round.
That will now pretty quickly.
Where do you see the second round.
Peaking and when do you think we get there.
Yes, I think I think it's too early to tell.
I don't feel that I can tell you is we're running worried.
Worried about 9% of the total that was originated.
Last time.
There was just a mad rush, so I don't see that happening I think that will continue to originate as I said, we're at $400 million roughly with <unk> hundred <unk> hundred 71 applications is what we took when we cut it off last night.
So that and that had the portal had just opened so I would expect there to be sustained demand from the product and I think it's hard to say, but we won't hit.
We won't be at two and $2 6 billion and I can tell you that.
That growth is that your loan officers being proactive in going out and letting our customers know that the portals, there or is it debt service organic demand for debt.
Well, we people zone.
Yes, we've been in communication when we originated in the first round, we have captured everybody's email addresses and burdening contact information they were assigned to a banker physically every single one of those.
19000, 20000 loans was assigned to a banker at the company and those bankers have maintained communication and we've also set up a communication system via E Mail, where we update the client's periodically about what's happening.
With the SBA and the PPP program. So I would say we were pretty active with that.
20000 base that we originated in the first time and what we're seeing are folks that are coming back that feel that they can qualify for this tranche and theyre coming back in.
I would say, yes, it's been managed and its been very fluid for US are we developed our portal in house.
Our people did a fantastic job planning it we monitor the changes that we're going with from a constant with the SBA.
It's very complicated because there is there is a first draw a second draw and we still have forgiveness going on but we have automated all of those processes.
And when we went live.
The website worked flawlessly.
With us.
And were end to end digital.
So I'm very impressed with what our people have done and very pleased with how easy this is to use for the customers.
Great. Thanks, and then just finally from me on the on the <unk>.
Inside you know that's great with the the 20 million targeted I guess.
If we look at the Covid.
Combinations, whether that's expenses or Jay.
Wage fees should we expect that debt is over now in 'twenty, one or or what's the tail on those COVID-19 sensitive expenses any COVID-19 sensitive.
Missing fees and.
Do you think that do you think that we get a 2021.
<unk> ratio back to where we were at <unk> 19.
I would say that the just a couple of things I mean on the expense side, we will still have some level of supplies. It off maybe it's $1 million to $2 million.
Just looking ahead to the first quarter at least so there'll still be some level of that just kind of given where we are.
If you look at the fee income side, you could see that on that non interest income slide service charges are down about 10% year over year.
At the bottom it was down about 45%.
<unk> seen cut.
Customer activity kind of moved back up not.
Not back to pre pandemic levels, yet but.
Yes, we will see as you go into 2021 I think.
One of the key things that we're monitoring as everybody else is is how customer behavior changes and evolves over time.
We've done I think a great job of investing in our digital initiatives in the ATM. The clicks to bricks that we have so that customers can bank wherever they want it.
But we're definitely going to closely monitor customer behavior over time to see where there are opportunities for maybe more consolidation as you go forward from here.
And then I guess, just one other thing on expenses too.
I wanted to mention is.
Process improvement initiatives, we've been actively working on that over the last few years and definitely looking at using some of these robotics RPE initiatives to streamline processes, even more and so we have.
A good number of initiatives this year.
That will help help the efficiency ratio and some of that's baked into the guide and if we can do even better on that would be the.
First time went from like some of these techniques I think theres more opportunity there too.
We've invested pretty heavily.
In the digital realm and that includes data analytics data warehousing.
Interface, we're adding features to our website.
Today, you can you can purchase.
Account products and move through the whole process online digitally from end to end, we're adding loan products. This year.
Our mobile App is going to have.
Picture Bill pay enhanced chat.
Credit score E statements, a new user interface.
And the ability to immediately enroll in mobile through the mobile application. We're also taking the mobile optimized website with the solution center and Thats going to be incorporated into our mobile app.
No.
People can actually shop on the solution center within the mobile app without going into a disparate website. So there's there's a lot going on I don't think we should lose focus.
On investing in those areas because that's what's kept us competitive.
With larger competitors and fin techs and I think we're hanging in there you can see from the market share data that I shared with you that we've done well in just about every <unk>.
MSA, we're in in terms of growth so I don't think that battles over.
Dealing with the headwinds on margin. So we've kind of curtailed some of it or delayed some of that investment, but that still needs to be a focus.
Great. Thanks, a lot.
Thank you.
Thank you and the next question comes from Michael Young with tourists Securities.
Hey, Thanks for taking the question.
Michael.
Wanted to maybe do a quick follow up on the expense side. So you've got about $15 million of kind of core expense inflation $21 million of planned savings.
Assume there'd be maybe a little bit of tailwind from from lower costs in the fee businesses on a year over year basis in particular mortgage so maybe could you kind of square that comment with maybe your expectations for the mortgage outlook or other fee businesses, maybe that are going to do better in.
In 2021.
Yes, I would say I mean, the fee businesses had a phenomenal year in 2020.
With record levels as Vince commented in his remarks from me look at <unk>.
Mortgage plus capital markets, plus insurance plus wealth.
The $32 million increase their contribution.
As we said in our guide.
The contributions there we will continue to have a very strong levels I don't know what were going to set a record every quarter.
As we did with mortgage when you look at mortgage last quarter, but this quarter was very strong again.
15, three following an 18 eight so.
We've invested a lot in those businesses we've expanded geographically.
Really in the mortgage business, we think there's still more upside to come.
Some of the markets.
Folks that have joined the team over the last year, but I think as we come through this period that will continue.
By more benefits to us.
No on the expense side I would say that the guide overall is kind of down slightly from 2020 levels in the first quarter always has.
Payroll taxes, and things kind of jump up in the first quarter, but if you look at the expenses going out second third and fourth quarters.
Now you get right around that 178 ish that we had been guiding to.
Hence the kind of the flat guide that's in there and thats through the cost savings of $20 million cost saves as well as kind of other initiatives.
To improve the efficiency. So that's kind of where you get to once you get through kind of the first quarter seasonal increase there.
And I guess my my second question kind of as it go back to the zero interest rate environment that we had coming out of the last cycle I remember at that point in time, you guys felt like it was prudent to grow more quickly early in the cycle, while credit spreads were wider.
As those would only get competed away throughout the cycle. So maybe just kind of an update on your view on being more aggressive on loan growth early this cycle again, and when you would feel comfortable kind of stepping out there and being more aggressive in that way.
Our strategy has always been to be consistent through cycle.
While we were able to grow faster and gain better margins because of credit spread broadening through the depths of the cycle, we were out in the marketplace deploying capital capital throughout the financial price.
That hasnt changed.
What's changed here.
The trillions of stimulus that's been injected into the economy. So.
If we didn't have that my belief is the F&B has credit metrics would be superior we would be out in the marketplace originating while others would be retrenching or returning capital because of concerns.
That didn't happen this cycle because I attribute it to the stimulus is essentially providing an opportunity for companies to work through the issues without relying on our bank to provide additional capital.
Actually we are providing the capital, but it's federally guaranteed.
For PPP.
Even in the consumer segment with these stimulus checks which are unprecedented.
That has changed the game.
With that we would have to be very careful about what we originate.
Eventually there will be a day of revenue. So I would say we're optimistic about the areas that we focus on and we're continuing to deploy capital in those areas just as we have and the most robust times and I think we will get a benefit because.
I think given the zero rate environment borrowers have been more receptive to floors. When you think about the theyre all in rate.
An additional 50 basis points doesn't change much.
It's not even that if you're going to net out.
<unk>.
One month LIBOR rate.
So I think that.
That.
Well our loan originations in the commercial segment, we're still calling aggressively that will.
Turn at some point here.
When demand starts to pick up and we believe.
The second third and fourth quarter of this year.
Yeah.
Sorry for the long answer but debt.
That's the view.
No that makes sense.
One just quick last one maybe for Vince C are there any other balance sheet actions that can be taken or opportunities ahead.
You've taken some in the last two quarters. So just curious if there's anything else out there.
Would expect.
Yes, I would say that you know we're always analyzing.
<unk> balance sheet.
<unk> improved the position we.
We took a lot of action in 2020.
I would say as we sit here today, if you look at the home loan advances.
$1 seven or so.
<unk> hundred 50 matures in 2021.
So kind of a short life there so there's another $1 billion or so.
We'll continue to evaluate to see does it make sense.
Essentially do that but we don't have any plans to do it right now Michael I mean, it's just kind of part of our regular evaluation and assessment of the markets and the balance sheet, but as we sit here today, we don't we don't have any plans for any other action.
Okay. Thanks.
Okay.
Thank you and the next question comes from Brody Preston with Stephens, Inc.
Hey, good morning, everyone.
Alright.
Hey, Gary I just wanted to ask was that was any of the reduction in the higher risk portfolios like the hotel did alone sales or was that pay downs or maybe some weaker credits that you didn't want to retain.
Yes, we.
We moved $65 million in hotels.
42 of the 65, we move them in the normal course of business.
Moving them off the balance sheet, but.
But we did we did sell a handful of hotels that we classified as higher risk.
In that book.
So it was only $23 million.
And we did move some other small business related items of a similar dollar amount.
But other than that the.
Sure. The majority of that was just moved off of the balance sheet.
Okay.
Of that $23 million that you sold was there any charge offs that were tied to those sales.
Total the total amount that we moved including some of the small business stuff was right at $50 million Brody.
In terms of charge offs. The charge offs net book were $6 million and of that we had that totally reserved for going into the sales. So it was provision neutral.
So it was a very good shape.
Okay.
I'm, sorry, if I missed it but could you give us a sense for how criticized and classified loans trended this quarter.
Yeah, the classifieds were down $50 million.
Criticized were up just a touch over 100 criticized being special mention.
So we had good movement in classifieds.
The increase in special mentioned.
Okay.
Alright, maybe just turning to the new loan originations I appreciate the color on the pipeline I just wanted to get a sense.
Vince for what new C&I and CRE yields like day.
We're getting I mean, Vince can maybe give you more detail on originations I can answer that.
Running.
Probably $2 50 range rate spread.
The spread is up about 45 to 50 bps over over mid year. So we are seeing improvement from up from.
Spread perspective.
As I said earlier I think the floors move down a little bit right we were.
Seeing 75 bps now we're seeing 50.
So there's a little bit of competition.
There's a lot of competition out there.
In particular and focusing on the force, we're still able to get them.
Not at the same.
Spread that we would have gotten at the beginning of the crisis.
Alright, and is that is that spread over LIBOR or I guess, what's the what's the best from me Gary is talking spread over LIBOR I'm talking flow.
Sure.
Okay.
All right understood and then.
Liquidity ticked up again would you deploy some of that in the securities.
Our strategy, we should expect more of or would you rather sort of hold off and use that to fund loans moving forward.
Well it will be a combination.
Monitoring that every day to decide which way to go.
We had been letting the securities portfolio run down earlier in the year.
We did put some good portion of the cash.
Cash flows came out of that portfolio and reinvest it in the fourth quarter.
The plan right now would be to hold securities flat.
In 2021, but again, that's subject to changes.
Kind of rates move around.
Liquidity is there.
We'd lose some assets to pay down some of the borrowings.
We'll continue to evaluate that and then additional stimulus, it's just going to bring more deposits since all the banks right. So.
I think that the plan there would be that as Vince commented earlier as you get through the year and you get the vaccine behind you and hope that economic activity picks up and customers work through cash and then you start to borrow again.
Utilize that liquidity so yes.
We like having the powder.
I think our teams are very well positioned and are actively calling on their clients as well as prospects. So that when that time comes I think.
It is payable.
Okay.
Or what are new security yields right now then.
I mean, there around I want to say around 100 basis points really pretty well.
Yes.
Okay, and then just I wanted to ask the outlook for capital markets.
Are you expecting some of your middle market customers to get more active throughout the year or is there not as much of a need just with so much liquidity on balance sheet right now.
No I think that there'll be opportunities for us to continue to execute capital market realm.
As we move through the year, particularly in the second half of the year I think that there'll be more activity in.
Our borrowers will want to take advantage of the low rate environment.
It will lead to opportunities as we start to fund debt from a working capital perspective, we're not fixing launches of embedded working capital, we're focusing principally on term borrowings.
That doesn't really come into play.
Recently.
Apart from.
CRA perspective, that's still an active area I would expect us to continue to see decent level capital markets opportunities and our syndications.
As both CRE and C&I are reloading their pipelines, so I think M&A will pick up.
In the second half of the year again and.
We're also forming a we're in the final stage of completing the.
The formation of a broker dealer.
Take advantage of debt capital markets fees for our large corporate borrowers debt to move that we made so that should help us as well.
This year.
That would be finalized shortly and we'll be able to accept fees.
On debt offerings for our clients.
Okay.
Done.
Yeah.
Just a couple quick ones from slab just wanted to on your insurance, but I just wanted to ask how much of that was how much of that is related to individual policies or is there a commercial insurance component to that as well.
It's pretty small in the individual piece of it is relatively small it's mostly commercial it's employee benefits.
Your typical risk based policies for commercial.
Okay.
And then just on the expense outlook.
The guidance.
You are running just a little bit higher than where your guidance would imply right now. So I just wanted to get a sense for if you could walk us through I guess, maybe time than some of the timing as to when the expense.
That core expense number would run down and gets you closer to 720 level for the full year.
Yes, I would say just as a couple of points I mean that the fourth quarter expenses are a little bit higher as we commented on.
Kind of production related commissions.
In there you typically have some of that at the end of the year kind of true everything up based on how you. How you closed out the year. So that's in there. There's a couple of million dollar increase in outside services.
Professional fees related to a variety of projects, we have going on when we brought us from outsiders to help with things like LIBOR and.
All of the projects that we had growth.
Helping out with so that's really not kind of run range as we go forward in a couple of million dollars in there for them.
Our fad 91 deferred origination fees were about $1 million lower.
So that increase the expenses so there's a lot of moving parts to that.
Kind of a fourth quarter, which is why my comment just a little earlier ago.
If you look at the expense run rate kind of second through fourth quarter. Once you get through the seasonal blip.
We're right around the 178 that we have been talking about for a couple of quarters in there. So.
The $20 million.
Initiative has a lot of I mean, it's all identified and a lot of it's in place.
Hmm.
Most of it starts within the first few months I would say so that you can get that kind of run rate benefit by the 20 ml is inclusive of the various timing of those initiatives as we go through the year.
But most of it's pretty early as you would expect so that we get.
Most of the full year benefit of those expense savings.
Great. Thank you very much from taking all my questions everyone. I appreciate the time.
Sure no problem.
Yes.
Thank you and the next question comes from Brian Martin with Janney Montgomery.
Hey, guys. Good morning, most of my Stuff's been answered just a couple of things.
Could you guys just comment.
You guys have been pretty adamant about M&A was off the table, but with activity may be picking up this year. Just if you could give any thoughts on how you're thinking about it if it's still really the focus continues to be organic growth or is there. Some some consideration you could be opportunistic on M&A. This year if activity does pick up.
Yes, I would I would definitely say that while we're experiencing good success with our de Novo expansion and the rollout of our digital platform more globally I think there's opportunities I mean, we're going to do whatever makes sense for our shareholders. If there are if there are opportunistic.
Transactions, we will look at them.
I think that one thing for sure though is that we're going to look for something that doesn't.
<unk> tangible book value substantially so the earned back we have to be relatively short.
And.
As you know from our past M&A activity our board does that.
Adamant about EPS accretion.
Significant internal rates of return.
On capital invested.
Earn back so.
So those will all be key elements and I do think as we move through we've made significant investments in our platform and our systems and our infrastructure.
Assets, which I think will be daunting for smaller banks. So I do think there will be opportunities to take cost out and to merge with or acquire smaller organizations.
Provide some decent accretion in some instances may be accretive to tangible book value capital.
So.
That's.
That's where we are thank you for asking the question.
Yes.
And you thought Vincent with D C.
Probably in market deals I guess it is what it sounds like rather than entrants into new markets. The way you are looking at it today.
Yes, I would say there is still work to do within the franchise were spread across three broad geographies. So theres plenty of opportunities to do in market acquisitions and that would be the priority.
Because obviously, we can take significant amount of cost out from overlap.
Drinking branch delivery channel.
The rollout of more digital.
Capabilities.
So I think that coupled with our ability to rollout additional ATM sites.
Across our footprint kind of bridging the gap where up to 800.
With <unk>.
Branded and owned Atms. So we have a pretty substantial network that goes hand in hand, with our ability to originate customers, both digitally and through the physical delivery channel. So.
Obviously within that footprint.
It is much easier to do.
Gotcha, Okay, and then just the last two from me.
The other Vincent Vincent I appreciate the color on the PPP could you give what the remaining non earn fees to collect or at this point before the new program kicked in here just kind of what's left as we go through.
The balance of the year.
Yeah, Brian I have that it's at the end of the year were $32 million of remaining on accretive fees. You may recall, it was kind of 82 to start.
With the program and Theres 32, this left to come in that we would expect.
Virtually all of it to come in during 2021, depending on the pace of forgiveness.
Got it Okay, and then last one for Gary was just the.
The color on the criticized and classified level and Gary do you feel like.
I guess it sounds like from your outlook I guess would you anticipate that fourth quarter levels or maybe a peak in the criticizing classified levels based on kind of a review of the portfolio and the better macro economic outlook of debt.
Kind of how youre thinking about it today.
I would say that's an accurate view at this point Brian.
They follow me.
Going to play a role there.
We get a continuing improvement throughout the year from here.
Yeah, I would expect that to play a health.
Naturally Gary.
Have you know a credit or to move from a ratings standpoint. So that's the temporarily moving number but I think we are little editor inflection point there.
Gotcha, Okay, and then that utilization you talked about kind of trending back up maybe in the back half of the year I guess can you get back to pre COVID-19 levels or do you think it's going to get maybe partway back if things kind of unfold as you guys look at them today.
I think it's gonna be a slow grind forward with.
Increased activity in the latter half I would not expect it to get back to a normal level.
Year end 'twenty one.
Got you okay. Thanks for taking the questions guys.
Thanks, Brian.
Thank you and that was the last question I would like to return the floor to management for any closing comments.
Yes. Thank you I really appreciate the interest and the questions I thought they were great questions. Hopefully we were able to provide transparent answer. So you guys can complete remodeling.
And again I want to thank our employees one more time I think it was a very challenging year.
We work as hard as possible to preserve shareholder value and to position as a company.
Success, I can't say that enough I mean, there were a number of management actions that took place that werent easy decisions.
But.
We made them.
We are well positioned to move into next year and we're looking forward you a return to normal.
Thank you everybody I appreciate the interest and take care.
Thank you and that does conclude today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.