Q4 2021 FNB Corp Earnings Call
Hello, and welcome to the F N B Corporation fourth quarter, 2021 earnings call.
All participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note today's event is being recorded I would now like to how it converts over to Alisa Constantine Investor Relations <unk>. Please go ahead.
Yeah.
Thanks, Good morning.
This conference call are FMC Corporation.
[laughter] filed with Securities and Exchange Commission I think contain forward looking statements non-GAAP financial measures.
non-GAAP financial measures.
Addition, too.
Alternative for our reported results prepared in them.
Yeah.
Conciliation.
non-GAAP operating nature.
Directly comparable financial measures are included in our presentation materials and in our earnings for me.
Please refer to these non-GAAP and forward looking statements disclosure.
And related to materials for Ford and registration statements filed with Securities and Exchange Commission and available on our website.
A replay of this call will be available until Thursday January 27, and the webcast.
It could be about.
The relations section of our corporate website I will now turn the call over to <unk>, Chairman President and CEO .
Thank you welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, Our Chief Credit Officer.
These fourth quarter earnings per share was <unk> 30.
Bringing our full year earnings to $1 23.
Highest earnings per share since the restructuring of the company in 2000.
In addition to the solid EPS numbers, the fourth quarter was highlighted by robust loan.
As well as the launch of the mobile E store and the digital rollout of our enhanced physicians first broke.
This full service offering is dedicated to the personal and commercial needs.
<unk> Dennis in veterinary.
Let's walk through each of these accomplishments.
With loans.
Yeah.
What loan growth, excluding the impact of CPP forget increased.
Increased 610 million or 10% annualized from the third quarter 2021.
Strong loan growth supported our 13% annualized sequential growth in net interest income.
<unk> TPP purchase accounting accretion, we provide significant momentum too.
2022 earnings.
In addition to achieving our initial full year loan growth guidance given last January .
We've achieved three consecutive quarters of strong loan growth, which led to a year over year increase of $1 3 billion, where 6% excluding <unk> from the December 31 2020.
Marshall quarterly loan growth of 10, 6% annualized.
Was due to strong production across our footprint demonstrating the benefit of our geographic diversification strategy.
This organic loan growth drove total assets 40 billion.
With pro forma balance sheet of approximately 42 billion once the Howard Bank acquisition closed.
Dave.
At the.
<unk> of November we.
<unk> our E store shopping tool into the F&B mobile App as part of the series of innovative enhancements. This builds on our customers' ability to bank.
Italy.
F&B also successfully upgraded our mobile experience, adding new features and expanding our suite of online loan application, including F&B credit cards mortgage products home equity lines of credit and home equity installment loan and small business loans.
This platform creates a fully digital bank, where customers to conduct routine transaction purchase products and services and scheduled time with our bankers virtually.
Our comprehensive mobile offering was recently recognized by S&P global market intelligence.
Which call F&B direct one of the most competitive mobile banking app in the industry.
Our analysis indicates that our mobile app has more features than any of our peers.
Andy is commensurate with Jpmorgan Bank of America.
In addition, we were also recognized for our best in class digital strategy clicks to bricks.
And received a prestigious National award for our mobile experience.
In addition to integrating the E store.
Our mobile App was upgraded to incorporate a new modern book streamline navigation and direct access features customers are most likely to use such as enhanced payment capability shopping and account opening tool.
And mobile chat.
This upgrade was received well by our customers as evidenced by an industry, leading app store.
Four eight stars.
We continue to integrate additional products and services into our digital platform to better serve our customers and increase our market share through customer acquisition, and a scalable and efficient manner.
Few weeks ago, we rolled out a fully digital and enhanced version of our physicians first program monarchies store.
This holistic suite of digitally accessible products and services dedicated to meeting the unique needs disposition, Dennis veterinarians and other healthcare professionals.
Commercial loan deposit products consumer loan and wealth management services.
With over 250000, physicians dentists, and veterinarians and our footprint.
And over $4 billion of new medical student debt created each year, our opportunity to improve financial outcomes for members of the healthcare industry is tremendous.
We have grown our position loans, 68% in the last 12 months.
Investing in personnel and product.
Given the momentum with our current program combined with the investment in our digital capabilities.
There is a significant opportunity to deepen existing relationships.
While new customers within the healthcare industry.
Lastly, I wanted to touch on the Howard Bank acquisition.
We are in the final days before our close on January 22nd.
On the systems integration on February 5th.
We have worked closely with Howard teeth, and expect the transition to be smooth.
We are very impressed with how its talented employees and are retaining more frontline employees originally expected.
Fact, our overall retention across our footprint has been strong.
We are excited for them to join us.
In this dynamic market.
The acquisition is progressing well and we are on track to achieve the expense saves laid out in the July announcement.
Asset quality has improved more than we originally expected.
And similar to past acquisition, we want to reduce our expanded product suite to our new clients to drive additional noninterest income growth in Baltimore and Washington DC.
Both the one time costs and the credit Mark.
Due to our expected to come in better than originally planned.
With that I will now turn the call over to Gary to comment on our overall credit quality Gary.
Thank you Vince and good morning, everyone.
We ended the year with continued positive performance across all of our portfolios as we closed out another successful year and entered 2022 in a position of strength.
During the quarter, we saw further improvement in credit quality as delinquency and Npls declined as did our level of rated credits.
Additionally, our fourth quarter and full year net charge offs. The boat reached historic low levels.
Let's now review some of the highlights followed by a brief update on the upcoming Howard Bank acquisition, and some closing remarks on our outlook for 2022.
Yeah.
The level of delinquency, excluding triple P balances ended December at a very solid 62 basis points, an improvement of nine bps on a linked quarter basis.
Npls and Oreo also improved during the period to end December at 39 basis points, representing a 10 basis point reduction from the prior quarter with reduced non accrual levels of $22 million driving the improvement.
On a year over year basis, our non accruals are down nearly 50% compared to December 2020, representing an 82 million dollar reduction.
This largely reflects the actions we took late in 2020 to better position our loan portfolio for the year ahead.
Each time, we proactively took risk off the table during a challenging macroeconomic environment.
Net charge offs for the quarter were very low at one $4 million or two basis points annualized while full year net charge offs for 2021 totaled $14 million and stood at a solid six basis points at historically low levels.
We recognized $2 $3 million net benefit in the provision during the quarter. Following the continued improvement in our credit quality position and the prior actions taken in 2020 to position the portfolio as well as a general improvement in economic factors that favor.
Verbally impacted our forecast models.
This resulted in a GAAP reserve position that was down three basis points to stand at 1.38% with the X Triple P reserve decreasing five bps to stand at one 4%.
Which remains directionally consistent with our credit results.
Our NPL coverage position further improved ending December at a very solid level of 392%. Following the noted reductions in Npls and rated credits during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts stands at 1.5%.
Okay.
And now I'd like to share with you some brief updates around the upcoming Howard acquisition.
Our credit teams have been carefully tracking and monitoring the Howard portfolio since announcement as is our standard practice.
At this point, we remain pleased with the credit performance and the anticipated day, one positioning of this book, which is tracking better than originally expected.
Post close we do not expect our loan risk profile or credit quality performance to be impacted as the Howard book remains well diversified and will have minimal impact to our concentrations of credit.
As we close out another successful year marked by continued positive credit trends. We are very pleased with the position of our portfolio moving into 2020 two.
With the global challenges and uncertain economic conditions faced during 2020, our proactive approach to risk management and ongoing review of our credit portfolio allowed us to strategically position ourselves entering 2021 proof point of the attentive and disciplined approach we've taken manner.
Our credit book.
We remain vigilant and attentive to any emerging risks and both the broader economy and within the markets in which we and our customers operate.
As macro factors continue to change, including economic conditions inflationary pressures and the evolving nature of the virus, we will continue to manage our book.
This highly competitive environment with our core credit philosophy is front and center.
This foundation of sound and consistent underwriting attentive management of risk and careful selection of high quality lending opportunities continues to support our growth objectives. As we look forward to more business opportunities ahead in 2022.
I will now turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary as we look at our financial results. We have delivered an exceptional performance this past year and exceeded our full year expectations on both the bottom line and pre provision net revenue basis.
We produced mid single digit loan growth, excluding Triple T was five 7% year over year growth on a spot basis.
We surpassed our full year revenue expectations with a record 1.23 billion driven by continued strategic focus on diversified fee income contribution.
Operating expenses were well controlled and operating pre provision net revenue or <unk> ended the year at $508 million.
Because of our strong credit quality trends and improved economic conditions, our provision for loan losses was essentially zero and zero point $6 million for the full year.
Through the successful execution of our strategies, we were able to increase our operating net income available to common stockholders by 27% to $400 million $4 24 per share.
Let's walk through the fourth quarter financials, starting with the highlights on slide five.
Fourth quarter operating EPS totaled <unk> 30.
An increase of two cents from the year ago quarter.
Tangible book value per share increased 9% year over year to $8 59.
Excluding triple P, which is more reflective of underlying loan growth.
Period end total loans increased $610 million or 10, 1% annualized linked quarter basis.
Including growth of $421 million in commercial loans and $188 million and consumer loans.
Commercial loan production was a record $1 5 billion.
Diversified across our geographic footprint.
Line of credit utilization increased for the third consecutive quarter to 35, 8%.
Still below the pre pandemic level of 40% to 45%.
Consumer lending had their second highest production quarter.
We had record linked quarter growth for small business loans.
Let's continue with the balance sheet on slide seven.
Average, earning assets are now over 35 billion securities increased four 8% linked quarter due to pre investing for the upcoming Howard acquisition, and utilizing excess cash with spot cash balances down 15%.
Reported average loans and leases remained flat at $24 7 billion with loan growth offset by $620 million reduction in average Triple T balances.
Average deposits totaled $31 7 billion, an increase of two 7% linked quarter with year over year growth in all eight of our primary MSA markets.
The growth continues to lead to a favorable funding mix given customers' preferences for low cost savings accounts and maintaining higher checking account balances.
We expect organic growth to continue and as rates rise, we expect the balanced growth and lower beta deposit products to shift to higher beta products.
Turning to slide eight net interest income totaled $223 3 million.
Decrease of $9 1 million or three 9% from the prior quarter total of $232 4 million.
Reflecting a $15 4 million decreased contribution from Triple T. Given forgiveness activity, which was partially offset by an increase in average earning assets are more favorable funding mix and lower deposit costs.
Reported net interest margin decreased 17 basis points to $2 55.
Total yield on earning assets declined 19 basis points to $2 80, reflecting the reduced triple T contributions and a $498 million or 15, 6% increase in average cash balances.
Total impact of Triple T purchase accounting accretion and higher cash balances. Our net interest margin was a decrease of 14 basis points for the fourth quarter.
To a benefit of two basis points in the prior quarter.
When excluding these factors net interest margin remains stable.
Reflecting a three basis point reduction in the cost of funds.
Offsetting the lower yields on variable rate loans.
Now lets look at noninterest income and expense non.
Noninterest income totaled $79 million.
This total decreased $9 9 million or 11, 1% and the <unk>.
Record level last quarter, we continue to achieve broad contributions from our fee based businesses.
Markets income totaled $9 5 million.
<unk> contribution from swap activity loan syndications debt capital markets and international banking.
We are very impressed with the performance of our capital markets team with international banking mounts indications, increasing 117% and 42% respectively.
The recent expansion of our debt capital markets capabilities has tripled revenue in the fourth quarter quick.
Quickly, becoming another $1 million plus revenue business for us.
Service charges increased <unk> 7 million, reflecting seasonally higher customer activity.
Mortgage banking operations income decreased $2 3 million or 27, 8% due to a seasonal reduction in held for sale pipeline and lower secondary market revenue.
SBA volumes and average transaction size has continued to be strong with $2 1 million in premium income included in other noninterest income the third consecutive quarter exceeding $2 million.
Yeah.
Reported noninterest expense was well managed and declined $2 6 million or one 4% linked quarter to one.
<unk> hundred $81 6 million.
This reduction was driven by salaries and employee benefits timing zero point $8 million or 0.8% primarily related to higher production and performance related commissions and incentives in the prior quarter.
Bancshares and franchise taxes decreased $1 9 million or <unk> 52, 8% due to recognition of state tax credits in the fourth quarter of 2021.
The efficiency ratio equaled 58, 1% compared to 55, four reflecting lower triple fee income and the previously mentioned non interest income decrease from record levels last quarter.
Overall this was a strong quarter to close out 2021.
<unk> us very well for 2022.
Now, let's turn to 2020 to guidance on page 12.
We expect the momentum in 2021 loan growth to continue.
We expect loans to increase in low double digits to low teens, including the benefit of the Howard Bank acquisition with.
With underlying organic growth in the mid to high single digits on a year over year spot basis.
Arthur This year had benefited from the Triple T program.
Other government stimulus, which we expect will begin to run off from 2022.
With that runoff included in our assumptions deposits are projected to grow mid to high single digits on a spot basis.
<unk> of Howard.
Let's now look at the income statement, which includes Howard Bank all assumptions.
We expect net interest income to end the year between $965 million and 1.005 billion with the first quarter between $226 million to $230 million.
Our base guidance currently assumes two rate hikes with the first being in June and the other in September although we have one sensitivity analysis given the recent volatility in the interest rate futures.
Full year noninterest income is expected to be between 320 $340 million with the first quarter in the high $70 million to $80 million range.
We expect noninterest expense on an operating basis to be between $760 million to $780 million for the full year.
$90 million to $195 million for the first quarter, given normal seasonality and the addition of Howard.
These do not include the one time expenses associated with the Howard Bank acquisition, we expect it to be better than originally modeled.
Positive credit quality is expected to continue throughout 2022 with provision guided to $20 million to $40 million.
This does not include the day to see supervision for Howard and low 20 millions in the first quarter and is dependent on the net loan growth experienced throughout the year.
Lastly, the effective tax rate should be between 17, and a half to 18, 5% for the full year.
With that I will turn the call back to them.
Thanks, Vince 2021 has been a great year for F&B, many accomplishments to celebrate.
I'd like to summarize several significant achievements.
F&B achieved record revenue leading to strong earnings with EPS at the highest level since the company's restructuring in 2004.
Grew loans, excluding PPP, but one.
3 billion year over year to drive total assets to an all time high of 40 billion.
Generated record fee income of over $330 million or 12% year over year growth, which now comprises 27% total revenue.
Our team achieved more than $20 million run rate cost savings half wish to accomplishing our three year total cost savings of.
Of $60 million.
Strength in credit quality liquidity and capital position, putting our company in a strong position to execute our 2022 operator.
Enhanced our digital technologies to better serve our customers putting us at the top of the industry.
And supporting our communities during the pandemic the facilitation of $3 6 billion PPP.
We also continued our effort to provide loan and investment so low to moderate income communities and received an outstanding CRA rating.
Our exceptional financial performance, we were able to create value for our shareholders with a 9% year over year increase to tangible book value and a 15% operating return on tangible common equity.
In addition, our company returned approximately $200 million in capital through dividends and the share repurchase program.
All of this would not be possible without the dedication of our F&B employees, who focus on serving their clients and driving shareholder value every day.
This past year was a difficult environment to navigate but our employees continuously delivering exceptional performance.
As we look to 2022, we are well positioned given our continued loan growth momentum.
<unk>.
And differentiated technology.
<unk> sensitive balance sheet.
Solid asset quality and improving capital flexibility.
I look forward to working alongside of our employees in 2022, driving performance and superior returns.
With that I'll turn the call over to the operator for questions.
Yeah.
Very good. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
And the first question comes from Michael Young with Truth Securities.
Hey, good morning.
Good morning, Michael Good morning, Michael.
Actually wanted to start with more of a strategic question for Vince.
With the rollout of the digital banking I know, both App and online marketplace.
What will that shift for you all strategically are you going to spend more marketing dollars and try to grab market share there or should we just see more efficient operations in the retail bank, how do you kind of think about that.
Both strategically and financially moving forward.
Well I think it adds.
It really adds an element of both I think we're able to operate more efficiently as we stand up the digital work streams within the company because thats part of it as well I mean the external.
The customer facing piece of it is important because I think it really helps us scale significantly in markets that have potential where we may not have top market share or deep penetration, so having the digital channels.
I think since we launched our.
E store.
We basically reformatted and relaunched it and then added loan product we started.
Last year, and then we phased in various loan products. So consumer loans came online in August .
September end.
Credit card rolled out in January but mortgages were rolled out and the mortgage product itself was rolled out in may.
We've done.
Pretty well with applications.
During that period, we were able to originate.
Almost 3000 applications online for those loan products.
Haven't even started.
Done no digital advertising, we've done very little with media contents or <unk>.
Commercials.
But thats going to gear up so our plan was to build the interface to continuously work to improve it because the next phase of this is to create an omnichannel application ive been talking about it for a long time, where customers can go in and fill out one application for five or six products simultaneous.
Asleep.
That's coming by the end of this year, we should have that pretty much in place.
Working on the development of it for some time in the meantime, we started standing up the various loan products. We had a full suite of depository products that we offer and by the way.
<unk>, we've been doing for a long time, I mean, a couple of years.
20000 applications in the deposit space last year.
If you look at what's happened.
If you look at what's going on across the actually have to restate that we had 20000 hits on our web site.
They werent necessarily applications with people, who started to engage with the solution Center.
Once we mobile optimized that particular E store product or platform, we should call it.
That jumped 56% so.
In December for the full month of December we had 31400 interactions with the east not all of them led to applications, but they started the process of reviewed content on products and services and what we're doing is we're grabbing that data.
Those.
Interactions and where we can identify a customer where they've identified themselves. We can create a lead and then push that back through our retail delivery channel and the commercial bank and how can follow up with it.
That's kind of the strategy, but it's really started to take off and I think it's going to add.
Add to our ability to grow loans I think it has.
I think it's helped us this year in certain categories, particularly mortgage with.
60, plus percent of the applications and the year coming through that.
So anyway that's.
That's what.
We're excited about and I think it will provide us with great opportunity to eke out efficiency as we streamline the process to bring these customers on board.
Worked out the digital work streams within the company, eliminating a lot of manual.
Processes, and then on the flip side it will help us scale.
And we have not advertised or spend a lot of money promoting it and we will this year, we have a plan to do that so and it is included in the expense guidance that you got from that.
Another element too is the non banking businesses running their operations through the digital back to wealth insurance private banking so there's.
<unk> is there to leverage the investments that we've made for really across the business.
Yeah.
Okay. Thank you and appreciate you tied it back into the financial guide.
Maybe.
As a follow up on the financial guidance for 2022 for Vince caliber. He's just as we think about kind of rate hikes, you've got to built into the estimate for the year, but if we weren't in the third have you kind of looked at the sensitivity on either $1 or NIM.
NIM basis to what an incremental rate hike would be in addition to what you have baked in.
Yes, yes, we did.
With things moving so quickly we have some sensitivity analysis around different options. So we did quantify that basically the ranges that we have for 2022 would go up by about 3%. If we get a rate hike in March so, adding one march to the June and September that we already have in the guidance is a 3% lift.
So the range of <unk> 65.
Okay, Great really helpful and one last one if I could sneak it in just on Howard you guys are so close to closing it are there any kind of pro forma balance sheet actions that you expect to take or things that have already been done whether that would be shrinking at an increasing kind of a net benefit or anything like that but we should be incorporating as we model that.
I think as we sit here today Michael.
The main item would be net borrowings of about $200 million and about $100 million yourself wholesale deposits.
Borrowings, we would pay off and then wholesale deposits kind of leaned out over the course of the year.
And then overall.
The main first step and there is nothing else from a like an exit portfolio on the loan side of that we have in the past some transaction.
We've been very happy with the credit quality there. So it's really those just those two items as we sit here today.
Okay perfect. Thank you.
Thank you and that's included in our I should comment too that is included in our guide those actions that I just mentioned.
Okay.
Okay.
And the next question comes from pressure Audi with Piper Sandler.
Good morning.
Right.
To start actually there I guess with a follow up on the rate hike question.
I don't believe you guys provide.
You know.
Quantify the deposit betas, you use but just wondered if you could give any color on how you model. It out in terms of the first few I would expect very minimal change in deposit pricing and then maybe pick up after there, but do you guys straight line. It can you say or do you take that approach.
No. It's more of a dynamic filing process I would say I think our expectation as we sit here today it would be.
I get a couple of the fed moves and then you'll start to see some impact on the deposit rates and I guess the way to characterize it would say by the end of the year, maybe 20% or so of the fed move would be captured in the deposit rates and then over time move more towards a kind of historical 40% to 50%, but R 22.
More in that kind of 20% level.
Got you, Okay, and that's why your model in terms of the guidance you've given.
Yes.
And then just on the expenses for next year.
Just wondering if you can speak to how significant inflation plays into that and then I may have missed it I apologize if I did I know Ben spoke of the $20 million in cost saves you've done over the last three years just wondering.
If there was something similar for this year and if it makes sense.
Yes, I would say a couple of comments there I mean your expenses for Q4.
As you know came in consistent with our expectations.
180 hours, what we guided to every line item on the nitrogen from <unk> Suisse.
This is unchanged from the third quarter as we move forward into 2022, we do have a kind of inflation component baked into our noninterest expense level for the year I mean, it's in the single kind of mid single digits I would say from a millions of dollar standpoint, but that is baked into the into the guidance that we have.
And then the second part Frank what was the second part of your cost saves.
Thanks.
Yes, the cost save number you know we had as you commented $20 million a year for three years.
We've done a lot of consolidation with the franchise over those three years. So that's the bogey we have for this year is $10 million.
In total for cost saves and Thats also baked into the guidance.
And I guess importantly, I should say too that when you look at the from an operating leverage standpoint.
Triple P. As we know it is kind of rolling through and there is a little bit of a tail left kind of in the first half of the year, but if you look at the underlying operations of the company and we have positive operating leverage ex PPP in the fourth quarter and as we move into 2022.
Positive operating leverage each quarter and expect that to build in.
Rate moves come in obviously that gives that even more of a lift.
As we have guided to here theres positive operating leverage in each quarter and building throughout the year. So I just wanted to comment on that too.
Okay, great. Thank you.
Alright, Thanks, Brian .
Thank you and the next question comes from Jared Shaw with Wells Fargo Securities.
Hi, Good morning, this is TMR, Brazil or filling in for Jared how are you.
How are you.
Yes.
So loan growth again, very impressive third consecutive quarter I think last time. We spoke you guys are very pleased with how December was going.
I guess you know.
Given the strong December given the strong production.
Was any of that pulled forward from the first quarter and then I guess as you look out at your 'twenty two guidance the mid to high single digits.
Okay and could that prove conservative if the current kind of level of momentum continues or do you see something else occurring in 'twenty, two that might kind of bring that loan growth rate down some.
Yes, I think.
The guide we gave is fairly consistent if you look back historically at our growth trajectory, it's fairly consistent to where we've grown historically.
So in our assessment of what the potential is in the marketplace. Obviously, we don't know we rely on pipeline.
Pipelines economic data input from the field.
Determine what we think we can produce.
I would say historically, we've been in the mid to upper single digit range really skewing towards the upper.
Single digit range with everything that's gone on economically with stimulus still.
<unk> still feeling the effects of stimulus there is potential for us to outperform but we can't.
We have to rely on what we know today.
And our pipelines are good.
We don't really comment on the details of the pipeline, but I would say, it's pretty good across the board.
Particularly in the south.
And in the mid Atlantic region.
Have been doing pretty well down there and it's really paid off for us that expansion has helped us.
The investment in technology sure if that starts to really take off the adoption picks up.
No.
We could see some.
Significant growth in certain categories consumer loan categories pick up some growth in small business potentially.
So that that is that could be additive, but our guide I think.
Yes.
Rooted in historical growth for the company.
I think it's reasonable to apply that Guy I also think that you asked about the first quarter I don't know if you meant the first quarter of this year where.
We were softer and then we had three strong quarters.
Half of the year or do you mean moving into next year 2000. This quarter wanted to yeah I meant the fourth quarter production. If any of that was pulled forward from the first quarter of 'twenty two.
No.
No we can't time now having been a commercial banker.
Hello, Vince Calabrese. This all the time he was like why can't these people forecast when theyre going to close the deal.
Don't control when transactions close there's so many.
There are so many factors obviously, the bankers want to get paid and our incentive compensation plans are geared towards.
Do they get paid on what they close.
<unk>. So there is if there is.
Kind of.
Tug of war between the client.
And the corporate banker, but at the end of the day the client wins.
M&A transaction gets delayed.
There are all kinds of things that can happen and they decided to FERC capex spend into the next year and.
There goes your incentive comp right you got it just pushed in to March So we don't really control that.
Yes.
I don't think anybody there's no reason for people to sandbag and our plans the way they are structured so.
I would suspect that.
The flow of production is real and normal and it's not.
It is not impacted by our people our behaviors of our people.
Okay. That's good color. Thank you for that and then maybe a question for Gary looking at the provision outlook for 'twenty two relative to your comments on asset quality.
Expectations kind of when the deal when the hour deal was announced.
Today, Okay could that proved to be conservative as well as as maybe some of that day two allowances is reversed out throughout the year.
I guess, just maybe talk through.
The puts and takes of a further reserve releases better Howard performance, and then providing for incremental growth and how that plays through the provision in 'twenty two.
Yes, I guess.
Horton pieces, there to more or are they continue and so.
The solid performance across the book of business that we manage and we do.
Do expect that to continue.
In fact, very nicely, but also the importance or the other important factor is the loan growth.
We're able to put up that loan growth is really going to drive that provision expense.
Around around that guide.
So depending upon how strong that growth is from that mid to high single digit level.
Push it up as we move forward.
Referenced referencing Howard we're very pleased with what the performance of that portfolio.
No.
Good day, one credit Mark.
The day two provision on that book are going to be better than expected as was mentioned earlier.
All told everything is moving in a good direction there, it's going to be driven by those factors as we work our way through the year.
Okay. Thank you and then one more if I could just looking at the balance sheet it looks like.
Some of the repositioning out of cash into securities that occurred in the back end of the quarter and I think Vince you referenced that the margin is a bit spring loaded going into the first quarter of 'twenty. Two maybe just talk through that dynamic and what was being purchased in the quarter on the securities book and kind of how you expect that to.
Flow through the margin.
Sure Yes.
The slide references the average cash balance kind of building on three two to $3 seven during the fourth quarter on a spot basis. It actually came down a half a billion. So we ended the year at $3 billion.
And that that excess cash.
As we think about what's baked into our 'twenty two guidance that number comes down about half between now and the end of the year.
We're projecting as far as the investment portfolio during the fourth quarter, we invested a little over $900 million into the portfolio.
This is about double the portfolio of cash flows.
A good portion of that being pre investing in anticipation of the Howard acquisition, So kind of on a net basis the portfolio grew.
<unk> hundred $79 million during the fourth quarter, we reinvesting around 134.
In the third quarter for reference it was $1 13 to 21 basis points higher than where we are investing in the third quarter you run that forward to so far this year in the first quarter in January we've invested $300 million put to work so far in January at 154, So another 21.
Basis points higher than where we were in.
Fourth quarter, so and it had a pretty low duration two to three to $3 seven.
So as we look to the end of the quarter, there's a lot of moving parts with how we're coming in with.
We ended the quarter with securities at about $77 1 billion at the end of March from six eight to $6 nine.
For the year.
Okay, great. Thank you I appreciate the color. Thank you for the questions and nice quarter.
Alright, thank you.
Thank you. Thank you and the next question comes from Daniel Tamayo with Raymond James.
Good morning, everyone.
Okay.
So just hopefully to close the loop here on the on the NII Guide.
You've talked about the the impact of excess cash and you've talked about the impact of deposit repricing.
Just was curious on the timing in terms of any floors or anything like that.
In terms of the incremental benefit of additional hikes as we as we work our way through the year and into next year.
How are how's the balance sheet positioned for.
The first hike relative to future hikes.
Yes, I would say.
The floors that we have a really pretty low.
Well I'm going to have 1 billion of loans that are indexed to short term LIBOR or at a time.
Less than 400 million $350 million or so have floors on them.
On a currency benefit of 63 basis points. So basically you'd have two fed moves before that $3 56.
But that's a small portion of the overall portfolio.
Just to remind you that as far as the total portfolio. We have $9 9 billion of total loans at the end of the year tied to one month LIBOR and then another $2 5 billion tied to prime so.
Between the two it's 50% of the loan portfolio is tied to those.
Short term indices.
And then four levels, we don't have the benefit of it on the way down some part of life and there is not that large of a balance there that kind of happened more factories.
Okay great.
And then on the on the noninterest income side.
Obviously mortgage banking will be will be impacted by the refi cycle coming to an end here, but I'm wondering how you think about the rest of the.
The base of noninterest income and what impact that could have on any of those line items from a rising rate environment.
I would say as we've talked about in the past.
The investments we've made over the last couple of strategic planning cycle too.
Invest in these fee based businesses as well for us, particularly in an environment when rates came down.
If you look at the different components, I mean, surcharges, just driven by customer activity and wealth management business up 16% year over year.
Trust and Securities Commission. So we look for that to continue to have nice growth. This year. The insurance business has been it's been growing nicely cat markets. While it was down from lights out record of $12 five in the third quarter $9 5 million as a very solid number.
We look for that kind of growth as we go forward and then what's additive to us with our coming onboard.
A depth of the products and services that we have.
Not have so we have the opportunity there for their client base to offer a much broader set of products and services, including capital markets. Thank you.
Well.
So we're very much looking forward to having that part of the company.
And working with those customers so.
It's kind of it's kind of all baked in I mean, the interest rate environment.
We've baked into our guidance so.
It's kind of all in there yes.
From a practical perspective, we would expect mortgage banking fee income to be down right because margins have come in versus the peak of that cycle.
But offsetting that on the flip side in a rising rate environment.
SBA gain on sale becomes better and that business is starting to pick up for us.
Our debt capital markets platform that Vince mentioned that we launched this past year already and $1 million in revenue. So that'll help moving into next year and there are some transactions that will be a part of this year next year, but I meant 2022.
There are transactions that were already.
Part of so we'll get some benefit from a fee income perspective there.
Indications so the pipeline is still pretty strong and syndications and that.
Business has been moved pretty nicely across the footprint and we're now starting to see larger opportunities in the southeast and mid Atlantic.
Region, as well as Pittsburgh and Cleveland.
Our traditional markets.
And then as we look.
At other opportunities to grow fee income, particularly in Treasury management and deployment of products and services and the Howard acquisition, we feel there is enough.
Other businesses and our diversified model.
Offset the declines that occur to economic cycle, that's kind of how we designed it.
And we're hoping that that holds true for us and we will achieve the guidance that we're getting.
There's a lot of moving parts.
I'm, sorry, Vince I just wanted to ask a question because your point quite a bit.
Make sure that we have that diversification.
On the mortgage side I would just add that.
Look into what's in our guidance for 2022, I would expect the fourth quarter level of around $6 million, probably to see kind of a bottom.
Part of why I'm, saying that is if you look at the.
Expectation in the market for mortgage applications, I mean, it's down 25% to 30%.
But for us.
75% of our business was purchased.
And purchase side is actually.
Expectations for Fannie Mae were up 10%, so that kind of bodes well given the business model that we run on the mortgage side and with us having 75% on the purchase side. So I would expect that number all things being equal to kind of build from here.
We go through 2022, and that's baked into our guidance.
That's great color I appreciate all that and that that's all I had thanks alright. Thank you.
Thank you and the next question comes from Michael Perito with K B W.
Hey, good morning.
Most of my questions been asked and answered, but just two quick ones. One just on the the loan growth obviously.
Obviously over the last few quarters.
Easy to see the benefit of having the.
The diversified platform, but the CRE growth has been a little slower sorry, if I missed any commentary on this but I was just curious as you look at the kind of the diversity of the pipeline heading into next year any any thoughts about where youre expecting to see.
You know that that mid to high single digit core growth come from it is the mix going to look similar to the back half of this year or do you think theres room for for maybe some other buckets to contribute some more based on the pipeline.
Well I think theres been a lot of activity in CRE I've been involved in discussions with some of the borrowers. So there there are still some projects that we're looking at that are fairly sizable.
And some projects that we closed that fund up over the course of the next year or so so I.
I would expect that business unit to contribute a little more next year, but I think overall when we when we look at our pipeline.
The Carolinas still.
We have very strong pipelines I think.
Charleston has been terrific for US we had good growth in Raleigh.
Charlotte.
There is a building pipeline and Charlotte for this year.
And then the mid Atlantic region, with Howard acquisition positioning the bank will be number six in deposit share and have a pretty substantial lending team.
In that market and in Washington D C.
I'm pretty optimistic.
That will be able to achieve these growth objectives, and I've said it before right.
It's really attributable to R.
Our expansion strategy and the fact that we went in.
To secure substantial market share positions in <unk>.
Really dynamic msas.
Cross the southeast and mid Atlantic.
Really helps us so were.
Yes.
In a good position as the economy continued hope.
The economy continues to grow.
Hold together.
Give us some upside.
And this year.
Hey, Michael one of the things that affected Q4, a bit there on the CRE side. We had we had six multifamily projects as we've talked in the past as being kind of lumpy.
Six projects for $150 million move into the secondary market so that that was a.
That was a bit of a challenge from from a from a footing standpoint in that particular book of business.
And we're going to continue to have that as you know that's an important part of what we do.
Especially in the South East as Vince mentioned, so youll continue to see some lumpiness there.
Exits.
Got it helpful. And then just lastly for me you know I would say it's good to see you there was some.
Regulatory uncertainty headlines in the markets about deals closing so it's good to see Howard closing shortly and as expected just curious if you could provide an updated.
Outlook on kind of 2022 and <unk>.
M&A is from an appetite perspective and just.
How are you kind of view the market overall, if you think there'll be more opportunities or or if the pipeline isn't as robust today.
Well.
As I've said before we're really focused on.
The best deployment of capital possible so.
<unk> kind of met the criteria. It was end market to take cost out to 15.
It was a decent size it wasn't too easily.
Seasonally digested.
Really gave us the ability to.
To position the company from an expense perspective.
Going into <unk>.
Environment, where everyone's concerned about inflation and wage pressure, so really it really worked out well the timing of it flushes coming off of PPP. So we're able to pick up those balances.
The timing also was good with the launch of our E store and the upgrades to our digital offerings. So we can offer those consumers those products. So I think.
That's an example of an M&A.
Opportunity that we.
We thought it was good right and we've looked at it or are we were approved by the fed and the OCC I think within 32 days of application.
So we did not experience we did not experience delays.
Maybe the relative size of the transaction plus our outstanding rating in that we have just concluded.
Our outstanding CRA rating and that we have just concluded some exams.
That maybe got the regulators a little more comfortable but we.
We were able to do that and.
I am very proud of that I think our relationship with the regulators is strong.
<unk>.
We listen and we.
We respond and I think that.
That's why we were able to get our deal approved and we're very conservative in terms of underwriting re underwriting the credits estimating the provision for the reserves.
In those portfolios and the other is a great deal of comfort there having said that.
Telling everybody what I'm most excited about is the investment that we've made in <unk>.
Digital and our digital technology.
What's going on inside the company that you can't see.
From an automation and AI perspective.
Analytics team data hub that we've created the infrastructure. We've built out internally there has really been helping us not just with securing customers and gathering information to help our customers.
With products and services, but also to gain efficiency within the company.
To monitor more and more metrics to help us drive performance. So all of that's very very exciting to me and I think given the positioning of the company.
Did our big expansion and moved into two very dynamic areas of the country, which should provide us with significant opportunities for years to come so.
Our focus is going to be on driving market share gains in those markets.
<unk> comes along from an M&A perspective that makes sense and fits into that strategy sure where we're going to look at it.
But it has to be shareholder friendly.
It harnesses.
Sure helpful.
Anyway, that's it so thank you I appreciate it thanks.
Yes.
Okay.
Thank you and the next question comes from Russell Gunther with D. A Davidson.
Hey, good morning, guys, just a follow up on the growth commentary.
If you could provide some additional color on what you think needs to happen to hit the high end of the range.
Thank you from the mid to the high single digits is that.
C&I utilization continuing to improve portfolio of single family at the current clip.
Curious as to what you think the drivers of that Delta will be well I think it'll be a combination.
We're going to have to execute in all of those areas and I think.
We grew.
10% with very little help.
From expansion in working capital facilities, I know I've read other other earnings reports.
Other companies have seen growth in line utilization, we haven't really I mean, we were up 1%.
It's a de Minimis amount.
<unk> so while that is a factor I think the more activity you see.
<unk> around working capital utilization that means there's opportunities to finance other things too so.
Obviously, those two go hand in hand.
We have great opportunities in the middle market across the footprint with the rollout of the E store and now being able to digitally onboard small business customers, we have a great opportunity there to do it much more efficiently.
Cost effectively across our footprint. So there is upside there theres upside in consumer.
There is upside in mortgage with our physicians first program that we rolled out that I mentioned, so yeah, I think we've got a lot of.
Channels to drive that that growth so.
I think that's right.
Our pipeline is looking pretty solid.
Going into the year so.
Pretty good.
That's great. Thank you and then just last one for me as a follow up on the expense savings you mentioned the 10 million is that from continued branch rationalization or any other drivers there.
Just from all the normal we have we have an expense team we call the guy that.
Runs that are real CEO .
<unk>.
It's driver so he is the chief expense office.
So we have somebody that reports defense and Adam does a terrific job. We look at every single line item.
And then we look at every single large contract that we have we've looked at.
A number of statistics around the branch network and we spend a lot of time there is a whole team.
Data analytics people that look at.
Transaction counts in the life and then we also have an effort.
In our operations area under gaining out to review automation.
And the utilization of intelligence software to help automate.
And eliminate redundant process and manual process. So all of that kind of ties in to the expense reduction and then we also have a team that looks at occupancy expense just constantly I mean, they are constantly reviewing that we don't let any ftes I mean, we review every single pad to staff.
Every replacement position as a company and we require people to do an analysis.
Based upon transaction volume.
Ratio, so that to justify even replacement.
Company has run we've been very fortunate in that given the churn or turnover.
Any companies our vacancy rate has been within historical norms. So we've not seen a mass exodus.
People leave here and there but.
It's been pretty solid we have not had any trouble recruiting people.
So I think.
Those are all the things we do to manage expenses, so there's a whole process.
Round, it and I think we've been we've done a very good job.
And Adam and that team Blue.
Sure.
And have done a terrific job keeper.
Keeping us in line.
Workplace accolade helped too.
Yeah, I mean, we've won best workplace for a number of years. We just won for the 10th year in one publication in Pittsburgh in just about every market for the last decade, We've won awards.
The award.
Employees feel like they're part of the process then.
And there is a tremendous amount of engagement, we had off the charts engagement scores when we hired a third party.
Survey the employee base. So I think the culture here is very strong.
The collaborative culture.
People genuinely liked each other it comes back in.
<unk> that we get.
Even though some of US are crazy I think that the rest of the company history.
I enjoy coming to work and working hard and winning and I think that when you have a culture like that.
Sure Youre not impenetrable, but.
That's a good place to be anyway, that's what leads to our performance and our results all of those things come into play.
Thank you Bob.
Thoughts there I appreciate it great color.
Thanks Ross.
Thank you and the next question comes from Samuel Varga with Stephens, Inc.
Good morning.
Good morning.
I want to ask a couple questions on the Securities book quick could you give us the percentage of floating rate securities.
Yeah.
To get that figure.
Have much if any.
I can't I can get an answer while we're talking to want to go to your next question.
Okay peer network.
Thanks Tahira.
And much of anything we don't have any.
Okay and then.
Kind of a follow up on that could you give the duration of the available for sale.
<unk> of the Securities book.
Sure.
Okay.
No.
Yes.
Scott if you want a scatter Bob just texted me.
We have that.
I just find it.
Hi can I ask another question, maybe until that number comes up.
Did you <unk> great question.
Yes.
Patient three I'm sorry.
Three 3%.
The duration.
<unk> <unk>, yes on the available for sale.
Thank you.
Sure.
Along the lines of kind of market share gains.
You have any sort of.
Initiatives for hiring whether it's seamless doubts or anything like that.
Just tell us about.
Yes, I mean, we've hired quite a few people over the last 12 months.
We've hired people, we generally hire people from larger institutions and the commercial bank. So we.
We just hired somebody from J P. Morgan here in Pittsburgh, Who's leading the teams in Pittsburgh.
We've hired a number of bankers from.
Other companies in the southeast so.
One of our bankers who have come from.
At one point in their career and they were either wells bofa in the southeast the entire Charleston team I think.
At different times, we can do a lift out we've hired a number of people from wells and BB&T and other places.
That's part of our culture to work that's why.
We're able to replace positions I think.
People view, our product set is deep corporate banker's incentive compensation plans or air and provide upside.
And you've got a good <unk>.
Solid.
Set of products from debt capital markets, all the way across.
Most of the commercial Treasury management products, which is one one Greenwich Awards.
In the Treasury management space National Award, so coming here as a commercial banker.
You've got it made I mean, you are coming in and many of these markets. We have a high deposit share, but a low relative commercial share. So the entire market sofa to your so if there's anybody out there listening on the call that want to work here you know please call me.
Think of all the places I have work.
I've never worked for our company.
The management of the wholesale bank.
There is such a collaborative.
<unk>.
Culture.
Can't even describe it I mean other than large companies people were finding within various product areas here.
Incentive compensation plans are designed to have people work together and they do work together to win they just want to win in the marketplace and do the best they can for their clients and for our shareholders. So it's a great culture.
We've not had an issue bringing people in from any from the largest bank in the United States, all the way down to smaller institutions.
So anyway.
Understood. Thank you and then if I could just sneak in a last one.
Do you have any sort of overdraft reduction plans moving forward.
Yeah, we actually we're ahead of the curve there we rolled out a product last year. There was a press release that was put out you can find it.
We have a totally we have an electronic checking product that.
We put out the digital part of our digital offering and you cannot overdrafts.
And that again, you are not charged any overdraft fees in the third I think behind it used to be the second.
Most sought after product or salt product within the company over the last eight or nine months. It may have dropped a third because our student checking campaign.
Student checking pushes it up but it's in the top three of our offering.
And that's why.
And our guide on noninterest income it includes.
Flattening.
<unk>.
In the consumer segment, even though we are seeing a rise in other areas. So.
There will be an impact it's already been baked into our guidance, but that's one thing we've done and we've made a number of other changes in our planning on changing.
Other elements of the fee structure within the consumer bank itself.
Yes, we are studying the competitive environment.
Can't be a market leader there we have to step back and watch.
It's happening, but we were on that one product in.
It's received.
Very positive reviews in its.
Thank god and certify them.
It's been great.
Yeah.
Also if I could clarify that.
The duration so the NFS duration is three four at 12 31.
The total is three six so the HTM is at three seven so.
Pretty similar but just to correct, what I said earlier at 334.
Portfolio.
Thank you very much and that'll be all for my question.
Thank you.
Thank you and the next question comes from Brian Martin with Janney Montgomery.
Hey, guys. Good morning, sorry last question here for you just on capital just kind of any changes in your outlook on that.
Appointment of capital I know you already talked a little Vince about the M&A kind of outlets like just kind of share repurchases, how youre thinking about that given the flexibility.
Sure Brian .
CET one at 99, you can see in the slide deck, it's been very stable 99 last quarter 98, a year ago. So we have talked about a kind of a 10% targets. There. So we're pleased with the level there and even with the strong loan growth, we had 10% as Vince mentioned holding the CET. One flat tells you about the <unk>.
Next generation that we're creating and entertaining.
As we look forward, what's baked into our guide is for the capital ratio to kind of slowly build from here.
We're still swapping normal loans for Triple P loans Reits that have zero risk weighting so.
But I still expect given our guidance for the CET one ratio okay.
Like I say gradually as you get from here to the end of the year and then we'll just be opportunistic on share repurchases I mean, our our first goal is to deploy it for loan growth. So to the extent that loan growth is stronger on the higher end, we want to use the capital to support that loan growth, but we will be opportunistic on share purchases as we move forward.
In 2022, we Didnt do any during the fourth quarter with the timing of Howard and regulatory approval and those types of things.
We will continue to monitor it monitor it and just manage capital in a way thats more.
Fully aligned with shareholder interest, but loan growth will be kind of our first lever that we will look to deploy four.
Gotcha, Okay, and then just baked into the guidance Vince I mean, what on the maybe you said this and I missed it I joined a little bit late but just kind of the excess liquidity I think if you kind of just talk about maybe kind of where the core of the core margin is in one queue I guess.
I guess, given and then just kind of the outlook. What you have baked in for that drag of 26 basis points in excess liquidity kind of as you go throughout the year given the loan growth outlook.
Yes.
The excess cash for the quarter was $3 7 billion on average in the fourth quarter. So that generated the drag that you see on the slide there.
It is our expectation.
Spectation for 2022 is that number kind of comes down in half. So it gets to around $1 million 1 billion and a half by the end of the year. Similarly.
Similarly, we have triple T related deposits that are also in our guide we have projected to come down about $1 three years or so and those have been stickier than.
What we have been estimating as we've been going through the process, but that is baked into our guidance. So.
So basically the cash level will go from an average of $3 seven and then kind of evolved to $1 billion in half by the end of the year. So I can't do that math in my head that quickly, but that's kind of what's what's underneath there so that that impact will lessen as we go through the year.
Okay, Alright, and then just one clarification on the guide.
The impact of Howard given the timing of the close.
The impact to NII and NII, but just the fees and expenses and whatnot that assumes the close here next week or is it was that kind of baked in kind of a year end close just want to make sure I clarify what you've got here on the on the guidance.
It's in there for 11 months, so yes gotcha.
That's what I thought I saw I just want to clarify thanks, Vince I appreciate you taking the questions alright.
Alright, Thanks, Brian Thank you.
Thank you.
This concludes our question and answer session and I would like to return the call to Vincent Lee for any closing comments.
Okay.
Thank you everybody. Thank you for the questions great questions very detail I'm glad we were able to answer hopefully we've answered everybody's question.
I just want to commend our leadership team and the employees I've spent a lot of time when I could.
Meeting with people in the field.
Interacting with different markets and the morale throughout this entire last two years has been terrific and the leadership there has been very strong and really that's what leads to our success. Let me commend everybody for all the hard work and dedication.
Drive to be successful so please keep it up and thank you.
Thank you for the questions and thank you to our shareholders for your continued support.
Thanks.
Okay. Thank you. Thank you and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yes.
Okay.