Fnb Corp/Pa/ Q4 FY2020 Earnings Call

Hello and welcome to the F.N.B. Corporation Fourth Quarter 2020 Quarterly Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Matthew Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please go ahead.

Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until January 27 and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Good morning 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'd like to highlight some key metrics from our 2020 financial results. Despite 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, FNB reported operating earnings per share of $0.28. And operating return on tangible common equity increased to 15%, building on the upper quartile returns relative to peers through the first nine months of 2020. Turning to the income statement for fiscal year 2020, FNB reported record total revenue of $1.2 billion, operating net income of $314 million and operating earnings per share of $0.96, 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 CET1 ratio to the highest levels in decades and increasing tangible book value per share by 5% to $7.88. Because of our performance and the prudent risk management culture, FNB continued to pay an attractive dividend. Our portfolios continue 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 market. Our leadership team prioritized a number of financial objectives during fiscal year 2020, designed to drive long-term results. Reflecting on the 2020 operational initiatives we laid out in 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, the 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 dividend 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 CECL, 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 returns through prudent balance sheet actions, notably the auto loan sale in November, reducing exposure to COVID-19 sensitive industries and the prepayment of higher cost liabilities. These actions reduce overall credit risk, reduce future interest expense and provide us with more liquidity moving forward. In the fourth quarter, we resumed the inaugural FNB share repurchase program, after activity was halted 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 overarching goal of our organization is to grow revenue by prudently increasing our loan and deposit portfolios, all while maintaining superior credit quality and FNB's 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 the deposit side, in addition to an improved deposit mix, non-interest-bearing deposits surpassed $9 billion to end the year as a percentage of non-interest-bearing deposit. Our percentage of non-interest-bearing deposits increased to 31%, up meaningfully from 24% five years ago. FNB is in a very strong liquidity position with a loan deposit ratio of 87% to fund future loan growth with strengthened capital and enhanced liquidity. Diversification and growth in our fee-based businesses namely capital markets, mortgage banking, and wealth management contributed significantly to our record total non-interest income level. Our fee-based businesses had an outstanding year with many groups setting all-time records for revenue. In 2020 capital markets, mortgage banking, and wealth management achieved revenue of $39 million, $50 million, and $49 million respectively. The strong performance was driven by increased contributions due to our geographic expansion strategy and providing value-added solutions to borrowers. We continue to look for ways to diversify our fee income streams by executing on strategic initiatives such as growing the mezzanine finance group and enhancing FNB's debt capital markets capabilities. Total operating non-interest income exceeded $300 million in 2020. Through our continuous investment in both our digital and physical delivery channels, we aspire to provide our customers with intuitive and efficient solutions 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 FNB to optimize our overall footprint with limited disruption for our customers. We've diligently invested in technology and risk management infrastructure by upgrading platforms in the retail bank and improving the customer experience. We continue to evaluate our distribution network regarding consolidation efforts as we announced 21 consolidations to take effect in 2021. Building on FNB's strategy to grow its market presence particularly in Metropolitan, Baltimore, and Washington D.C., we entered an agreement with Royal Farms, a regional convenience store operator that enables us to connect cash distribution services with a robust online and mobile banking offering, providing convenient access to essential banking products and services throughout a broader geographic region with the deployment of more than 220 ATM locations in the Mid-Atlantic region. In addition to withdrawals, transfers, and balance inquiries several of the Royal Farms ATM will also feature check and cash depositing capabilities to provide customers with even greater flexibility and increased access to broader product offerings. As evidence of successful execution of our growth strategy, according to the most recent FDIC data we experienced deposit growth in 50 of 53 MSAs across our footprint. FNB achieved a top five share position in nearly half of those MSAs, 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 evident by FNB achieving our stated 2020 cost savings goal of $20 million. In addition to achieving the 2020 target, FNB also achieved its roughly $20 million cost target in 2019. When including a plan to reduce an additional $21 million in expenses during the 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 initiative, our efficiency ratio remained at a good level at 56%, despite pressures on net interest income in 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, Vince, and good morning, everyone. Our credit portfolio continued to perform in a satisfactory manner in 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-sensitive environment, which drove a reduction in the level of delinquency and non-performing loans (NPLs). Specifically, we were successful in further reducing our limited exposure to the hotel and lodging industry by nearly 20%, which improved our position in this hardest hit asset class that now stands at only 1.3% of the loan portfolio, exclusive of PPP loan balances. Let's now review some of the highlights covering both the fourth quarter and full year results, followed by some commentary around COVID-sensitive portfolios and deferrals. Turning first to credit quality. The level of delinquency came in at a very good level of 1.02%, representing a five basis point improvement over the prior quarter. And when excluding PPP loan volume, delinquency would have ended December at 1.11%. The level of NPLs and OREO totaled 70 basis points, an improvement of 6 basis points linked-quarter while the non-GAAP level, excluding PPP 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 de-risk 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 these select COVID-sensitive credits off the books, utilizing previously established reserves. Our GAAP net charge-off for the full year came in at a very solid 24 basis points. Provision expense totaled $17 million for the quarter ending December with a reserve position at 1.43%. Excluding PPP loan volume, the non-GAAP ACL stands at 1.56% or a 5 basis point linked-quarter decrease, again due to the reductions in exposure across these COVID-impacted sectors. When including the remaining acquired unamortized discount, our total coverage stands at 1.8%. 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-sensitive industry exposure. As it relates to our borrowers requesting payment deferral, 1.7% of the loan portfolio, excluding PPP, was under a COVID-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 to stand at only 3.1% 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 1.3% of our total loan portfolio. Loan deferrals in 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 during the final quarter of the year in this COVID-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 our COVID-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 the expanded lending opportunities ahead. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Thanks, Gary, and good morning. Today, I will discuss our financial results and discuss some of our current expectations. As noted on Slide 5, fourth quarter operating EPS totaled $0.28, an increase of 8% compared to the third quarter. Full year 2020 operating EPS totaled $0.96, after adjusting for $46 million of significant items. While this year brought unique economic challenges, we were well positioned to adapt to the environment and provide strong internal capital generation. Vince mentioned, we increased our tangible book value per share to $7.88, an increase of 5% in 2019. Despite a volatile year for equity markets, our combined dividend yield and share repurchases put us above peer median levels. Looking at 2021, we are confident that 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 1.6% in the third quarter largely due to the previously mentioned indirect auto sale of $500 million that was completed in November 2020. Linked-quarter PPP balances decreased $377 million on a spot basis as we received forgiveness remittances from the SBA throughout December. Commercial loan line utilization rates are 32%, which is about 8% or $500 million 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 non-interest-bearing deposits, partially 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 and FHLB borrowings with a rate of $2.35 during the fourth quarter. Including the FHLB 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, FNB 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 3.2% compared to the third quarter and the net interest margin increased eight basis points to 2.87%. PPP loans added 17 basis points to the net interest margin in the fourth quarter as the level of net interest income from PPP increased $8.8 million compared to the third quarter offsetting three basis points of negative impact from higher average cash balances 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 were down another seven basis points to 36. Let's now look at non-interest income and expense on slides 13 and 14. Operating non-interest income totaled $81 million when excluding the $12.3 million loss on FHLB debt extinguishment. Mortgage banking income remained strong at $15 million with large contributions from the Mid-Atlantic and Pittsburgh regions, and the 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 impacts on assets under management. Capital markets, wealth management, mortgage banking, and insurance are 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, non-interest 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 of 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 and branch consolidation expenses, non-interest expense increased $6.6 million or 3.7%, 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 to 7.24% compared to September 30th, 2020, with net PPP loan balances negatively impacting the December 31st and September 30th, 2020 TCE ratios by 45 and 56 basis points respectively. Compared to the year-ago quarter, the ratio decreased 34 basis points due primarily to the PPP loan impact and the 2020 day one CECL adoption impact. On a linked-quarter basis, our CET1 ratio improved to an estimated 9.9%, reflecting FNB's strategy to optimize capital deployment and increased over 40 basis points from year-end to 2019. Turning to our outlook, we will offer quarterly guidance for the first quarter of 2021 and some high-level expectations for the full year of 2021. I'll 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 31st, assuming approximately $700 million of additional forgiveness of PPP loans in the first quarter. Excluding PPP and 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 non-interest 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 a full-year basis, we expect total revenues to decline low single-digits. This top line 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 the impact of PPP forgiveness and net of any new PPP originations. I'll note this does not account for any additional government stimulus and assume some level of line of credit utilization increase throughout the year as the U.S. economic conditions are expected to improve from where we stand today. We would expect transaction deposits excluding PPP 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 in 2021. Lastly, we expect the effective tax rate to be around 19% assuming no change to the statutory corporate tax rate of 21%. I will 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 channels 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 initiative in our digital delivery channels was instrumental in our success, serving our clients in growing loans, deposits, and fee-based business. FNB will be adding a number of features to our mobile app in the first quarter, providing an improved offering to clients. 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 in our digital platform will enable us to reach new households in 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 work through one of the 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 a resilient U.S. economy to perform at a higher level as the effect of expected stimulus and the rollout of the vaccine take hold, accelerating business activity and economic growth as we move through the year. We will continue to serve our constituency by actively engaging with communities, investing in our dedicated employees and working continuously to deliver greater shareholder value.

Yes, thank you. We will now begin the question-and-answer session. The first question comes from Frank Schiraldi with Piper Sandler.

Good morning.

Good morning, Frank.

I wanted to start by asking about buybacks. You repurchased some shares in the fourth quarter, and I’m curious how you would describe the buyback opportunities now that shares have risen to higher levels. Additionally, I believe you mentioned aiming for an 8% TCE ratio excluding PPP in the coming quarters. Has there been any change to that outlook?

Sure, Frank. I can comment on that. Just from a capital perspective, as you saw on the slides, we ended the year with the CET1 ratio at 9.9 and our TCE ratio of 7.7 excluding PPP both good levels. And as you mentioned, we did comment and we expect to move past 10 and 8 in the first half of 2021. As you know, we've taken actions to bolster our capital position to take it to these levels that are really high for us within our kind of forecast and guidance to look for capital ratios to kind of gradually build from here. And then as far as the repurchase activity, I mean, 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 the balance sheet, overall credit profile that we had. And during the fourth quarter, we were able to buy back 25% of those below tangible book value, which is nice from 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. If loan growth slows and there's more opportunity to do that. But it's definitely going to be a tool we have and we'll look to deploy as we go through the year.

Got it. Regarding expenses, you are targeting $20 million in savings for 2021. You've effectively reduced expenses over the last few years, so this amount is consistent with your past efforts. I'm curious if there are additional opportunities for cost savings in 2021, especially considering the challenging rate environment and the growth in the digital channel, or if any additional savings would be reinvested. Thank you.

Hey, Frank, this is Vince. When looking at the overall picture, it comes to $60 million over three years. We've managed reasonably well despite challenges by cutting costs each year. We have a system in place to constantly seek out cost-saving opportunities, so it's possible we could find more. Our goal has been to achieve about $20 million a year, and we're making good progress toward that. This is reflected in our expense guide for the year. However, we can always explore different areas within the company to enhance efficiency. This year, we've significantly reduced our branch network, as I mentioned earlier with 111 branches. We continue to search for places to cut back while still keeping our customer base intact. Our recent improvements in ATM distribution, especially in the Mid-Atlantic and Ohio markets, help us utilize our digital channels to attract new customers, allowing us to eliminate underperforming branches without losing market coverage. This is our main strategy. We aim to bring down our efficiency ratio below 55%, with a long-term goal of reaching around 50%. Achieving some of this will depend on revenue growth as well. Lastly, we are quite confident about the markets we've entered and are experiencing good success in these higher growth areas. We hope our growth trajectory improves alongside the economy, leading to significant revenue contributions from these markets, which will help enhance our efficiency ratio. Our focus is not solely on expenses but also on increasing top-line revenue.

Got it. I just want to confirm that I heard Vince Calabrese correctly regarding the PPP. Did you say that it added 17 basis points in total for the fourth quarter? If that’s the case, could you remind us what the contribution was for the third quarter?

The fourth quarter added 17 basis points, and the contribution to the third quarter was 6 basis points.

Okay. Thank you.

Welcome.

Thank you. And the next question comes from Casey Haire with Jefferies.

Thank you. Good morning, everyone. I'd like to discuss the loan growth, which is expected to be in the mid single-digits. Can you provide more details? It seems like this growth will primarily come from your higher growth markets. However, I noticed that commercial real estate showed strong performance, and there are indications of momentum in that area as well. Given the concerns associated with it, what is driving that strength? Additionally, Vince Calabrese, you mentioned that line credit utilization is supporting some of this growth. I'm trying to understand how that relates to the current high liquidity situation among borrowers. Could you elaborate on the loan growth?

Well, the southeastern markets in particular and the Mid-Atlantic region they have fairly substantial pipelines. The overall pipeline is down slightly, I think, 8% to 10% 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. And I would also say that the pipelines in the southeastern markets are fairly robust. I mean, Charleston is doing exceptionally well. We expanded in Asheville, North Carolina and we're seeing some good activity in Asheville both from a CRE and C&I perspective. The Mid-Atlantic region is still moving in the right direction, add some growth potential. And then our legacy markets we're expecting to pick up in the second half of the year. They're more industrial-based in the Midwest. And we're expecting to see more C&I opportunities. Gary, I don't know if you want to add to that? You're seeing the book. You're seeing the opportunities come over.

Yes. I think, as you mentioned, Vince, the Southeast has been more active than the other regions at this point, seeing some new opportunities. We brought on a few new bankers, and they've been active. So we're seeing some very nice new opportunities with some new names out of those new bankers that we brought on board, very solid and 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 about 0.5% into the mid-32 range. So, we are expecting as the economy improves over the next year in the latter half, we will see some growth from a utilization standpoint with our industrial base. So that's kind of the expectation there.

Yes, there is a significant amount of cash on corporate balance sheets that is currently unused. We will need to navigate through several sales cycles to reduce that cash. Some of it is driven by stimulus, so I believe that in the second half of the year, we will begin to see an increase in the utilization of credit from a balance standpoint.

Great. Thank you. I appreciate the color on the PPP and the purchase accounting. Is there a way to quantify what the contribution will be in 2021 for those items, so we can get a better sense of what the core revenue outlook looks like?

Yes. Let me explain some details since there are many factors involved. For the fourth quarter, net interest income was $234 million. The PPP contribution was $31 million, an increase from $22 million in the third quarter. This reflects approximately $400 million in forgiveness and updates our assumptions for the remaining lifespan. The deterioration in purchase credit accretion related to CECL was $9 million, which is a decrease of $2 million from the third quarter, totaling $11 million. Overall, if we consider net interest income excluding PPP and purchase accounting, we reached $195 million, slightly up from $194 million. The net interest margin and cash position also play a role here. The cash position will slightly reduce the margin by about 3 basis points. All these factors contribute to our confidence that we are at a turning point for the net interest margin. Looking ahead to the first quarter, we anticipate net interest income, again excluding PPP and purchase accounting, to remain relatively stable despite having fewer days in the quarter. We expect the PPP contribution to be between $20 million and $25 million, assuming $700 million in forgiveness. Purchase accounting likely will decrease by a couple of million to around $78 million. These are the main factors regarding purchase accounting and PPP. Additionally, we noted that interest-bearing deposit costs fell by 12 to 43 basis points, ending the quarter at 36 basis points. This gives us a 7 basis point advantage going into the first quarter, and there is still room for further improvement in business deposits. Consumer CDs are maturing at around $275 million to $300 million per month in the first quarter, with those maturing at approximately 1.5% to 1.6%, while new CDs are being issued at 19 basis points. This continues to create opportunities regarding the rates we pay. The new loans from this quarter had a coupon rate of 3.21%, which is 1 basis point higher than the portfolio yield. This stabilization is beneficial for our loans. Lastly, the reinvestment rates in the securities portfolio were 91 basis points for the quarter, not including some T-bills used for budgeting, which are rolling off at 228 basis points. While there is a slight headwind from that, we believe the stabilization of loan yields and new loans relative to the portfolio yield, as well as opportunities on the deposit side, will help. I apologize for the lengthy explanation, but I wanted to cover all the key drivers.

Yes. No, no that's great. Very helpful. Appreciate it.

May give a complicated position.

We originated 1,900 PPP applications on the first day for approximately $400 million and just launched our portal. Now, we are on day two and will be adding more.

That's not in our guidance.

Yes. Understood.

So that will be coming on the balance sheet.

Got you. Okay. And just last one for me. A question for Gary. So the $70 million to $80 million provision, obviously you guys have your CECL forecast. And I'm just wondering what the loss progression looks like for 2021? And where the ACL ratio lands at the end of the year with that kind of provision guide?

Gary?

Casey, you know, we've done a lot of work across the portfolio. Reviewed a lot of credit, updated significant amounts of credit in the latter half of the year with our normal reviews that come in, 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-impacted sectors and we really feel good about the book coming into the New Year. And our reserve levels at year-end were at solid levels. Our 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 position of the book. So, our expectations as we look forward subject to loan growth around the portfolio is that we're expecting charge-offs to be in what we would call normal ranges with some guide there. And we feel good about that provision guide in 2021 with expectations that the economy will continue to improve. So, a lot of work has gone into it, and we feel good about the information that we have forward with you.

Great. Thank you.

Thank you. And the next question comes from Jared Shaw with Wells Fargo Securities.

Good morning, guys.

Hey, Jared.

Sticking with the credit discussion, considering the guidance of $70 million to $80 million in allowances and what we observed this quarter, how much of a qualitative assessment did you need to apply to maintain the provision at its current level? Also, regarding your comment about improving economic expectations, should we expect that the qualitative assessment will decrease throughout the year, leading to a notable drop in the allowance ratio?

Yes. With the end of the year review of the allowance for credit losses, we applied some qualitative factors based on the position of the portfolio. Most of our allowance is based on quantitative data, but there is some qualitative consideration as well. As the economy improves, we will continue to manage it accordingly. The metrics we used, including an improving economy in the fourth quarter, as well as improvements in unemployment, housing, GDP, and the markets, indicate a gradual steady improvement. Unemployment is projected to continue declining, reaching just over 6% in our forecast. We anticipate GDP growth of about 4% next year and 3% the following year. These are some inputs into our allowance for credit losses, and we feel positive about its current position.

Okay. Regarding the second round of the PPP, I know it's not included in your guidance, but considering the $2.5 billion you managed to distribute in the first round so quickly, how do you anticipate the second round will peak, and when do you expect we will reach that point?

Yes, I think it's too early to tell. I can share that we're currently at about 9% of the total that was originated last time, and there was a significant rush during that period. I don't anticipate that happening again. I believe we will continue to originate. As of last night, we've reached roughly $400 million with 1,871 applications submitted when we closed the portal. I expect there will be sustained demand for the product. It's difficult to predict exact figures, but I can say we will not reach $2.6 billion.

With that growth, is that your loan officers being proactive in going out and letting your customers know that the portal is there or is it that there's sort of this organic demand for it that people got it out?

Yes, we've been in communication since we originated in the first round. We collected everyone's email addresses and relevant contact information, and each loan, totaling around 19,000 to 20,000, was assigned to a banker at our company. Those bankers have continued to stay in touch. Additionally, we've established a communication system through email to periodically update clients about the SBA and PPP program. Therefore, I would say we have been quite active with the 20,000 loans we originated initially. We are also seeing customers return, believing they qualify for this new tranche. So, yes, it has been effectively managed and has been very fluid for us. Our portal was developed in-house, and our team did an excellent job planning it. We continuously monitor the changes alongside the SBA. It's quite complex due to the first draw, second draw, and ongoing forgiveness processes, but we have automated all of them. When we launched, the website functioned flawlessly for us. We are fully digital from start to finish. I'm very impressed with our team's efforts and pleased with how user-friendly this has become for our customers.

Great. Thanks. And then just finally for me on the expense side, that's great with the $20 million target. I guess when we look at the COVID accommodations, whether that's expenses or waived fees. Should we expect that that is over now in 2021, or what's the tail on those COVID-sensitive expenses and COVID-sensitive missing fees? And do you think that we get a 2021 efficiency ratio back to where we were in 2019?

I would say that regarding expenses, we anticipate approximately $22 million in supplies as we look ahead to the first quarter. On the fee income side, non-interest income from service charges has decreased about 10% year-over-year, and about 45% from its lowest point. We've certainly seen a rebound in customer activity, though it's not yet back to pre-pandemic levels. Moving into 2021, a key area of focus will be monitoring changes in customer behavior over time. We have made significant investments in digital initiatives, allowing customers to bank wherever they prefer. We will continue to closely track customer behavior to identify opportunities for potential consolidation moving forward. Additionally, I want to mention our ongoing process improvement initiatives. We've been working on these for several years and are integrating robotics process automation to further streamline our processes. We have several initiatives planned for this year aimed at improving the efficiency ratio, some of which are included in our guidance, and if we can enhance our performance in this area, it would be the first time we're applying these techniques. I believe there are additional opportunities for improvement as well.

We have made substantial investments in the digital space, which includes data analytics and data warehousing. We're enhancing our website to allow customers to purchase checking account products and complete the entire process online. This year, we will also introduce loan products. Our mobile app will feature picture bill pay, improved chat functions, credit score access, e-statements, a new user interface, and the ability to enroll in mobile services directly through the app. Additionally, we are integrating our mobile-optimized website with the solution center into our app, enabling users to shop within the app without going to a separate website. There are numerous developments underway, and it is crucial that we continue to invest in these areas to maintain our competitiveness against larger rivals and Fintech companies. Our market share data indicates that we are performing well in terms of growth across most metropolitan statistical areas we operate in. The competition is ongoing, and while we are currently facing challenges with margins and have had to slow down some of our investments, it remains a priority.

Great. Thanks a lot.

All right. Thank you.

All right. Thanks, Jared.

Thank you. And the next question comes from Michael Young with Truist Securities.

Hey. Thanks for taking the question.

Hey, Michael.

Hey, Michael.

Wanted to maybe do a quick follow-up on the expense side. So, you've got about $15 million of core expense inflation, $21 million of planned savings. And I would assume, there'd be maybe a little bit of tailwind from lower cost 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 that maybe that are going to do better in 2021?

The fee business had an outstanding year in 2020 with record levels, as mentioned by Vince. The increase of $32 million in fee contribution comes from mortgage, capital markets, insurance, and wealth. While we expect to maintain a strong level of contribution, it may not be at record levels every quarter, particularly in the mortgage sector which had a very strong past quarter. We've made significant investments in these areas and expanded geographically in the mortgage business, and we see potential for further growth with new team members. On the expense side, we anticipate a slight decrease from 2020 levels. The first quarter typically sees some inflation due to payroll taxes, but looking forward to the second, third, and fourth quarters, expenses should align with our guidance of around $178 million. This is supported by $20 million in cost savings and other efficiency initiatives, which should stabilize costs after the seasonal jump in the first quarter.

And I guess, my second question kind of is, 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 focused on consistency through different cycles. While we managed to grow rapidly and achieve better margins during the financial crisis, the current landscape has shifted due to the significant stimulus injected into the economy. In the absence of this stimulus, I believe that our credit metrics would be stronger, and we would be actively originating loans while others might be cautious or pulling back due to uncertainty. However, the stimulus has allowed companies to navigate challenges without needing additional capital from banks. We are essentially supplying capital that is federally backed through programs like PPP, and the unprecedented consumer stimulus checks have transformed the landscape. It's important for us to be cautious in our loan originations because there will be consequences in the future. Despite this, we remain optimistic about our target areas and continue to allocate capital as we have during the strongest periods. Given the zero interest rate environment, borrowers are more open to accepting slight increases in rates, as the overall impact of an additional 50 basis points is minimal. Although we're pursuing our loan originations in the commercial sector aggressively, we expect to see a shift when demand increases later this year, in the second, third, and fourth quarters. Apologies for the lengthy response, but that summarizes our perspective.

No, that makes sense. And one – just quick last one maybe for Vince. Are there any other balance sheet actions that can be taken or opportunities ahead? And you've taken some in the last two quarters. So just curious if there's anything else out there that we should expect?

Yes. I would say that we're always analyzing the full balance sheet to see if there's ways to improve the position. We took a lot of action in 2020. I would say as we sit here today, if you look at the home loan advances there's about $1.7 billion or so. $650 million matures in 2021, so kind of the short life there. So there's another $1 billion or so that we'll continue to evaluate to see does it make sense to potentially 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 have any plans for any other actions.

Okay. Thanks.

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

Hi, good morning everyone.

Good morning, Brody.

I just wanted to ask was any of the reduction in the higher risk portfolios like the hotel due to loan sales, or was that pay downs of maybe some weaker credits that you didn't want to retain? Yes. We moved $65 million in hotels. $42 million of the $65 million we moved them in the normal course of business, moving them off the balance sheet. 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.

Okay.

But other than that 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?

Yes. The total amount that we moved including some of the small business stuff was right at $50 million, Brody. And in terms of charge-offs, the charge-offs on that 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 very good.

Okay. And 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. And the criticized were up just a touch over $100 million, criticized being special mention. So we had good movement in classifieds, slight increase in the special mention category.

Okay. All right. Maybe just turning to new loan originations, I appreciate the color on the pipeline. But just wanted to get a sense, Vince, for what new C&I and new CRE yields are like today?

We're seeing originations in the probably 250 range right now. Vince can provide more detail on that.

And the spread is up about 45bps to 50bps over midyear. So we are seeing improvement from a spread perspective.

I believe the floors have decreased slightly. We were previously seeing 75 basis points, and now it's around 50 basis points. There is some competition, quite a bit actually, but in focusing on our core, we are still able to secure them, though not at the same spread we would have achieved at the start of the crisis.

All right. And is that spread over LIBOR, or I guess, what's the benchmark?

Gary is talking spread over LIBOR. And I'm talking floor.

Okay, all right, understood. And then, the liquidity ticked up again, which you deployed some of that in the securities. Is that a strategy we should expect more of, or would you rather hold off and use that to fund loans moving forward?

Well, it will be a combination. I mean, we're monitoring that every day to decide, kind of, which way to go. We have been letting the securities portfolio run down earlier in the year. And we did put some good portion of the cash flows that came out of that portfolio, we reinvested in the fourth quarter. And the plan right now would be to hold securities flat in 2021. But again that subject to changes as rates move around. The liquidity is there. We use some of that to pay down some of the borrowings. Like I said, we'll continue to evaluate that. And then, additional stimulus is just going to bring more deposits into other banks, right? So, I think that the plan there would be, as Vince commented earlier, as you get through the year and you get the vaccine behind, and hope that economic activity picks up and the customers work through cash and then they start to borrow again to utilize that liquidity. So we like having the powder. And I think our teams are very well-positioned. They're actively calling on their clients, as well as prospects so that when that time comes I think we'll be right at the table.

Okay. And what are new security yields right now, Vince?

I mean, they're around 100 basis points really pretty well.

Okay. 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 sheets right now?

No. I think that there will be opportunities for us to continue to execute the capital markets realm. As we move through the year, particularly in the second half of the year, I think that there'll be more activity and our borrowers will want to take advantage of the low-rate environment. So, it will lead to opportunities as we start to fund debt. From a working capital perspective, we're not fixing tranches of embedded working capital. We're focusing principally on term borrowings. So that doesn't really come into play, frequently.

Okay.

From a commercial real estate perspective, that remains an active area. I expect us to continue seeing solid levels of capital market opportunities. Our syndications in both commercial real estate and industrial are refreshing their pipelines. Therefore, I anticipate that mergers and acquisitions will increase in the second half of the year. Additionally, we are nearing the completion of establishing a broker-dealer to capitalize on debt capital market fees for our large corporate clients. This move should benefit us this year. The finalization will happen soon, allowing us to accept these debt offerings for our clients, which we haven't been able to do before.

Thanks for that. I have just a couple of quick questions left. Regarding your insurance, I wanted to inquire how much of it is related to individual policies, or if there is also a commercial insurance component involved.

It's pretty small. The individual piece of it is relatively small. It's mostly commercial. It's employee benefits, and your typical risk-based policies for commercial.

Okay. Regarding the expense outlook, I appreciate the guidance, but it seems like expenses are running a little higher than expected. I would like to understand when the core expense figures might reduce and align more closely with the sub-720 level for the full year.

Yes. I wanted to highlight a few points. The fourth quarter expenses are slightly elevated due to production-related commissions, which are usually higher at the end of the year as we finalize things. Additionally, we've seen a couple of million dollars increase in outside services and professional fees for various ongoing projects where we've engaged outside help for tasks like LIBOR. This isn't expected to be part of our regular run rate moving forward. We've also recorded about $1 million less in FAS-91 deferred origination fees, contributing to the increased expenses. There are many factors influencing the fourth quarter, which is why, if you look at the expense run rate from the second to the fourth quarter, we are around the $178 million we had been guiding to for a few quarters now. The $20 million initiative has been identified, and much of it will begin within the first few months to provide the anticipated run rate benefits. However, the $20 million is reflective of the timing of these initiatives throughout the year, with most of the benefits expected early on to capture the full year savings.

Great. Thank you very much for taking all my questions. Everyone, I appreciate the time.

Thank you.

Brian thanks.

Thank you. I really appreciate the interest and the questions. I thought they were great questions. Hopefully, we were able to provide transparent answers, so you guys can complete your modeling. And again, I want to thank our employees one more time. I think it was a very challenging year. We worked as hard as possible to preserve shareholder value and to position this company for success. I can't say that enough. I mean there were a number of management actions that took place that weren't easy decisions, but we made them and we're well-positioned to move into next year and we're looking forward to a return to normal. So, thank you, everybody. Appreciate the interest. Take care.

Thank you. And that does conclude today's teleconference. Thank you for attending today's presentation. You may now disconnect your lines.