Fnb Corp/Pa/ Q4 FY2021 Earnings Call

Hello, and welcome to the F.N.B. Corporation Fourth Quarter 2021 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please follow the Operator Instructions. Please note today's event is being recorded. I would now like to turn the conference over to Lisa Constantine, Investor Relations. Ms. Constantine, please go ahead.

Thank you. Good morning, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports we 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 statements disclosures contained in our related materials, reports, and registration statements filed with the Securities and Exchange Commission and available on our website. A replay of this call will be available until Thursday, January 27, and the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince Delie, Chairman, President and CEO.

Thank you. Welcome to our fourth quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, our Chief Credit Officer. FNB's fourth quarter earnings per share was $0.30, bringing our full year earnings to $1.23; the highest earnings per share since the restructuring of the Company in 2004. In addition to the solid EPS number, the fourth quarter was highlighted by robust loan growth, as well as the launches of the mobile eStore and the digital rollout of our enhanced Physicians First program. This full-service offering is dedicated to the personal and commercial needs of physicians, dentists, and veterinarians. Let's walk through each of these accomplishments starting with loan growth. Spot loan growth, excluding the impacts of PPP forgiveness, increased $610 million or 10% annualized from the third quarter of 2021. Strong loan growth supported our 13% annualized sequential growth in net interest income, excluding PPP, purchase accounting accretion and provided significant momentum to the 2022 earnings. In addition to achieving our initial full-year loan growth guidance given last January, we've achieved 3 consecutive quarters of strong loan growth which led to a year-over-year increase of $1.3 billion or 6% excluding PPP from the December 31, 2020 balance. Commercial 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 to $40 billion year-end with a pro forma balance sheet of approximately $42 billion, once the Howard Bank acquisition closes in a couple of days. At the beginning of November, we integrated our e-Store shopping tool into the FNB mobile app as part of a series of innovative enhancements that build on our customers' ability to bank digitally. FNB also successfully upgraded our mobile banking experience, adding new features and expanding our suite of online loan applications, including FNB credit cards, mortgage products, home equity lines of credit, home equity installment loans, and small business loans. This platform creates a fully digital bank, where customers can conduct routine transactions, purchase products and services, and schedule time with our bankers virtually. Our comprehensive mobile offering was recently recognized by S&P Global Market Intelligence, which called FNB Direct one of the most competitive mobile banking apps in the industry. Their analysis indicates that our mobile app had more features than any of our peers and is commensurate with JPMorgan and 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 banking experience. In addition to integrating the eStore, our mobile app was upgraded to incorporate a new modern look, streamline navigation, and direct access features customers are most likely to use, such as enhanced payment capability, shopping and account openings tools, and mobile chat. This upgrade was well received by our customers, as evidenced by an industry-leading app store rating of 4.8 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 in a scalable and efficient manner. A few weeks ago, we rolled out a fully digital and enhanced version of our Physicians First Program on our eStore. This holistic suite of digitally accessible products and services dedicated to meeting the unique needs of physicians, dentists, veterinarians, and other healthcare professionals includes commercial loans, deposit products, consumer loans, and wealth management services, With over 250,000 physicians, dentists, and veterinarians in 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've grown our physician loans 68% in the last 12 months because we've invested in personnel and products. Given the momentum with our current program combined with the investment in our digital capabilities, there is a significant opportunity to deepen existing relationships and acquire 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 with the system's integration on February 5th. We have worked closely with the Howard team and expect the transition to be smooth. We're very impressed with Howard's talented employees and are retaining more frontline employees than originally expected. In fact, our overall retention across our footprint has been strong. And we're excited for them to join FNB in this dynamic market. The acquisition is progressing well, as we are on track to achieve the expense savings outlined in the July announcement. Asset quality has improved more than we originally expected. Similar to past acquisitions, we will introduce our expanded product suite to our new clients to drive additional non-interest income growth in Baltimore and Washington, DC. Both the one-time costs and the credit mark, including day two, are 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 non-performing loans (NPLs) declined, as did our level of rated credits. Additionally, our fourth quarter and full-year net charge-offs have both reached historic new 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. The level of delinquency excluding PPP balances ended December at a very solid 62 basis points, an improvement of 9 basis points on a linked-quarter basis. NPLs and Other Real Estate Owned (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 reduction. This largely reflects the actions we took late in 2020 to better position our loan portfolio for the year ahead at which time we proactively took risk off the table during a challenging macroeconomic environment. Net charge-offs for the quarter were very low at $1.4 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 a $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 favorably impacted our forecast models. This resulted in a GAAP reserve position that was down three basis points, to stand at 1.38% with the extra PPP reserve decreasing five basis points to stand at 1.4%, 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%. I'd now 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 the announcement, as is our standard practice. At this point, we remain pleased with the credit performance and the anticipated Day 1 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 Bank 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 2022. 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, a proof-point of the attentive and disciplined approach we take in managing our credit book. We remain vigilant and attentive to any emerging risks in 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 through this highly competitive environment with our core credit philosophies front and center. This foundation of sound and consistent underwriting, a tenet 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 looked 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 PPP, with a 5.7% year-over-year growth on a spot basis. We surpassed our full-year revenue expectations with a record $1.23 billion driven by a continued strategic focus on diversified fee income contribution. Operating expenses were well controlled and operating pre-provision net revenue, or PPNR, 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 at $0.6 million for the full year. Through this successful execution of our strategies, we were able to increase our operating net income available to common stockholders by 27% to $400 million or $1.24 per share. Let's walk through the fourth quarter financials, starting with the highlights on Slide 5. Fourth quarter operating EPS totaled $0.30, an increase of $0.02 from the year-ago quarter. Tangible book value per share increased 9% year-over-year to $8.59. When excluding PPP, which is more reflective of underlying loan growth, period end total loans increased by $610 million or 10.1% annualized on a quarter basis, including growth of $421 million in commercial loans and $188 million in 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 the second highest production quarter. We also had record linked-quarter growth for small business loans. Let's continue with the balance sheet on Slide 7. Average earning assets are now over $35 billion as securities increased by 4.8% linked-quarter due to pre-investment for the upcoming Howard acquisition, 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 a $620 million reduction in average PPP balances. Average deposits totaled $31.7 billion, an increase of 2.7% from the 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 balance growth and lower beta deposit products to shift to higher beta products. Turning to Slide 8. Net interest income totaled $223.3 million, a decrease of $9.1 million or 3.9% from the prior quarter total of $232.4 million, reflecting a $15.4 million decreased contribution from PPP given forgiveness activity, which was partially offset by an increase in average earning assets, a more favorable funding mix, and lower deposit costs. Reported net interest margin decreased 17 basis points to 255. The total yield on earning assets declined 19 basis points to 280, reflecting the reduced PPP contributions and a $498 million or 15.6% increase in average cash balances. The total impact of PPP, purchase accounting accretion, and higher cash balances on net interest margin was a decrease of 14 basis points for the fourth quarter compared to a benefit of 2 basis points in the prior quarter. But 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 let's look at non-interest income and expense. Non-interest income totaled $79 million. While this total decreased by $9.9 million or 11.1% from the record level last quarter, we continued to achieve broad contributions from our fee-based businesses. Capital markets income totaled $9.5 million; solid contributions from swap activity, loan indications, debt capital markets, and international banking. We are very impressed with the performance of our capital markets team, with international banking and loan indications increasing by 117% and 42% respectively. The recent expansion of our debt capital markets capabilities has tripled revenue in the fourth quarter, quickly becoming another $1 million-plus revenue business for us. Service charges increased by $0.7 million, reflecting seasonally higher customer activity. Mortgage banking operations income decreased by $2.3 million or 27.8% due to a seasonal reduction in the held-for-sale pipeline and lower secondary market revenue. SBA volumes and average transaction sizes continue to be strong, with $2.1 million in premium income included in other non-interest income, the third consecutive quarter exceeding $2 million. Reported non-interest expense was well managed and declined by $2.6 million or 1.4% linked quarter to $181.6 million. This reduction was driven by salaries and employee benefits, earning $0.8 million or 0.8% primarily related to higher production and performance-related commissions and incentives in the prior quarter. Bank shares and franchise taxes decreased by $1.9 million or 52.8% due to recognition of state tax credits in the fourth quarter, 2021. The efficiency ratio was 58.1% compared to 55.4%, reflecting lower PPP income, and the previously mentioned non-interest income decrease from record levels last quarter. Overall, this was a strong quarter to close out 2021, positioning us very well for 2022. Now let's turn to 2022 guidance on Page 12. We expect the momentum in 2021 loan growth to continue. We expect loans to increase in the low double digits to low teens, including the benefit of the Howard Bank acquisition with underlying organic growth in the mid-to-high single digits on a year-over-year spot basis. Deposits this year have benefited from the PPP program and other government stimulus, which we expect will begin to run off in 2022. With that runoff included in our assumptions, deposits are projected to grow mid-to-high single digits on a spot basis, inclusive of Howard. Let's now look at the income statement, which includes Howard Bank in 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 our sensitivity analysis, given the recent volatility in the interest rate futures. Full-year non-interest income is expected to be between $320 and $340 million with the first quarter in the high $70s to $80 million dollar range. We expect non-interest expense on an operating basis to be between $760 to $780 million for the full year, and $190 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 that we expect 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-two CSO provision for Howard in 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 17.5% to 18.5% for the full year. With that, I will turn the call back to Vince.

Thanks Vince. 2021 has been a great year for FNB with many accomplishments to celebrate. I'd like to summarize several significant achievements. FNB achieved record revenue leading to strong earnings with EPS at the highest level since the Company's restructuring in 2004. We grew loans excluding PPP by $1.3 billion year-over-year to drive total assets to an all-time high at $40 billion. Generated record fee income of over $330 million or 12% year-over-year growth which now comprises 27% of total revenue. Our team achieved more than $20 million in run rate cost savings accomplishing our 3-year total cost savings goal of $60 million. Banks and credit quality liquidity and the capital position putting our Company in a strong position to execute our 2022 operating. Enhanced our digital technologies to better serve our customers, putting us at the top of the industry, and supporting our communities during the pandemic through the facilitation of $3.6 billion PPP loans. We also continued our efforts to provide loans and investments to low-to-moderate-income communities and received an outstanding CRA rating. Through 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 FNB employees, who focus on serving their clients and driving shareholder value every day. This past year was a difficult environment to navigate though our employees continuously delivered exceptional performance. As we look to 2022, we are well-positioned given our continued loan growth momentum, investments in differentiated technology, asset-sensitive balance sheet, solid asset quality, and improving capital flexibility. I look forward to working alongside our employees in 2022, driving performance and superior return. With that, I will turn the call over to the operator for questions.

Very good. Thank you. At this time, we will begin the question-and-answer session. Please follow the Operator Instructions. At this time, we will pause momentarily to assemble the roster. And the first question comes from Michael Young with Truist Securities.

Good morning.

Good morning, Michael.

Good morning, Michael.

Actually, I wanted to start with more of a strategic question for Vince. With the rollout of the digital banking both the 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? And how do you think about that, maybe both strategically and financially moving forward?

I believe this initiative truly enhances our operations in multiple ways. We are becoming more efficient as we implement digital work streams across the Company. The customer-facing aspect is crucial, as it enables us to scale significantly in markets with potential where our market share or penetration isn't as deep. Since the relaunch of our eStore and the addition of loan products, we've seen substantial progress. Last year, we began introducing consumer loans which went live in August and September, with the credit card rolling out in January, followed by the mortgage product in May. We've successfully originated nearly 3,000 applications for these loan products without investing in digital advertising or extensive media content, but that will change soon. Our goal was to build and continuously improve the user interface. The next phase is to develop an omni-channel application that allows customers to complete one application for multiple products simultaneously, which we expect to have in place by the end of this year. While we were launching various loan products, we've also been offering a complete range of depository products. In the deposit sector alone, we had significant engagement last year, recording 20,000 interactions on our website. Once we optimized our eStore for mobile users, we saw a 56% increase in engagement. In December, our total interactions reached 31,400, which were preliminary steps toward application submissions as users reviewed our products and services. We are capturing that data and generating leads to pass back through our retail and commercial bank channels for follow-up. This strategy is gaining momentum, and I believe it's contributing to our loan growth, especially in mortgages, where over 60% of applications have come through this channel this year. We're excited about these developments as they present a great opportunity to enhance our efficiency by streamlining processes, moving away from many manual tasks while also improving our capacity to scale. Although we haven't heavily promoted this yet, we plan to invest more in marketing this year, as outlined in the expense guidance provided.

Another element too is the non-banking businesses running their operations through the digital bank too, wealth, insurance, private banking so there's opportunities there to leverage the investments that we've made for really across the businesses.

Okay. Thank you and appreciate you're tying it back into the financial guide. Maybe as a follow-up on the financial guidance for 2022 for Vince Calabrese, just as we think about rate hikes, you've got 2 built into the estimate for the year. But if we were to get a third, have you looked at the sensitivity on either a dollars or NIM basis to what an incremental rate hike would be in addition to what you have baked in?

Yes. Yeah, we did. With things moving so quickly, we've done 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 in March to the June and September that we already have in the guidance is a 3% lift to the range, it's either $965 million to $1.005 billion.

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 pro forma balance sheet actions that you expect to take or things that have already been done? Whether that would be shrinking it and increasing kind of a NIM benefit or anything like that that we should be incorporating as we model that.

As we speak today, the primary focus is on their borrowings of about $200 million and roughly $100 million in wholesale deposits that we plan to pay off, along with gradually reducing wholesale deposits throughout the year. Overall, that's the main first step, and there are no additional exit portfolio items on the loan side related to past transactions. We are quite satisfied with the credit quality in that area, so it's essentially just these two items for now.

Okay, perfect. Thank you.

Thank you. And the next question comes from Frank Schiraldi with Piper Sandler.

Good morning. I wanted to start with a follow-up on the rate hike question. I don't believe you quantify the deposit betas you use, but I was wondering if you could share any information on how you model it out in terms of the initial period. I would expect very minimal change in deposit pricing at first, with maybe an increase afterward. Do you use a straight-line approach, or do you take a different approach?

So it's more of a dynamic filing process, I would say. I think our expectation as we sit here today would be to try and get a couple of the Fed moves in and then 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 historical 40% to 50%. But for '22 more in that 20% level.

And that's what you model in terms of the guidance you've given. 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. Apologies if I did, I know Vince 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.

I would say a couple of comments there. The expenses for Q4, as you know, came in consistent with our expectations. At 180 was what we guided to. Every line item on the non-cash income statement you can see is basically unchanged from the third quarter. As we move forward into 2022, we do have an inflation component baked into our non-interest expense level for the year. It's in the mid-single digits, so I would say from a million dollars standpoint. But that is baked into the guidance that we have. Then the second part Frank, what was the second part again?

Cost saves the $20 million.

The cost savings we projected were $20 million a year for three years, and we experienced significant consolidation with our branches during that period. This year, we expect a total of $10 million in cost savings, which is included in our guidance. Additionally, from an operational leverage perspective, as we know, PPP is being phased out, with a slight residual impact in the first half of the year. However, if we focus on the Company's underlying operations, we achieved positive operating leverage excluding PPP in the fourth quarter. As we enter 2022, we anticipate positive operating leverage in each quarter, expecting it to increase. As interest rates change, this should provide an additional boost. We've indicated that there will be positive operating leverage each quarter, which should strengthen throughout the year, and I wanted to highlight that as well.

Great. Thank you.

Thanks, Frank.

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

Hi, good morning. This is Timur Braziler filling in for Jared. How are you?

Good. How are you?

Good. 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 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 '22 guidance, the mid-to-high single-digits; could that prove conservative if the current level of momentum continues or do you see something else occurring in '22 that may bring that loan growth rate down some?

I believe the guidance we provided is quite consistent. Historically, our growth trajectory aligns well with our past performances. In evaluating the potential in the marketplace, we rely on economic data and field input to estimate what we can produce. Traditionally, our growth has been in the mid to upper single-digit range, leaning towards the upper side. Given the ongoing economic effects of stimulus, there is a possibility for us to exceed expectations, but we must depend on current information, and our pipelines are looking good. While we don't typically disclose pipeline details, I can say that the situation is promising, especially in the Southeast and the Mid-Atlantic regions. Our successes in those areas have been beneficial, and our expansion has yielded positive results. If technology adoption significantly increases, we might see considerable growth in certain areas like consumer loans and possibly in small business loans. However, our guidance is grounded in the company's historical growth, which seems reasonable to maintain. Regarding your question about the first quarter, I'm not sure if you meant this year's first quarter, where we experienced some softness before three solid quarters in the latter half of the year, or if you're referring to next year's first quarter.

Yeah. I meant the fourth quarter production, if any of that was pulled forward from the first quarter of '22?

No, we can't predict when deals will close. As a former commercial banker, I often remind Vince Calabrese about this. It's challenging for people to forecast the timing of transactions because many factors are at play. Naturally, bankers want to earn their commission, and our compensation plans are designed to reward them based on what they close each quarter. This creates a conflict between the client and the corporate banker. Ultimately, the client has the upper hand, and if a deal is delayed, numerous outcomes can result. For instance, clients might choose to postpone capital expenditures until the following year, which can affect our incentive compensation. We don't have control over these situations, and I don't believe there's a reason for anyone to hold back under our current incentive structure. Therefore, I expect that the flow of production is consistent and typical, unaffected by the actions or behaviors of our team.

Okay. That's good color. Thank you for that. And then maybe a question for Gary. Looking at the provision outlook for '22 relative to your comments on asset quality, expectations when the Howard deal was announced today. Could that prove to be conservative as well as maybe some of that Day 2 allowances as reversed out throughout the year? I guess, just maybe talk through the puts and takes of further reserve releases, better Howard performance, and then providing for incremental growth, and how that plays through the provision in '22?

I think the key points here are the continued strong performance across our business and our expectation for that to keep trending positively. Additionally, the loan growth we are achieving will significantly influence our provision expense. Depending on how robust that growth is, especially in the mid to high single-digit range, it could lead to an increase as we progress. We are very satisfied with the performance of the portfolio associated with the Howard deal, and both the Day 1 credit mark and the Day 2 provision for that book are turning out to be better than we anticipated. Overall, everything is heading in a positive direction and will be guided by those factors as we move through the year.

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 and into securities occurred in the backend of the quarter. And I think Vince, you referenced that the margin is a bit spring-loaded going into the first quarter of '22. Maybe just talk through that dynamic and what was being purchased in the quarter on the securities book and how you expect that to flow through the margin.

Sure. Yeah, the slide references the average cash balance building from $3.2 to $3.7 during the fourth quarter. On a spot basis, it actually came down $0.5 billion. So we ended the year at $3 billion for that excess cash. And as we think about what's baked into our '22 guidance, that number comes down about half between now and the end of the year is what we're projecting. As far as the investment portfolio, during the fourth quarter, we invested a little over $900 million into the portfolio. About double the portfolio cash flows. A good portion of that being pre-investing in anticipation of the Howard acquisition. So on a net basis, the portfolio grew $479 million. During the fourth quarter, we're investing around $134 million. In the third quarter for reference, it was $113 million. So a good 21 basis points higher than where we were investing in the third quarter. We run that forward to so far this year in the first quarter in January, we've invested $300 million we've put to work so far in January, at 154. So another 21 basis points higher than where we were in the fourth quarter. And that's a pretty low duration too, 3 to 3.7. So as we look to the end of the quarter, there's a lot of moving parts with Howard coming in. We've looked at the end of the quarter with securities at about $7 billion to $7.1 billion at the end of March from $6.8 billion to $6.9 billion at least to end of this year.

Okay. Great. Thank you. I appreciate the color. Thank you for the questions and nice quarter.

Okay. Thank you.

Thank you. And the next question comes from Daniel Tamayo with Raymond James.

Good morning, everyone.

Hi, Dan.

So just hopefully to close the loop here on the NII guide. You've talked about 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 work our way through the year and into next year. How's the balance sheet position for the first hike relative to future hikes?

I would say the floors that we have are really pretty low. We have $12.5 billion of loans that are indexed to short-term LIBOR or time, more than $400 million, $250 million or so have floors on them at a current benefit of 63 basis points. Basically, you'd have two fed moves before that 356 for the move. 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 in 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 home portfolio that is tied to those short-term entities. In the four levels, we didn't have the benefit of it on the way down. So part of why there's not that large of a balance there that have to work back through.

Okay, great. And then on the non-interest income side, obviously mortgage banking will be impacted by the market cycle coming to an end to you, but wondering how you think about the rest of the base of non-interest 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 cycles to invest in these fee-based businesses has paid well for us, particularly in an environment when rates came down. If you look at the different components, I mean, sure charges just driven by customer activity and the 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 growing nicely. Cap markets, while we're down from lights-out record of $12.5 million in the third quarter, $9.5 million is a very solid number. We will look for that growth as we go forward. And then with the Howard coming onboard, the depth of the part and services that we have, that they do 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, banking, and wealth management, so we're very much looking forward to having them become part of the company and working with those customers. It's all baked in. The interest rate environment, we described we baked into our guidance, so all in there.

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. That business is starting to pick up for us. Our debt capital markets platform that Vince mentioned, that we launched this past year, is already in $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. I say 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. Its indication the pipeline is still pretty strong in syndications, and that business has been moved pretty nicely across the footprint. We're now starting to see larger opportunities in the Southeast and Mid-Atlantic regions as well as Pittsburgh and Cleveland and our traditional markets. And then as we look at other opportunities to grow fee income, particularly in treasury management or the deployment of products and services and the Howard acquisition, We feel there's enough other businesses in our diversified model to offset the declines that occur to economic cycles. That's how we designed it. We're hoping that that holds true for us, and we'll achieve the guidance that we're giving it. There's a lot of moving parts. I just wanted to clarify quite a bit to make sure that we have that diversification.

Regarding the mortgage sector, as we analyze our guidance for 2022, I anticipate the fourth-quarter level to be around $6 million, which could signify a low point. The reasoning behind this is that market expectations for mortgage applications have decreased by 25% to 30%. However, since 75% of our business is comprised of purchases, and expectations from Fannie Mae have increased by 8% to 10%, this is positive news. This reflects well on our mortgage business model, especially considering our focus on the purchase segment. Therefore, I expect that number to progressively improve throughout 2022, and this expectation is incorporated into our guidance as well.

That's great color. I appreciate all that, and that's all I had. Thanks.

All right. Thank you.

Thank you. And the next question comes from Michael Perito with KBW.

Hey, good morning. Most of my questions have been asked and answered, but just 2 quick ones. 1. Just on the loan growth. Obviously, over the last few quarters, it's easy to see the benefit of having the diversified platform, but the CRE growth has been a little slower. Sorry if I missed any comments here on this. But I was curious as you look at the diversity of the pipeline heading into next year. Any thoughts about where you're expecting to see that mid to high single-digit core growth come from? Is the mix going to look similar to the back half of this year or do you think there's room for maybe some other buckets to contribute some more based on pipeline?

I think there's been a lot of activity in CRE. I've been involved in discussions with some of the borrowers, so 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 would expect that business unit to contribute a little more next year, but I think overall when we looked at our pipelines, the Carolinas still have very strong pipelines. I think Charleston has been terrific for us. We had good growth in Raleigh, Charlotte. There's a building pipeline in Charlotte for this year. And then the Mid-Atlantic region with the Howard acquisition positioning, the bank, we'll be number six in deposit share and have a pretty substantial lending team in that market and in Washington DC. So I'm pretty optimistic that we'll be able to achieve these growth objectives. And as I said it before, I think it's really attributable to our expansion strategy. And the fact that we were able to secure substantial market share positions and the fairly dynamic MSAs more across the Southeast and the Mid-Atlantic really helps us. So we're in a good position as the economy continues to hold together and give us some upside in this year.

One of the factors that impacted Q4 on the commercial real estate side was six multi-family projects we previously mentioned as being unpredictable. These six projects, valued at $150 million, faced challenges as we moved into the secondary market, particularly regarding the footing in that area of our business. This will continue to be a significant aspect of our operations, especially in the Southeast, as Vince highlighted. Therefore, we should expect some variability with those transitions.

Got it. That's helpful. Lastly, it's encouraging to see some regulatory uncertainty in the markets regarding deal closures. It's good to see Howard closing soon as expected. I'm just curious if you can provide an updated outlook for 2022, particularly regarding the appetite for M&A and your overall view of the market. Do you anticipate more opportunities, or is the pipeline not as strong right now?

We are committed to making the best use of our capital. The acquisition of Howard met our criteria, as it was in the market, allowed us to reduce costs, and had a good team with a manageable size for integration. This decision positioned us well regarding expenses, especially given the current concerns about inflation and wage pressure. The timing coincided well with the reduction of pressures from the PPP, allowing us to acquire those balances effectively, and it aligned with the launch of our eStore and improvements in our digital services, enabling us to provide better products to consumers. This acquisition was a solid M&A opportunity that we evaluated thoroughly. We received approval from the OCC quickly, within 32 days, without the delays typically seen for transactions of this size. Our strong rating and recent successful CRA rating likely reassured regulators. I'm proud of our relationship with them; we listen to their feedback, which contributed to our approval success. We maintain a conservative approach in our underwriting, ensuring we accurately assess credit and reserve provisions. On a related note, I'm very excited about our investments in digital technology, including advancements in automation, AI, and our Data Analytics team. The infrastructure we've developed supports not only customer acquisition and information gathering but also enhances our efficiency and performance monitoring. Overall, we expanded into two dynamic U.S. regions, which should open up significant opportunities for growth. Our main focus will be on increasing our market share in these areas, and we'll consider M&A opportunities that align with this strategy, provided they are beneficial for our shareholders.

Helpful.

So anyways, that's it. So thank you, I appreciate your question.

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. Curious if you could provide some additional color on what you think needs to happen to hit the high-end of the range. So it can take you from the mid to the high single-digit. Is that C&I utilization continuing to improve, portfolio in single-family at the current clip? Just curious as to what you think the drivers of that Delta will be?

I believe it's going to require us to perform well in all areas. We've achieved a 10% growth with minimal assistance from expansion and working capital facilities. While I've seen other reports where companies have reported growth in line utilization, our increase was only 1%. That's a negligible amount. Although this plays a role, increased working capital utilization opens up opportunities for financing other areas as well. These factors are closely linked. We have significant opportunities in the middle market with the launch of the e-Store and our ability to digitally onboard small business customers, which will allow us to operate more efficiently and cost-effectively. Furthermore, there is potential for growth in consumer lending and mortgage services, particularly with our Physicians First program that was recently launched. Overall, we have numerous channels to drive growth, and our pipeline looks strong as we head into the year, leaving us feeling optimistic.

That's great then. Thank you. And then just last one for me is 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 an expense team led by someone we consider the real CEO because he drives our expenses, acting as the Chief Expense Officer. This person reports to Vince, and Adam does an excellent job. We examine every line item and major contract, analyzing various statistics related to our branch network. Our entire team focuses on data analytics, reviewing transaction counts and related metrics. Additionally, we are working within our operations area on automation and the use of intelligent software to streamline and remove redundant and manual processes. All these efforts contribute to our expense reduction strategy. We also have a dedicated team that continuously assesses occupancy expenses. We thoroughly evaluate every new hire and replacement position in the company, requiring analyses based on transaction volumes to justify each replacement. Fortunately, despite the high turnover seen in many companies, our vacancy rate has remained stable within historical norms, and we have not experienced a mass exodus. While there are occasional departures, overall, we've been solid and have not encountered recruitment issues. These measures illustrate our comprehensive approach to expense management, and I believe we have executed it very well; Vince, Adam, and their team have done an outstanding job keeping us on track.

The best workplace accolade helped too, with the team?

We have been recognized as the best workplace for several years, recently achieving this milestone for the tenth time in one publication in Pittsburgh and in nearly every market over the last decade. We've received numerous awards, and our employees feel included in the process, demonstrating significant engagement. Our partnership with a third party to survey our employees revealed outstanding engagement levels. I believe our culture is very strong; it's collaborative, with people genuinely liking each other, which reflects positively in our results. While some may say we're a bit unconventional, the rest of the company enjoys coming to work, putting in hard effort, and achieving success. Having such a culture isn’t foolproof, but it certainly makes for a positive environment, contributing to our strong performance and results.

Thank you for your thoughts there, I appreciate it. Great color.

Thanks, Russell.

Thank you. And the next question comes from Samuel Varga with Stephens, Inc.

Good morning.

Evening.

Morning.

I wanted to ask a couple of questions on securities. But quick, could you give us the percentage of floating rate securities?

I'd have to get that figure. I don't know if we have much, if any. Again, I can get an answer while we're talking if you want to go to your next question.

Okay.

Three percent.

Thank you. And then a follow-up on that. Could you give the duration of the available-for-sale portion of the securities book?

Scott, if you want to find it, just text me. How's that?

I can ask another question, maybe until that number comes up.

3.4 as of 12/31. The total is 36, so the HTM is that 3.7. They're pretty similar, but just to correct what I had said earlier at 3, it's 3.4 the AFS portfolio.

Thank you very much. And that will be all for me. Thanks for taking my questions.

Thank you.

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

Good morning, everyone. I have one last question regarding capital. Can you share any updates on your outlook for capital deployment? You've mentioned a bit about the mergers and acquisitions outlook and share repurchases. How are you approaching that, considering your flexibility?

Sure, Brian. CET1 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 10% target there. So we're pleased with the level there. And even with the strong loan growth we had of 10% that Vince mentioned, holding the CET1 flat tells you about the earnings generation that we're creating and entertaining. As we look forward to what's baked into our guidance for the capital ratio to slowly build from here, we're still swapping normal loans for PPP loans that have a 0-risk weighting. I still expect, given our guidance for the CET1 ratio, to rebuild, like I said, gradually to get from here to the end of the year. Then we'll just be opportunistic on share repurchases. Our first goal is to deploy it for loan growth. So to extent, the loan growth is stronger on the higher end and 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 didn't do any during the fourth quarter with the timing of Howard and regulatory approval and those types of things. But we will continue to monitor it, and just manage capital in a way that's more fully aligned with shareholder interest. But loan growth will be our first lever that we'll look to deploy for.

Got it. Okay. In the guidance, what can you share about the excess liquidity? I might have missed it since I joined a bit late, but could you discuss where the core margin stands in the first quarter and what you've factored in regarding the 26 basis point drag from excess liquidity as the year progresses, considering the loan growth outlook?

Yes. The excess cash for the quarter was an average of $3.7 billion in the fourth quarter, which contributed to the drag shown on the slide. For 2022, we expect that amount to decrease to about $1.5 billion by the end of the year. Additionally, there are PPP-related deposits included in our guidance, which we've projected to decline by roughly $1.3 billion a year. However, those have been more stable than anticipated during the process, but we have factored that into our guidance. Essentially, the cash level will decrease from an average of $3.7 billion to about $1.5 billion by year-end. I can't quickly calculate that in my head, but that's the underlying situation, and this impact will reduce as the year progresses.

Yeah. Okay. And then just one clarification on the guide, the impact of Howard, given the timing of the close. I mean, the impact to NII and not NII, but just the fees and expenses and whatnot, that assumes the close here next week. Or was that baked in at year-end close? Just want to make sure I clarify what you've got here on the guides.

No. It's in there for 11 months.

I got you. That's what I thought. I certainly just wanted to clarify. Thanks, Vince. I appreciate you taking the questions.

All right. Thanks, Brian.

Thank you.

And this concludes the question-and-answer session, and I'd like to return the call to Vince Delie for any closing comments.

Okay. Thank you, everybody. Thank you for the questions. Great questions, very detailed and glad we were able to answer. Hopefully we 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 and interacting with different markets. The morale throughout these entire last 2 years has been terrific, and the leadership has been very strong. Really that's what leads to our success. So I mostly commend everybody for all the hard work, dedication, and the 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.

Thank you.

That's all I have. Thank you.

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