FNB Corp (FNB) 2021 Q4 法說會逐字稿

Hello, and welcome to the F.N.B. Corporation Fourth Quarter 2021 Earnings Call.

(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 it files 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 website.

A replay of this call will be available until Thursday, January 27, and the webcast replay will be posted to the About Us, Investor Relations section of our corporate website.

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

Thank you. Welcome to our fourth quarter earnings call.

Joining me today are Vincent 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 launch of the Noble 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 impact of PPP forgiveness increased $610 million or 10% annualized from the third quarter 2021. Strong loan growth supported our 13% annualized sequential growth in net interest income, excluding PPP and purchase accounting accretion and provides 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 at year end with 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 eStore shopping tool into the FNB mobile app as part of the series of innovative enhancements that's 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 line credit, home equity installment loans and small business loans. This platform creates a only 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. And their analysis indicates that our mobile app has 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 streamlined navigation and direct access features customers are most likely to use such as enhanced payment capability, shopping and account opening tools and mobile chat. This upgrade was received well by our customers and is evident 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 new store.

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 have grown our physician loans 68% in the last 12 months as we 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 health care industry. Lastly, I wanted to touch on the Howard Bank acquisition. We are in the final days before our close on January 22 and the systems integration on February 5. We have worked closely with Howard team and expect the transition to be smooth. We are 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 are excited for them to join FNB in this dynamic market. The acquisition is progressing well as we are on track to achieve the expense saves laid out in the July announcement Asset quality has improved more than we originally expected. And similar to past acquisition, we'll introduce our expanded product suite to our new clients to drive additional noninterest income growth in Baltimore and Washington, D.C. Both the onetime costs and the credit mark, including day 2, 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 NPLs declined as did our level of rated credits. Additionally, our fourth quarter and full year net charge-offs have both reached historically 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 bps on a linked-quarter basis.

NPLs and OREO also improved during the period to end December at 39 basis points, representing a 10 basis point reduction from the prior quarter with reduced nonaccrual levels of $22 million, driving the improvement. On a year-over-year basis, our nonaccruals 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 2 basis points annualized while full year net charge-offs for 2021 totaled $14 million and stood at a solid 6 basis points, a historically low level. We recognized the $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 3 basis points to stand at 1.38% with the x PPP reserve decreasing 5 bps 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% and 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 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 book remains well diversified and will have minimal impact to our concentrations of credit. As we close out another successful year, marked by continued positive credit trends, we are very pleased with the position of our portfolio moving into 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 cement. This foundation of sound and consistent underwriting a tenant management of risk and careful selection of high-quality lending opportunities continues to support our growth objectives as we look forward to more business opportunities ahead in 2022. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Thanks, Gary.

As we look at our financial results, we have delivered an exceptional performance this past year and exceeded our full year expectations on both the bottom line and pre-provision net revenue basis. We produced mid-single-digit loan growth, excluding PPP, was 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 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 0 and $0.6 million for the full year. Through the successful execution of our strategies, we were able to increase our operating net income available to common stockholders by 27% to $400 million 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, and 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 $610 million or 10.1% annualized on a linked-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% built below the prepandemic level of 40% to 45%. Consumer leading had their second highest production quarter, and 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 and securities increased 4.8% linked-quarter due to pre-investing for the upcoming Howard acquisition and utilizing excess cash with spot cash balances down 15%. Reported average loans and leases remained flat at $24.7 billion, with loan growth offset by a $620 million reduction and average PPP balances. Average deposits totaled $31.7 billion, an increase of 2.7% linked-quarter, with year-over-year growth in all 8 of our primary MSA markets. The growth continues to lead to a favorable funding mix, giving customers preferences for low-cost savings accounts and maintain higher checking account balances. We expect organic growth to continue and as rates rise, expect the balance growth in 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 2.55%. The total yield on earning assets declined 19 basis points to 2.80%, reflecting the reduced PPP contributions and a $498 million or 15.6% increase in average cash balances. 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. When excluding these factors, net interest margin remained stable, reflecting a 3 basis point reduction in the cost of funds offsetting the lower yields on variable rate loans.

Now let's look at noninterest income and expense. Noninterest income totaled $79 million. While this total decreased $9.9 million or 11.1% from the record level last quarter, we continue to achieve broad contributions from our fee-based businesses. Capital markets income totaled $9.5 million, with a solid contribution from spot activity, loan syndications, debt capital markets and international banking. We are very impressed with the performance of our capital markets team with international banking and loan syndication increasing 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 $0.7 million, reflecting seasonally higher customer activity. Mortgage banking operations income decreased $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 noninterest income, the third consecutive quarter exceeding $2 million. Reported noninterest expense was well managed and declined $2.6 million or 1.4% linked-quarter to $181.6 million. This reduction was driven by salaries and employee benefits declining $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 $1.9 million or 52.8% due to recognition of state tax credits in the fourth quarter 2021.

Efficiency ratio equaled 58.1% compared to 55.4%, reflecting lower PPP income and the previously mentioned noninterest income decreased 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 and 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 2 rate hikes with the first being in June and the other in September, although we have launched sensitivity analysis given the recent volatility in the interest rate futures.

Full year noninterest income is expected to be between $320 million and $340 million with the first quarter in the high $70 million to $80 million range. We expect noninterest expense on an operating basis to be between $760 million to $780 million for the full year and $190 million to $195 million for the first quarter, given normal seasonality and the addition of Howard.

These do not include the onetime expenses associated with the Howard Bank acquisition. We're expected 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 2 CECL provision for Howard and below $20 million 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 in the highest level since the company's restructuring in 2004. We grew loans, excluding PPP, by $1.3 billion year-over-year and drive total assets to an all-time high of $40 billion, generated record fee income of over $330 million or 12% year-over-year growth, which now comprises 27% of total revenue.

Our team achieved more than $20 million of run rate cost savings, accomplishing our 3-year total cost savings goal of $60 million. Strength in credit quality, liquidity and the capital position, putting our company in a strong position to execute our 2022 offering, enhanced our digital technologies to better serve our customers, putting us at the top of the industry and supporting our communities to bring the pandemic through the facilitation of $3.6 billion of PPP loans. We also continued our efforts to provide loans and investment to low-to-moderate income communities and received an outstanding CRA rate. 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, but our employees continuously delivering 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'll turn the call over to the operator for questions.

(Operator Instructions)

And the first question comes from Michael Young with Truist Securities.

Actually, I wanted to start with more of a strategic question for Vince. With the rollout of the digital banking, both app and online marketplace, what will that shift for you all strategically? Are you going to spend more marketing dollars and try to grab market share there? Or should we just see more efficient operations in the retail bank? How do you kind of think about that maybe both strategically and financially moving forward?

Well, I think it adds -- it really adds an element to both. I think we're able to operate more efficiently as we stand up the digital work streams within the company because that's part of it as well. I mean, the external -- the customer-facing piece of it is important because I think it really helps us scale significantly in markets that have potential where we may not have top market share or deep penetration. So having the digital channels were -- I think since we launched our eStore, we basically reformatted it and relaunched it then added loan product. We started last year and then we phased in various loan products.

So consumer loans came online in August and September and credit card rolled out in January, but mortgages were rolled out in the -- mortgage product itself was rolled out in May. We've done pretty well with applications. I mean we -- during that period, we were able to originate almost 3,000 applications online for those loan products.

And we haven't even started. We've done no digital advertising. We've done very little with media content or commercials but that's going to gear up. So our plan was to build the interface to continuously work to improve it because the next phase of this is to create an omnichannel application. I've been talking about it for a long time where customers can go in and build out 1 application for 5 or 6 products simultaneously.

That's coming -- by the end of this year, we should have that pretty much in place. We've been working on the development of it for some time. In the meantime, we started standing up the various loan products. We had a full suite of depository products that we offer. And by the way, deposits we've been doing for a long time, I mean, a couple of years, we took 20,000 applications in the deposit space last year. If you look at what's happened -- if you look at what's going on across the -- actually I have to restate that, we had 20,000 hits on our website.

They weren't necessarily applications. The people who started to engage with the solutions center. Once we mobile-optimized that particular eStore product or platform, we should call it, that jumped 56%. So in December, for the full month of December, we had 31,400 interactions would be used for, not all of them led to applications, but they started to process or review for content on products and services. And what we're doing is we're grabbing that data, those interactions and where we can identify a customer where they've identified themselves, we can create a lead and then push that back through our retail delivery channel and the commercial bank and how we follow up with it.

So that's kind of the strategy, but it's really started to take off, and I think it's going to add to our ability to grow loans. I think it has added. I think it's helped us this year in certain categories, particularly mortgage with 60-plus percent of the applications in the year coming through that channel.

So anyway, that's -- that's what we're excited about, and I think it will provide us with a great opportunity to eke out efficiency as we streamline the process to bring these customers on board and working out the digital work streams within the company, eliminating a lot of manual processes. And then on the flip side, it will help us scale. And we have not advertised or spent a lot of money on promoting that, we will. This year, we have a plan to do that. So it's included in the expense guidance that you got from Vince.

Another element too is the nonbanking 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. And appreciate you tying it back into the financial guide. Maybe as a follow-up on the financial guidance for 2022 for Vincent Calabrese. Just -- As we think about kind of rate hikes, you've got to built into the estimate for the year, but if we were to do a third, have you kind of looked at the sensitivity on either dollars or a NIM basis to what an incremental rate hike would be in addition to what you have baked in?

Yes. Yes, we did. When things moving so quickly, we've done some sensitivity analysis around different options. So we did quantify that. And basically, the ranges that we have for 2022 would go up by about 3% if we get a rate hike in March. So adding 1 March to the June and September that we already have in the guidance is a 3% lift to the range of the $965 million to $1.005 billion.

Okay. Great. Really helpful. And 1 last one, if I could sneak it in. Just on Howard, you guys are so close to closing it. Are there any kind of pro forma balance sheet actions that you expect to take or things that have already been done, whether that would be shrinking it and increasing kind of a NIM benefit or anything like that, that we should be incorporating as we model that?

I think as we sit here today, Michael, the main item would be, they have borrowings of about $200 million and about $100 million or so of wholesale deposits that we would -- the borrowings we would pay off and then wholesale deposits kind of wean down over the course of the year. And then overall, that's the main first step, and there's nothing else from like an exit portfolio on the loan side as we had in the past some transactions. We've been very happy with credit quality there. So really those -- just those 2 items as you see here today.

Perfect.

Mike, I should comment, too, that's included in our guide, those actions that I just mentioned.

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

I wanted to start actually there, I guess, with a follow-up on the rate hike question. I don't believe you guys provide quantifying the deposit betas you use. But just wondered if you could give any color on how you model it out in terms of the first few, I would expect very minimal change in deposits pricing and then maybe pick up after there. But do you guys straight line it, can you say? Or do you take out both.

It's more of a dynamic modeling process, I would say. I think our expectation, as we sit here today, will be to get a couple of the Fed moves in and then we start to see some impact on the deposit rates and I guess the way to characterize it, would say, by the end of the year, maybe 20% or so of the Fed move would be captured in the deposit rates and then over time, move more towards a kind of historical 40% to 50%. But for '22, kind of more in that kind of 20% level.

Got you. Okay. 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 3 years. Just wondering if there was something similar for this year and at the...

Yes. I would say a couple of comments there. I mean, the thesis for Q4, as you know, came in consistent with our expectations as one what we guided to. Every line item on nonutilities basically unchanged from the third quarter. As we move forward into 2022, we do have a kind of inflation component baked into our noninterest expense double for the year. I mean it's in the single -- kind of mid-single digits, I would say, from a millions of dollars standpoint, but that is baked into the guidance that we have. And then second part, Frank, what was the second part again?

Cost saves.

Yes, the cost save number, we had, as you commented, $20 million a year for 3 years. We've got a lot of consolidation with the branches over those 3 years. So the vote we have for this year is $10 million in total for cost saves, and that's also baked into the guidance. And I guess, importantly, I should say, too, that when you look at the -- from an operating leverage standpoint, PPP, as we know, is kind of rolling through, and there's a little bit of a tail left kind of in the first half of the year. But if you look at the underlying operations of the company, I mean, we have positive operating leverage ex PPP in the fourth quarter. And as we move into 2022, we have positive operating leverage each quarter and expect that to build. And as the rate moves come in, obviously, that gives that even more of a lift. But as we've guided to here, there's positive operating leverage in each quarter and building throughout the year. So I just wanted to comment on that, too.

The next question comes from Jared Shaw with Wells Fargo Securities.

This is Timur Braziler filling in for Jared. So loan growth, again, very impressive third consecutive quarter. I think last time we spoke, you guys were 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. And could that prove conservative if the current kind of level of momentum continues? Or do you see something else occurring in '22 that might kind of bring that loan growth rate down some?

Yes. I think the guide we gave is fairly consistent. If you look back historically in our growth trajectory, it's fairly consistent to where we've grown historically. So in our assessment of what the potential is in the marketplace, obviously, we don't know. We rely on pipeline economic data and this input in the field. to determine what we think we can produce. I would say, historically, we've been in the mid- to upper single-digit range really skewing towards the upper single-digit range with everything that's gone on economically with stimulus, still the economy is still feeling the effects of stimulus, there is potential for us to outperform, but we can't we have to rely on what we know today. And our pipelines are good. We don't really comment on the details of the pipeline, but I would say it's pretty good across the board, particularly in the South East and in the Mid-Atlantic region. So we have been doing pretty well down there, and it's really paid off for us, that expansion has helped us. The investment in technology; sure, if that starts to really take off the adoption picks up, we could see some significant growth in certain categories, consumer loan category pick up some growth in small business potentially. So that is -- that could be additive. But our guide, I think, is that's rooted in historical growth for the company. And I think it's reasonable to apply that guide. I also think that you asked about the first quarter. I don't know if you met the first quarter of this year where we were softer, and then we had 3 strong orders in the second half of the year or do you mean moving into next year, this quarter.

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

No. We can't time having been a commercial banker, I tell this celebrates all the time as like why can't these people forecast when they're going to close a deal. We don't control when transactions close. There are so many factors. Obviously, the bankers want to get paid. And our incentive compensation plans are geared towards -- they get paid on what they close each quarter. So there's kind of tug of war between the clients and the corporate banker. But at the end of the day, the client wins, an M&A transaction gets delayed. There are all kinds of things that can happen. They decided to defer CapEx spend into the next year. And there goes your incentive comp, right? You got to get pushed into March. So we don't really control that. I don't think anybody -- there's no reason for people to sandbag in our plans the way they're structured. So I would suspect that the flow of production is real and normal, and it's not impacted by our people or behaviors of our people.

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

Yes. I guess the important piece is there to more are the continuance of the solid performance across the book of business that we manage. And we do expect that to continue to track very nicely. But also the important -- the other important factor is the loan growth that we're able to put up, that loan growth is really going to drive that provision expense around that guide.

So depending upon how strong that growth is from that mid- to high single digit level, it could push it up as we move forward. Referencing Howard, we're very pleased with the performance of that portfolio. And the day 1 credit mark and the day 2 provision on that book are going to be better than expected as was mentioned earlier. So all told, everything is moving in a good direction there. It's going to be driven by those factors as we work our way through the year.

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

Sure. Yes. The slide references the average cash balance kind of building from 3.2 to 3.7 in the fourth quarter. On a spot basis, it actually came down $0.5 billion. So we ended the year at $3 billion, we're going to have 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, which is about double the portfolio cash flows. A good portion of that being preinvesting in anticipation of the Howard acquisition. So kind of on a net basis, the portfolio grew $179 million.

During the fourth quarter, we were reinvesting around $134 million. In the third quarter for reference, it was $113 million. So 21 basis points higher than where we're 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 million.

So another 21 basis points higher than where we were in fourth quarter. So -- and it had a pretty low duration 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 look at the end of the quarter with securities at about $7 billion, $7.1 billion at the end of March from $6.8 billion to $6.9 billion that we kind of ended the year.

The next question comes from Daniel Tamayo with Raymond James.

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 pricing. 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 is the balance sheet positioned for kind of the first hike relative to future hikes?

Yes. I would say the floors that we have are really pretty low. We have $12.5 billion of loans that are indexed to what LIBOR order time and less than $400 million, $350 million or so, have floors on them at a current benefit of 63 basis points.

So basically, you have 2 Fed moves before that $356 million for the move, but that's a small portion of the overall portfolio. just to remind you that as far as the total portfolio, I mean, we have $9.9 billion in total loans at the end of the year tied to 1-month LIBOR and then another $2.5 billion tied to products. So between the 2, it's 50% of the loan portfolio that's tied to those short-term indices. And the 4 levels, we didn't have the benefit on the way down. So part of why is that large of a balance there that kind of have to work back through.

Okay. Great. And then on the noninterest income side, obviously, mortgage banking will be impacted by the refi cycle coming to an end here. But wondering how you think about the rest of the base of noninterest income and what impact that could have on any of those line items from a rising rate environment.

I would say, as we've talked about in the past, the investments we've made over the last couple of strategic planning cycles to invest in these fee-based businesses is -- paid very well l for us, particularly in an environment when rates came down. If you look at the different components, I mean, service charge is just driven by customer activity, 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. On cap markets, while it's down from a lifetime record of 12.5% in the third quarter, $9.5 million is a very solid number. We will look for that to kind of grow as we go forward. And then what's additive, too, is with Howard coming on board, the depth of the products and services that we have, 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 as well. So we're very much looking forward to having them become part of the company and working with those customers. So it's kind of all baked in. I mean, the interest rate environment that we described is baked into our guidance. So kind of all in there.

Yes. From a practical perspective, we would expect mortgage banking fee income to be down, right, those 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, it's already been $1 million in revenue. So that will help moving into next year. And there are some transactions that will be a part of this year -- I said next year, but I meant 2022.

There are transactions that we're already part of. So we'll get some benefit from a fee income perspective there. Syndication, the pipeline is still pretty strong, in syndications. And that business has been moved pretty nicely across the footprint, and we're now starting to see larger opportunities in the Southeast and the Atlantic region as well as Pittsburgh and Cleveland and our traditional markets.

And then as we look and other opportunities to grow fee income, particularly in treasury management, 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 through economic sites. That's kind of how we designed it. We're hoping that, that holds true for us, and we'll achieve the guidance that we're giving there. There's a lot of moving parts. I'm sorry, Vince, I just wanted to add...

No, that's a really good point.

Quite a bit to make sure that we have that diversification.

And on the mortgage side, I would just add that as we look into our -- what's in our guidance for 2022, I would expect the fourth quarter level around $6 million probably to see kind of a bottom. Part of why I'm saying that is if you look at the expectation in the market for mortgage applications, I mean, it's down 25% to 30%.

But for us, 75% of our business is purchased. And the purchase side is actually, the expectations from Fannie Mae at least were up 8% to 10%. So that kind of bodes well given the business model that we run on the mortgage side and with us having 75% on the purchase side. So I would expect that number, all things being equal to kind of build from here as we go through 2022, and that's baked into our guidance, too.

And the next question comes from Michael Perito with KBW.

Most of my questions have been asked and answered, but just 2 quick ones. One, just on the loan growth. Obviously, it's -- 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 commentary on this, but I was just curious, as you look at the kind of the diversity of the pipeline heading into next year. Any 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 or maybe some other buckets to contribute some more based on the pipeline?

Well, 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 that we had some projects that we closed that fund up over the course of the next year or so. I would expect that business unit to contribute a little more next year. But I think overall, when we look at our pipelines, the Carolinas still have very strong pipeline. 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 will be #6 in deposit share and have a pretty substantial lending in that market and in Washington, D.C. So I'm pretty optimistic that we'll be able to achieve these growth objectives. And I said it before, I think it's really attributable to our expansion strategy and the fact that we were to secure substantial lucky share physicians and fairly dynamic MSAs across the Southeast and Mid-Atlantic really helps us. So we're in a good position as the economy can hopefully, the economy continues to hold together and give us some upside in this year.

Michael, one of the things that impacted Q4 a bit there on the CRE side. We had multifamily projects, as we've talked in the past, just being kind of lumpy. 6 projects for $150 million move into the secondary market. So that was -- that was a bit of a challenge from a footing standpoint in that particular book of business. And we're going to continue to have that as that's an important part of what we do especially in the Southeast, as Vince mentioned. So we'll continue to see some lumpiness there with those exits.

Got it. Helpful. And then just lastly for me. Obviously, it's good to see there's some regulatory uncertainty headlines in the markets about deals closing. So it's good to see Howard closing shortly and as expected. Just curious if you can provide an updated outlook on kind of 2022 and where M&A is from an appetite perspective and just where -- how you kind of view the market overall and if you think there'll be more opportunities or if the pipeline isn't as robust today?

Well, we -- as I've said before, we're really focused on the best deployment of capital possible. So Howard kind of meant the criteria. It was in market, if you take cost out, it's a good team. it was a decent size. It wasn't too big, easily digest it. It really gave us the ability to position the company from an expense perspective moving into an environment where everyone is concerned about inflation and wage pressure. So it really worked out well, the timing of it plus you're coming off of PPP. So we will pick up those balances and the timing also was good with the launch of our eStore and the upgrades to our digital offering. So we could offer those consumers those products. So I think that's an example of an M&A opportunity that we thought was good, right? We looked at it. Our -- we were approved by the Fed and the OCC, I think, within 32 days of application. So we note we did not experience delays. Maybe the relative size of the transaction plus our outstanding rating and that we had just concluded our outstanding CRA rating and that we had just concluded some exams that maybe got the regulators a little more comfortable, but we were able to do that and I'm very proud of that. I think our relationship with the regulators is strong, and we listen and we respond. And I think that's why we were able to get our deal approved. And we're very conservative in terms of underwriting, re-underwriting the credits, estimating the provision for the reserves in those portfolios, and there's a great deal of comfort there. Having said that, I keep telling everybody what we're most excited about is the investment that we've made in digital -- in our digital technology, what's going on inside the company that you can't see from an automation and AI perspective, data analytics team, the data hub that we've created, the infrastructure we've built out internally, that's really been helping us not just with securing customers and gathering information to help our customers with products and services, but also to gain efficiency in the company, to monitor more and more metrics to help us drive performance. So all of that is very, very exciting to me. And I think given the positioning of the company, we did our big expansion and moved into 2 very dynamic areas of the country, which should provide us with significant opportunities for years to come. So our focus is going to be on driving market share gains in those markets. And if something comes along from an M&A perspective, it sense and fits into that strategy, sure we're going to look at it. But it has to be shareholder friendly, not something that harms us or shareholders anyway, that's it. So thank you. I appreciate the question.

And the next question comes from Russell Gunther with D.A. Davidson.

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 to 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 put. Just curious as to what you think the drivers of that delta will be.

Well, I think it will be a combination we're going to have to execute in all of those areas. And I think we grew 10% with very little help expansion in working capital facilities. I know I've read other earnings reports and other companies have seen growth in line utilization. We haven't really. I mean, we were up 1% it's a de minimis amount that has contributed. So while that is a factor, I think the more activity you see around working capital utilization, that means there's opportunities to finance other things, too. So that obviously, those 2 go hand in hand. But we have great opportunities in the middle market across the footprint with the rollout of the eStore and now being able to digitally onboard small business customers we have a great opportunity there to do it much more efficiently cost effectively across our footprint. So there's upside there. There's upside in consumer there's upside in mortgage with our physicians first program that we rolled out that I mentioned. So yes, I think we've got a lot of channels to drive that growth. So I think our pipeline is looking pretty solid going into the year. So we're feeling pretty good.

That's great. 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, and we call the guy that runs at our real CEO because the expense driver -- So he'd be Chief Expense Officer. So we have somebody that reports the events and Adam does a terrific job. We look at every single line item. And then we look at every single large contract that we have, we look at a number of statistics around the branch network and we spend a lot of time. There's a whole team of really data analytics people that look at transaction counts and the like. And then we also have an effort within our operations area under Udemy app to review automation and the utilization of intelligent software to help automate and eliminate redundant process and manual process So all of that kind of ties in to the expense reduction.

And then we also have a team that looked at occupancy expense just constantly. I mean they're constantly reviewing that. We don't let any FTEs. I mean, we review every single ad to staff, every replacement position at the company, and we require people to do an analysis based upon transaction volume, some sort of bearing ratio to justify even replacement.

The company has run -- we've been very fortunate in that given the turnover at many companies. Our vacancy rate has been within historical norms. So we've not seen a mass exodus. People leave here and there, but it's been pretty solid. We've not had any trouble recruiting people. So I think those are all the things we do to manage expenses. It was a whole process around it. And I think we've been -- we've done a very good job. And as in Adam and that team do, they worked really good, have done a terrific job keeping us in line.

The best workplace accolade helped too.

Yes. I mean we've won best workplace for a number of years. We just won for the 10th year and 1 publication in Pittsburgh just about every market the last decade. We've won awards and with the award, the employees feel like they're part of the process, and there's a tremendous amount of engagement. We had off-the-charts engagements for us when we hired a third party to survey the employee base.

So I think the culture here is very strong. It's a collaborative culture. People genuinely like each other. It comes back in the results that we get even though some of us are crazy, I think that the rest of the company history. They enjoy coming to work and working hard and winning. And I think that when you have a culture like that, sure, you're not impenetrable, but it's a good place to be. Anyway, that's what needs to our performance and our results. All of those things come into play.

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

I want to ask a couple of questions on the securities book quick. Could you give us the percentage of floating rate securities.

I have to get back to you. Although we don't have much, if any but I can get an answer while we're talking, if you want to go to your next question. Not much of any, we don't have any.

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

Hold that up. Scott, if you want to -- Scott or Bob, just text me, maybe you have that, just find it.

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

3%.

The duration?

The duration is 3%, yes on the available for sale.

And then along the lines of kind of market share gains, do you have any sort of initiative for hiring, whether it's team lift outs or anything like that if you could just tell us about.

Yes. I mean we've hired quite a few people over the last 12 months. We've hired -- we generally hire people from larger institutions in the commercial bank. So we just hired somebody from JPMorgan here in Pittsburgh, who's leading the teams in Pittsburgh. We've hired a number of bankers from other companies in the Southeast. So a good bit of our bankers have come from either at 1 point in their career, they were at either Wells or BofA in the Southeast.

The entire Charleston team, I think at different times, we can do a lift out as we've hired a number of people from Wells and BB&T and other places. And I think that's part of our culture, too. We're -- that's why we're able to replace physicians, I think, people view our product set as deep if you're a corporate banker, the incentive compensation plans are fair and provide upside.

And you've got a good solid set of products from debt capital markets all the way across to most of the commercial treasury management products, which are on -- we've won branch awards in the Treasury Management International award. So coming here as a commercial banker, you got it made. I mean you're coming in, in many of these markets. We have a high deposit share but a low relative commercial share.

So the entire market -- so if there's anybody out there listening on the call, who want to work here, please call me. But I think of all the places I have worked, I've never worked for a company where the management of the wholesale bank. I mean, there's such a collaborative spirited culture. I just -- I can't even describe it.

I mean other large companies, people are fighting within various product areas. Here, the incentive compensation plans are designed to have people work together and they do work together to win. They just want to win in the marketplace and do the best they can for their clients and for our shareholders. So it's a great culture, and like I said, we've not had an issue bringing people in from any -- from the largest bank in the United States all the way down to smaller institutions. So anyway.

Understood. And then if I could just sneak in the last one. Do you have any sort of overdraft reduction plans moving forward?

We actually were ahead of the curve there. We rolled out a product last year. There was a press release that was put out, you can find it. We have a total -- we have an electronic checking product that we put out the digital -- part of our digital offering. And you cannot overdraft in that, you're not charged any overdraft fees.

And that's the third -- I think behind -- it used to be the second most sought after product or sold product within the company over the last 8 or 9 months. It may have dropped 1/3 because our student checking campaign, student checking pushes it up, but it's in the top 3 of our offering. And that's why in our guide on noninterest income, it includes a flattening of fees in the consumer segment, even though we're seeing a rise in other areas.

So there will be an impact. It's already baked into our guidance. But that's one thing we've done, and we've made a number of other changes and are planning on changing other elements of the fee structure within the consumer bank. So...

Yes, we're studying a competitive environment.

Yes. We can't be a market leader there. We have to step back to watch what's happening, but we were on that one product, and it's received very positive reviews and it's back on certified, and it's been great.

Also if I could clarify the duration. So the AFS duration is 3.4 at 12/31, the total is 3.6. So the HTM is at 3.7. So they're pretty similar. But just to correct what I said earlier, at 3.4 is the AFS portfolio.

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

So last question here for you or 2. Just on capital. Just kind of any changes in your outlook on kind of deployment of capital. I know you already talked a little, Vince, about the M&A kind of outlook, but just kind of share repurchases, how you're thinking about that given the flexibility?

Sure, Brian. CET1 at 9.9%, you can see in the slide deck, it's been very stable. 9.9% last quarter, 9.8% a year ago. So we have talked about kind of a 10% target there. So we're pleased with the level there. And even with the strong loan growth we had 10% as Vince mentioned, holding the CET1 flat tells you about the earnings generation that we're creating and then retaining.

As we look forward, what's baked into our guide is for the capital ratio to kind of slowly build from here, we're still swapping normal loans for PPP loans, right, that have 0 risk weighting. So -- but I still expect, given our guidance for the CET1 ratio build, like I said, gradually we get from here to the end of the year. And then we'll just be opportunistic on share repurchases.

I mean our first goal is to deploy it for loan growth. So to the extent the loan growth is stronger on the higher end we want to use the capital to support that loan growth. But we will be opportunistic on share purchases as we move forward in 2022. We didn't do any during the fourth quarter with the timing of Howard and regulatory approval and those types of things. But we'll continue to monitor it and just manage capital in a way that's fully aligned with shareholder interests. But loan growth will be kind of our first lever that we'll look to deploy it for.

Got you. Okay. And then just baked into the guidance, Vince, I mean what on the -- maybe you said this and I missed it, I joined a little bit late, but just kind of the excess liquidity. I think if you kind of just talk about maybe kind of where the core margin is in 1Q, I guess, given -- and then just kind of the outlook of what you have baked in for a drag of 26 basis points in excess liquidity kind of as you go throughout the year, given the loan growth outlook?

Yes. So the excess cash for the quarter was $3.7 billion on average in the fourth quarter. So that generated the drag that you see on the slide there. As our expectation for 2022 is that number kind of comes down in half. So it gets to around $1.5 billion by the end of the year. Similarly, we have PPP related deposits that are also in our guide that we are projecting to come down about $1.3 billion or so.

And those have been stickier than what we've been estimating as we've been going through the process, but that is baked into our guidance. So basically, the cash level will go from an average of $3.7 billion and then kind of evolve to $1.5 billion by the end of the year. So I can't do that math in my head that quickly. But that's kind of what's underneath there. So that impact will lessen as we go through the year.

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

No. It's in there for 11 months.

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

This concludes question-and-answer session. Now I'd like to turn the call to Vincent 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 would spend a lot of time when I could meeting with people in the field and interacting with different markets. And the morale throughout this entire last 2 years has been terrific, and the leadership has been very strong.

And really, that's what leads to our success. So I'd like to commend everybody for all the hard work and the dedication and the drive to be successful. So please keep it up. And thank you, and thank you for the questions, and thank you to our shareholders for your continued support.

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